-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G+4DzFXbsvm8i8g/IvZ3sJt4h7W/BRw2gF1q2tszzEo5jueOJcwKIGIFBEyNYDoV 660abACMmVAlfzkI9z36JQ== 0000908737-96-000125.txt : 19960605 0000908737-96-000125.hdr.sgml : 19960605 ACCESSION NUMBER: 0000908737-96-000125 CONFORMED SUBMISSION TYPE: 8-A12G PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19960604 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIS BANCORP INC CENTRAL INDEX KEY: 0001013049 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MA FILING VALUES: FORM TYPE: 8-A12G SEC ACT: 1934 Act SEC FILE NUMBER: 000-20809 FILM NUMBER: 96576650 BUSINESS ADDRESS: STREET 1: P O BOX 3034 STREET 2: 1441 MAIN STREET CITY: SPRINGFIELD STATE: MA ZIP: 01102-3034 BUSINESS PHONE: 4137488000 8-A12G 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-A For Registration of Certain Classes of Securities Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934 SIS BANCORP, INC. (Exact Name of Registrant as Specified in its Charter) Massachusetts 04-3303264 (State of Incorporation or Organization) (I.R.S. Employer Identification no.) 1441 Main Street Springfield, Massachusetts 01102 (Address of principal executive office) (zip code) If this Form relates to the If this Form relates to the registration of a class of registration of a class of debt securities and is effective debt securities and is to become upon filing pursuant to General effective simultaneously with the Instruction A(c)(1) please check effectiveness of a concurrent the following box. / / registration statement under the Securities Act of 1933 pursuant to General Instruction A(c)(2) please check the following box. / / Securities to be registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which to be so Registered Each Class is to be Registered None Securities to be registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value per share (Title of Class) Item 1. Description of Registrant's Securities to be Registered. General Pursuant to an Agreement and Plan of Reorganization dated as of January 31, 1996 (the "Plan of Reorganization") between Springfield Institution for Savings, a Massachusetts chartered stock savings bank (the "Bank") and SIS Bancorp, Inc., a newly-formed Massachusetts corporation organized at the direction of the Bank (the "Company"), the Company will acquire all of the outstanding common stock, par value $1.00 per share, of the Bank other than shares held by stockholders, if any, exercising dissenters' appraisal rights, in a share-for-share exchange for the common stock, par value $.01 per share, of the Company ("Common Stock"). The Bank will thereby become a wholly-owned subsidiary of the Company and the Bank's stockholders will become, subject to their exercise of dissenters' appraisal rights, stockholders of the Company. Under the Articles of Organization of the Company (the "Articles"), as amended prior to the consummation of the Plan of Reorganization, the Company will be authorized to issue up to 25,000,000 shares of Common Stock and up to 5,000,000 shares of preferred stock, par value $0.01 per share. Preferred Stock The Board of Directors of the Company is authorized to issue shares of preferred stock in series and to fix the voting powers, designations, preferences, or other special rights of the shares of each such series and the qualifications, limitations, and restrictions thereon. The issuance of preferred stock by the Company is subject to the approval of a majority vote of the Board of Directors of the Company. Preferred stock issued by the Company may rank prior to the Common Stock as to dividend rights, or liquidation preferences, or both, may have full or limited voting rights (including multiple voting rights and voting rights as a class), and may be convertible into shares of Common Stock. Common Stock Voting Rights. Stockholders are entitled to one vote per share on any matters subject to stockholder approval, including the election of Directors. The Articles do not provide for cumulative voting in connection with the election of Directors, and therefore holders of a majority of the Common Stock will be able to elect all of the Directors standing for election in each year, subject to the rights of the holders of shares of preferred stock, if and when issued. Preemptive Rights. Holders of Common Stock have no preemptive rights as to the purchase of any shares issued in the future. Therefore, the Board of Directors may sell shares of capital stock without first offering them to the then stockholders of the Company. Assessability. Under Massachusetts law, Common Stock is non-assessable. Dividend Rights; Repurchase or Redemption of Shares. A Massachusetts business corporation, such as the Company, may pay dividends or repurchase or redeem its shares of capital stock; however, a director who votes to authorize a dividend, repurchase or redemption which is in violation of the corporation's articles of organization or which renders the corporation insolvent may be jointly and severally liable for such improper dividend, repurchase or redemption. Stockholders to whom a corporation makes any such distribution (except a distribution of stock of the corporation), if the corporation is, or is thereby rendered, insolvent, are liable to the corporation for the amount of such distribution made, or for the amount of such distribution which exceeds that which could have been made without rendering the corporation insolvent, but in either event only to the extent of the amount paid or distributed to them, respectively. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of the past year's net income, and only if prospective earnings retention is consistent with the organization's expected future needs. The policy further provides that a bank holding company should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its subsidiary banks. The Federal Reserve Board also requires by regulation that a bank holding company seeking to purchase or redeem any of its equity securities must provide prior notice to the appropriate regional Federal Reserve -2- Bank, which may disapprove of such proposed purchase or redemption, if the gross consideration for such purchase or redemption, when aggregated with the net consideration paid by the holding company for all such purchases or redemptions during the preceding twelve months, exceeds 10% of the holding company's consolidated net worth, except that such prior notice requirements do not apply to any holding company that is "well capitalized" in accordance with Federal Reserve Board regulations, has received a composite "1" or "2" rating in its most recent examination and is not subject to any unresolved regulatory issues. Any issuance of preferred stock with a preference over Company Common Stock as to dividends may affect the dividend rights of Common Stock holders. Directors Number and Staggered Terms. The By-laws of the Company (the "By-laws") provide that, subject to the rights of holders of preferred stock, if and when issued, a majority of the total number of Directors that the Company would have if there were no vacancies (the "Whole Board") shall fix from time to time the number of Directors of the Company, which number will not in any case be less than three, unless at the time there is an Interested Stockholder in which case a majority vote of the Continuing Directors is also required to fix such number. The Board of Directors of the Company will initially be composed of seven Directors. The Articles provide for three classes of Directors with one class elected each year for three year staggered terms, so that ordinarily no more than approximately one-third of the Directors will stand for election in any one year, and that there will be no cumulative voting in the election of Directors. The term "Interested Stockholder" is defined in the Articles to mean generally any beneficial owner of more than 4.9% of the outstanding voting stock or, from and after February 7, 1998, 10% of the outstanding voting stock of the Company and certain assignees of such Interested Stockholder. The term "Continuing Directors" is defined in the Articles to mean generally Directors and certain successor Directors who are not affiliates of any Interested Stockholder and who were Directors prior to the time that any Interested Stockholder became an Interested Stockholder. Removal. The Articles provide that Directors may be removed from office, but only for cause, and then only by the affirmative vote of not less than eighty percent of the outstanding shares entitled to vote at a duly constituted meeting of stockholders. The Articles define cause to mean only the following: (i) conviction of a felony, (ii) declaration of unsound mind by order of court, (iii) gross dereliction of duty, (iv) commission of an act involving moral turpitude, or (v) commission of an action which constitutes intentional misconduct or a knowing violation of law if such action in either event results both in an improper substantial personal benefit and a material injury to the Company. Vacancies. The By-laws provide that any vacancy occurring on the Board of Directors of the Company, including vacancies resulting from an enlargement of the Board, shall be filled solely by the affirmative vote of a majority of the remaining Directors, unless at the time there is an Interested Stockholder, in which case the affirmative vote of a majority of the Continuing Directors is required. Any Director of the Company so chosen would hold office for the remainder of the term of the class of Directors to which the Director has been elected. Meetings of Stockholders The Articles provide that a special meeting of stockholders may be called only by the President, or by a majority of the Whole Board, provided that if at the time of any such call there is an Interested Stockholder, such call shall also require the affirmative vote of a majority of the Continuing Directors then in office. The Articles also provide that only those matters set forth in the call of the special meeting may be considered or acted upon at such special meeting, unless otherwise provided by law. The By-laws set forth certain advance notice and informational requirements and time limitations on any Director nomination or any new business which a stockholder wishes to propose for consideration at a meeting of stockholders. Any such nomination or new business, to be timely, shall be delivered to, or mailed and received at, the principal executive offices of the Company not less than 70 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting, provided that in the event that the date of the annual meeting is advanced by more than twenty days or delayed by more than seventy days from such anniversary date, notice by the stockholder to be timely -3- must be so delivered not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of the seventieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Notwithstanding the above, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Company at least eighty days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice would be considered timely, but only with respect to nominees for any new positions created by such increase, if delivered to the Clerk of the Company at its principal executive offices not later than the close of business on the tenth day following the day on which such public announcement was first made by the Company. Stockholder proposals that do not satisfy these requirements may be rejected by the Board of Directors. Stockholder Vote Required to Approve Certain Transactions Massachusetts law provides that certain agreements of merger or consolidation, or the sale, lease or exchange of all or substantially all of the property and assets, of a Massachusetts corporation must be approved by the affirmative vote of holders of two-thirds of the shares of each class of stock outstanding and entitled to vote thereon or, if the articles of organization so provide, the vote of a lesser proportion, but not less than a majority. Additionally, Massachusetts law provides that no vote of the stockholders of the surviving Massachusetts corporation is required, unless its articles of organization otherwise provide, to approve a merger if (i) the agreement of merger does not amend in any respect the corporation's articles of organization, (ii) the number of shares of the surviving corporation's stock to be issued in the merger does not exceed 15% of the shares of the same class outstanding immediately prior to the effective date of the merger and (iii) the issuance of authorized but unissued stock pursuant to a merger by vote of the directors has been authorized by the by-laws or a vote of the stockholders. A Massachusetts corporation owning at least 90% of the outstanding shares of each class of stock of another corporation may merge such corporation into itself without a vote of the stockholders. The Articles provide that an affirmative vote of the holders of a majority of the voting power of the then outstanding voting stock of the Company, voting together as a single class, may authorize any (i) sale, lease or exchange of all or substantially all of its assets or (ii) consolidation or merger of the Company with or into any other corporation that would otherwise, pursuant to Chapter 156B of the Massachusetts General Laws, have required an affirmative vote of the holders of two-thirds of the voting power of the Company's then outstanding voting stock voting together as a single class, provided that, in either case, such transaction has previously been approved by a vote of a majority of the Board of Directors (and, if at the time of such action there is an Interested Stockholder, an additional vote of a majority of the Continuing Directors). The Articles provides that any Business Combination (as defined below) involving the Company and an Interested Stockholder must be approved by the holders of at least 80% of the outstanding shares of the Company's voting stock voting together as a single class (the "Voting Requirement"). The Voting Requirement does not apply and the affirmative vote of only a majority of the Company's voting stock is required, if (i) the Business Combination is approved by an affirmative vote of a majority of both the Continuing Directors and the Board of Directors or (ii) certain "fair price" (defined generally to mean, among other things, that the consideration to be received by stockholders in such Business Combination shall be in the same form and kind as the consideration paid by the Interested Stockholder for the Company's capital stock owned by such person and shall be at least equal to the highest of the following: (A) the highest per share price paid by such Interested Stockholder in acquiring any of its holdings of Common Stock within the two year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or in the transaction through which such person became an Interested Stockholder; (B) the highest Fair Market Value (as defined in the Articles) per share of Common Stock on any date during the one-year period prior to and including the Announcement Date; and (C) the price per share equal to (1) the Fair Market Value per share of common stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder, multiplied by (2) a fraction (x) the numerator of which is the highest per share price paid by the Interested Stockholder for any share of Common Stock acquired by it within the two-year period immediately prior to and including the Announcement Date and (y) the denominator of which is the Fair Market Value per share of Common Stock on the first day in such two-year period on which the Interested Stockholder acquired any shares of Common Stock) and other criteria are met. As defined in the Articles, a "Business Combination" includes, among other things (i) any merger or consolidation of the Company with an Interested Stockholder or affiliate thereof, (ii) the sale, lease, exchange, mortgage, -4- pledge, transfer or other disposition by the Company of assets having a fair market value of $1,000,000 or more to or with an Interested Stockholder or an affiliate thereof, (iii) the purchase, exchange, lease or other acquisition by the Company of all or substantially all the assets or business of any Interested Stockholder or affiliate thereof, (iv) the issuance or transfer by the Company of any securities of the Company to an Interested Stockholder or any affiliate thereof in exchange for cash, securities or other property (or a combination thereof) having a fair market value of $1,000,000 or more, (v) the adoption of a plan or proposal for the liquidation or dissolution of the Company proposed by or on behalf of an Interested Stockholder or an affiliate thereof and (vi) any transaction that has the effect of increasing the proportionate share of any class of equity security of the Company that is beneficially owned by an Interested Stockholder or any affiliate thereof. Beneficial Ownership Limitation The Articles contain a prohibition against any person directly or indirectly offering to acquire, or acquiring, beneficial ownership (as defined in the Articles) of more than 4.9% of any class of outstanding equity securities of the Company prior to February 7, 1998, or directly or indirectly offering to acquire, or acquiring, beneficial ownership of more than 10% of any class of outstanding equity securities of the Company at any time from and after February 7, 1998. The Articles contain an exception from this limitation for any offer to the Company made by the underwriters acting on behalf of the Company in connection with a public offering by the Company of its capital stock. In addition, the Articles provide an exception for any acquisition of shares of capital stock which has been approved by an affirmative vote of not less than two-thirds of the Board of Directors then in office (or, if there is an Interested Shareholder at the time of such vote, then also the affirmative vote of not less than two-thirds of the Continuing Directors then in office). In approving the Plan of Reorganization, the Massachusetts Commissioner of Banks has also imposed a substantially similar prohibition on any offer to acquire, or acquisition of, more than 10% of any class of the Company's equity securities without prior notice to the Company and prior approval of the Commissioner of Banks. This regulatory limitation, which may not be waived by the Company or its Board of Directors, remains in effect until February 7, 1998. Amendment of Articles The Articles provide that an amendment must first be approved by a majority of the Directors of the Company then in office and thereafter by an affirmative vote of at least eighty percent (80%) of the voting power of the then outstanding voting stock of the Company (except that certain provisions may be amended by a majority vote of the stockholders). In addition, if, at any time within a sixty-day period prior to the meeting of stockholders at which such amendment is to be considered there is an Interested Stockholder, the amendment must also be approved by an affirmative vote of a majority of the Continuing Directors then in office, prior to approval by the stockholders. Amendment of By-laws The Articles provide that the By-laws may be adopted or amended either by the Board of Directors or the stockholders of the Company. Such action by the Board of Directors shall require the affirmative vote of at least a majority of the Directors then in office at a duly constituted meeting of the Board of Directors, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall also require the affirmative vote of at least a majority of the Continuing Directors then in office, at such a meeting. Such action by the stockholders of the Company shall require (i) approval by the affirmative vote of a majority of the Board of Directors then in office at a duly constituted meeting of the Board of Directors, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall also require the affirmative vote at such meeting of at least a majority of the Continuing Directors then in office, (ii) unless waived by the affirmative vote of the Board of Directors (and, if applicable, Continuing Directors) specified in the preceding sentence, the submission by the stockholders of written proposals for adopting, altering, amending, changing or repealing the By-laws that comply in all respects with the provisions of the By-laws governing such submissions and (iii) the affirmative vote of at least 80% of the votes eligible to be cast by stockholders at a duly constituted meeting of stockholders called expressly for such purpose. -5- Anti-Takeover Provisions Chapter 110D of the Massachusetts General Laws covers "control share acquisitions" affecting corporations incorporated in Massachusetts that have at least 200 stockholders and possess certain statutory indicia reflecting additional substantial ties to Massachusetts (as would be the case with the Company). Chapter 110D limits the voting rights of shares held by persons who have acquired 20% or more of the voting power of the target corporation. Under this statute, shares acquired in a control share acquisition retain the same voting rights as all other shares of the same class or series only to the extent authorized by a vote of the majority of all shares entitled to vote for the election of directors, excluding such acquired shares. A corporation that is otherwise subject to Chapter 110D may expressly provide in its articles of organization or bylaws that the statute does not apply. Chapter 110D by its terms would apply to the Company. The Company has not included any "opt out" provision in either the Articles or By-laws of the Company. Chapter 110F of the Massachusetts General Laws provides that if any acquiror buys 5% or more of a target company's stock, where the target company has at least 200 stockholders and possesses certain statutory indicia reflecting substantial ties or nexus to Massachusetts, without the prior approval of the target company's board of directors, such acquiror generally may not, for a period of three years, (i) complete the acquisition of the target company through a merger, (ii) pledge or sell any assets of the target company or (iii) engage in other self-dealing transactions with the target company. The prior board of directors approval requirement does not apply if the acquiror buys at least 90% of the target company's outstanding stock in the transaction in which it crosses the 5% threshold or if the acquiror, after crossing the threshold, obtains the approval of the target company's board of directors and two-thirds of the target company's stock held by persons other than the acquiror. A corporation that would otherwise be covered by Chapter 110F may expressly provide in its articles of organization that the statute does not apply. Chapter 110F by its terms would apply to the Company. The Articles do not contain any such "opt out" provision. Item 2. Exhibits. The following exhibits are filed as a part of this Registration Statement: Exhibit Number Description 99.1 Articles of Organization of the Registrant 99.2 Bylaws of the Registrant 99.3 Annual Report on F.D.I.C. Form F-2 of Springfield Institution for Savings (the "Bank") for the fiscal year ended December 31, 1995 99.4 Report of Independent Accountants on the financial statements of the Bank for the year ended December 31, 1993 99.5 Notice and Proxy Statement dated March 27, 1996 for the Annual Meeting of Shareholders of the Bank 99.6 Quarterly Report on F.D.I.C. Form F-4 of the Bank for the fiscal quarter ended March 31, 1996 -6- SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant has caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. SIS BANCORP, INC. Date: June 4, 1996 By: /s/ F. William Marshall, Jr. ----------------------------- F. William Marshall, Jr. President -7- EX-99.1 2 EXHIBIT 99.1 The Commonwealth of Massachusetts William Francis Galvin Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 ARTICLES OF ORGANIZATION (General Laws, Chapter 156B) ARTICLE I The exact name of the corporation is: SIS BANCORP, INC. ARTICLE II The purpose of the corporation is to engage in the following business activities: See Exhibit A attached hereto and made a part hereof. ARTICLE III State the total number of shares and par value, if any, of each class of stock which the corporation is authorized to issue. WITHOUT PAR VALUE WITH PAR VALUE - ------------------------------ ------------------------------------------ TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - ---- ---------------- ---- ---------------- --------- Common: Common: 250,000 $.01 Preferred: Preferred: 50,000 $.01 ARTICLE IV If more than one class of stock is authorized, state a distinguishing designation for each class. Prior to the issuance of any shares of a class, if shares of another class are outstanding, the corporation must provide a description of the preferences, voting powers, qualifications, and special or relative rights or privileges of that class and of each other class of which shares are outstanding and of each series then established within any class. See Exhibit B attached hereto and made a part hereof. ARTICLE V The restrictions, if any, imposed by the Articles of Organization upon the transfer of shares of stock of any class are: None ARTICLE VI Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: See Exhibit C attached hereto and made a part hereof. SIS BANCORP, INC. ARTICLES OF ORGANIZATION EXHIBIT A ARTICLE II: Purposes 1. Buying, selling, investing in, holding and dealing in property of every nature and description, real and personal, tangible and intangible; 2. Acquiring, investing in and holding stock in any subsidiary permitted under the Bank Holding Company Act of 1956 or Chapter 167A of the Massachusetts General Laws, as such statutes may be amended from time to time, and engaging in any other activity or enterprise permitted to a bank holding company under said statutes or other applicable law; and 3. In general, engaging in any other business which may lawfully be carried on by a corporation organized under the Business Corporation Law of the Commonwealth of Massachusetts, as amended from time to time. SIS BANCORP, INC. ARTICLES OF ORGANIZATION EXHIBIT B ARTICLE IV: Description of Each of the Different Classes of Stock A description of the different classes and series of the Corporation's capital stock and a statement of the designations and the relative rights, preferences and limitations of the shares of each class and series of capital stock are as follows: Section 4.1 Common Stock. Except as provided by law or in this Article IV (or in any supplementary sections hereto or in any certificate of establishment of any series of preferred stock), the holders of the common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote on all matters for each share held by such holder. There shall be no cumulative voting rights in the election of Directors. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of a sinking fund or a retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends; but only when and as declared by the Board of Directors. Subject to Section 6.4 of these Articles of Organization, in the event of any liquidation, dissolution or winding up of the Corporation, after there shall have been paid to or set aside for the holders of any class having preference over the common stock in the event of liquidation, dissolution or winding up of the Corporation the full preferential amounts to which they are respectively entitled, the holders of the common stock, and of any class or series of stock entitled to participate in whole or in part therewith as to distribution of assets, shall be entitled, after payment or provision for payment of all debts and liabilities of the Corporation, to receive the remaining assets of the Corporation available for distribution, in cash or in kind, in proportion to their holdings. Section 4.2 Preferred Stock. The Board of Directors of the Corporation is authorized by vote or votes, from time to time adopted, to provide for the issuance of preferred stock (the "Preferred Stock") in one or more series and to fix and state the voting powers, designations, preferences and relative participating, optional or other special rights of the shares of each series and the qualifications, limitations and restrictions thereof, including, but not limited to, determination of one or more of the following: (1) The distinctive serial designation and the number of shares constituting such series; (2) The dividend rates or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends and the participating or other special rights, if any, with respect to dividends; (3) The voting powers, if any, of shares of such series; (4) Whether the shares of such series shall be redeemable and, if so, the price or prices at which, and the terms and conditions on which, such shares may be redeemed; (5) The amount or amounts payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (6) Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price or prices at which such shares may be redeemed or purchased through the application of such fund; (7) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation, and if so convertible or exchangeable, the conversion price or prices, or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (8) The price or other consideration for which the shares of such series shall be issued; (9) Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of preferred stock and whether such shares may be reissued as shares of the same or any other series of stock; and (10) Such other powers, preferences, rights, qualifications, limitations and restrictions thereof as are permitted by law and as the Board of Directors of the Corporation may deem advisable. Unless otherwise provided by law, any such vote shall become effective when the Corporation files with the Secretary of State of the Commonwealth of Massachusetts a certificate of designation of one or more series of preferred stock signed by the President or any Vice President and by the Clerk, Assistant Clerk, Secretary or Assistant Secretary of the Corporation, setting forth a copy of the vote of the Board of Directors establishing and designating the series and fixing and determining the relative rights and preferences thereof, the date of adoption of such vote and a certification that such vote was duly adopted by the Board of Directors. SIS BANCORP, INC. ARTICLES OF ORGANIZATION EXHIBIT C ARTICLE VI: Other Lawful Provisions Section 6.1 Issuance of Rights. The Board of Directors is hereby authorized to create and issue, whether or not in connection with the issuance and sale of any of its stock or other securities or property, rights entitling the holders thereof to purchase or receive from the Corporation shares of stock or other securities or assets of the Corporation or any other corporation, recognizing that, under certain circumstances, the creation and issuance of such rights could have the effect of discouraging third parties from seeking, or impairing their ability to seek, to acquire a significant portion of the outstanding securities of the Corporation, to engage in any transaction which might result in a change of control of the Corporation or to enter into any agreement, arrangement or understanding with another party to accomplish the foregoing or for the purpose of acquiring, holding, voting or disposing of any securities of the Corporation. The times at which and the terms upon which such rights are to be issued will be determined by the Board of Directors and set forth in the contracts or instruments that evidence such right. The authority of the Board of Directors with respect to such rights shall include, but not be limited to, determination of the following: (1) The initial purchase price per share or other unit of the stock or other securities or property to be purchased upon exercise of such rights. (2) Provisions relating to the times at which and the circumstances under which such rights may be exercised or sold or otherwise transferred, either together with or separately from, any other stock or other securities of the Corporation. (3) Provisions which adjust the number or exercise price of such rights or amount or nature of the stock or other securities or property receivable upon exercise of such rights in the event of a combination, split or recapitalization of any stock of the Corporation, a change in ownership of the Corporation's stock or other securities or a reorganization, merger, consolidation, sale of assets or other occurrence relating to the Corporation or any stock of the Corporation, and provisions restricting the ability of the Corporation to enter into any such transaction absent an assumption by the other party or parties thereto of the obligations of the Corporation under such rights. (4) Provisions which deny the holder of a specified percentage of the outstanding stock or other securities of the Corporation the right to exercise such rights and/or cause the rights held by such holder to become void. (5) Provisions which permit the Corporation to redeem or exchange such rights, which redemption or exchange may be within the sole discretion of the Board of Directors, if the Board of Directors reserves such right to itself. (6) The appointment of a rights agent with respect to such rights. Section 6.2 No Action by Written Consent of Stockholders. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in Article IV of these Articles of Organization to elect additional Directors under specific circumstances or to consent to specific actions taken by the Corporation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing in lieu of a meeting of such stockholders. Section 6.3 Certain Business Combinations. 6.3.1. Vote Required for Certain Business Combinations. (A) In addition to any affirmative vote required by the Massachusetts General Laws or by Section 6.3.2 below, the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the then outstanding shares ofcapital stock of the Corporation entitled to vote generally in the election of Directors (the "Voting Stock"), voting together as a single class, shall be required for any Business Combination (hereinafter defined). (B) "Business Combination" shall mean: (1) any merger or consolidation of the Corporation or any Subsidiary (hereinafter defined) with (a) any Interested Stockholder (hereinafter defined) or (b) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate of an Interested Stockholder; or (2) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder, or any Affiliate of any Interested Stockholder, of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $1,000,000 or more; or (3) the purchase, exchange, lease or other acquisition by the Corporation or any Subsidiary (in a single transaction or a series of related transactions) of all or substantially all of the assets or business of any Interested Stockholder or any Affiliate of any Interested Stockholder; or (4) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value (as hereinafter defined) of $1,000,000 or more, except for any issuance or transfer pursuant to an employee benefit plan of the Corporation or any Subsidiary thereof; or (5) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of any Interested Stockholder or any Affiliate of any Interested Stockholder; or (6) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder. 6.3.2. When Higher Vote is Not Required. Section 6.3.1 above shall not be applicable to any particular Business Combination, and such Business Combination shall require only the affirmative vote of the majority of the outstanding shares of Voting Stock, if, in the case of any Business Combination that does not involve any cash or other consideration being received by the stockholders of the Corporation solely in their capacity as stockholders of the Corporation, the condition specified in the following paragraph A of this Section 6.3.2 is met or, in the case of any other Business Combination, the condition(s) specified in either of the following paragraph A or paragraph B of this Section 6.3.2 is met: (A) Approval by Continuing Directors. The Business Combination shall have been approved by a majority of the Continuing Directors (hereinafter defined) and a majority of the Board of Directors. (B) Price and Procedure Requirements. All of the following conditions shall have been met: (1) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by the holders of common stock in such Business Combination shall at least be equal to the higher of the following: (a) (if applicable) the Highest Per Share Price (hereinafter defined), including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Stockholder or any of its Affiliates for any shares of common stock acquired by it (x) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date"), or (y) in the transaction in which it became an Interested Stockholder, whichever is higher; and (b) the highest Fair Market Value per share of common stock on any date during the one-year period prior to and including the Announcement Date; and (c) (if applicable) the price per share equal to the product of (i) the Fair Market Value per share of common stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (such later date is referred to in this Section 6.3 as the "Determination Date"), whichever is higher, multiplied by (ii) a fraction, (x) the numerator of which is the Highest Per Share Price (including any brokerage commissions, transfer taxes and soliciting dealers fees) paid by the Interested Stockholder for any shares of common stock acquired by it within the two-year period immediately prior to and including the Announcement Date, and (y) the denominator of which is the Fair Market Value per share of common stock on the first day in such two-year period upon which the Interested Stockholder acquired any shares of common stock. (2) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class of outstanding Voting Stock other than common stock shall be at least equal to the highest of the following (it being intended that the requirements of this paragraph B(2) shall be required to be met with respect to every such class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (a) (if applicable) the Highest Per Share Price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (x) within the two-year period immediately prior to the Announcement Date, or (y) in the transaction in which it became an Interested Stockholder, whichever is higher; (b) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and (c) the highest Fair Market Value per share of such class of Voting Stock on any date during the one-year period prior to and including the Announcement Date; and (d) (if applicable) the price per share equal to the product of (i) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher, multiplied by (ii) a fraction, (x) the numerator of which is the Highest Per Share Price (including any brokerage commissions, transfer taxes and soliciting dealers fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it within the two-year period immediately prior to and including the Announcement Date, and (y) the denominator of which is the Fair Market Value per share of such class of Voting Stock on the first day in such two-year period upon which the Interested Stockholder acquired any shares of such class of Voting Stock. (3) The consideration to be received by holders of a particular class of outstanding Voting Stock (including common stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration to be received per share by holders of shares of such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by the Interested Stockholder. The price determined in accordance with this paragraph B(3) shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event. (4) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (i) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding stock having preference over common stock as to dividends or liquidation, (ii) there shall have been (x) no reduction in the annual rate of dividends paid on common stock (except as necessary to reflect any subdivision of common stock), except as approved by a majority of the Continuing Directors, and (y) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of common stock, unless the failure to so increase such annual rate is approved by a majority of the Continuing Directors, and (iii) neither such Interested Stockholder nor any of its Affiliates shall have beneficial ownership of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder. (5) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided, directly or indirectly, by the Corporation or any Subsidiary, whether in anticipation of or in connection with such Business Combination or otherwise. (6) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and rules and regulations promulgated thereunder, shall be mailed to stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to the Exchange Act or such rules and regulations). 6.3.3. Certain Definitions. For the purposes of these Articles of Organization: (A) A "Person" shall include an individual, a group acting in concert, a corporation, a partnership, an association or other entity, a joint venture, a pool, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities. (B) "Interested Stockholder" shall mean any Person (other than the Corporation or Subsidiary thereof) that: (1) is the beneficial owner, directly or indirectly, of more than 4.9% of the outstanding Voting Stock for the 3 year period from and after February 9, 1995 or of more than 10% of the outstanding Voting Stock thereafter; or (2) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 4.9% or more of the outstanding Voting Stock for the 3 year period from and after February 9, 1995 or of 10% or more of the outstanding Voting Stock thereafter; or (3) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended, and such assignment or succession was not approved by a majority of the Continuing Directors. (C) "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act (the "SEC Rules"). (D) "Beneficial ownership" shall be determined pursuant to Rule 13d-3 of the SEC Rules; provided, however, that, a Person shall, in any event, also be deemed the beneficial owner of any Voting Stock: (1) which such Person or any of its Affiliates or Associates, directly or indirectly, beneficially owns; or (2) which such Person or any of its Affiliates or Associates, directly or indirectly, has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding (but shall not be deemed to be the beneficial owner of any Voting Stock solely by reason of an agreement, arrangement or understanding with the Corporation to effect any transaction which is described in any one or more of the subparagraphs of paragraph A of Section 6.3.1 above), or upon the exercise of conversion rights, exchange rights, warrants, or options or otherwise, or (B) sole or shared voting or investment power with respect thereto pursuant to any agreement, arrangement, understanding, relationship or otherwise (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, with respect to shares of which neither such Person nor any such Affiliate or Associate is otherwise deemed the beneficial owner); or (3) which is beneficially owned, directly or indirectly, by any partnership, limited partnership, syndicate or other group in which such Person or any of its Affiliates or Associates participates pursuant to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock of the Corporation; provided further, however, that (1) no Director or officer of the Corporation (or any Affiliate or Associate of any such Director or officer) shall, solely by reason of any or all of such Directors or officers acting in their capacities as such, be deemed, for any purposes of these Articles of Organization, to beneficially own any Voting Stock beneficially owned by any other such Director or officer (or any Affiliate or Associate thereof), and (2) neither any tax-qualified employee benefit plan of the Corporation or any Subsidiary, nor any trustee with respect thereto or any Affiliate or Associate of such trustee (solely by reason of such capacity of such trustee), shall be deemed, for any purposes of these Articles of Organization, to beneficially own any Voting Stock held under any such plan. (E) For purposes of determining whether a Person is an Interested Stockholder pursuant to paragraph B of this Section 6.3.3, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned by such Person through application of paragraph D of this Section 6.3.3, but shall not include any other shares of Voting Stock which may be issuable by the Corporation pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options or otherwise. (F) "Subsidiary" shall mean any corporation (including without limitation, any banking or thrift institution) of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in paragraph (B) of this Section 6.3.3, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. (G) "Continuing Director" shall mean any member of the Board of Directors who is not an Affiliate or Associate of the Interested Stockholder and was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any Director who is thereafter chosen to fill any vacancy of the Board of Directors or who is elected and who, in either event, is not an Affiliate or Associate of the Interested Stockholder and in connection with his or her initial assumption of office is recommended for appointment or election by a majority of Continuing Directors then on the Board of Directors. (H) "Fair Market Value" shall mean: (1) in the case of stock, the highest closing sales price of the stock during the 30 calendar day-period immediately preceding the date in question of a share of such stock on the National Association of Securities Dealers Automated Quotation System or any system then in use, or, if such stock is admitted to trading on a principal United States securities exchange registered under the Exchange Act, Fair Market Value shall be the highest sale price reported during the 30 calendar day-period preceding the date in question, or, if no such quotations are available, the Fair Market Value on the date in question of a share of such stock as determined by the Board of Directors in good faith, in each case with respect to any class of stock, appropriately adjusted for any dividend or distribution in shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock; and (2) in the case of property other than cash or stock, the Fair Market Value of such property on the date in question as determined by the Board of Directors in good faith. (I) Reference to "Highest Per Share Price" shall in each case with respect to any class of stock reflect an appropriate adjustment for any dividend or distribution in shares of stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock. 6.3.4. Powers of the Board of Directors. A majority of the Directors of the Corporation (or, if there is an Interested Stockholder, a majority of the Continuing Directors then in office) shall have the power to determine for the purposes of this Section 6.3 on the basis of information known to them after reasonable inquiry, (A) whether a Person is an Interested Stockholder, (B) the number or percentage of any class of securities beneficially owned by any Person, (C) whether a Person is an Affiliate or Associate of another, (D) whether the requirements of Section 6.3.2 above have been met with respect to any Business Combination, (E) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more and (F) any other matters of interpretation arising under this Section 6.3 or under Section 6.6 below. The good faith determination of a majority of the Directors (or, if there is an Interested Stockholder, a majority of the Continuing Directors then in office) on such matters shall be conclusive and binding for all purposes of this Section 6.3 and of Section 6.6 below. A majority of the Directors of the Corporation (or, if there is an Interested Stockholder, a majority of the Continuing Directors then in office) shall have the further power to interpret all the terms and provisions of this Section 6.3 and of Section 6.6 below. 6.3.5. No Effect on Fiduciary Obligations of Interested Stockholders. Nothing contained in this Section 6.3 shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. Section 6.4 Standards for Board of Directors' Evaluation of Offers. The Board of Directors of the Corporation, when evaluating any offer of another Person (as defined in Section 6.3 above) to (A) make a tender or exchange offer for any equity security of the Corporation, (B) merge or consolidate the Corporation with another institution or (C) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation and its stockholders, give due consideration to all relevant factors including, without limitation, the social and economic effects of acceptance of such offer on the Corporation's and/or its Subsidiaries' present and future account holders, borrowers and employees; on the communities in which the Corporation and its Subsidiaries operate or are located; and on the ability of the Corporation to fulfill the objectives of a bank holding company under applicable statutes and regulations. Section 6.5 Pre-emptive Rights. Holders of the capital stock of the Corporation shall not be entitled to pre-emptive rights with respect to any shares of the capital stock of the Corporation which may be issued. Section 6.6 Beneficial Ownership Limitation. No person shall directly or indirectly offer to acquire or acquire beneficial ownership (as that term is defined in Section 6.3.3 above of more than 4.9% of the outstanding shares of any class of equity securities of the Corporation during the period up to and through February 6, 1998 or at any time thereafter more than ten percent (10%) of the outstanding shares of any class of equity securities of the Corporation. This limitation shall not apply (A) to any acquisition of shares of capital stock of the Corporation which has been expressly approved in advance by an affirmative vote of not less than two-thirds of the Board of Directors then in office (or, if there shall be an Interested Stockholder at the time of such vote, then also by the affirmative vote of not less than two-thirds of the Continuing Directors then in office) or (B) to any offer to the Corporation made by the underwriters selected by the Corporation in connection with a public offering by the Corporation of the Corporation's capital stock. For the purposes of determining the number of shares of equity securities owned hereunder by any Person, the number of shares of equity securities deemed to be outstanding shall include shares deemed owned by such Person through the application of paragraph D of Section 6.3.3 above but shall not include any other shares of equity securities which may be issuable by the Corporation pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options or otherwise. In the event that beneficial ownership of any class of equity securities is acquired in violation of this Section 6.6, (i) all shares of common or preferred stock beneficially owned by any Person in excess of 4.9% or ten percent (10%), as the case may be, of the total number of outstanding shares of such class shall not be counted as shares entitled to vote, shall not be voted by any Person or counted as voting shares in connection with any matter submitted to the stockholders for a vote, and shall not be counted as outstanding for purposes of determining the affirmative vote necessary to approve any matter submitted to the stockholders for a vote, and (ii) the Board of Directors may cause all securities beneficially owned by any Person in excess of 4.9% or ten percent (10%), as the case may be, of the total number of outstanding shares of such class of equity securities to be transferred to an independent trustee for sale to the Corporation or on the open market at a price which shall be the lesser of the purchase or the market price. The expenses of such trustee shall be paid out of the proceeds from such sale. The term "offer" as used in this Section 6.6 includes every offer to buy or acquire, solicitation of an offer to sell, tender offer for or request or invitation for tender of, a security or interest in a security of value. Section 6.7 Directors. The Corporation shall be under the direction of a Board of Directors. The number of Directors shall not be fewer than three. The Board of Directors shall be divided into three classes as nearly equal in number as possible, with one class to be elected each year. The initial directors of the Corporation shall hold office as follows: the directors initially elected to Class I shall hold office for a term expiring at the annual meeting of stockholders to be held in 1997, the directors initially elected to Class II shall hold office for a term expiring at the annual meeting of stockholders to be held in 1998, and the directors initially elected to Class III shall hold office for a term expiring at the annual meeting of stockholders to be held in 1999, with the members of each such class to hold office until their respective successors are duly elected and qualified. At each annual meeting, or special meeting in lieu thereof, of stockholders of the Corporation, the successors to the class of directors whose term expires at the meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election and until their respective successors are elected and qualified. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in any certificate of establishment with respect thereto to elect additional Directors under specific circumstances, any Director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the then outstanding Voting Stock, voting together as a single class. At least thirty days prior to such meeting of stockholders, written notice shall be sent to the Director whose removal will be considered at the meeting. For purposes of this Section 6.7, "cause" shall be defined to mean only the following: (i) conviction of a felony, (ii) declaration of unsound mind by order of court, (iii) gross dereliction of duty, (iv) commission of an act involving moral turpitude, or (v) commission of an action which constitutes intentional misconduct or a knowing violation of law if such action in either event results both in an improper substantial personal benefit and a material injury to the Corporation. Section 6.8 Directors' Liability. No Director shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of such Director's fiduciary duty as a Director, notwithstanding any provision of law imposing such liability; provided, however, that, to the extent required by applicable law, this provision shall not eliminate the liability of a Director (i) for any breach of such Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under provisions of the Massachusetts General Laws imposing liabilities on Directors in respect of distributions to the stockholders of the Corporation or loans to officers or Directors of the Corporation, or (iv) any transaction from which such Director derived any improper personal benefit. This provision shall not eliminate the liability of a Director for any act or omission occurring prior to the date upon which this provision becomes effective. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any Director of the Corporation for or with respect to any acts or omissions of such Director occurring prior to the date of such amendment or repeal. Section 6.9 Transactions with Interested Persons. 6.9.1. Unless entered into in bad faith or in violation of any provision of these Articles of Organization, no contract or transaction by the Corporation shall be void, voidable or in any way affected by reason of the fact that it is with an Interested Person. 6.9.2. For the purposes of this Section 6.9, "Interested Person" means any Person in any way interested in the Corporation whether as a director, officer, stockholder, employee or otherwise, and any other entity in which any such Person is in any way interested. 6.9.3. Unless such contract or transaction was entered into in bad faith or in violation of any provision of these Articles of Organization, no Interested Person, because of such interest, shall be liable to the Corporation or to any other Person for any loss or expense incurred by reason of such contract or transaction or shall be accountable for any gain or profit realized from such contract or transaction. 6.9.4. The provisions of this Section 6.9 shall be operative notwithstanding the fact that the presence of an Interested Person was necessary to constitute a quorum at a meeting of Directors or stockholders of the Corporation at which such contract or transaction was authorized or that the vote of an Interested Person was necessary for the authorization of such contract or transaction. Section 6.10 Acting as a Partner. To the extent not prohibited by applicable law, the Corporation may be a partner in any business enterprise which it would have power to conduct by itself. Section 6.11 Stockholders Meetings. Meetings of stockholders may be held at such place in the Commonwealth of Massachusetts or, if permitted by applicable law, elsewhere in the United States as the Board of Directors may determine. Section 6.12 Call of Special Meetings. Special meetings of the stockholders for any purpose or purposes may be called at any time only by the President or by the Board of Directors pursuant to a resolution adopted by a majority of the total number of Directors that the Corporation would have if there were no vacancies (the "Whole Board"); provided, however, that if there is an Interested Stockholder, any such call shall also require the affirmative vote of a majority of the Continuing Directors then in office. Only those matters set forth in the call of the special meeting may be considered or acted upon at such special meeting, unless otherwise required by law. Section 6.13 Amendment of Bylaws. The Bylaws of the Corporation may be adopted, altered, amended, changed or repealed by the Board of Directors or the stockholders of the Corporation. Such action by the Board of Directors shall require the affirmative vote of at least a majority of the Directors then in office at a duly constituted meeting of the Board of Directors, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall also require the affirmative vote of at least a majority of the Continuing Directors then in office, at such a meeting. Such action by the stockholders shall require (i) approval by the affirmative vote of a majority of Directors then in office, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall also require the affirmative vote of at least a majority of the Continuing Directors then in office, at such meeting, (ii) unless waived by the affirmative vote of a majority of the Directors then in office (and, if applicable, Continuing Directors) specified in the preceding sentence, the submission by the stockholders of written proposals for adopting, altering, amending, changing or repealing the Bylaws that comply in all respects with the provisions of the Bylaws governing such submissions and (iii) the affirmative vote of at least eighty percent (80%) of the voting power of the then outstanding Voting Stock voting together as a single class at a duly constituted meeting of stockholders called expressly for such purpose. Section 6.14 Amendment of Articles of Organization. No amendment, addition, alteration, change or repeal of any Article of these Articles of Organization shall be made, unless the same is first approved by the affirmative vote of a majority of the Board of Directors of the Corporation then in office, and thereafter approved by the affirmative vote of stockholders holding not less than eighty percent (80%) of the voting power of the then outstanding Voting Stock voting together as a single class cast at a duly constituted meeting, or, in the case of Articles I, II and III hereof by not less than a majority of the voting power of the then outstanding Voting Stock voting together as a single class cast at a duly constituted meeting; provided, however, that if, at any time within the sixty day period immediately preceding the meeting at which the stockholder vote is to be taken, there is an Interested Stockholder, such amendment, addition, alteration, change or repeal shall also require the affirmative vote of not less than a majority of the Continuing Directors then in office, prior to approval by the stockholders. Unless otherwise provided by law, any amendment, addition, alteration, change or repeal so acted upon shall be effective on the date it is filed with the Secretary of State of the Commonwealth of Massachusetts or on such other date as specified in such amendment, addition, alteration, change or repeal or as the Secretary of State may specify. Section 6.15 Reduced Shareholder Vote Approval for Certain Transactions. The Corporation may, by an affirmative vote of the holders of a majority of the voting power of the then outstanding Voting Stock voting together as a single class cast at a duly constituted meeting, authorize any (i) sale, lease or exchange of all or substantially all of its assets (a "Sale") or (ii) consolidation or merger of the Corporation with or into any other corporation (a "Merger", and together with a Sale, a "Transaction") that would otherwise, pursuant to Chapter 156B of the Massachusetts General Laws, have required an affirmative vote of the holders of two-thirds of the voting power of the then outstanding Voting Stock voting together as a single class cast at a duly constituted meeting; provided however, that such Transaction has previously been approved by a vote of at least a majority of the Board of Directors then in office (and, if at the time of such action there shall be an Interested Stockholder, an additional vote of at least a majority of the Continuing Directors then in office). This Section 6.15 is intended to apply to any Transaction that would not otherwise constitute a Business Combination that is subject to the provisions of Section 6.3 above. ARTICLE VII The effective date of organization of the corporation shall be the date approved and filed by the Secretary of the Commonwealth. If a later effective date is desired, specify such date which shall not be more than thirty days after that date of filing. ARTICLE VIII The information contained in Article VIII is not a permanent part of the Articles of Organization. a. The street address (post office boxes are not acceptable) of the principal office of the corporation in Massachusetts is: 1441 Main Street, Springfield, Massachusetts 01102-3034 b. The name, residential address and post office address of each director and officer of the corporation is as follows:
Name Residential Address Post Office Address President: F. William Marshall, Jr. 87 Ely Road SIS Bancorp, Inc. Longmeadow, MA 01106 1441 Main Street Springfield, MA 01102-3034 Treasurer: John F. Treanor 10 Dutton Circle " Medford, MA 02155 Clerk: Michael E. Tucker 26 Lawler Drive " Easthampton, MA 01027 Directors: John M. Naughton 75 Churchill Drive " Longmeadow, MA 01106 F. William Marshall, Jr. See Above " John F. Treanor See Above "
c. The fiscal year (i.e., tax year) of the corporation shall end on the last day of the month of: December d. The name and business address of the resident agent, if any, of the corporation is: N/A ARTICLE IX By-laws of the corporation have been duly adopted and the president, treasurer, clerk and directors whose names are set forth above, have been duly elected. IN WITNESS WHEREOF AND UNDER THE PAINS AND PENALTIES OF PERJURY, I, whose signature appear below as incorporator and whose name and business or residential address are clearly typed or printed beneath each signature do hereby associate with the intention of forming this corporation under the provisions of General Laws, Chapter 156B and do hereby sign these Articles of Organization as incorporator this 18th day of January, 1996. /s/ Stephen J. Coukos Stephen J. Coukos, Esq. SULLIVAN & WORCESTER One Post Office Square Boston, MA 02109 THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF ORGANIZATION (General Laws, Chapter 156B) I hereby certify that, upon examination of these Articles of Organization, duly submitted to me, it appears that the provisions of the General Laws relative to the organization of corporations have been complied with, and I hereby approve said articles; and the filing fee in the amount of $300 having been paid, said articles are deemed to have been filed with me this 18th day of January 1996. Effective date:_________________________________ /s/ William Francis Galvin WILLIAM FRANCIS GALVIN Secretary of the Commonwealth FILING FEE: One tenth of one percent of the total authorized capital stock, but not less than $200.00. For the purpose of filing, shares of stock with a par value less than $1.00, or no par stock, shall be deemed to have a par value of $1.00 per share. TO BE FILLED IN BY CORPORATION Photocopy of document to be sent to: Stephen J. Coukos, Esq. SULLIVAN & WORCESTER One Post Office Square Boston, MA 02109 Telephone: 617-338-2912 [FORM OF ARTICLES OF AMENDMENT TO BE FILED PRIOR TO REORGANIZATION] THE COMMONWEALTH OF MASSACHUSETTS OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE MICHAEL J. CONNOLLY, Secretary ONE ASHBURTON PLACE, BOSTON, MASSACHUSETTS 02108 ARTICLES OF AMENDMENT General Laws, Chapter 156B, Section 72 We, F. William Marshall, Jr., President, and Michael E. Tucker, Clerk, of SIS Bancorp, Inc. (EXACT Name of Corporation) located at: 1441 Main Street, Springfield, Massachusetts 01102 (MASSACHUSETTS Address of Corporation) do hereby certify that these ARTICLES OF AMENDMENT affecting Articles NUMBERED: 3 (Number those articles 1, 2, 3, 4, 5 and/or 6 being amended hereby) of the Articles of Organization were duly adopted at a meeting held on __________ 1996, by vote of: the sole incorporator in accordance with the rights and powers accorded thereto under Ch. 156B M.G.L. ss.44. To CHANGE the number of shares and the par value (if any) of any type, class or series of stock which the corporation is authorized to issue, fill in the following: The total presently authorized is: WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCK - ------------------------------ ------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - ---- ---------------- ---- ---------------- --------- COMMON: COMMON: 250,000 $0.01 PREFERRED: PREFERRED: 50,000 $0.01 CHANGE the total authorized to: WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCK - ------------------------------ ------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - ---- ---------------- ---- ---------------- --------- COMMON: COMMON: 25,000,000 $0.01 PREFERRED: PREFERRED: 5,000,000 $0.01 The foregoing amendment will become effective when these articles of amendment are filed in accordance with Chapter 156B, Section 6 of The General Laws unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. LATER EFFECTIVE DATE:__________ IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereunto signed our names this day of , in the year 1996. ______________________________________________President F. William Marshall, Jr. ______________________________________________ Clerk Michael E. Tucker THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF AMENDMENT GENERAL LAWS, CHAPTER 156B, SECTION 72 I hereby approve the within articles of amendment and, the filing fee in the amount of $ having been paid, said articles are deemed to have been filed with me this day of 19 MICHAEL J. CONNOLLY Secretary of State TO BE FILLED IN BY CORPORATION PHOTOCOPY OF ARTICLES OF AMENDMENT TO BE SENT To: Stephen J. Coukos, Esq. SULLIVAN & WORCESTER LLP One Post Office Square Boston, MA 02109 Telephone: 617-338-2912 EX-99.2 3 EXHIBIT 99.2 BYLAWS OF SIS BANCORP, INC. ARTICLE 1 Organization The name of this Company is SIS Bancorp, Inc. The Company shall have and fully exercise all powers and authority, both express and implied, available to it under applicable law. ARTICLE 2 Offices Section 2.1 Principal Office. The principal office of the Company shall be located at 1441 Main Street, Springfield, Massachusetts and may be changed from time to time by the Board of Directors of the Company, subject to applicable law. Section 2.2 Additional Offices. The Company may have such additional offices, either within or without the Commonwealth of Massachusetts, as the Board of Directors may from time to time designate or the business of the Company may require, subject to applicable law. ARTICLE 3 Stockholders Section 3.1 Annual Meeting. The annual meeting of the stockholders of the Company shall be held on the last Wednesday in April of each year, if not a legal holiday, and if a legal holiday then on the next succeeding business day, at 10:00 a.m., local time, at the principal executive offices of the Company, or at such other date, place and/or time as may be fixed by resolution of the Board of Directors. Section 3.2 Special Meeting. Subject to the rights of the holders of any series of preferred stock, par value $0.01 per share (the "Preferred Stock"), or any other series or class of stock as set forth in the Articles of Organization (as defined in Section 10.3 of these Bylaws) to elect additional directors under specified circumstances, special meetings of the stockholders may be called only by the President or by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors that the Company would have if there were no vacancies (the "Whole Board"); provided, however, that if at the time of such call there is an Interested Stockholder, any such call shall also require the affirmative vote of a majority of the Continuing Directors then in office. As used in these Bylaws, the terms "Interested Stockholder" and "Continuing Director" shall have the same respective meanings assigned to them in the Articles of Organization. Any determination of beneficial ownership of securities under these Bylaws shall be made in the manner specified in the Articles of Organization. Section 3.3 Place of Meeting. The Board of Directors may designate the place of meeting for any meeting of the stockholders. If no designation is made by the Board of Directors, the place of meeting shall be the principal executive offices of the Company. Section 3.4 Notice of Meeting. A written notice of all annual and special meetings of stockholders stating the hour, date, place and purposes of such meetings shall be given by the Clerk or an Assistant Clerk (or other person authorized by these Bylaws or by law) not less than seven days nor more than fifty days before the meeting to each stockholder entitled to vote thereat or to each stockholder who, under the Articles of Organization or under these Bylaws, is entitled to such notice by mailing it addressed to such stockholder at the address of such stockholder as it appears on the stock transfer books of the Company. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid. In the case of a special meeting the notice shall also state the purpose or purposes thereof. Any previously scheduled meeting of the stockholders may be postponed by resolution of the Board of Directors upon public notice given prior to the time previously scheduled for such meeting of stockholders. Section 3.5 Waiver of Notice. Notice of any stockholders' meeting may be waived in writing by any stockholder either before or after the time stated therein for convening of the meeting, and, if any person present in person or by proxy at a stockholders' meeting does not protest, prior to or at the commencement of the meeting, the lack of proper notice, such person shall be deemed to have waived notice of such meeting. Section 3.6 Quorum and Adjournment. Except as otherwise provided by law or by the Articles of Organization, the holders of a majority of the voting power of the then outstanding shares of the Company entitled to vote generally in the election of directors (the "Voting Stock"), represented in person or by proxy, shall constitute a quorum at a meeting of stockholders, except that when specified business is to be voted on by a class or series voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum for the transaction of such business. The chairman of the meeting or a majority of the voting power of the shares of Voting Stock so represented may adjourn the meeting from time to time, whether or not there is such a quorum (or in the case of specified business to be voted on as a class or series, the chairman or a majority of the shares of such class or series so represented may adjourn the meeting with respect to such specified business). No notice of the time and place of adjourned meetings need be given except as required by law. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Section 3.7 Proxies. Stockholders may vote either in person or by written proxy dated not more than six months before the meeting named therein. Proxies shall be filed with the Clerk of the meeting, or of any adjournment thereof, before being voted. Except as otherwise limited therein, proxies shall entitle the persons authorized thereby to vote at any adjournment of such meeting, but they shall not be valid after final adjournment of such meeting. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by or on behalf of any one of them unless at or prior to the exercise of the proxy the Company receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. Section 3.8 Notice of Stockholder Business and Nominations. (A) Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors of the Company and the proposal of business to be considered by the stockholders may be made at an annual meeting of the stockholders (a) pursuant to the Company's notice of meeting delivered pursuant to Section 3.4 of these Bylaws, (b) by or at the direction of the President or the Board of Directors pursuant to a resolution adopted by a majority of the Whole Board (unless there is an Interested Stockholder, in which case the affirmative vote of a majority of the Continuing Directors then in office shall also be required) or (c) by any stockholder of the Company who is entitled to vote at the meeting, who complied with the notice procedures set forth in clauses (2) and (3) of paragraph (A) of this Section 3.8 and who was a stockholder of record at the time such notice is delivered to the Clerk of the Company. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this Section 3.8, the stockholder must have given timely notice thereof in writing to the Clerk of the Company. To be timely, a stockholder's notice shall be delivered to the Clerk at the principal executive offices of the Company not less than seventy days nor more than ninety days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than twenty days, or delayed by more than seventy days, from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of the seventieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to regulations promulgated by the Securities and Exchange Commission (the "SEC"), or any successor agency thereto, pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Company's books, and of such beneficial owner and (ii) the class and number of shares of the Company which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Section 3.8 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Company at least eighty days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by these Bylaws shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Clerk at the principal executive offices of the Company not later than the close of business on the tenth day following the day on which such public announcement is first made by the Company. (B) Special Meeting of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Company's notice of meeting pursuant to Section 3.4 of these Bylaws. (C) General. (1) Only persons who are nominated in accordance with the procedures set forth in these Bylaws shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in these Bylaws. (2) Except as otherwise provided by law, the Articles of Organization or these Bylaws, the Chief Executive Officer of the Company as chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defective proposal or nomination shall be disregarded. (3) For purposes of these Bylaws, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Company with the SEC pursuant to Section 13, 14 or 15(d) of the Exchange Act. (4) Notwithstanding the foregoing provisions of these Bylaws, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in these Bylaws. Nothing in these Bylaws shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Company's proxy statement pursuant to rules promulgated under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. Section 3.9 Procedure for Election of Directors; Required Vote. Election of directors at all meetings of the stockholders at which directors are to be elected shall be by written ballot, and except as otherwise set forth in the Articles of Organization with respect to the right of the holders of any series of Preferred Stock or any other series or class of stock to elect additional directors under specified circumstances, a plurality of the votes cast thereat shall elect the directors. Except as otherwise provided by law, the Articles of Organization or these Bylaws, all matters submitted to the stockholders at any meeting shall be decided by the affirmative vote of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the matter and shall be the act of the stockholders. Section 3.10 No Stockholder Action by Written Consent. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in the Articles of Organization to elect additional directors under specific circumstances or to consent to specific actions taken by the Company, any action required or permitted to be taken by the stockholders of the Company must be effected at an annual or special meeting of stockholders of the Company and may not be effected by any consent in writing by such stockholders. ARTICLE 4 Board of Directors Section 4.1 General Powers. The business and affairs of the Company shall be managed by or under the direction of its Board of Directors. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board of Directors may exercise all such powers of the Company and do all such lawful acts and things as are not by law or by the Articles of Organization or by these Bylaws required to be exercised or done by the stockholders. Section 4.2 Composition and Term. The Board of Directors shall be composed of: (a) those persons elected by the incorporator(s) of the Company to serve as the initial directors of the Company in accordance with Section 12 of Chapter 156B of the Massachusetts General Laws, such persons to serve as directors until the respective expiration dates of their terms as established by said incorporator(s) and until their successors are elected and qualified and (b) such other persons who are elected as directors from time to time as provided herein. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in the Articles of Organization to elect directors under specified circumstances, the number of directors shall be fixed from time to time exclusively pursuant to a resolution adopted by a majority of the Whole Board (provided that if at the time of such action there is an Interested Stockholder, a majority vote of the Continuing Directors then in office shall also be required), but shall consist of not less than three directors. The directors, other than those who may be elected by the holders of any series of Preferred Stock or any other series or class of stock as set forth in the Articles of Organization, shall be divided into three classes as nearly equal in number as possible, and designated as Class I, Class II and Class III. Members of each Class shall hold office until their successors shall have been duly elected and qualified. At each succeeding annual meeting of stockholders of the Company, (i) the successors of the Class of directors whose term expires at that meeting shall be elected by a plurality vote of all votes cast at such meeting to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election, and until their successors are elected and qualified and (ii) if authorized by a resolution of the Board of Directors, directors may be elected to fill any vacancy on the Board of Directors, regardless of how such vacancy shall have been created. Section 4.3 Qualification. Each director shall have such qualifications as are required by applicable law. Any director who becomes in any manner disqualified, shall vacate his office forthwith. To the extent required by law, each director, when appointed or elected, shall take an oath that he will faithfully perform the duties of his office. The oath, to the extent so required, shall be taken before a notary public or justice of the peace, who is not an officer of the Company, and a record of the oath shall be made a part of the records of the Company. To the extent required by law, members of the Board of Directors shall be citizens and residents of the Commonwealth of Massachusetts. Section 4.4 Regular Meetings. A regular meeting of the Board of Directors shall be held without notice other than these Bylaws immediately after, and at the same place as, each annual meeting of stockholders. The Board of Directors may, by resolution, provide the time and place for the holding of additional regular meetings without notice other than such resolution. Section 4.5 Special Meetings. Special meetings of the Board of Directors shall be called at the request of the Chairman of the Board, if one is elected, the President, or a majority of the Board of Directors. The person or persons authorized to call special meetings of the Board of Directors may fix the place and time of the meetings. Section 4.6 Notice. Notice of any special meeting shall be given to each director at his or her business or residence in writing by hand delivery, first-class or overnight mail or courier service, telegram or facsimile transmission or orally by telephone communication. If mailed, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, at least five days before such meeting. If by telegram, overnight mail, or courier service such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph company or its notice is delivered to the overnight mail or courier service company at least twenty-four hours before such meeting. If by facsimile transmission, such notice shall be deemed adequately delivered when the notice is transmitted at least twenty-four hours before such meeting. If by telephone or by hand delivery, the notice shall be given at least twelve hours prior to the time set for the meeting. Neither business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice of such meeting, except for amendments to these Bylaws as provided under Article 8 of these Bylaws. A meeting may be held at any time without notice if all the directors are present or if those not present waive notice of the meeting as provided in Section 4.7 of these Bylaws. Section 4.7 Waiver of Notice. Notice of any directors' meeting may be waived in writing by all the directors and, if any director present at a directors' meeting does not protest prior to or at the commencement of the meeting the lack of proper notice, he shall be deemed to have waived notice of such meeting. Section 4.8 Quorum. A majority of the Whole Board shall constitute a quorum for the transaction of business, but if at any meeting of the Board of Directors there shall be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time without further notice. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 4.9 Vacancies. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in the Articles of Organization to elect additional directors under specified circumstances, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, unless there is an Interested Stockholder, in which case such vacancy may only be filled by vote of a majority of the Continuing Directors then in office. A director so chosen shall hold office for the remainder of the full term of the Class of directors in which the vacancy occurred or the new directorship was created and until such director's successor has been elected and qualified. No decrease in the number of authorized directors shall shorten the term of any incumbent director. Section 4.10 Presumption of Assent. A director of the Company who is present at a meeting of the Board of Directors at which action on any Company matter is taken shall be presumed to have assented to the action taken unless his dissent or abstention shall be entered in the minutes of the meeting or unless he shall file a written dissent to such action with the person acting as the Clerk of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Clerk of the Company within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action. Section 4.11 Manner of Participation. Members of the Board of Directors or of committees elected by the Board pursuant to Section 4.15 may participate in meetings of the Board or such committee by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person but shall not constitute attendance for the purpose of compensation pursuant to Section 4.12, unless the Board of Directors by resolution so provides. Section 4.12 Compensation of Directors. The Board of Directors shall have authority to fix fees of directors, including a reasonable allowance for expenses actually incurred in connection with their duties. Section 4.13 Resignation. Any director may resign at any time by sending a written notice of such resignation to the principal executive office of the Company addressed to the Chairman of the Board, the President or the Clerk. Unless the resigning director otherwise specifies in the notice of resignation, such resignation shall take effect upon receipt by the Chairman of the Board, the President or the Clerk. Section 4.14 Limitation on Service by Directors. A director upon attaining the age of seventy (70) shall retire from service as a director of the Company. In special circumstances, a person may be nominated as a Director who has attained the age of seventy (70) because of the special contribution such person may make to the business and management of the Company. Section 4.15 Committees. The Board of Directors may, by resolution adopted by a majority of the Whole Board, designate one or more committees, including without limitation an executive committee, each committee to consist of three (3) or more directors elected by the Board of Directors. The Board of Directors may elect one or more directors as alternate members of any such committee, who may take the place of any absent member or members at a meeting of such committee. If a member of any such committee shall be absent from any meeting, or disqualified from voting thereat, the remaining member or members present and not disqualified from voting, whether or not such member or members constitute a quorum, may, by unanimous vote, appoint another member of the Board of Directors to act at the meeting in place of an absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, and except as otherwise provided by law, the Articles of Organization or these Bylaws, shall have and may exercise, when the Board of Directors is not in session, all the powers and authority of the Board of Directors in the direction of the Company. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Unless otherwise specified in the resolution of the Board of Directors designating the committee, the majority of the total number of members of the committee shall constitute a quorum for the transaction of business, and the vote of the majority of the members of the committee present at any meeting of which there is a quorum shall be the act of the committee. Each such committee shall keep regular minutes of its meetings and report the same to the Board of Directors, when required. Section 4.16 Removal. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in the Articles of Organization to elect additional directors under specified circumstances, any director may be removed from office at any time, but only for cause and then only by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the then outstanding Voting Stock, voting together as a single class. ARTICLE 5 Officers Section 5.1 Enumeration. The officers of the Company shall consist of a President, a Treasurer, a Clerk and such other officers, including, without limitation, a Chairman of the Board, a Clerk and one or more Vice Presidents as the Board of Directors may determine to be necessary for the management of the Company. Section 5.2 Election. The President, Treasurer and the Clerk (and, if any, the Secretary) shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders. Other officers shall be elected by the Board of Directors at such first meeting of the Board of Directors or at any other meeting. Section 5.3 Qualification. Any two or more offices may be held by any person. The President shall be a Director. Any officer may be required by the Board of Directors to give bond for the faithful performance of his duties in such amount and with such sureties as the Board of Directors may determine. Section 5.4 Tenure. Except as otherwise provided by law, by the Articles of Organization, or by these Bylaws, the President, Treasurer and Clerk (and, if any, the Secretary) shall hold office until the first meeting of the Board of Directors following the next annual meeting of the stockholders and until their respective successors are chosen and qualified and all other officers shall hold office until the first meeting of the Board of Directors following the next annual meeting of stockholders, or for such shorter term as the Board of Directors may fix at the time such officers are chosen. The Chief Executive Officer may resign at any time by written notice to the Board of Directors or the Clerk. Any other officer may resign at any time by written notice to the Chief Executive Officer. Such resignation shall be effective upon receipt unless the resignation otherwise provides. Election or appointment of an officer, employee or agent shall not of itself create contract rights. The Board of Directors may, however, authorize the Company to enter into an employment contract with any officer in accordance with law, but no such contract right shall impair the right of the Board of Directors to remove any officer at any time in accordance with Section 5.5 hereof. Section 5.5 Removal. Except as otherwise provided by law or the Articles of Organization, the Board of Directors may remove any officer with or without cause by the affirmative vote of a majority of the Whole Board; provided, however, that if at the time of such removal there is an Interested Stockholder, the affirmative vote of a majority of the Continuing Directors then in office shall also be required. Any such removal, other than for cause, shall be without prejudice to the contract rights, if any, of the persons involved. Any officer may be removed for cause only after ten days' written notice and opportunity to be heard by the Board of Directors. Section 5.6 Absence or Disability. In the event of the absence or disability of any officer, the Board of Directors may designate another officer to act temporarily in place of such absent or disabled officer. Section 5.7 Vacancies. Any vacancy in any office may be filled for the unexpired portion of the term by the Board of Directors. Section 5.8 Chief Executive Officer. The President shall be the Chief Executive Officer, unless the Board of Directors shall elect a Chairman of the Board and designate such Chairman to be the Chief Executive Officer. The Chief Executive Officer shall, subject to the direction of the Board of Directors, have general supervision and control of the Company's business and shall preside, when present, at all meetings of the stockholders. Section 5.9 Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Board of Directors. If a Chairman of the Board is not elected or is absent, the President shall preside at all meetings of the Board of Directors. The Chairman of the Board shall have such other powers and shall perform such other duties as the Board of Directors may from time to time designate. If the Chairman of the Board is not the Chief Executive Officer, he shall also have such powers and perform such duties as the Chief Executive Officer may from time to time designate. Section 5.10 The President. The President, if he is the Chief Executive Officer, shall preside at all meetings of the stockholders. If a Chairman of the Board is not elected or is absent, the President shall preside at all meetings of the Board of Directors. If the President is not the Chief Executive Officer, he shall have such powers and perform such duties as the Chief Executive Officer may from time to time designate. Section 5.11 Vice Presidents, Treasurer and Other Officers. Any Vice President, the Treasurer and any other officers whose powers and duties are not otherwise specifically provided for herein shall have such powers and shall perform such duties as the Chief Executive Officer may from time to time designate. Section 5.12 Clerk and Assistant Clerks. The Clerk shall keep a record of the meetings of stockholders. If a Secretary is not elected or is absent, the Clerk shall keep a record of the meetings of the Board of Directors. In the absence of the Clerk, an Assistant Clerk, if one is elected, shall perform the Clerk's duties. Otherwise a Temporary Clerk designated by the person presiding at the meeting shall perform the Clerk's duties. Section 5.13 Secretary and Assistant Secretaries. The Secretary, if one is elected, shall keep a record of the meetings of the Board of Directors. In the absence of the Secretary, any Assistant Secretary, the Clerk, any Assistant Clerk or a Temporary Secretary designated by the person presiding at such meeting shall perform the Secretary's duties. ARTICLE 6 Stock Certificates and Transfers Section 6.1 Certificates of Stock. Unless otherwise provided by the Board of Directors, each stockholder shall be entitled to a certificate of the capital stock of the Company in such form as may from time to time be prescribed by the Board of Directors. Such certificate shall be signed by the President or a Vice President and by the Treasurer or an Assistant Treasurer. Such signatures may be facsimile if the certificate is signed by a transfer agent or by a registrar, other than a Director, officer or employee of the Company. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Company with the same effect as if he were such officer at the time of its issue. Every certificate for shares of stock which are subject to any restriction on transfer and every certificate issued when the Company is authorized to issue more than one class or series of stock shall contain such legend with respect thereto as is required by law. Section 6.2 Transfers. Subject to any restrictions on transfer and unless otherwise provided by the Board of Directors, shares of stock may be transferred on the books of the Company by the surrender to the Company or its transfer agent of the certificate therefor properly endorsed or accompanied by a written assignment and power of attorney properly executed, with transfer stamps (if necessary) affixed, and with such proof of the authenticity of signature as the Company or its transfer agent may reasonably require. Section 6.3 Record Holders. Except as otherwise required by law, by the Articles of Organization or by these Bylaws, the Company shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote, regardless of any transfer, pledge or other disposition of such stock, until the shares have been transferred on the books of the Company in accordance with the requirements of these Bylaws. It shall be the duty of each stockholder to notify the Company of his address and any changes thereto. Section 6.4 Record Date. The Board of Directors may fix in advance a time of not more than sixty days before the date of any meeting of the stockholders, the date for the payment of any dividend or the making of any distribution to stockholders or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting, and any adjournment thereof, or the right to receive such dividend or distribution or the right to give such consent or dissent. In such case, only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the Company after the record date. If no record date is fixed and the transfer books are not closed, (a) the record date for determining stockholders having the right to notice of or to vote at a meeting of stockholders shall be the close of business on the day next preceding the day on which notice is given, and (b) the record date for determining stockholders for any other purpose shall be the close of business on the date on which the Board of Directors acts with respect thereto. Section 6.5 Replacement of Certificates. In case of the alleged loss, destruction or mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms as the Board of Directors may prescribe. Section 6.6 Issuance of Capital Stock. Except as provided by law, the Board of Directors shall have the authority to issue or reserve for issue from time to time the whole or any part of the capital stock of the Company which may be authorized from time to time, to such persons or organizations, for such consideration, whether cash, property, services or expenses and on such terms as the Board of Directors may determine, including, without limitation, the granting of options, warrants or conversion or other rights to subscribe to said capital stock. Section 6.7 Dividends. Subject to applicable law, the Articles of Organization and these Bylaws, the Board of Directors may from time to time declare, and the Company may pay, dividends on outstanding shares of its capital stock. ARTICLE 7 Indemnification Section 7.1 Indemnification and Insurance. (A) Each person who was or is made a party or is threatened to be made a party to or is otherwise involved (including, without limitation, as a witness) in any action, suit or proceeding, whether civil, derivative, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, partner, trustee, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to any employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action or inaction in an official capacity as a director, officer, partner, trustee, employee or agent or in any other capacity while serving as a director, officer, partner, trustee, employee or agent, shall be indemnified and held harmless by the Company against all expense, liability and loss (including, without limitation, attorneys' fees and disbursements, judgments, fines, excise taxes or penalties under the Employee Retirement Income Security Act of 1974, as amended, and amounts paid or to be paid in settlement) reasonably incurred by such indemnitee in connection with such proceeding, provided that such indemnitee shall have acted in good faith in the reasonable belief that such action was in, or not opposed to, the best interests of the Company or such corporation, partnership, joint venture, trust or other enterprise, as the case may be, or with respect to any employee benefit plan, the best interests of the participants or beneficiaries of such employee benefit plan; provided, however, that except as provided in paragraph (C) of this Section 7.1 with respect to proceedings seeking to enforce rights to indemnification, the Company shall indemnify any such indemnitee seeking indemnification in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors. (B) The right to indemnification conferred in paragraph (A) of this Section 7.1 shall include the right to be paid by the Company the expenses (including attorneys' fees and disbursements) incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, to the extent required by applicable law, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Company of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this paragraph (B) or otherwise. (C) If a claim under paragraphs (A) or (B) of this Section 7.1 is not paid in full by the Company within thirty days after a written claim has been received by the Company, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right of an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the Company shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth under applicable law. Neither the failure of the Company (including its Board of Directors, independent legal counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth under applicable law, nor an actual determination by the Company (including its Board of Directors, independent legal counsel or stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the burden or proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under these Bylaws or otherwise shall be on the Company. (D) The right to indemnification and the advancement of expenses conferred in this Section 7.1 shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Organization, provision of these Bylaws, agreement, vote of stockholders or disinterested directors or otherwise. (E) The Company may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Company or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under applicable law. (F) The Company may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and rights to the advancement of expenses, to any employee or agent of the Company to the fullest extent of the provisions of these Bylaws with respect to the indemnification and advancement of expenses of directors and officers of the Company. (G) The rights to indemnification and to the advancement of expenses conferred in paragraphs (A) and (B) of this Section 7.1 shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. Section 7.2 Merger or Consolidation. If the Company is merged into or consolidated with another corporation and the Company is not the surviving corporation, the surviving corporation shall assume the obligations of the Company under this Article 7 with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring at or prior to the date of such merger or consolidation. Section 7.3 Savings Clause. If this Article 7 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify and advance expenses to each indemnitee as to any expenses (including reasonable attorneys' fees), judgments, fines, liabilities, losses, and amounts paid in settlement in connection with any action, suit, proceeding or investigation, whether civil, criminal or administrative, including an action by or in the right of the Company, to the fullest extent permitted by any applicable portion of this Article 7 that shall not have been invalidated and to the fullest extent permitted by applicable law. Section 7.4 Subsequent Legislation. If the Massachusetts General Laws are amended after adoption of this Article 7 to expand further the indemnification permitted to an indemnitee, then the Company shall indemnify all such persons to the fullest extent permitted by the Massachusetts General Laws, as so amended. ARTICLE 8 Amendments Section 8.1 Amendments. These Bylaws may be altered, amended, changed or repealed by the Board of Directors or the stockholders of the Company, provided notice of the proposed change was given in the notice of the meeting and, in the case of the Board of Directors, in a notice given no less than twenty-four hours prior to the meeting. Such action by the Board of Directors shall require the affirmative vote of at least a majority of the Directors then in office at a duly constituted meeting of the Board of Directors, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall also require the affirmative vote of at least a majority of the Continuing Directors then in office, at such a meeting. Such action by the stockholders shall require (i) approval by the affirmative vote of a majority of Directors then in office, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall also require the affirmative vote of at least a majority of the Continuing Directors then in office, at such meeting, (ii) unless waived by the affirmative vote of a majority of the Directors then in office (and, if applicable, the affirmative vote of a majority of the Continuing Directors then in office) specified in the preceding sentence, the submission by the stockholders of written proposals for adopting, altering, amending, changing or repealing the Bylaws that comply in all respects with the provisions of these Bylaws governing such submissions and (iii) the affirmative vote of at least eighty percent (80%) of the voting power of the then outstanding Voting Stock voting together as single class at a duly constituted meeting of stockholders called expressly for such purpose. ARTICLE 9 Special Corporate Acts Section 9.1 Execution of Negotiable Instruments. All checks, drafts, notes, bonds, bills of exchange, and orders for the payment of money shall be signed by such officer or officers of the Company as the Board of Directors shall determine from time to time. The Board of Directors may authorize the use of facsimile signatures of any officer or employee in lieu of manual signatures. Section 9.2 Execution of Deeds, Contracts, Etc. Subject always to the specific directions of the Board of Directors or the Executive Committee, all deeds, mortgages, assignments, extensions, releases, partial releases, and discharges of mortgages made by the Company and all other written contracts, agreements and undertakings to which the Company shall be a party shall be executed in its name by the Chairman of the Board of Directors, the President, any Executive Vice President, any Senior Vice President, any Vice President, or such other officer as may be designated by the Chairman of the Board of Directors or the President, and, when requested, the Clerk or an Assistant Clerk shall attest to such signatures and affix the corporate seal to the instruments. Section 9.3 Endorsement of Stock Certificates. Subject always to the specific directions of the Board of Directors or the Executive Committee, any share or shares of stock issued by any corporation and owned by the Company (including reacquired shares of stock of the Company) may, for sale or transfer, be endorsed in the name of the Company by the Chairman of the Board of Directors, the President or such other officer as may be designated by the Chairman of the Board of Directors or the President, and his signature shall be attested to by the Clerk or an Assistant Clerk who shall affix the corporate seal. Section 9.4 Voting of Shares Owned by Company. Subject always to the specific directions of the Board of Directors or the Executive Committee, any share or shares of stock issued by any other corporation and owned or controlled by the Company may be voted at any stockholders' meeting of the other corporation by the President or Chief Executive Officer of the Company, or in the absence by such other officer as may be designated by the President or Chief Executive Officer. Whenever, in the judgment of the President or the Chief Executive Officer, or in their absence, of any such other officer as may be designated by the President or Chief Executive Officer, it is desirable for the Company to execute a proxy or give a stockholders' consent in respect to any share or shares of stock issued by any other corporation and owned or controlled by the Company, the proxy or consent shall be executed in the name of the Company by the President of Chief Executive Officer without necessity of any authorization by the Board of Directors. Any person or persons designated in the manner above stated as the proxy or proxies of the Company shall have full right, power and authority to vote the share or shares of stock issued by the other corporation. ARTICLE 10 Miscellaneous Provisions Section 10.1 Fiscal Year. Except as otherwise determined by the Board of Directors, the fiscal year of the Company shall be the twelve months ending December 31 or on such other date as may be required by law. Section 10.2 Seal. The Board of Directors shall have power to adopt and alter the seal of the Company. Section 10.3 Articles of Organization. All references in these Bylaws to the Articles of Organization shall be deemed to refer to the Articles of Organization of the Company, as amended and in effect from time to time. EX-99.3 4 EXHIBIT 99.3 FEDERAL DEPOSIT INSURANCE CORPORATION Washington, D.C. FORM F-2 Annual Report under Section 13 of the Securities and Exchange Act of 1934 For the Fiscal Year Ended 23297 December 31, 1995 (FDIC Certificate Number) SPRINGFIELD INSTITUTION FOR SAVINGS (exact name of bank as specified in charter) COMMONWEALTH OF MASSACHUSETTS (State or other jurisdiction of incorporation or organization) 04-1859200 (I.R.S. Employer Identification No.) 1441 Main Street Springfield, Massachusetts 01102 (address of principal office) Telephone: (413) 748-8000 (Bank's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class Common Stock, par value $1.00 per share Indicate by check mark if disclosure of delinquent filers pursuant to Item 10 is not contained herein, and will not be contained, to the best of the Bank's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form F-2 [ ] Indicate by check mark whether the bank (1) has filed all reports to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The aggregate market value of the voting stock of the Bank held by non-affiliates of the Bank, based on the closing sale price for the Bank's Common Stock on February 28, 1996 as reported by NASDAQ, was $102,078,762.50. At December 31, 1995, the Bank had 5,710,700 shares of common stock, par value $1.00 per share. The number of shares of common stock outstanding on February 28, 1996, the most recent practicable is 5,718,200. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Springfield Institution for Savings Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders to be held on May 9, 1996 are incorporated by reference into Part I and III of this Form F-2. Portions of the Springfield Institution for Savings Registration Statement on Form F-1, as amended, and certain exhibits thereto, are incorporated by reference into Part IV of this Form F-2. CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Bank desires to take advantage of the new "safe harbor" provisions of the Private Securities Litigation Reform Act of 1935. This Report contains certain "forward-looking statements" including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Bank wishes to caution readers that the following important factors, among others, may have affected and could in the future affect the Bank's actual results and could cause the Bank's actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf on the Bank herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Bank must comply, the cost of compliance either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Bank's organization, compensation and benefit plans; (iii) the effect on the Bank's competitive position within in its market area increasing consolidation within the banking industry, and increasing competition from larger regional and out-of-state banking organizations as well as nonbank providers of various financial services; (iv) the effect of unforeseen changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the New England and national economy. PART I ITEM 1: BUSINESS Overview Established in 1827, Springfield Institution for Savings (the "Bank") is a state chartered, stock savings bank headquartered in Springfield, MA. The Bank provides a wide variety of financial services which include retail and commercial banking, residential mortgage origination and servicing, commercial real estate lending and consumer lending. The Bank serves its primary market of Hampden and Hampshire Counties through a network of 20 retail branches. The Bank completed a successful conversion from mutual to stock form (the "Conversion") on February 7, 1995. Through the issuance of 5,562,500 shares of common stock, the Bank received proceeds of $35.9 million, net of Conversion related costs and the Bank's Employee Stock Ownership Plan. The Bank's revenues are derived principally from interest payments on its loan portfolios and mortgage-backed and other investment securities. The Bank's primary sources of funds are deposits, borrowings and principal and interest payments on loans and mortgage-backed securities. Background Historically, the Bank's principal business was attracting deposits from the general public and investing those funds in loans secured by one to four family residential real estate. During the 1980's the Bank significantly increased its portfolio of commercial real estate and real estate-related commercial loans both directly and through certain of its wholly-owned direct and indirect real estate investment subsidiaries, including Colebrook Corporation ("Colebrook"). As the national and regional economic recession generally impaired borrowers' ability to repay loans, the level of the Bank's non-performing assets increased from the period of 1989 through 1992. As a consequence, the Bank increased its provision for loan losses and expenses of managing and disposing of non-performing assets, which resulted in net losses in each of the years 1990 through 1994. These net losses caused the Bank's total surplus to decline from a peak of $93.5 million or 8.64% of total assets at December 31, 1989 to $28.5 million or 3.10 % of total assets at December 31, 1994. The increase in the level of non-performing assets and regulatory concerns over the preservation of the Bank's capital, together with other factors in the operations of the Bank, resulted in the Bank entering into a Stipulation and Consent to the issuance of an Order to Cease and Desist (the "Order") with the Federal Deposit Insurance Corporation ("FDIC") and the Office of the Massachusetts Commissioner of Banks ("Commissioner of Banks") on May 12, 1992. The Order required, among other things, that the Bank submit a written plan to the FDIC and the Commissioner of Banks outlining the Bank's strategy to increase capital in the event the Bank's Tier I leverage capital ratio fell below 6%. In accordance with the Order, the Bank submitted a capital restoration plan to the FDIC and the Commissioner of Banks, strengthened its senior management team ("Management") and developed and implemented new strategies to improve the Bank's financial condition and to enhance profitability. The Bank's capital restoration plan called for the Bank to raise additional capital through the issuance of common stock in connection with the Conversion. In October 1994, the Commissioner of Banks approved the Bank's Plan of Conversion. On November 8, 1994, the FDIC raised no objections to the Bank's Plan of Conversion. Consequently, the Bank commenced a concurrent Depositor Subscription and Community Offering. The Bank closed the Conversion on February 7, 1995 with the issuance of 5,562,500 shares of common stock at $8.00 per share. The stock commenced trading on February 8, 1995 on the NASDAQ National Market System under the symbol 'SISB'. As a result of the Conversion there was a net increase to capital of $35.9 million. The Bank substantially strengthened its senior management team by hiring a new President and Chief Executive Officer, a new Chief Financial Officer, new Senior Executives in Credit Administration and Commercial Lending, Retail Banking, Treasury, Audit and Human Resources and several senior officers in Loan Review, Loan Workout and Commercial Lending. Management subsequently implemented a strategy to (1) reduce the level of the Bank's 3 non-performing assets, (2) reduce the risk profile of the Bank, (3) refocus on the Bank's "core" community banking activities to serve the needs of consumers and small businesses in the Bank's primary market area, (4) reduce operating expenses and improve operating efficiency, and (5) improve the Bank's capital position. Management recognized that the Bank needed to reduce its non-performing assets in order to make the bank more profitable and competitive. The Bank adopted an accelerated disposition program comprised of bulk sales of non-performing assets and other assets, accelerated sales of foreclosed properties and procedures to intensify loan workout and restructuring activities. This program resulted in significant reductions in non-performing assets in 1994 and 1995. At December 31, 1994 and 1995, non-performing assets totaled $25.9 million, or 2.81% of total assets, and $13.9 million, or 1.30% of assets, respectively. In 1995, as a result of this significant decline in non-performing assets, the Bank reduced its loan loss provision and foreclosed real estate expenses which contributed to net income of $11.5 million. With the proceeds from the Conversion and net income for the year, the Bank's total equity increased to $81.5 million or 7.61% of total assets at December 31, 1995. By regulatory definitions, the Bank is considered "well capitalized." Effective April 24, 1995, the Bank received notification from both the FDIC and the Commissioner of Banks that the Order had been terminated, which unconditionally released the Bank from its obligations under the Order. Since 1993, the Bank has been in the process of divesting its real estate investment business that was largely conducted through Colebrook and the Bank's other wholly-owned real estate investment subsidiaries (collectively the "Real Estate Subsidiaries"). This divestment is required by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The Bank submitted its divestiture plan for the Real Estate Subsidiaries to the FDIC, which approved the plan in December 1995. This plan is scheduled to be completed by December 1997. Investment Activities The Bank engages in investment activities for both investment and liquidity purposes. The Bank maintains an investment securities portfolio which consists primarily of U.S. Government and agency securities, corporate obligations and Federal Home Loan Bank stock. Other short-term investments held by the Bank periodically include interest-bearing deposits and federal funds sold. The Bank also maintains a mortgage-backed securities portfolio consisting of securities issued and guaranteed by the Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) in addition to publicly traded and rated mortgage-backed securities issued by private financial intermediaries which are rated "AA" or higher by rating agencies of national prominence. Effective January 1, 1994, the Bank adopted Statement of Financial Accounting Standards ("SFAS") No. 115, " Accounting for Certain Investments in Debt and Equity Securities," and now holds both "available for sale" and "held to maturity" portfolios. Securities which the Bank has the intent and ability to hold until maturity are classified as held to maturity and are carried at amortized cost, while those securities which have been identified as assets that may be sold prior to maturity or assets for which there is not a positive intent to hold to maturity are classified as available for sale and are carried at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. 4 The following table sets forth certain information regarding the amortized cost and fair value of the Bank's investment portfolio at the dates indicated. Data for periods prior to January 1, 1994 do not distinguish between the available for sale and held to maturity portfolios, as the Bank had not adopted SFAS No. 115 prior to that time.
December 31, 1995 --------------------------------------------------------------- Available for Sale Held to Maturity ----------------------------- ---------------------------- Amortized Amortized Cost Fair Value Cost Fair Value -------------- ------------ ------------ ----------- (Dollars in Thousands) U.S. government and agency obligations $ 7,700 $ 7,699 $ - $ - Mortgage-backed securities 222,673 224,101 161,168 161,481 Other bonds and short term obligations 9,300 9,300 11,625 11,449 Other securities 5,884 5,884 - - -------- -------- -------- -------- Total $245,557 $246,984 $172,793 $172,930 ======== ======== ======== ======== December 31, 1994 --------------------------------------------------------------- Available for Sale Held to Maturity ----------------------------- ---------------------------- Amortized Amortized Cost Fair Value Cost Fair Value -------------- ------------ ------------ ----------- (Dollars in Thousands) U.S. government and agency obligations $ 23,953 $ 23,882 $ 17,350 $ 16,173 Mortgage-backed securities 112,452 109,455 136,901 125,096 Other bonds and short term obligations 23,229 23,169 3,992 3,992 Other securities 4,808 4,815 - - -------- -------- -------- -------- Total $164,442 $161,321 $158,243 $145,261 ======== ======== ======== ======== December 31, 1993 ----------------------------- Amortized Cost Fair Value ------------ ----------- (Dollars in Thousands) U.S. government and agency obligations $ 47,477 $ 47,487 Mortgage-backed securities 114,443 114,602 Other bonds and short term obligations 64,813 65,022 Other securities 4,832 4,842 -------- -------- Total $231,565 $231,953 ======== ========
The Bank's investment portfolio increased $100.2 million between December 31, 1994 and December 31, 1995. This increase reflects the investment of proceeds from the Conversion and funds obtained from wholesale borrowing. In 1995, the Financial Accounting Standards Board ("FASB") issued a special report, "A Guide to Implementation of Statement 115," that provided additional guidance related to the application of SFAS 115. In connection with the issuance of this special report, the FASB allowed all organizations to review their portfolio classifications and make a one-time reclassification of securities between categories during the period from November 15, 1995 to December 31, 1995. On December 15, 1995, the Bank transferred securities with an amortized cost of $84.3 million and an unrealized loss of $1.2 million from the held to maturity portfolio to the available for sale portfolio. In addition, the Bank also transferred securities with an estimated fair value of $47.3 million and an unrealized gain of $0.3 million from the available for sale portfolio to the held to maturity portfolio. The unrealized gain of $0.3 million remains as a separate component of stockholders' equity. Subsequent to the transfer of these securities, the Bank sold $82.9 million of available for sale securities at a net loss of $0.9 million. 5 The following table sets forth the contractual maturity distribution of the carrying value and the weighted average yields of the investment portfolio at December 31, 1995. Changes in interest rates will affect actual maturities.
Available for Sale: Held to Maturity: ----------------------------------------------- ----------------------------------------------- U.S. Other U.S. Other Government Mortgage Bonds & Total Government Mortgage Bonds & Total Agency Backed Short Term Debt & Agency Backed Short Term Debt Obligations Securities Obligations Securities Obligations Securities Obligations Securities Total ------------ ---------- ----------- ----------- ----------- ---------- ----------- ---------- ------ (Dollars in thousands) Within One Year: Amortized Cost $ - $ - $ 9,300 $ 9,300 $ - $ - $ - $ - $ 9,300 Weighted Avg Yield 0.00% 0.00% 5.38% 5.38% 0.00% 0.00% 0.00% 0.00% 5.38% 1-5 Years: Amortized Cost $ 4,700 $ 8,487 $ - $ 13,187 $ - $ 10,593 $ - $ 10,593 $ 23,780 Weighted Avg Yield 6.74% 7.53% 0.00% 6.74% 0.00% 7.81% 0.00% 7.81% 7.22% 5-10 Years: Amortized Cost $ 3,000 $ - $ - $ 3,000 $ - $ 9,963 $ 100 $ 10,063 $ 13,063 Weighted Avg Yield 6.00% 0.00% 0.00% 6.93% 0.00% 7.05% 6.73% 7.02% 6.97% Over 10 Years: Amortized Cost $ - $214,186 $ - $214,186 $ - $140,612 $ 11,525 $152,137 $366,323 Weighted Avg Yield 0.00% 6.91% 0.00% 6.91% 0.00% 7.05% 6.73% 7.02% 6.97% Total: Amortized Cost $ 7,700 $222,673 $ 9,300 $239,673 $ - $161,168 $ 11,625 $172,793 $412,466 Market Value $ 7,699 $224,101 $ 9,300 $241,100 $ - $161,481 $ 11,449 $172,930 $414,030 Weighted Avg Yield 6.45% 6.94% 5.38% 6.86% 0.00% 7.12% 6.75% 7.10% 6.96%
As of December 31, 1995, approximately 96.2% of mortgage-backed securities available for sale and 65.3% of mortgage-backed securities held to maturity were adjustable rate. Lending Activities Gross loans comprised $573.1 million or 53.5% of total assets at December 31, 1995, compared to $513.5 million or 55.8% of total assets at December 31, 1994. The following table sets forth information concerning the Bank's loan portfolio in dollar amounts and percentages, by type of loan at December 31, 1995, 1994 and 1993, respectively.
At December 31, ------------------------------------------------------------------------------------ 1995 1994 1993 ---------------------- ------------------------- ------------------------- Percent of Percent of Percent of Amount Total Amount Total Amount Total -------- ---------- -------- ---------- -------- ---------- (Dollars in Thousands) Residential real estate loans $263,551 45.99% $257,623 50.17% $264,011 41.21% Commercial real estate loans 118,005 20.59% 122,091 23.78% 227,313 35.49% Commercial loans 117,674 20.53% 80,296 15.64% 110,630 17.27% Home equity loans 67,657 11.81% 46,593 9.07% 26,819 4.19% Consumer loans 6,196 1.08% 6,883 1.34% 11,801 1.84% ------- ------ -------- ------ -------- ------ Total loans receivable, gross 573,083 100.00% 513,486 100.00% 640,574 100.00% ------- ------ -------- ------ -------- ------ Less: Unearned income and fees (566) 60 940 Allowance for loan losses 14,986 15,844 18,367 -------- -------- -------- Total loans receivable, net $558,663 $497,582 $621,267 ======== ======== ========
6 Maturity of Loan Portfolio The following table sets forth the Bank's loan portfolio, before allowance for loan losses and unearned discounts, based on contractual maturities. The table does not consider prepayment assumptions. Principal amortization is included based on scheduled payments. Demand loans, and loans having no stated schedule of repayment and no stated maturity are reported as due within one year. Actual maturities may be significantly shorter due to changes in interest rates and economic conditions.
At December 31, 1995 ------------------------------------------------------------------ Less Than 1 Year More Than 1 Year to 5 Years 5 Years Total ---------- ---------- --------- ----- (Dollars in thousands) Fixed rate loans (1): Residential real estate (2) $ 8,221 $ 5,028 $ 29,050 $ 42,299 Commercial real estate 8,404 8,560 15,045 32,009 Commercial 7,574 15,846 4,486 27,906 Home equity 115 756 1,845 2,716 Consumer 2,175 3,758 263 6,196 ------ ------ ------- ------- Total fixed rate loans 26,489 33,948 50,689 111,126 ------ ------ ------- ------- Adjustable rate loans (1): Residential real estate 2,943 14,348 203,961 221,252 Commercial real estate 11,341 42,278 32,377 85,996 Commercial 20,798 44,852 24,118 89,768 Home equity 145 798 63,998 64,941 Consumer - - - - ------ ------ ------- ------- Total adjustable rate loans 35,227 102,276 324,454 461,957 ------ ------ ------- ------- Total amounts due $61,716 $136,224 $375,143 $573,083 ======= ======== ======== ======== (1) Includes non-accrual loans. (2) Loans held for sale of $6.7 million are included as maturing in less than one year.
Delinquency The following table sets forth a summary of the Bank's delinquent loans at December 31, 1995, 1994 and 1993 (dollars in thousands):
At December 31, 1995 ---------------------------------------------------------------- 60-89 Days 90 Days or More --------------------------- --------------------------- Number Principal Number Principal of Balance of Balance Loans of Loans Loans of Loans -------- --------- -------- --------- Residential real estate loans 39 $2,472 75 $3,080 Commercial real estate loans 2 171 19 2,067 Commercial loans 8 493 3 36 Home equity loans 5 147 7 71 Consumer loans 24 13 12 14 -- ------ --- ------ Total delinquent loans 78 $3,296 116 $5,268 == ====== === ====== Delinquent loans to total gross loans 0.58% 0.92% 7 At December 31, 1994 ---------------------------------------------------------------- 60-89 Days 90 Days or More --------------------------- --------------------------- Number Principal Number Principal of Balance of Balance Loans of Loans Loans of Loans -------- --------- -------- --------- Residential real estate loans 24 $690 63 $2,686 Commercial real estate loans 1 129 6 2,150 Commercial loans 3 203 3 165 Home equity loans 10 195 16 339 Consumer loans 43 59 30 41 -- ------ --- ------ Total delinquent loans 81 $1,276 118 $5,381 == ====== === ====== Delinquent loans to total gross loans 0.25% 1.05% At December 31, 1993 ---------------------------------------------------------------- 60-89 Days 90 Days or More --------------------------- --------------------------- Number Principal Number Principal of Balance of Balance Loans of Loans Loans of Loans -------- --------- -------- --------- Residential real estate loans 40 $1,406 103 $8,296 Commercial real estate loans 5 5,066 8 5,976 Commercial loans 21 575 34 5,143 Home equity loans 8 159 20 571 Consumer loans 75 88 151 140 -- ------ --- ------ Total delinquent loans 149 $7,294 316 $20,126 === ====== === ====== Delinquent loans to total gross loans 1.14% 3.14%
Allowance for Loan Losses The allowance for possible loan losses reflects an amount that in Management's judgment is adequate to provide for potential losses in the loan portfolio. In addition, examinations of the adequacy of the loan loss reserve are conducted periodically by various regulatory agencies. The Bank's loan loss reserve methodology emphasizes an evaluation of non-performing loans and those loans that have been identified as having a higher risk of becoming non-performing loans. The overall analysis is a continuing process that gives consideration to such factors as size and risk characteristics of the loan portfolio, the risk rating of individual credits, general economic conditions, historical delinquency and charge-off experience, the borrowers' financial capabilities and the underlying collateral, including, when appropriate, independent appraisals of real estate properties. In addition, Management periodically reviews the methodology of allocating reserves to the various loan categories based on similar factors. The Bank's allowance for possible loan losses is decreased by loan charge-offs and increased by provisions for possible loan losses and recoveries on loans previously charged-off. When commercial and residential real estate loans are foreclosed, the loan balance is compared with the fair value of the property. If the net carrying value of the loan at the time of foreclosure exceeds the fair value of the property less estimated selling costs, the difference is charged to the allowance for possible loan losses and the fair value of the property becomes the new cost basis of the real estate owned. The Bank has or obtains current appraisals on real estate owned at the time it obtains possession of the property. Real estate owned is subsequently carried at the lower of cost or fair value less estimated selling costs with any further adjustments reflected as a charge against operations. The Bank assesses the value of real estate owned on a periodic basis. The Bank maintains an allowance for estimated losses, which at December 31, 1995 amounted to $0.8 million, to account for declines in the carrying value of foreclosed real estate. 8 The allowance for possible loan losses at December 31, 1995 was $15.0 million, compared to $15.8 million at December 31, 1994. The activity in the allowance for possible loan losses for the fiscal years ended December 31, 1995, 1994 and 1993 is set forth in the following table:
For The Years Ended December 31, ---------------------------------------- 1995 1994 1993 ------ ------ ------ (Dollars in Thousands) Balance, beginning of period $ 15,844 $ 18,367 $ 12,176 Provision for loan losses 4,359 25,742 15,740 Charge-offs: Residential real estate loans (472) (4,588) (2,558) Commercial real estate loans (4,632) (20,430) (3,693) Commercial loans (705) (5,729) (4,161) Home equity loans (51) (124) (215) Consumer loans (208) (233) (373) -------- -------- -------- Total charge-offs (6,068) (31,104) (11,000) Recoveries: Residential real estate loans 0 460 242 Commercial real estate loans 379 1,199 558 Commercial loans 301 1,058 566 Home equity loans 82 79 46 Consumer loans 89 43 39 -------- -------- -------- Total recoveries 851 2,839 1,451 -------- -------- -------- Net charge-offs (5,217) (28,265) (9,549) Balance at end of period $ 14,986 $ 15,844 $ 18,367 ======== ======== ======== Ratio of net loan charge-offs during the period to average loans outstanding during the period (0.96%) (4.94%) (1.36%) Ratio of allowance for loan losses to total loans at the end of the period 2.61% 3.09% 2.87% Ratio of allowance for loan losses to non-performing loans at the end of the period 155.71% 106.71% 33.09%
Effective January 1, 1995, the Bank adopted No. SFAS 114, "Accounting by Creditors for Impairment of a Loan." At December 31, 1995, the recorded investment in loans that are considered impaired under SFAS No. 114 was $8.0 million. Included in this amount is $0.9 million of impaired loans for which the related SFAS 114 allowance is $0.3 million and $7.1 million of impaired loans for which the SFAS 114 allowance is zero. The average recorded investment in impaired loans during the year ended December 31, 1995 was approximately $9.8 million For the year ended December 31, 1995, the Bank recognized interest income on these impaired loans of $0.3 million. The following table shows the allocation of the allowance for loan losses to various types of loans.
At December 31, --------------------------------------------------------------------------------- 1995 1994 1993 -------------------------- ------------------------ -------------------------- % of Total % of Total % of Total Allowance for Allowance for Allowance for Amount Loan Loss Amount Loan Losses Amount Loan Losses --------- --------------- ------- --------------- ------- ------------- Residential real estate loans . . . . . . . . . 1,881 12.55% 4,377 27.63% $ 1,949 10.61% Commercial real estate loans . . . . . . . . 6,784 45.27% 7,240 45.69% 10,568 57.54% Commercial loans . . . . . . . . . . . . . . . 5,480 36.57% 3,101 19.57% 5,605 30.52% Home Equity loans . . . . . . . . . . . . . . 672 4.48% 906 5.72% 120 0.65% Consumer loans . . . . . . . . . . . . . . . . 169 1.13% 220 1.39% 125 0.68% ------- ------ ------- ------ ------- ------ Total allowance for loan losses . . . . . . $14,986 100.00% $15,844 100.00% $18,367 100.00% ======= ====== ====== ====== ======= ======
9 Deposit Distribution The principal source of funds for the Bank are deposits from local consumers and businesses. There were no brokered deposits at December 31, 1995. The Bank's deposits consist of demand and NOW accounts, passbook and statement savings accounts, Money Market accounts and Time deposit accounts. Total deposits were $885.4 million at December 31, 1995 compared to $853.6 million at December 31, 1993. In the fall of 1993, the Bank initiated a new strategy for obtaining consumer deposit accounts with a focus on increasing the number of checking and savings accounts at the Bank. From December 31, 1993 to December 31, 1995, the Bank has increased its demand and savings accountbalances by approximately $37.8 million, with the greatest proportion of growth in demand deposit accounts. This increase is a result of the Bank's consumer deposit strategy to attract and retain core deposits which provides the Bank with a lower cost source of funds. During the period from December 31, 1994 to December 31, 1995, Time deposit balances have increased $42.0 million, largely attributable to the introduction of the "Can't Lose CD" product, a 90 day CD which pays a rate equal to the prime rate less 350 basis points. As of December 31, 1995, the Bank had $32.0 million in "Can't Lose CD" balances. Money Market accounts have steadily declined from December, 1993 reflecting a shift to higher yielding Time deposits as well as an outflow to other investment vehicles such as annuities and mutual funds. The following table sets forth the distribution of the Bank's deposit accounts for each of the three years ended December 31, 1995, 1994 and 1993.
At December 31, ------------------------------------------------------------------- 1995 1994 1993 --------------------- ------------------- ------------------- Percent Percent Percent of of of Amount Total Amount Total Amount Total -------- ------- ------- ------- -------- ------- (Dollars in Thousands) Demand deposits . . . . . . . . . . . . . . $ 71,539 8.08% $ 51,932 6.08% $ 36,997 4.23% NOW accounts . . . . . . . . . . . . . . . 57,271 6.47% 56,297 6.59% 58,595 6.70% Savings accounts . . . . . . . . . . . . . . 185,555 20.96% 184,513 21.62% 182,301 20.84% Money market accounts . . . . . . . . . . 203,313 22.96% 235,168 27.55% 255,553 29.21% Time deposits . . . . . . . . . . . . . . . . 367,708 41.53% 325,723 38.16% 341,460 39.02% -------- ------- -------- ------- -------- ------- Total deposits . . . . . . . . . . . . . . $885,386 100.00% $853,633 100.00% $874,906 100.00% ======== ======= ======== ======= ======== =======
The Bank does not actively solicit Time deposit accounts in excess of $100,000. The following table sets forth the remaining contractual maturities of the Bank's Time deposit portfolio in amounts greater than $100,000 at December 31, 1995. At December 31, 1995 --------------------- (Dollars in Thousands) Three months or less . . . . . . . . . . $11,051 Over three through six months . . . . . 5,168 Over six through 12 months . . . . . . . 8,926 Over 12 months . . . . . . . . . . . . . 5,464 ------- Total . . . . . . . . . . . . . . $30,609 ======= Borrowings Deposits are the primary source of funds for the Bank. However, the Bank is able to borrow from the Federal Home Loan Bank ("FHLB") of Boston and can enter into repurchase agreements. At December 31, 1995, the Bank's total outstanding FHLB advances and repurchase agreements were $41.5 million and $31.1 million, respectively. 10 Competition Vigorous competition exists in all areas in which the Bank engages in business. The Bank faces intense competition in its market areas from major banking and financial institutions, including many which have substantially greater resources or market presence than the Bank. Competitors of the Bank include commercial banks, savings banks, mutual funds, insurance companies, finance companies, credit unions and mortgage companies. Government Regulation The Bank is in a heavily regulated industry. As a state-chartered savings bank whose deposits are insured by the FDIC and the Depositors Insurance Fund, a private excess insurer, the Bank is subject to regulation by federal and state regulatory authorities including, but not limited to, the FDIC and the Commissioner of Banks. ITEM 2: PROPERTIES The Bank's corporate headquarters are located at 1441 Main Street, Springfield, Massachusetts 01102. At December 31, 1995 the Bank had 20 banking offices which are set forth in the table below. Own/Lease Location Expiration Date ------------ ----------------- Banking Offices 40 Springfield Street, Agawam Own 693 Memorial Drive, Chicopee Own 153 Meadow Street, Chicopee Own 465 North Main Street, East Longmeadow Lease/2010 1360 Carew Street, East Springfield Lease/2004 50 Holyoke Street, Holyoke Lease/2001 724 Bliss Road, Longmeadow Lease/01/97 52 East Street, Ludlow Lease/08/97 175 Main Street, Northampton Own 412 Boston Road, Springfield Own 1800 Boston Road, Springfield Own 619 Chestnut Street, Springfield Own 441 Cooley Street, Springfield Own 561 Sumner Avenue, Springfield Own 1441 Main Street, Springfield Own 807 Wilbraham Road, Springfield Lease/08/96 958 State Street, Springfield No Lease 968 Riverdale Road, West Springfield Lease/2006 1425 Westfield Street, West Springfield Lease/02/97 60 Main Street, Westfield Own ITEM 3: LEGAL PROCEEDINGS The Bank is not involved in any pending litigation other than routine legal proceedings occurring in the ordinary course of business. While the legal responsibility and financial impact with respect to such litigation cannot presently be ascertained, the Bank does not anticipate that any of these matters will result in the payment by the Bank of damages, that, in the aggregate, would be material in relation to the consolidated financial position or operations of the Bank. 11 ITEM 4: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of December 31, 1995, the Bank had 5,710,700 shares of Common Stock issued and outstanding. The response to this Item is incorporated by reference from the discussion under the headings "Security Ownership of Management and Directors" on Pages 56 and 57 of the "Proxy Statement of Springfield Institution for Savings, Annual Meeting of Shareholders, May 9, 1996" filed as Form F-5 with the FDIC (the "Proxy Statement"). PART II ITEM 5: MARKET FOR BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS (a) The Bank's Common Stock is traded on the NASDAQ National Market System ("NASDAQ") under the symbol "SISB". The following table sets forth the high and low last sale prices of the Common Stock, as reported by NASDAQ. 1995 High Low -------- ------- First Quarter** $11 1/16 $ 9 5/8 Second Quarter $13 1/16 $10 7/8 Third Quarter $16 $12 7/8 Fourth Quarter $17 1/8 $14 5/8 - -------- ** The Bank was a mutual company in 1994 and converted to a stockholder owned savings bank on February 7, 1995. Trading in the Bank's shares commenced on the NASDAQ market on February 8, 1995. (b) As of February 28, 1996, the most recent practicable date, the closing sale price of the Bank's Common Stock, as reported by NASDAQ, was $17 7/8 per share. As of that same date, the Bank had 1,202 holders of record of the Bank's Common Stock. This figure does not reflect beneficial ownership of shares held in nominee names. (c) While it is not anticipated that the Bank will be paying any cash dividends in the near future, the Board of Directors will be periodically reviewing whether any cash dividend should be paid. 12 ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA SELECTED FINANCIAL DATA:
At December 31, ---------------------------------------------------------------- 1995 1994 1993 1992 1991 ----------- ---------- ---------- ---------- ---------- (In Thousands) Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,070,978 $ 920,689 $ 969,904 $1,002,513 $1,045,365 Investment securities . . . . . . . . . . . . . . . . . . . . . . 419,777 319,564 231,565 156,279 131,130 Loans receivable, gross . . . . . . . . . . . . . . . . . . . . . 573,083 513,486 640,574 717,301 786,600 Allowance for possible loan losses . . . . . . . . . . . . . . . . 14,986 15,844 18,367 12,176 11,873 Investments in real estate and real estate partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . 6,092 6,699 9,939 13,219 15,361 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 885,386 853,633 874,906 898,050 937,316 Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,071 2,392 6,063 6,240 6,415 Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 81,469 28,503 58,531 72,762 82,905 Asset Quality: Non-accruing loans . . . . . . . . . . . . . . . . . . . . . . . 9,037 14,472 52,308 63,865 54,888 Loans past due 90 days and still accruing . . . . . . . . . 587 376 3,205 5,679 4,215 ---------- ---------- ---------- ---------- ---------- Total non-performing loans . . . . . . . . . . . . . . . 9,624 14,848 55,513 69,544 59,103 Foreclosed real estate, net . . . . . . . . . . . . . . . . . . 1,529 4,951 25,085 52,757 49,750 Restructured loans on accrual status (1) . . . . . . . . . . 2,732 6,114 15,845 1,544 10,509 ---------- ---------- ---------- ---------- ---------- Total non-performing assets . . . . . . . . . . . . . . . $ 13,885 $ 25,913 $ 96,443 $ 123,845 $ 119,362 ========== ========== ========== ========== ========== (1) Restructured loans are loans for which concessions, including reduction of interest rates or deferral of interest or principal payments, have been granted to acknowledge changes in the borrower's financial condition or changes in the underlying cash flows of the loan's collateral. Restructured loans on non-accrual status are reported in the non-accrual loan category. Restructured loans on accrual status are those that have complied with the terms of a restructuring agreement for a satisfactory period (generally six months).
13 SELECTED OPERATING DATA:
For the Year Ended December 31, -------------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (Dollars in thousands) Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . $ 69,916 $ 57,913 $ 63,174 $ 72,187 $ 86,165 Interest and dividend expense . . . . . . . . . . . . . . . . . . . . . . 32,556 23,792 27,175 36,537 57,562 -------- -------- -------- -------- -------- Net interest and dividend income . . . . . . . . . . . . . . . . . . . . 37,360 34,121 35,999 35,650 28,603 Less: provision for possible loan losses . . . . . . . . . . . . . . . . 4,359 25,742 15,740 13,219 8,610 -------- -------- -------- -------- -------- Net interest and dividend income after provision for possible loan losses . . . . . . . . . . . . . . . . . 33,001 8,379 20,259 22,431 19,993 Noninterest income: Net gain (loss) on sale of loans and securities . . . . . . . . . . . . (643) (553) 2,351 1,612 2,095 Loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,221 3,213 Deposit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,191 4,122 4,337 4,038 Other fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355 1,547 1,207 -------- -------- -------- -------- -------- Total noninterest income . . . . . . . . . . . . . . . . . . . . . . 8,124 8,329 11,671 10,426 9,377 Noninterest expense: Operating expenses: Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . 15,961 16,808 16,583 13,927 13,267 Occupancy expense of bank premises . . . . . . . . . . . . . . . . . . 3,459 3,410 3,502 3,575 3,532 Furniture and equipment expense . . . . . . . . . . . . . . . . . . . . 1,943 1,830 1,696 1,929 1,558 Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . 13,768 15,109 13,442 11,274 10,084 -------- -------- -------- -------- -------- Total operating expenses . . . . . . . . . . . . . . . . . . . . . 35,131 37,157 35,223 30,705 28,441 Foreclosed real estate expenses . . . . . . . . . . . . . . . . . . . . . 521 5,470 11,734 13,272 3,547 Net expense (income) of real estate operations . . . . . . . . . . . . . (227) 988 2,632 1,077 6,493 -------- -------- -------- -------- -------- Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . 35,425 43,615 49,589 45,054 38,481 -------- -------- -------- -------- -------- Income (loss) before income taxes and cumulative effect of change in accounting principles . . . . . . . . . . . . . . . . . . . . . . . . . 5,700 (26,907) (17,659) (12,197) (9,111) Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . (5,759) -- (3,384) (3,228) (636) -------- -------- -------- -------- -------- Income (loss) before cumulative effect of change in accouting principle . 11,459 (26,907) (14,275) (8,969) (8,475) Cumulative effect of change in accounting principle (1) . . . . . . . . . -- -- -- 1,295 -- -------- -------- -------- -------- -------- Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,459 ($26,907) ($14,275) ($10,264) ($ 8,475) ======== ======== ======== ======== ======== (1) Results from the January 1, 1992 adoption of SFAS No. 109, "Accounting for Income Taxes."
14 SELECTED FINANCIAL RATIOS AND OTHER DATA:
At or For the Year Ended December 31, ------------------------------------------------------------ 1995 1994 1993 1992 1991 ------ ------ ------ ------ ----- Performance Ratios: (1) Return on average assets . . . . . . . . . . . . . . . . . . . . . 1.16% (2.88%) (1.46%) (1.01%) (0.79%) Return on average equity . . . . . . . . . . . . . . . . . . . . . 17.25% (63.55%) (20.85%) (13.24%) (9.47%) Net interest income/spread (2). . . . . . . . . . . . . . . . . . 3.59% 3.72% 4.06% 3.92% 2.74% Net interest margin (3). . . . . . . . . . . . . . . . . . . . . 4.00% 3.90% 4.13% 3.97% 2.95% Efficiency ratio (4) . . . . . . . . . . . . . . . . . . . . . . 76.16% 86.41% 77.72% 69.06% 79.26% Operating expenses to average assets . . . . . . . . . . . . . . 3.55% 3.98% (3.60%) 3.02% 2.66% Ratio of net loan charge-offs to average loans outstanding . . . . (0.96%) (4.94%) (1.36%) (1.72%) (1.19%) Asset Quality Ratios: Non-performing loans to total gross loans . . . . . . . . . . . . 1.68% 2.89% 8.67% 9.70% 7.51% Non-performing assets to total assets . . . . . . . . . . . . . . 1.30% 2.81% 9.94% 12.35% 11.42% Allowance for possible loan losses to non-performing loans . . . 155.71% 106.71% 33.09% 17.51% 20.09% Allowance for loan losses to total gross loans . . . . . . . . . 2.61% 3.09% 2.87% 1.70% 1.51% Capital Ratios: Equity to total assets . . . . . . . . . . . . . . . . . . . . . 7.61% 3.10% 6.03% 7.26% 7.93% Tier 1 leverage capital ratio . . . . . . . . . . . . . . . . . . 7.57% 3.43% 6.02% 7.28% 7.72% Tier 1 risk-based capital ratio . . . . . . . . . . . . . . . . . 12.52% 6.07% 8.47% 10.13% 10.78% Total risk-based capital ratio . . . . . . . . . . . . . . . . . . 13.77% 7.32% 9.72% 11.38% 12.28% Other Data: Number of deposit accounts . . . . . . . . . . . . . . . . . . . 208,254 156,524 147,835 144,118 152,395 Residential loan originations ($000s) . . . . . . . . . . . . . . $107,045 $176,355 $380,202 $392,045 $234,375 Loans serviced for others ($000s) . . . . . . . . . . . . . . . . $880,558 $935,066 $911,028 $792,243 $501,114 Number of full time equivalent employees . . . . . . . . . . . . . 410 463 533 530 480 Facilities: Full-service customer service facilities . . . . . . . . . . . . 20 19 19 20 20 Mortgage origination offices . . . . . . . . . . . . . . . . . . . - 2 2 2 2 (1) With the exception of end of period ratios, all ratios are based on average daily balances during the indicated periods and are annualized where appropriate. (2) Interest spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities (which do include non-interest bearing demand accounts). (3) Net interest margin represents the net interest income as a percent of average interest-earning assets, including the average daily balance amount of non-performing loans. (4) The efficiency ratio represents operating expenses as a percentage of net interest income and noninterest income, excluding gains/(losses) on sales of loans and securities.
15 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition The following discussion and analysis of the financial condition and results of operations of the Bank should be read in conjunction with the Bank's Consolidated Financial Statements and Notes thereto, which are included in Exhibit A of this report. Balance Sheet Changes Total assets of $1,071.0 million at December 31, 1995 increased $150.3 million or 16.3 % from $920.7 million at December 31, 1994. This increase reflects the investment of net proceeds of $35.9 million from the Conversion as well as increases of $75.7 million in borrowed funds and $31.8 million in deposits. The growth in total assets occurred primarily in commercial and home equity loans and the investment portfolio. Commercial loans totaled $117.7 million as of December 31, 1995 compared to $80.3 million as of December 31, 1994, an increase of $37.4 million or 46.5%. This increase reflects the Bank's continued effort to expand its share of loans to small and medium sized businesses. Home equity loan balances grew from $46.6 million as of December 31, 1994 to $67.7 million as of December 31, 1995, an increase of $21.1 million or 45.6%. This increase is the result of the Bank's competitive loan pricing approach coupled with the waiver of closing costs on its home equity loan products. Investments increased $100.2 million to a total of $419.8 million as of December 31, 1995 from the $319.6 million reported one year earlier. Total deposits were $885.4 million as of December 31, 1995 compared to $853.6 million as of December 31, 1994, an increase of $31.8 million or 3.7%. During this period, the Bank sought to increase its share of primary deposit relationships. As a result of its consumer strategy, the Bank increased demand deposits by $19.6 million or 37.8%. Time deposit balances increased $42.0 million or 12.9% primarily due to the 1995 introduction of the "Can't Lose CD" product, a 90 day CD which pays a rate equal to the prime rate less 350 basis points. Total balances in this new CD product were $32.0 million as of December 31, 1995. Offsetting these increases, Money Market account balances decreased $31.9 million during the period reflecting a shift in balances to higher yielding Time deposits as well as outflow to other investment vehicles such as annuities and mutual funds. Asset Quality/Non-Performing Assets Non-performing assets declined $12.0 million to $13.9 million at December 31, 1995. The following table sets forth information regarding the components of non-performing assets for the periods presented. At December 31, ------------------------------ 1995 1994 1993 ------ ------ ------ (Dollars in Thousands) Non-accrual loans (1): Residential real estate loans $ 2,553 $ 2,651 $ 6,112 Commercial real estate loans 5,745 10,003 32,569 Commercial loans 638 1,492 13,489 Home equity loans 90 289 0 Consumer loans 11 37 138 ------ ------ ------ Total non-accrual loans 9,037 14,472 52,308 ------ ------ ------ Loans past due 90 days still accruing (2) 587 376 3,205 ------ ------ ------ Total non-performing loans 9,624 14,848 55,513 Foreclosed real estate (3) 1,529 4,951 25,085 Restructured loans on accrual status (4) 2,732 6,114 15,845 ------ ------ ------ Total non-performing assets $13,885 $25,913 $96,443 ====== ======= ======= Total non-performing loans to total gross loans 1.68% 2.89% 8.67% Total non-performing assets to total assets 1.30% 2.81% 9.94% Allowance for possible losses to non-performing loans 155.71% 106.71% 33.09% 16 (1) Non-accrual loans are loans that are contractually past due in excess of 90 days, for which the Bank has stopped the accrual of interest, or loans which are not past due but on which the Bank has stopped the accrual of interest based on management's assessment of the circumstances surrounding these loans. (2) Accruing loans past due 90 days or more are loans which have not been placed on non-accrual status as, in management's opinion, the collection of the loan and contractual interest, in full, is not in doubt. (3) Foreclosed real estate includes OREO, defined as real estate acquired through foreclosure or acceptance of a deed in lieu of foreclosure. The Bank carries foreclosed real estate at net realized value, which approximates fair value less estimated selling costs. (4) Restructured loans are loans for which concessions, including reduction of interest rates or deferral of interest or principal payments have been granted due to the borrower's financial condition. Restructured loans on non-accrual status are reported in the non-accrual loan category. Restructured loans on accrual status are those loans that have complied with terms of a restructuring agreement for a satisfactory period (generally six months). Liquidity Liquidity measures the ability of the Bank to meet its maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund its operations and to provide for customer credit needs. The Bank's principal sources of funds are deposits, advances from the FHLB of Boston, repurchase agreements, repayments and maturities on loans and securities, proceeds from the sale of securities in the available-for-sale portfolio, and funds provided by operations. While scheduled loan and security amortization and maturities are relatively predictable sources of funds, deposit flows and loan and security prepayments are greatly influenced by economic conditions and the general level of interest rates and competition. The Bank utilizes particular sources of funds based on comparative costs and availability. The Bank generally manages the pricing of its deposits to maintain a steady deposit balance, but has from time to time decided not to pay rates on deposits as high as its competition, and when necessary, will supplement deposits with longer term and/or less expensive alternative sources of funds such as advances from the FHLB and repurchase agreements. Liquidity management is both a daily and long-term responsibility of Management. The Bank adjusts its investments in cash and cash equivalents based upon Management's assessment of expected loan demand, projected security maturities, expected deposit flows, yields available on interest-bearing deposits, and the objectives of its asset/liability management program. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and collateral eligible for repurchase agreements. Because the Bank has a stable retail deposit base, Management believes that significant borrowings will not be necessary to maintain its current liquidity position. The Bank's ongoing principal use of capital resources remains the origination of single-family residential mortgage loans, commercial real estate loans, commercial loans, and home equity loans secured by residential real estate. Capital Resources/Regulatory Capital Under current FDIC capital regulations, state-chartered, non-member banks (banks that are not members of the Federal Reserve System), such as the Bank, are required to comply with three separate minimum capital requirements: a "Tier 1 leverage capital ratio" and two "risk-based" capital requirements: "Tier 1 risk-based capital ratio" and "Total risk-based capital ratio." The Tier 1 leverage capital ratio is expressed as a percentage of "Tier 1 capital" to quarterly average total assets. Tier 1 capital generally includes common stockholders' equity (including retained earnings), qualifying non-cumulative perpetual preferred stock and any related surplus and minority interests in the equity accounts of fully consolidated subsidiaries. In addition, deferred tax assets are allowable up to a certain limit. Intangible 17 assets, other than properly valued purchased mortgage servicing rights up to certain specified limits, must be deducted from Tier 1 capital. The unrealized gain or loss on securities available for sale is not included as a component of Tier 1 capital under the current guidelines. The Tier 1 risk-based capital ratio is expressed as a percentage of Tier 1 capital to total risk-weighted assets. Risk-weighted assets are calculated by assigning assets to one of several broad risk categories (0%, 20%, 50%, or 100%) based primarily on credit risk. The aggregate dollar value of the amount in each category is then multiplied by the risk-weight associated with the category. Risk-weights for all off-balance sheet items are determined by a two-step process. First, the "credit equivalent amount" of off-balance sheet items is determined in most cases by multiplying the off-balance sheet item by a credit conversion factor. Second, the credit equivalent amount is treated like any balance sheet asset and generally is assigned to the appropriate risk category. The resulting weighted values from each of the risk categories are added together, and this sum is the Bank's total risk-weighted assets that comprise the denominator of the risk-based capital ratios. The Total risk-based capital ratio is expressed as a percentage of "Qualifying total capital" to total risk weighted assets. Qualifying total capital consists of the sum of Tier 1 capital plus Tier 2 capital, which consists of cumulative perpetual preferred stock, mandatory convertible debt, term subordinated debt, and a certain portion of the allowance for loan losses up to a maximum of 1.25 % of risk- weighted assets. The following table reflects the regulatory capital position of the Bank at year end 1995, 1994 and 1993 as well as the December 31, 1995 minimum regulatory capital requirements for well-capitalized institutions. At December 31, ----------------------- FDIC 1995 1994 1993 Requirement ------ ------ ------ ----------- Tier 1 leverage capital ratio 7.57% 3.43% 6.02% 5.00% Tier 1 risk-based capital ratio 12.52% 6.07% 8.47% 6.00% Total risk-based capital ratio 13.77% 7.32% 9.72% 10.00% Interest Rate Risk Management The operations of the Bank are subject to the risk of interest rate fluctuations to the extent that there is a substantial difference in the amount of the Bank's assets and liabilities that reprice or mature within specific time periods. An asset-sensitive position indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specific time horizons, which would generally imply a favorable impact on net interest income in periods of rising interest rates and a negative impact in periods of falling interest rates. A liability-sensitive position would generally imply a negative impact on net interest income in periods of rising interest rates and a positive impact in periods of falling interest rates. The objective of the Bank's interest rate risk management process is to identify, manage, and control its interest rate risk within established limits in order to produce consistent earnings that are not contingent upon favorable trends in interest rates. This is attained by monitoring the levels of interest rates, the relationships between the rates earned on assets and the rates paid on liabilities, the absolute amount of assets and liabilities which reprice or mature over similar periods, and the effect of all of these factors on the estimated level of net interest income. During 1995, the Bank continued to enhance its analytical capability for measuring interest rate risk and its ability to respond to potential situations that might unduly increase such risk. There are a number of industry standards used to measure a financial institution's interest rate risk position. Most common among these is the one-year gap which is the difference between assets, liabilities, and off-balance sheet instruments that will mature or reprice within one year expressed as a percentage of total assets. Using Management's estimates of asset prepayments and core deposit decay in its computation, the Bank estimates that its cumulative one-year gap position was a positive $104.6 million or 9.8% of total assets at December 31, 1995. The Bank also utilizes income simulation modeling in measuring its interest rate risk and managing its interest rate sensitivity. Income simulation not only considers the impact of changing market interest rates on forecasted net interest income, but also takes into consideration other factors such as yield curve relationships, the volume and mix of assets and liabilities, customer preferences, and general market conditions. 18 The following table sets forth the amounts of assets and liabilities outstanding at December 31, 1995, which are anticipated by the Bank to mature or reprice in each of the future time periods shown using certain assumptions based on its historical experience, the current interest rate environment, and other data available to Management. Management believes that these assumptions approximate actual experience and considers such assumptions reasonable; however, the interest rate sensitivity of the Bank's assets and liabilities could vary substantially if different assumptions were used or actual experience differs from the assumptions used. Management periodically reviews and, when appropriate, changes assumptions used in evaluating the Bank's interest rate sensitivity.
GAP Position at December 31, 1995 --------------------------------------------------------------------------------- More than six Less than months less six months than one year 1 - 5 Years Over 5 Yrs TOTAL ------------ ------------- ----------- ---------- ------- (Dollars in Thousands) Assets: Federal funds sold and interest bearing deposits $ 8,045 $ - $ - $ - $ 8,045 Investment securities 232,642 121,884 40,786 24,465 419,777 Residential real estate loans 82,744 62,958 100,894 14,730 261,326 Commercial real estate loans 32,620 18,767 60,279 568 112,234 Residential real estate loans 82,744 62,958 100,894 14,730 261,326 Commercial loans 74,532 6,752 35,905 - 117,189 Home equity loans 61,401 290 4,585 1,616 67,892 Consumer loans 4,239 287 1,026 419 5,971 Other Assets - - - 78,544 78,544 -------- -------- -------- -------- ---------- Total assets $496,223 $210,938 $243,475 $120,342 $1,070,978 ======== ======== ======== ======== ========== Liabilities & stockholders' equity: Savings accounts $ 27,834 $ 27,834 $129,887 $ - $ 185,555 NOW accounts 8,590 8,590 40,091 - 57,271 Money market accounts 60,994 60,994 81,325 - 203,313 Time deposits 189,458 113,283 64,967 - 367,708 Borrowed funds 51,577 25,009 83 1,402 78,071 Other liabilities & stockholders' equity 14,210 14,210 42,632 108,008 179,060 -------- -------- -------- -------- ---------- Total liabilities & stockholders' equity $352,663 $249,920 $358,985 $109,410 $1,070,978 ======== ======== ======== ======== ========== Period GAP position $143,560 ($38,982) ($115,510) $10,932 Net period GAP as a percentage of total assets 13.40% (3.64%) (10.79%) Cumulative GAP $143,560 $104,578 ($10,932) - Cumulative GAP as a percentage of total assets 13.40% 9.76% (1.02%) -
For purposes of the above interest sensitivity analysis: Residential loans held for sale at December 31, 1995 totaling $6.7 million are included in the less than six month interest sensitivity period. Fixed rate assets are scheduled by contractual maturity and adjustable rate assets are scheduled by their next repricing date. In both cases, assets that have prepayment optionality are adjusted for the Bank's estimate of prepayments. Loans do not include non accrual loans of $9.0 million. Loans do not include the allowance for possible loan losses of $15.0 million. 19 In certain deposit categories where there is no contractual maturity, Management assumed the sensitivity characteristics listed below based on the current interest rate environment and the Bank's historical experience. Management reviews these assumptions on a quarterly basis and may modify them as circumstances dictate. --Savings accounts are assumed to decay at an annual rate of 30%. --NOW accounts are assumed to decay at an annual rate of 30% --Money market accounts are assumed to decay at an annual rate of 60%. --Non-interest bearing demand deposit accounts are included in other liabilities and are assumed to decay at an annual rate of 40%. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, while certain assets and liabilities may have similar contractual maturities or periods to repricing, they may react in different ways to changes in market interest rates. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Finally, the ability of borrowers to service their adjustable rate mortgages may decrease in the event of an interest rate increase. 20 Results of Operations Comparison of Years Ended December 31, 1995 and 1994 General For the year ended December 31, 1995 the Bank reported net income of $11.5 million as compared to a net loss of $26.9 million for the year ended December 31, 1994. This increase in earnings reflects growth in earning assets as well as lower levels of loan loss provision and foreclosed real estate expenses in 1995 versus 1994. During the year ended December 31, 1995 the Bank recorded a number of nonrecurring items. The Bank released $6.0 million of the valuation allowance on that portion of its net deferred tax asset associated with temporary differences (principally loan loss reserves). In addition, the Bank recorded a $0.9 million loss on the sale of securities in connection with the restructuring of its investment portfolio and a $0.5 million severance accrual related to organizational changes. These items were offset in part by a $0.4 million gain on the sale of a real estate investment and a $0.6 million insurance rebate from the Federal Deposit Insurance Corporation. The Bank's core operating earnings, net of nonrecurring items, were approximately $6.0 million for the year ended December 31, 1995. Net Interest Income Net interest income represents the difference between income earned on interest-earning assets and expense paid on interest bearing liabilities. Net interest income is affected by the mix and volume of assets and liabilities, and the movement and level of interest rates. 21 The following table sets forth, for the periods indicated, average balances, interest income and expense, and yields earned or rates paid on the major categories of assets and liabilities. Non-accrual loans have been included in the appropriate average balance loan category, but unpaid interest on non-accrual loans has not been included for purposes of determining interest income. For purposes of this table, investment securities available for sale are reflected at amortized cost.
Twelve Months Ended December 31 -------------------------------------------------------------------------- 1995 1994 --------------------------------------- -------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost --------- -------- ---------- -------- -------- ---------- (Dollars in Thousands) Interest-earning assets: Fed funds sold and interest-bearing deposits $ 22,294 $ 1,316 5.82% $ 11,682 $ 527 4.45% Investment securities held to maturity 183,139 10,849 5.92% 147,943 8,173 5.52% Investment securities available for sale 184,551 12,214 6.62% 143,801 6,576 4.57% Residential real estate loans 266,276 20,970 7.88% 249,294 18,575 7.45% Commercial real estate loans 116,957 9,671 8.27% 182,626 13,236 7.25% Commercial loans 96,246 9,050 9.27% 95,093 7,210 7.48% Home equity loans 57,943 5,306 9.16% 32,890 2,651 8.06% Consumer loans 6,482 540 8.33% 12,088 965 7.98% -------- -------- ---- --------- -------- ---- Total interest-earning assets 933,888 69,916 7.49% 875,417 57,913 6.62% Allowance for loan losses (16,346) (22,015) Non-interest-earning assets 71,341 80,574 -------- -------- Total assets $988,883 $69,916 $933,976 $57,913 ======== ======= ======== ======= Interest-bearing liabilities: Deposits Savings accounts $185,176 $ 4,616 2.49% $188,125 $ 3,846 2.04% NOW accounts 53,955 727 1.35% 56,699 801 1.41% Money market accounts 212,272 6,945 3.27% 249,674 6,452 2.58% Time deposit accounts 349,950 18,136 5.18% 326,616 12,693 3.89% -------- -------- ---- --------- -------- ---- Total Deposits 801,353 30,424 3.80% 821,114 23,792 2.90% Borrowed funds 34,457 2,132 6.10% - - - -------- -------- ---- --------- -------- ---- Total interest-bearing liabilities 835,810 32,556 3.90% 821,114 23,792 2.90% Non-interest-bearing liabilities 86,632 70,236 -------- -------- Total liabilities 922,442 891,350 Total stockholders' equity 66,441 42,626 -------- -------- Total liabilities and stockholders' equity $988,883 $32,556 $933,976 $23,792 ======== ======= ======== ======= Net interest income/spread $37,360 3.59% $34,121 3.72% ======= ==== ======== ==== Net interest margin as a % of interest- earning assets 4.00% 3.90% ==== ====
Net interest income increased $3.2 million or 9.4% for the year ended December 31, 1995 versus the same period last year. This increase was the result of an increase in interest-earning assets combined with an increase of 10 basis points in the net interest margin to 4.00% for the year ended December 31, 1995 from 3.90% for the same period last year. Total interest income was $69.9 million for the year ended December 31, 1995, an increase of $12.0 million or 20.7%. This increase is attributable to higher levels of interest-earning assets and weighted average yields as 22 well as lower levels of non-performing assets. Interest-earning assets averaged $933.9 million for the year ended December 31, 1995 compared to $875.4 million for the year ended December 31, 1994, an increase of $58.5 million or 6.7%. Average investments increased $75.9 million or 26.0% reflecting the reinvestment of proceeds from the Conversion and leveraging a portion of the Bank's capital position. Average loans decreased $28.1 million reflecting bulk sales of loans, which occurred in 1994, partially offset by increases in residential real estate loans as well as home equity loans. The average yield on interest-earning assets was 7.49% for the year ended December 31, 1995 compared to 6.62% for the same period in 1994, an increase of 87 basis points or 13.1% reflecting the repricing of adjustable rate loans and investment securities to market rates and lower levels of non-accruing loans. These positive effects on interest income were partially offset by a change in asset mix from higher yielding loans to lower yielding investment securities. Total interest expense was $32.6 million for the year ended December 31, 1995 compared to $23.8 million for the same period in 1994, an increase of $8.8 million or 37.0%. This increase is attributable to higher deposit rates and the use of borrowings in 1995. The average rate paid on deposits was 3.80% for the year ended December 31, 1995 compared to 2.90% for the same period in 1994, an increase of 90 basis points or 31.0% reflecting a higher interest rate environment, continued competitive pricing pressures on consumer deposits, and the introduction of the "Can't Lose CD" product, which pays a rate equal to the prime rate less 350 basis points. Borrowings averaged $34.5 million during 1995 reflecting the Bank's leveraged Employee Stock Ownership Plan as well as the use of Federal Home Loan Bank Advances and repurchase agreements to leverage a portion of the Bank's capital position. Rate/Volume Analysis The following table presents the changes in net interest income resulting from changes in interest rates or changes in the volume of interest assets and interest-bearing liabilities during the periods indicated. Changes which are attributable to both rate and volume have been allocated evenly between the change in rate and volume components.
For The Years Ended December 31, 1995 versus 1994 ---------------------------------- Increase (Decrease) Due to ---------------------------------- Volume Rate Net -------- ------ ----- (In Thousands) Interest earning assets: Federal funds sold and interest bearing deposits . . . . . . . . . $ 553 $ 236 $ 789 Investment securities held to maturity . . 2,015 661 2,676 Investment securities available for sale . 2,280 3,358 5,638 Residential real estate loans . . . . . . . . 1,301 1,094 2,395 Commercial real estate loans . . . . . . . (5,095) 1,530 (3,565) Commercial loans . . . . . . . . . . . . . . 98 1,742 1,840 Home equity loans . . . . . . . . . . . . . . 2,156 499 2,655 Consumer loans . . . . . . . . . . . . . . . (457) 32 (425) ------- ------- ------- Total interest-earning assets . . . . . . . . . 2,851 9,152 12,003 ------- ------- ------- Interest bearing liabilities: Deposits: Savings accounts . . . . . . . . . . . . . . . (67) 837 770 NOW accounts . . . . . . . . . . . . . . . . (38) (36) (74) Money market accounts . . . . . . . . . . . (1,095) 1,588 493 Time deposit accounts . . . . . . . . . . . . 1,058 4,385 5,443 ------- ------- ------- Total deposits . . . . . . . . . . . . . . . . (142) 6,774 6,632 Borrowed funds . . . . . . . . . . . . . . . . 1,066 1,066 2,132 ------- ------- ------- Total interest-bearing liabilities . . . . . . . 924 7,840 8,764 ------- ------- ------- Change in net interest income . . . . . . . . $ 1,927 $ 1,312 $ 3,239 ======= ======= ========
23 Provision for Loan Losses The Bank recorded $4.4 million for the provision for possible loan losses in the year ended December 31, 1995 compared to $25.7 million in the year ended December 31, 1994. The loan loss provision in 1994 reflects the implementation of an accelerated disposition program. The provision for possible loan losses is based upon Management's judgment of the amount necessary to maintain the allowance for possible loan losses at a level which is considered adequate. For further discussion of this topic please refer to the section titled "Allowance for Possible Loan Losses" in the Balance Sheet Analysis section of this document. Non-interest Income Non-interest income is composed of fee income for bank services and gains or losses from the sale of assets. The components of non-interest income for the periods represented are as follows: For The Years Ended December 31, ---------------------- 1995 1994 ------ ------ (Dollars in thousands) Net gain (loss) on sale of loans . . $ 243 $ (505) Net gain (loss) on sale of securities (886) (48) Loan charges and fees . . . . . . . 3,221 3,213 Service charges and fees . . . . . . 5,191 4,122 Other charges and fees . . . . . . . 355 1,547 ------ ------ $8,124 $8,329 ====== ====== Net loss on sale of loans declined $0.7 million reflecting mark to market losses of $0.5 million on residential loans held for sale recorded in 1994. Net loss on sale of securities increased $0.9 million reflecting losses on the sale of securities in connection with the restructuring of the investment portfolio. Deposit service charges and fees increased $1.1 million due primarily to increased service charges on noninterest bearing accounts. Other charges and fees declined $1.1 million in the year ended December 31, 1995 compared to the same period in 1994 primarily as the result of losses incurred in 1995 from the disposition of fixed assets and non-recurring income recorded in 1994, specifically gains on sales of lease financing receivables and tax abatements. Non-interest Expense Salaries and Benefits Expense Salaries and benefits expense totaled $15.9 million for the year ended December 31, 1995 compared to $16.8 million for the same period in 1994, a decrease of $0.8 million or 4.8% reflecting a reduction in headcount partially offset by standard wage increases as well as new employee benefit programs instituted in 1995. Other Operating Expense For The Years Ended December 31, ----------------------- 1995 1994 ------- ------- (Dollars in thousands) Marketing and public relations . . . . . $ 1,339 $ 1,638 Insurance . . . . . . . . . . . . . . . . . . 2,440 3,270 Professional services . . . . . . . . . . . . 2,902 4,076 Outside processing . . . . . . . . . . . . . 2,893 2,683 Other . . . . . . . . . . . . . . . . . . . . 4,194 3,442 ------- ------- $13,768 $15,109 ======= ======= 24 Marketing and public relations expense decreased $0.3 million reflecting a lower level of advertising expenses incurred in 1995. Insurance expense includes FDIC Insurance expense, which totaled $1.9 million in 1995 compared to $2.6 million in 1994, a decrease of $0.7 million. This decrease reflects an insurance premium reduction of $0.6 million from the FDIC in 1995. Professional services expense decreased $1.2 million for the year ended December 31, 1995 compared to the same period last year primarily due to costs incurred in 1994 related to the management and disposition of non-performing assets. Outside processing expenses increased $0.2 million due to higher transaction and account volume associated with increased account activity resulting from the consumer banking strategy, partially offset by savings which resulted from a renegotiated data processing contract. Other operating expenses increased $0.8 million primarily due to costs associated with shareholder relation activities and costs associated with significant growth in retail deposit accounts as a result of the consumer strategy. Foreclosed Real Estate Expense Foreclosed real estate expense reflects losses on sales, writedowns and net operating results of foreclosed properties. These expenses were $5.5 million in 1994 compared to $0.5 million in 1995. The expenses in 1994 reflect the Bank's aggressive program of selling foreclosed properties as part of its efforts to reduce the level of non-performing assets. Net Expenses of Real Estate Operations The Bank has certain subsidiaries that are engaged in various real estate investments directly or in joint ventures with unaffiliated partners. The Bank has terminated its real estate development activities and plans to sell its remaining real estate investments by December 31, 1997 as part of a divestiture plan submitted to the FDIC. The FDIC approved the plan in December of 1995. The net expense of real estate operations reflects the net operating results of these activities, writedowns on real estate properties and gains/losses on sales of these properties. Net expense (income) of real estate operations was ($0.2) million and $1.0 million in 1995 and 1994, respectively. Income Taxes In accordance with SFAS 109, "Accounting for Income Taxes," Management evaluated the income tax benefits associated with deductible temporary differences, based on the weight of available evidence, as to whether it is more likely than not that the income tax benefits would be realized. As a result, a 100% valuation allowance was established at December 31, 1994. Management reviews the valuation allowance on a periodic basis and, based upon all available facts and circumstances at that time, may adjust the level of the allowance. At December 31, 1995, Management evaluated the weight of available evidence and concluded that it is more likely than not that the Bank will realize a significant portion of the net deferred tax asset and has reduced the valuation allowance from $15.9 million at December 31, 1994 to $7.9 million at December 31, 1995. As part of that reduction, the Bank released $6.0 million of its valuation allowance resulting in a tax benefit. Factors influencing Management's judgment include among other things changes in the level of actual and expected future taxable income and anticipated reversals of net deductible temporary differences. In addition, the Bank recorded $0.2 million of state and federal alternative minimum tax provision in 1995. 25 Impact of Inflation Monetary assets and liabilities are claims to receive or pay a sum of money, the amount of which is fixed. Most assets and liabilities of a bank are monetary in nature. In times of inflation, monetary assets lose purchasing power and monetary liabilities gain purchasing power because the obligations will be repaid with dollars that have less purchasing power than at the time the assets and liabilities were recorded. Since the Bank's primary source of earnings is net interest income, interest rates have a more significant impact on the Bank's financial performance than the general levels of inflation. Interestrates do not necessarily move in the same direction or to the same extent as the prices of goods and services. Impact of Accounting Changes In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS 121 is effective prospectively for fiscal years beginning after December 15, 1995, and will be adopted by the Bank effective January 1, 1996. The Bank does not believe adoption of this statement will have a material impact on its results of operations. In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage Service Rights." SFAS 122 amends certain provisions of SFAS 65, "Accounting for Certain Mortgage Banking Activities," to eliminate the accounting distinction between rights to service mortgage loans for others that are acquired through loan origination activities and those acquired through purchase transactions. SFAS 122 is effective prospectively for fiscal years beginning after December 15, 1995, and will be adopted by the Bank effective January 1, 1996. The Bank does not believe the adoption of this statement will have a material impact on its results of operations or financial position. In November 1995, the FASB issued SFAS 123, "Accounting for Stock Based Compensation" which gives companies the option of employing intrinsic value accounting under the guidelines of Accounting Principles Board (APB) No. 25 or fair value accounting for stock based compensation. While SFAS 123 does not require the adoption of fair value accounting, it does require certain disclosures in the financial statements as if fair value accounting had been adopted, including pro forma net income and earnings per share. SFAS 123 is effective prospectively for fiscal years beginning after December 15, 1995, and will be adopted by the Bank effective January 1, 1996. The Bank will continue to apply APB 25 in accounting for stock based compensation. 26 Comparison of Years Ended December 31, 1994 and 1993 General For the year ended December 31, 1994 the Bank reported a net loss of $26.9 million as compared to a net loss of $14.3 million for the year ended December 31, 1993. The increased loss resulted from higher levels of loan loss provisions attendant to the completion of four bulk sales of loans and other problem assets during 1994. These sales involved non-performing loans, foreclosed real estate properties, and loans that were performing, but which management determined had undesirable credit characteristics. Net Interest Income Net interest income represents the difference between income earned on interest-earning assets and expense paid on interest bearing liabilities. Net interest income is affected by the mix and volume of assets and liabilities, and the movement and level of interest rates. The following table sets forth, for the periods indicated, average balances, interest income and expense, and yields earned or rates paid on the major categories of assets and liabilities. Non-accrual loans have been included in the appropriate average balance loan category, but unpaid interest on non-accrual loans has not been included for purposes of determining interest income. For purposes of this table, investment securities available for sale are reflected at amortized cost.
Twelve Months Ended December 31, ------------------------------------------------------------------------ 1994 1993 ------------------------------------ -------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- (Dollars in Thousands) Interest-earning assets: Fed funds sold and interest-bearing deposits $ 11,682 $ 527 4.45% $ 8,154 $ 251 3.04% Investment securities held to maturity 147,943 8,173 5.52% 159,554 7,728 4.84% Investment securities available for sale 143,801 6,576 4.57% - - - Residential real estate loans 249,294 18,575 7.45% 292,941 23,626 8.07% Commercial real estate loans 182,626 13,236 7.25% 233,820 18,177 7.77% Commercial loans 95,093 7,210 7.48% 126,107 9,451 7.39% Home equity loans 32,890 2,651 8.06% 26,875 1,850 6.88% Consumer loans 12,088 965 7.98% 23,261 2,091 8.99% --------- -------- ----- --------- ------- ----- Total interest-earning assets 875,417 57,913 6.62% 870,712 63,174 7.26% Allowance for loan losses (22,015) (15,837) Non-interest-earning assets 80,574 123,340 --------- --------- Total assets $933,976 $57,913 $978,215 $63,174 ========= ======== ========= ======= Interest-bearing liabilities: Deposits Savings accounts $188,125 $ 3,846 2.04% $179,080 $ 4,190 2.34% NOW accounts 56,699 801 1.41% 57,509 1,045 1.82% Money market accounts 249,674 6,452 2.58% 259,568 7,010 2.70% Time deposit accounts 326,616 12,693 3.89% 353,775 14,930 4.22% --------- -------- ----- --------- ------- ----- Total interest-bearing liabilities 821,114 23,792 2.90% 849,932 27,175 3.20% Non-interest-bearing liabilities 70,236 59,818 --------- --------- Total liabilities 891,350 909,750 Total stockholders' equity 42,626 68,465 --------- --------- Total liabilities and stockholders' equity $933,976 $23,792 $978,215 $27,175 ========= ======== ========= ======= Net interest income/spread $34,121 3.72% $35,999 4.06% ======== ===== ======= ===== Net interest margin as a % of interest- earning assets 3.90% 4.13% ===== =====
27 Net interest income declined $1.9 million or 5.2% for the year ended December 31, 1994 versus the same period last year. This net decrease resulted from a decrease in interest income of $5.3 million offset partially by a decrease in interest expense of $3.4 million. The decrease in interest income resulted from a change in asset mix to lower yielding (and lower risk) investments. The net impact of the above changes was a 34 basis point decrease in net interest spread and a 23 basis point decrease in net interest margin. Despite a small increase in interest-earning average assets of $4.7 million, interest income declined $5.3 million or 8.3 %. This decrease was largely attributable to a change in asset mix from higher yielding loans to lower yielding investment securities. Average loans outstanding decreased $131.0 million or 18.6% from $703.0 million at December 31, 1993 to $572.0 million at December 31, 1994. This decrease was attributable to the Bank's program to accelerate the disposition of its problem assets, and also to the securitization of $40 million in single-family residential mortgage loans. This decrease was offset by an increase of $132.2 million in investment securities. Interest expense declined $3.4 million in 1994 due largely to lower rates paid on deposits and, to a lesser extent, lower deposit levels. The average rate paid on deposits declined 30 basis points from 3.20% for the year ended December 31, 1993 to 2.90% for the year ended December 31, 1994. This accounted for $2.2 million of the decrease. The lower interest rates were across all deposit products. In addition, interest expense also declined due to lower average deposit balances of $821.1 million at December 31, 1994 versus $849.9 million at December 31, 1993, a 3.4% decrease. Rate/Volume Analysis The following table presents the changes in net interest income resulting from changes in interest rates or changes in the volume of interest assets and interest-bearing liabilities during the periods indicated. Changes which are attributable to both rate and volume have been allocated evenly between the change in rate and volume components.
For the Years Ended December 31, 1994 versus 1993 --------------------------------- Increase (Decrease) Due to --------------------------------- Volume Rate Net ----------- ------- --------- (In Thousands) Interest earning assets: Federal funds sold and interest bearing deposits . . . $ 134 $ 142 $ 276 Investment securities held to maturity . . . . . . . (602) 1,047 445 Investment securities available for sale . . . . . . 3,288 3,288 6,576 Residential real estate loans . . . . . . . . . . . . . (3,386) (1,665) (5,051) Commercial real estate loans . . . . . . . . . . . . (3,845) (1,096) (4,941) Commercial loans . . . . . . . . . . . . . . . . . . . (2,338) 97 (2,241) Home equity loans . . . . . . . . . . . . . . . . . . . 449 352 801 Consumer loans . . . . . . . . . . . . . . . . . . . . (948) (178) (1,126) ------ ------ ------ Total interest-earning assets . . . . . . . . . . . . (7,248) 1,987 (5,261) ------ ------ ------ Interest bearing liabilities: Deposits: Savings accounts . . . . . . . . . . . . . . . . . . . . 198 (542) (344) NOW accounts . . . . . . . . . . . . . . . . . . . . . (13) (231) (244) Money market accounts . . . . . . . . . . . . . . . (261) (297) (558) Time deposit accounts . . . . . . . . . . . . . . . . (1,101) (1,136) (2,237) ------ ------ ------ Total interest-bearing liabilities . . . . . . . . . . (1,177) (2,206) (3,383) ------ ------ ------ Change in net interest income . . . . . . . . . . . ($6,071) $ 4,193 ($1,878) ======= ======= =======
28 Provision for Loan Losses The Bank added $25.7 million to its allowance for loan losses in 1994 compared to $15.7 million in the prior year. The loan loss provision in 1994 reflects the implementation of the accelerated disposition program and the implementation of new loan loss reserve methodology. The provision for loan losses is based upon Management's judgment of the amount necessary to maintain the allowance for possible loan losses at a level which is considered adequate. Non-interest Income Non-interest income is composed of fee income for bank services and gains or losses from the sale of assets. The components of non-interest income for the periods represented are as follows: For The Years Ended December 31, ------------------------------- 1994 1993 ------- ------ (Dollars in thousands) Net gain (loss) on sale of loans . . ($ 505) $ 2,627 Net gain (loss) on sale of securities (48) (276) Loan charges and fees . . . . . . . 3,213 3,776 Service charges and fees . . . . . . 3,909 4,123 Other charges and fees . . . . . . . 1,760 1,421 -------- -------- $ 8,329 $ 11,671 ======== ======== The Bank originates fixed-rate residential mortgage loans primarily for sale into the secondary market. Net gains on the sale of loans declined $3.1 million partly due to lower production in 1994 as compared to 1993, as a consequence of the decreased demand for refinancing. A more volatile interest rate environment in 1994 resulted in a reduction of gains on sales of loans as well as the recognition of mark to market losses. Loan charges and fees declined $0.6 million due to the sale of the Bank's VISA credit card portfolio in the fourth quarter of 1993 and lower levels of residential mortgage originations. Other charges and fees increased $0.3 million in 1994 as a result of non-recurring income, specifically gains on the sale of lease financing receivables recorded in 1994. Non-interest Expense Other Operating Expense For The Years Ended December 31, ----------------------- 1994 1993 ------- ------- Marketing and public relations $ 1,638 $ 1,526 Insurance 3,270 3,324 Professional services 4,076 3,399 Outside processing 2,683 2,027 Other 3,442 3,166 ------- ------- $15,109 $13,442 ======= ======= Professional Services expense increased $0.7 million due to professional fees related to the management and disposition of non-performing assets and additional consulting services in connection with the Bank's new business strategies. Outside processing expenses increased $0.7 million due to higher transaction and account volumes associated with increased activity resulting from the new consumer banking strategy. 29 Foreclosed Real Estate Expense Foreclosed real estate expense reflects losses on sales, writedowns and net operating results of foreclosed properties. This expense totaled $5.5 million for the year ended December 31, 1994 compared to $11.7 million for the year ended December 31, 1993. Expenses in both years reflect the Bank's aggressive selling of foreclosed properties as part of its effort to reduce the level of non-performing assets. Net Expenses of Real Estate Operations Colebrook represents certain subsidiaries of the Bank that are engaged in various real estate investment activities directly or through joint ventures with unaffiliated partners. The Bank plans an orderly divestment of its real estate investments with a target date of December 31, 1997. Net expense of real estate operations reflect the net operating results of Colebrook, writedowns of real estate properties, and gains/losses on sales of these properties. Net expenses of real estate operations was $1.0 million for the year ended December 31, 1994 versus $2.6 million for the year ended December 31, 1993. Income Taxes Due to the Bank's continuing losses, there was no federal or state tax benefit or expense for the year ended December 31, 1994. In the fourth quarter of 1993, the Bank changed its status for federal income tax purposes. The Bank was no longer classified as a thrift institution but, rather, qualified as a bank under federal income tax rules. As a result, the Bank was eligible to carryback losses related to bad debts to the ten preceding tax years. Accordingly, the Bank recorded a tax benefit of $3.4 million in the fourth quarter of 1993. Impact of Inflation Monetary assets and liabilities are claims to receive or pay a sum of money, the amount of which is fixed. Most assets and liabilities of a bank are monetary in nature. In times of inflation, monetary assets lose purchasing power and monetary liabilities gain purchasing power because the obligations will be repaid with dollars that have less purchasing power than at the time the assets and liabilities were recorded. Since the Bank's primary source of earnings is net interest income, interest rates have a more significant impact on the Bank's financial performance than the general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. 30 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item is attached as Exhibit A. The following items are found in the 1995 Consolidated Financial Statements and Notes. Page Consolidated Balance Sheets as of December 31, 1995 and 1994 A-1 Consolidated Statements of Operations for the three years ended December 31, 1995, 1994, and 1993 A-2 Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 1995, 1994, and 1993 A-3 Consolidated Statements of Cash Flows for the three years ended December 31, 1995, 1994, and 1993 A-4 Notes to Consolidated Financial Statements A-6 Report of Independent Accountants A-28 All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. 31 PART III ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK (a) Directors of the Bank: The response to this Item regarding those persons who are directors of the Bank is contained in the discussion under the caption "Directors and Nominees" contained on pages 41 through 43 of the Proxy Statement filed as Form F-5 with the FDIC, which is incorporated by reference herein. (b) Principal Officers of the Bank: The following table sets forth certain information regarding the principal officers of the Bank (those Officers subject to Section 16 reporting requirements):
Name Age Position and office with the Bank Office held since - ---- --- --------------------------------- ----------------- F. William Marshall, Jr.(1) 54 President & Chief Executive Officer, Director 1993 Frank W. Barrett(2) 56 Executive Vice President/Credit & Commercial 1994 Lending Group B. John Dill(3) 44 Executive Vice President of Bank; President of 1987 Colebrook Corporation John F. Treanor(4) 48 Executive Vice President, Chief Financial Officer 1994 & Treasurer Gilbert F. Ehmke(5) 36 Senior Vice President, Chief Investment Officer 1995 Henry J. McWhinnie(6) 52 Senior Vice President/Human Resources Group 1994 Jeanne Rinaldo(7) 47 Senior Vice President/Residential Mortgage 1992 Group Christopher A. Sinton(8) 51 Senior Vice President/Retail Banking Group 1995 Michael E. Tucker(9) 39 Senior Vice President & General Counsel 1993 Ting Chang(10) 32 Vice President/Investor Relations 1995 Laura Sotir Katz(11) 32 Vice President & Controller 1992 Brian Schwartz(12) 28 Vice President & Director of Internal Auditing 1995
(c) Family Relationships: The response to this item is incorporated by reference from the discussion under the caption "Management of the Bank - Directors and Nominees" in the Proxy Statement. - -------- (1) Mr. Marshall joined the Bank in May, 1993. He formerly served as Chairman and Chief Executive Officer of the Bank of Ireland First Holdings, Inc. and First NH Bank. Prior to 1991, Mr. Marshall served as Executive Vice President of Shawmut National Corporation. Mr. Marshall served as a Trustee of the Bank from May, 1993 until the Conversion of the Bank to stock form on February 8, 1995. (2) Mr. Barrett joined the Bank in January, 1994. He formerly served as Senior Vice President of Bank of Ireland First Holdings and First NH Bank; Senior Vice President of Shawmut Bank, N.A., and Executive Vice President of Shawmut Worcester County Bank, N.A. (3) Mr. Dill joined the Bank in 1974 and has served as Executive Vice President of the Bank since 1987 and President and Chief Executive Officer of Colebrook since 1982. (4) Mr. Treanor joined the Bank in August, 1994. He formerly served as Executive Vice President, Treasurer and Chief Financial Officer of Sterling Bancshares Corporation and Senior Vice President of Shawmut National Corporation. 32 (5) Mr. Ehmke joined the Bank in February, 1995. Prior to joining the Bank, he was Senior Vice President and Treasurer of Northeast Savings, F.A. in Hartford, Connecticut. (6) Mr. McWhinnie joined the Bank in September, 1994. He formerly served as Senior Vice President Human Resources of Bristol Savings Bank in Bristol, Connecticut and as Executive Vice President of Centerbank, Waterbury, Connecticut. (7) Ms. Rinaldo joined the Bank in 1988 and has served as Senior Vice President since May, 1992. (8) Mr. Sinton joined the Bank in February, 1995. He formerly was Executive Vice President-Retail Banking Division of United Jersey Bank. (9) Mr. Tucker joined the Bank in 1980 and has served as Senior Vice President since December, 1993 and General Counsel since 1985. (10) Ms. Chang joined the Bank in 1989 and has served as Vice President for Investor Relations since 1995. (11) Ms. Katz joined the Bank in 1990. She previously was a C.P.A. at Ernst and Young in Boston, Massachusetts. (12) Mr. Schwartz joined the Bank in May, 1995. He formerly served as Audit Manager with Shawmut National Corporation. Prior to 1993, he was Corporate Compliance Officer with MNC Financial Corporation. ITEM 10. MANAGEMENT COMPENSATION AND TRANSACTIONS The response to this Item is contained in the discussion under the captions "Executive Compensation", "Employment Agreements", "Benefits Under Plans", "Transactions with Certain Related Persons" and "Certain Business Relationships" contained on Pages 45 through 57 of the Proxy Statement, which is incorporated by reference herein. The disclosure required regarding the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 is contained at page 62 of the Proxy under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934". PART IV ITEM 11: EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM F-3 (a) Contents: (1) Financial Statements: All Financial Statements referred to in Part II, Item 8 of this Report are included as Exhibit A. The index is on page 31 of this Report. (2) Financial Statement Schedules: Schedules are omitted because the information is either not required, not applicable, or is included in Part II, items 6-8 of this report. (b) Reports on Form F-3: None filed during the fourth quarter of 1995. (c) Exhibits: (1) Articles of Incorporation and Bylaws (a) Amended and Restated Charter of Springfield Institution for Savings - filed as Exhibit 1(a) from the Bank's Registration Statement on Form F-1 (b) Amended and Restated By-laws of Springfield Institution for Savings - filed as Exhibit 1(b) from the Bank's Registration Statement on Form F-1 33 (2) Instruments Defining the Rights of Security Holders (a) Amended and Restated Charter of Springfield Institution for Savings - filed as Exhibit 1(a) from the Bank's Registration Statement on Form F- 1 (b) Amended and Restated By-laws of Springfield Institution for Savings - filed as Exhibit 1(b) from the Bank's Registration Statement on Form F- 1 (c) Specimen Certificate for shares of Common Stock of the Springfield Institution for Savings - filed as Exhibit 3 from the Bank's Registration Statement on Form F-1 (3) Material Contracts (a) Employment agreements for Messrs. F. William Marshall, Jr., Frank W. Barrett, B. John Dill, John F. Treanor, Henry J. McWhinnie, Ms. Jeanne Rinaldo, and Mr. Michael E. Tucker are incorporated by reference to Exhibit 7 from the Bank's Registration Statement on Form F-1 (b) The form of Employment agreements for Messrs. Gilbert F. Ehmke and Christopher A. Sinton is attached to this Report as Exhibit B. (4) Statement Regarding Computation of Per Share Earnings Such computation is attached to this Report as Exhibit C. (5) Statement Regarding Computation of Ratios As the Bank does not have any debt securities registered under Section 12 of the Act, no ratio of earnings to fixed charges appears in this Annual Report on Form F-2. (6) Exhibit Report to Security Holders The Springfield Institution for Savings 1995 Annual Report is furnished only for the information of the Federal Deposit Insurance Corporation and is not deemed to be filed herewith. (7) Letter Regarding Change in Accounting Principles None (8) Previously Unfiled Documents None (9) Subsidiaries of the Bank The Bank owns 100% of the capital stock of each of the following subsidiaries, all of which are Massachusetts corporations (unless otherwise indicated) and all of which are included in the Bank's consolidated financial statements: (1) Commerce Properties, Inc. (2) Properties Two, Inc. (Connecticut corporation) (3) Montague Properties, Inc (4) Village Park Properties, Inc. (Georgia corporation) (5) 1190 Adams Street Corporation (6) SIS Investment Corporation (7) SIS Investment Corporation II (8) Sherman Street Corporation (9) SIS Center, Inc. (10) Newgate Corporation (11) Colebrook Corporation (12) Colebrook-Leominster, Inc. 34 The Bank also owns 100% of the capital stock of each of the following subsidiaries through Colebrook Corporation, all of which are Massachusetts corporations (unless otherwise indicated) and all of which are included in the Bank's consolidated financial statements: (1) Colebrook Realty Services, Inc. (2) Colebrook-Diamond, Inc. (3) Colebrook-Riverdale Corporation (4) New Marlboro Corp. (5) Colebrook-Woodcrest, Inc. (6) Colebrook/Westor, Inc. (7) 140 Glastonbury Boulevard, Inc. (Connecticut Corporation) (8) Overlook, Inc. In addition, the Bank owns, either directly or through the wholly owned subsidiaries of Colebrook Corporation specified below, the percentage interest in the partnership or corporation set forth opposite each such wholly owned subsidiary.
Partnership or Subsidiary Corporation Owned Percentage Interest - ------------------------------ ---------------------------- -------------------------- (1) Colebrook-Woodcrest, Inc. Hillman Associates 50% general partnership Partnership #4 Waltham Medical Associates 12.5% limited partnership Limited Partnership Wiljon Partnership 50% general partnership (2) New Marlboro Francoline Colebrook 50% general partnership Partnership #7 (3) Colebrook/Westor Corporation Westor Corporation 50% stockholder Westor Partnership 1% general partnership (98% limited partnership owned by Westor Corporation). (4) Newgate Corporation Sunchase Limited Partnership 14.57% limited partnership Capital Drive Limited Partnership 25% general partnership (5) Overlook, Inc. Chester Commons 99% limited partnership (6) Sherman Street Corporation Van Der Hayden 1% general partnership
35 SIGNATURES Pursuant to the requirements of the Section 13 of the Securities Exchange Act of 1934, the Bank has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. February 28, 1996 SPRINGFIELD INSTITUTION FOR SAVINGS By: /s/ F. William Marshall, Jr. F. William Marshall, Jr., President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Bank and in the capacities on the dates indicated.
Signature Title Date --------- ------- ---- By: /s/ F. William Marshall, Jr. President, Chief Executive February 28, 1996 F. William Marshall, Jr. Officer and Director By: /s/ John F. Treanor Executive Vice President, February 28, 1996 John F. Treanor Chief Financial Officer and Treasurer By: /s/ Laura Sotir Katz Vice President, Controller February 28, 1996 Laura Sotir Katz (Chief Accounting Officer) By: /s/ John M. Naughton Director, Chairman of the February 28, 1996 John M. Naughton Board By: /s/ Teresita Alicea Director February 28, 1996 Teresita Alicea By: /s/ Mary E. Boland Director February 28, 1996 Mary E. Boland By: /s/ Sister Mary Caritas Geary, S.P. Director February 28, 1996 Sister Mary Caritas Geary, S.P. By; /s/ Donald F. Collins Director February 28, 1996 Donald F. Collins 36 Signature Title Date --------- ------- ---- By: /s/ Harry J Courniotes Director February 28, 1996 Harry J. Courniotes By: /s/ Paulette Henderson-Johnson Director February 28, 1996 Paulette Henderson-Johnson By: /s/ Charles L. Johnson Director February 28, 1996 Charles L. Johnson By: /s/ Stephen A. Shatz Director February 28, 1996 Stephen A. Shatz By: /s/ Gary P. Shannon Director February 28, 1996 Gary P. Shannon By: /s/ John H. Southworth Director February 28, 1996 John H. Southworth By: /s/ Albert E. Steiger, Jr. Director February 28, 1996 Albert E. Steiger, Jr.
37 EXHIBIT A SPRINGFIELD INSTITUTION FOR SAVINGS INDEX TO FINANCIAL STATEMENTS Page Consolidated Balance Sheets as of December 31, 1995 and 1994 A - 1 Consolidate Statements of Operations for the three years ended December 31, 1995, 1994, and 1993 A - 2 Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 1995, 1994 and 1993 A - 3 Consolidated Statements of Cash Flows for the three years ended December 31, 1995, 1994 and 1993 A - 4 Notes to Consolidated Financial Statements A - 6 Report of Independent Accountants A - 28
SPRINGFIELD INSTITUTION FOR SAVINGS CONSOLIDATED BALANCE SHEET (Dollars in Thousands) December 31, ---------------------------- 1995 1994 ------ ------ ASSETS Cash and due from banks $ 30,377 $ 30,100 Federal funds sold and interest bearing deposits 8,045 25,620 Investment securities available for sale 246,984 161,321 Investment securities held to maturity (market value 172,793 158,243 $172,930 at December 31, 1995; and $145,261 at December 31, 1994) Loans receivable, net of allowance for possible losses 558,663 497,582 ($14,986 at December 31, 1995 and $ 15,844 at December 31, 1994) Accrued interest and dividends receivable 7,109 5,116 Investments in real estate and real estate partnerships 6,092 6,699 Foreclosed real estate, net 1,529 4,951 Bank premises, furniture and fixtures, net 25,706 23,413 Other assets 13,680 7,644 ---------- -------- $1,070,978 $920,689 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $885,386 $853,633 Federal Home Loan Bank advances 41,500 - Securities sold under agreements to repurchase 31,101 - Loans payable 5,470 2,392 Mortgagors' escrow deposits 4,193 5,306 Accrued expenses and other liabilities 21,859 30,855 ---------- -------- Total liabilities 989,509 892,186 ---------- -------- Commitments and contingent liabilities Stockholders' equity: Preferred stock ($1 par value; 5,000,000 shares authorized; no shares issued and outstanding) - - Common stock ($1 par value; 25,000,000 shares authorized; 5,710,700 shares issued in 1995) 5,710 - Unearned compensation (4,937) - Additional paid-in capital 35,887 - Retained earnings 43,083 31,624 Net unrealized gains (losses) on investment securities available for sale 1,726 (3,121) ---------- -------- Total stockholders' equity 81,469 28,503 ---------- -------- $1,070,978 $920,689 ========== ========
See accompanying Notes to the Consolidated Financial Statements A-1
SPRINGFIELD INSTITUTION FOR SAVINGS CONSOLIDATED STATEMENT OF OPERATIONS (Dollars In Thousands) For the Years Ended December 31, ------------------------------------------- 1995 1994 1993 ------ ------ ------ Interest and dividend income Interest on loans $ 45,536 $ 42,637 $ 55,195 Interest and dividends on investment securities available for sale 12,215 6,576 - Interest and dividends on investment securities held to maturity 10,849 8,173 7,728 Interest on federal funds sold and interest bearing deposits 1,316 527 251 ----------- ---------- ---------- Total interest and dividend income 69,916 57,913 63,174 ----------- ---------- ---------- Interest expense Interest on deposits 30,424 23,792 27,175 Interest on borrowed funds 2,132 - - ----------- ---------- ---------- Total interest expense 32,556 23,792 27,175 ----------- ---------- ---------- Net interest and dividend income 37,360 34,121 35,999 Less: Provision for possible loan losses 4,359 25,742 15,740 ----------- ---------- ---------- Net interest and dividend income after provision for possible loan losses 33,001 8,379 20,259 Noninterest income Net gain (loss) on sale of loans 243 (505) 2,627 Net gain (loss) on sale of securities (886) (48) (276) Fees and other income 8,767 8,882 9,320 ----------- ---------- ---------- Total noninterest income 8,124 8,329 11,671 ----------- ---------- ---------- Noninterest expense Operating expenses Salaries and employee benefits 15,961 16,808 16,583 Occupancy expense of bank premises, net 3,459 3,410 3,502 Furniture and equipment expense 1,943 1,830 1,696 Other operating expenses 13,768 15,109 13,442 ----------- ---------- ---------- Total operating expenses 35,131 37,157 35,223 ----------- ---------- ---------- Foreclosed real estate expense 521 5,470 11,734 Net (income) expense of real estate operations (227) 988 2,632 ----------- ---------- ---------- Total noninterest expense 35,425 43,615 49,589 ----------- ---------- ---------- Income (loss) before income tax benefit 5,700 (26,907) (17,659) Income tax benefit (5,759) - (3,384) ----------- ---------- ---------- Net income (loss) $ 11,459 ($ 26,907) ($ 14,275) =========== =========== =========== Pro forma earnings per share: (1) Primary $ 2.21 ($ 5.21) ($ 2.77) Fully diluted (2) $ 2.19 ($ 5.21) ($ 2.77) Pro forma weighted average shares outstanding: (1) Primary 5,174,037 5,174,037 5,174,037 Fully diluted 5,220,778 5,220,778 5,220,778 (1) Net income (loss) per share for the twelve months ended December 31, 1995, 1994 and 1993 is computed on a pro forma basis as if the stock issued in the conversion had been issued as of the beginning of each period presented. (2) For the years ended December 31, 1994 and 1993 the fully diluted earnings per share calculation is anti-dilutive.
See accompanying Notes to the Consolidated Financial Statements A-2
SPRINGFIELD INSTITUTION FOR SAVINGS CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For The Years Ended December 31, 1995, 1994 and 1993 (Dollars In Thousands) Net unrealized Net gain (loss) unrealized on investment loss on Unearned Additional securities marketable Common Compen- Paid-In Retained available equity Stock sation Capital Earnings for sale securities Total ----------- ---------- ----------- ---------- ------------- -------------- ------- Balance at December 31, 1992 $ -- $ -- $ -- $ 72,806 $ -- ($ 44) $ 72,762 Net Loss -- -- -- (14,275) -- -- (14,275) Change in net unrealized loss on marketable equity securities -- -- -- -- -- 44 44 -------- -------- -------- -------- -------- -------- -------- Balance at December 31, 1993 -- -- -- $ 58,531 $ -- $ -- $ 58,531 ======== ======== ======== ======== ======== ======== ======== Balance at December 31, 1993 $ -- $ -- $ -- $ 58,531 $ -- $ -- $ 58,531 Net Loss -- -- -- (26,907) -- -- (26,907) Change in unrealized gain (loss) on investment securities available for sale -- -- -- -- (3,121) -- (3,121) -------- -------- -------- -------- -------- -------- -------- Balance at December 31, 1994 -- -- -- $ 31,624 ($ 3,121) $ -- $ 28,503 ======== ======== ======== ======== ======== ======== ======== Balance at December 31, 1994 $ -- $ -- $ -- $ 31,624 ($ 3,121) $ -- $ 28,503 Net Income -- -- -- 11,459 -- -- 11,459 Issuance of common stock 5,562 -- 33,909 -- -- -- 39,471 Unearned compensation 148 (5,375) 1,667 -- -- -- (3,560) Decrease in unearned compensation -- 438 311 -- -- -- 749 Change in unrealized gain (loss) on investment securities available for sale -- -- -- -- 4,847 -- 4,847 -------- -------- -------- -------- -------- -------- -------- Balance at December 31, 1995 $ 5,710 ($ 4,937) $ 35,887 $ 43,083 $ 1,726 $ -- $ 81,469 ======== ======== ======== ======== ======== ======== ========
A-3
SPRINGFIELD INSTITUTION FOR SAVINGS CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars In Thousands) For the Years Ended December 31, ------------------------------------ 1995 1994 1993 ------ ------ ------ Cash Flows From Operating Activities Net income (loss) $ 11,459 ($ 26,907) ($ 14,275) Adjustments to reconcile net income (loss) to net cash (used for)/ provided by operating activities Provision for possible loan losses 4,359 25,742 15,740 Provision for foreclosed real estate 836 6,034 7,975 Depreciation 3,026 3,605 3,089 Amortization of premium on investment securities, net 972 1,812 1,348 Amortization of lease income -- (1) (197) Investment security losses 886 48 276 Loss from equity investment in partnerships 133 987 346 (Gain) loss on sales of loans (243) 505 (2,627) Disbursements for mortgage loans held for sale (65,747) (126,727) (353,041) Receipts from mortgage loans held for sale 65,989 126,161 354,747 Loss (gain) on sale of fixed assets and real estate 609 (4,306) 178 Changes in assets and liabilities: (Increase) decrease in other assets, net (8,029) 1,382 563 (Decrease) increase in accrued expenses and other (8,996) 5,678 4,060 liabilities ------- ------ ------- Net cash (used for)/provided by operating activities 5,254 14,013 18,182 ------- ------ ------- Cash Flows From Investing Activities Proceeds from sales of investment securities available for 213,252 59,609 - sale Proceeds from maturities and principal payments received on investment securities available for sale 135,076 406,369 -- Purchase of investment securities available for sale (345,959) (497,675) -- Proceeds from sales of investment securities held to -- -- 82,406 maturity Net cash (used for)/provided by operating activities 5,254 14,013 18,182 Proceeds from maturities and principal payments received on investment securities held to maturity 33,287 13,783 160,770 Purchase of investment securities held to maturity (132,878) (75,067) (320,043) Net decrease in investment in real estate -- 6,005 2,353 Cash distributions from partnerships -- 63 36 Capital contributions to partnerships -- (401) (22) Net (increase) decrease in loans receivable (66,864) 20,685 50,119 Net decrease in foreclosed real estate 2,928 16,437 24,395 Principal payments received under leases -- 177 1,358 Proceeds from sale of loans 1,081 74,925 12,166 Proceeds from sale of fixed assets and leases -- 27 546 Purchase of fixed assets (5,454) (1,967) (1,925) ------- ------ ------- Net cash (used for)/provided by investing activities (165,531) 22,970 12,159 --------- ------ -------
See accompanying Notes to the Consolidated Financial Statements A-4
SPRINGFIELD INSTITUTION FOR SAVINGS CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars In Thousands) For the Years Ended December 31, ------------------------------------ 1995 1994 1993 ------ ------ ------ Cash Flows From Financing Activities Net proceeds from stock conversion $ 35,911 $ -- $ -- Net increase (decrease) in deposits 31,753 (21,273) (23,144) Net increase (decrease) in borrowings 75,679 (3,671) (177) Net (decrease) increase in mortgagors' escrow deposits (1,113) 79 883 Net decrease in unearned compensation 749 -- -- --------- --------- --------- Net cash provided by/(used for) financing activities 142,979 (24,865) (22,438) --------- --------- --------- (Decrease) increase in cash and cash equivalents (17,298) 12,118 7,903 Cash and cash equivalents, beginning of year 55,720 43,602 35,699 --------- --------- --------- Cash and cash equivalents, end of year $ 38,422 $ 55,720 $ 43,602 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for interest to depositors and $ 32,456 $ 23,751 $ 27,317 interest on debt Non-cash investing activities: Transfers to foreclosed real estate, net $ 342 $ 2,337 $ 4,698
A-5 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands) General Established in 1827, Springfield Institution for Savings is a state chartered, stock savings bank headquartered in Springfield, Massachusetts. Springfield Institution for Savings and its subsidiaries (the "Bank") provides a variety of financial services which include retail and commercial banking, residential mortgage origination and servicing, commercial real estate lending and consumer lending. The Bank serves its primary market of Hampden and Hampshire Counties of Massachusetts through a network of 20 retail branches. The Bank's revenues are derived principally from interest payments on its loan portfolios and mortgage-backed and other investment securities. The Bank's primary sources of funds are deposits, borrowings and principal and interest payments on loans and mortgage-backed securities. 1. Accounting Policies The accounting and reporting policies of the Bank conform with generally accepted accounting principles. The significant policies are summarized below. The consolidated financial statements of the Bank are dependent on the use of estimates, particularly with regard to the allowance for possible loan losses and the value of other real estate. Estimates of loan collectability and real estate values involve a high degree of judgment and the use of appraisals and other information. Subsequent changes in general economic conditions and the financial condition of borrowers may require changes in such estimates. Consolidation The consolidated financial statements include the accounts of the Bank and its wholly owned subsidiaries, most of which are involved in the purchase, sale, management and rental of real estate. All significant intercompany items have been eliminated. Certain amounts in prior periods have been reclassified to conform to the current year presentation. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and interest bearing deposits. Generally, federal funds are sold for one day periods. Investment Securities In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" which requires that debt and equity securities be segregated into three categories: (i) held to maturity, which will be carried at amortized cost; (ii) available for sale, which will be valued at market with unrealized gains and losses reported as a separate component of stockholders' equity net of tax and (iii) trading securities, which will be valued at market with unrealized gains and losses included in current earnings. The Bank adopted FAS 115 effective January 1, 1994. The effect upon adoption at January 1, 1994 was to increase stockholders' equity by $1,069. Prior to adoption of this new standard, investment debt securities represented those securities which management had the intent and ability to hold until maturity and were stated at cost adjusted for amortization of premiums and accretion of discounts. Marketable equity securities were stated at the lower of their aggregate cost or market value with net unrealized losses reported as a reduction to the stockholders' equity account. Gains or losses from security transactions are computed under the specific identification method. A-6 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Investments in Real Estate and Real Estate Partnerships Investments in real estate reflect the Bank's interest in wholly owned real estate properties. Investments in real estate properties are carried at the lower of cost, including cost of improvements incurred subsequent to acquisition, or fair value less costs to sell. Investments in partnerships reflect the Bank's interest in joint venture real estate developments. Investments in partnerships which are greater than 50% owned by the Bank are accounted for using the equity method and are carried at the Bank's equity in the underlying assets. Loans Loans are stated at the principal amount outstanding, net of unearned income. Interest income on loans is accrued based on rates applied to amounts outstanding. Unearned income on loans made or purchased on a discounted basis are recognized in interest income over the lives of the loans using a method that approximates a level yield. Loans held for sale are carried at the lower of cost or market value. Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount is amortized as a yield adjustment over the average life of the loans using a method that approximates a level yield method. Loans on which the accrual of interest has been discontinued are classified as nonaccrual loans. Interest accruals on loans are normally discontinued whenever the payment of interest or principal is more than 90 days past due or when, in the opinion of management, such action is prudent. When a loan is placed on nonaccrual status, all interest previously accrued in the current year but not collected is reversed against current year interest income. Loans are removed from nonaccrual status when they become current as to principal and interest and when, in the opinion of management, the loans are estimated to be fully collectible as to principal and interest. The Bank may continue to accrue interest on loans past due 90 days or more that are well secured and in the process of collection. Restructured loans are loans for which concessions, including reduction of interest rates or deferral of interest or principal payments, have been granted to acknowledge changes in the borrower's financial condition or changes in underlying cash flows of the loan's collateral. Interest income on restructured loans is accrued at the modified rates after a satisfactory period of performance (generally six months). Effective January 1, 1995 the Bank adopted FAS 114, "Accounting by Creditors for Impairment of a Loan." FAS 114 modifies the accounting for impaired loans, defined as those loans, where, based on current information and events, it is probable that a creditor will be unable to collect all amounts due, both interest and principal, according to the contractual terms of the loan agreement. Specifically, FAS 114 requires that the allowance for possible loan losses related to impaired loans be determined based on the present value of expected cash flows discounted at the loan's effective interest rate or, as a practical expedient, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The adoption of this statement did not have a material impact on the Bank's results of operations or financial position. Effective January 1, 1995, the Bank also adopted FAS 118, "Accounting by Creditors for an Impairment of a Loan - Income Recognition and Disclosure," which amends FAS 114 to permit a creditor to use existing methods for recognizing interest income on impaired loans. Generally, interest income received on impaired loans either continues to be applied by the Bank against principal or is realized as interest income, according to Management's judgment as to the collectability of the principal. A-7 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Allowance for Possible Loan Losses The allowance for possible loan losses is established through charges against income. Loans deemed uncollectable are charged against the allowance, while recoveries of amounts previously charged-off are credited to the allowance. The allowance represents an amount which, in Management's judgment, will be adequate to absorb probable losses on existing loans that may become uncollectable. Management's judgment in determining the adequacy of the allowance is based on various factors influencing the collectability of the loan. These factors include, but are not limited to, an analysis of the borrower's ability to meet the repayment terms, the borrower's overall financial condition, the estimated value of collateral supporting the credit, the concentration of credit risk in the portfolio and judgments as to the effect of current and anticipated economic conditions. Management's determination of the allowance is, by necessity, dependent upon estimates, appraisals and judgments, which may change because of changing economic conditions and the Bank's perception as to how these factors may affect the financial condition of the borrowers. Foreclosed Real Estate Real estate acquired through foreclosure is transferred to foreclosed real estate at the lower of the estimated fair value of the asset acquired or book value. The excess if any, of the loan over the fair value of the property at the time of transfer is charged to the Allowance for Possible Loan Losses. Subsequent declines in the value of the property are reflected as a valuation allowance and charged to operations. Subsequent to transfer, foreclosed real estate is carried at the lower of cost or the estimated fair value less expenses to dispose of the asset. Bank Premises, Furniture and Fixtures Bank premises, furniture and fixtures are stated at cost less accumulated depreciation and amortization. Depreciation is computed by use of the straight-line method over the estimated useful lives of the related assets, ranging from 3 to 30 years. Leasehold improvements are amortized over the shorter of the lease terms or the useful life of the improvement. Fair Values of Financial Instruments In 1992, the Bank adopted FAS 107, "Disclosures about Fair Value of Financial Instruments," which requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial position, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The calculation of fair value estimates is dependent upon certain subjective assumptions and involves significant uncertainties, resulting in variability in estimates with changes in assumptions. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in the fair value amounts disclosed. FAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank. In addition, the fair value estimates are not intended to reflect the liquidation value of the financial instruments. The following methods and assumptions were used by the Bank to estimate the fair value for each class of financial instruments for which it is practicable to estimate that value. Cash and short-term investments - The carrying amounts for cash and short-term investments are reasonable estimates of those assets' fair values. Investment securities - Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities. A-8 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Loans receivable, net - For adjustable rate residential loans that reprice frequently and with no significant change in credit risk, fair values are based on the market prices for securities collateralized by similar loans. For certain homogeneous categories of loans, such as some residential fixed rate mortgages, fair value is estimated using the quoted market price for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Accrued interest and dividends receivable - The carrying amount of interest and dividends receivable approximates its fair value. Deposit liabilities - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date, that is, the carrying value. The fair value of fixed maturity certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently offered for deposits of similar remaining maturities on the future cash flows expected to be paid on the deposits. In estimating the fair value of deposit liabilities, FAS 107 prohibits financial entities from taking into account the value of its long-term relationships with depositors, commonly known as core deposit intangibles. Federal Home Loan Bank advances - The fair value of advances from the Federal Home Loan Bank of Boston is based on discounted values of contractual cash flows using rates currently offered for instruments with similar terms and maturities or, when available, quoted market prices. Securities sold under agreements to repurchase - The fair value of securities sold under agreements to repurchase are based on the discounted value of contractual cash flows using dealer quoted rates for agreements of similar terms and maturities. Loans payable - The fair values of the Bank's loans payable are estimated using discounted cash flow analyses, based on rates currently available to the Bank for debt with similar terms and remaining maturities. Standby letters of credit - The estimated fair value of financial guarantees, such as standby letters of credit, are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the creditworthiness of the counterparties or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. Commitments to extend credit - The fair value of commitments to extend credit, which includes unused lines of credit and commitments to fund loans, is estimated using the fees currently charged to enter into similar agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The commitments to extend credit have terms that are consistent with current market terms. Long-Lived Assets In March 1995, the FASB issued FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. FAS 121 is effective prospectively for fiscal years beginning after December 15, 1995, and will be adopted by the Bank effective January 1, 1996. The Bank does not believe adoption of this statement will have a material impact on its results of operations. A-9 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Pension Plan and Other Employee Benefit Plans All eligible employees are covered by a non-contributory defined benefit pension plan which is administered by the Savings Bank Employees' Retirement Association. The pension plan is funded in an amount consistent with the funding requirements of federal laws and regulations. The Bank sponsors postretirement health care and life insurance benefit plans that provide health care and life insurance benefits for retired employees that have met certain age and service requirements. Postretirement health care and life insurance benefits expense is based upon an actuarial computation of current and future benefits to earnings for employees and retirees. The Bank accounts for its postretirement health care and life insurance benefits in accordance with FAS 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions." The Financial Accounting Standards Board has issued FAS 112, "Employers' Accounting for Postemployment Benefits," which requires accrual of a liability for all types of benefits paid to former or inactive employees after employment but before retirement. Benefits subject to this accounting pronouncement include salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits (including workers' compensation), job training and counseling and continuation of such benefits as health care and life insurance coverage. The Bank adopted this accounting standard beginning January 1, 1994. The adoption of FAS 112 did not have a material impact on the Bank's results of operations or financial position. The Bank sponsors a leveraged employee stock ownership plan ("ESOP") that covers all full-time and part-time employees with more than one year of service at the Bank. The ESOP was formed with the completion of the Bank's conversion from mutual to stock form (the "Conversion") on February 7, 1995. The Bank makes annual contributions to the ESOP equal to the ESOP's debt service. The ESOP's shares initially were pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid during the year. The Bank accounts for its ESOP in accordance with Statement of Position (SOP) 93-6. Accordingly, the debt of the ESOP is recorded as long-term debt and the shares pledged as collateral are reported as unearned compensation in the Bank's Consolidated Balance Sheet. As shares are released from collateral, the Bank records compensation expense equal to the current market price of the shares, and the shares become outstanding for purposes of calculating earnings per share. The Bank's Stock Option Plan (the "Stock Option Plan") was approved by the Bank's stockholders at its annual meeting on May 31, 1995. The Stock Option Plan provides for the granting of incentive and nonqualified stock options to certain employees and non-employee directors of the Bank and its wholly-owned subsidiaries for the purchase of the Bank's common stock at 100 percent of the fair market value at the date of grant. The maximum option term is 10 years. Options granted under the Stock Option Plan will generally vest, under ordinary circumstances, at 20% per year commencing on the first anniversary of the date of grant. Under the terms of the Stock Option Plan, 556,250 shares of authorized but unissued common stock were reserved for issuance under the Stock Option Plan. At December 31, 1995, 415,600 stock options had been granted under the Stock Option Plan. The Bank's Restricted Stock Plan (the "Restricted Stock Plan") was approved by the Bank's stockholders at its annual meeting on May 31, 1995. The Restricted Stock Plan provides for the granting of restricted stock to certain employees and non-employee directors of the Bank and its wholly-owned subsidiaries. The restricted stock vests over a period of time in which such grantee is employed by or serves as a director of the Bank. Each award under the Restricted Stock Plan will generally vest, under ordinary circumstances, at 20% per year commencing on the first anniversary of the date of grant. At December 31, 1995, 148,200 shares of restricted stock had been granted under the Restricted Stock Plan. A-10 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Bank sponsors a defined contribution profit sharing plan (the Plan), with cash or deferral arrangements permitted by Internal Revenue Code subsection 401(k). The Plan was formed by the Bank in 1995. Substantially all employees are eligible to participate after satisfaction of the one year service requirement under the Plan. Under the savings aspect of the Plan, employees may contribute 1% to 12% of base compensation with up to 6% being eligible for matching contributions, at 25%, from the Bank. Contributions to the Plan by the Bank were $52 for the year ended December 31, 1995. In November 1995, the FASB issued FAS 123, "Accounting for Stock Based Compensation" which gives companies the option of employing intrinsic value accounting under the guidelines of Accounting Principles Board (APB) No. 25 or fair value accounting for stock based compensation. While FAS 123 does not require the adoption of fair value accounting, it does require certain disclosures in the financial statements as if fair value accounting had been adopted, including pro forma net income and earnings per share. FAS 123 is effective prospectively for fiscal years beginning after December 15, 1995, and will be adopted by the Bank effective January 1, 1996. The Bank will continue to apply APB 25 in accounting for stock based compensation. Mortgage Banking Activities Fees paid for the right to service mortgage loans are capitalized and amortized in proportion to, and over the period of, estimated net servicing income. Amortization is adjusted prospectively to reflect increases or decreases in prepayment experience. Purchased mortgage servicing rights of $405 and $589 at December 31, 1995 and 1994, respectively, are included in other assets. Servicing income represents fees earned for servicing real estate mortgage loans owned by outside investors. The fees are calculated on the outstanding principal balances of the loans serviced and are recorded as income when earned. The mortgage loans being serviced for outside investors are not included in the consolidated financial statements because they are not assets of the Bank. The Bank maintained a servicing portfolio for other investors of $880,558 and $935,066 at December 31, 1995 and 1994, respectively. In May 1995, the FASB issued FAS 122, "Accounting for Mortgage Service Rights." FAS 122 amends certain provisions of FAS 65, "Accounting for Certain Mortgage Banking Activities," to eliminate the accounting distinction between rights to service mortgage loans for others that are acquired through loan origination activities and those acquired through purchase transactions. FAS 122 is effective prospectively for fiscal years beginning after December 15, 1995, and will be adopted by the Bank effective January 1, 1996. The Bank does not believe the adoption of this statement will have a material impact on its results of operations or financial position. Income Taxes The Bank accounts for income taxes in accordance with FAS 109, "Accounting for Income Taxes." FAS 109 requires an asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Under the deferred method, deferred taxes were recognized using the tax rate applicable to the year of the calculation and were not adjusted for subsequent changes in tax rates. A-11 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Pro forma Earnings Per Share Net income (loss) per share for the years ended December 31, 1995, 1994 and 1993 is computed on a pro forma basis as if the stock issued in the Conversion had been issued as of the beginning of each year presented and is adjusted for common stock equivalents as appropriate. 2. Conversion and Regulatory Matters On May 12, 1992, the Bank entered into a Stipulation and Consent to the issuance of an Order to Cease and Desist (the "Order") with the FDIC and the Massachusetts Commissioner of Banks ("Commissioner of Banks"). The Bank had previously entered into an informal agreement with the Commissioner of Banks. The terms of this informal agreement, which was entered into in April 1991, were similar to those of the Order. The Order placed certain restrictions on the Bank's operations, made other actions subject to the approval of the FDIC and the Commissioner of Banks, and contained certain affirmative obligations. In addition, the Order required the Bank to maintain a Tier 1 leverage capital ratio of at least 2%, and further provided that in the event that the Bank's Tier 1 leverage capital ratio falls below 6%, the Bank would submit a written plan to the FDIC to increase such ratio to at least 6%, and, within 180 days thereafter, achieve and thereafter maintain a Tier 1 leverage capital ratio of at least 6%. As a consequence of the net losses incurred by the Bank during 1994, the Bank's Tier 1 leverage capital ratio fell below the 6% minimum required by the Order, and its total risk-based capital ratio fell below the 8% minimum regulatory requirement. These net losses resulted primarily from the Bank's efforts to reduce the level of its non-performing assets through accelerated dispositions, which included bulk sales, and the adoption of new loan loss reserve methodologies and charge-off requirements. In accordance with the Order, the Bank submitted a capital restoration plan (the "Capital Restoration Plan") to the FDIC in May 1994, which plan, as subsequently modified following discussions with the FDIC, satisfied the FDIC's directive to raise capital. The Capital Restoration Plan, which was accepted by the Regional Office of the FDIC in August 1994, called for the Bank to raise the additional capital necessary to comply with the required capital ratios through the Conversion. The Conversion was successfully completed on February 7, 1995. The Bank issued 5,562,500 shares of common stock at a price of $8.00 per share. After deducting net expenses of approximately $5,029 relating to underwriting fees and other costs of the conversion process, and amounts relating to the ESOP of $3,560, the Bank received net proceeds of $35,911. With the infusion of the net proceeds from the Conversion, the Bank immediately satisfied the capital requirements of the Order and all minimum regulatory requirements and has the requisite capital levels to qualify for treatment as a "well capitalized" institution under the FDIC Improvement Act ("FDICIA"). Effective April 24, 1995, the Bank received notification from both the FDIC and the Commissioner of Banks that the Order had been terminated, which unconditionally released the Bank from its obligations under the Order. 3. Cash and Due from Banks Under provisions of the Federal Reserve Act, depository institutions are required to maintain certain average balances in the form of cash or non-interest bearing balances with a Federal Reserve Bank. Reserve balances of $4,794 and $3,004 at December 31, 1995 and 1994, respectively, were maintained in accordance with these requirements. A-12 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 4. Investment Securities The aggregate carrying amounts and approximate market values of investment securities at the following dates were:
Securities Available for Sale December 31, 1995 -------------------------------------------- Book Unrealized Unrealized Market Value Gains Losses Value --------- ----------- ----------- -------- U.S. Government and agency obligations $ 7,700 $ 5 ($ 6) $ 7,699 Mortgage-backed securities 222,673 1,562 (134) 224,101 Other bonds and short-term obligations 9,300 - - 9,300 Other securities 5,884 - - 5,884 -------- -------- -------- -------- Total $245,557 $ 1,567 ($ 140) $246,984 ======== ======== ======== ======== Securities Held to Maturity December 31, 1995 -------------------------------------------- Book Unrealized Unrealized Market Value Gains Losses Value --------- ----------- ----------- -------- Mortgage-backed securities $161,168 $ 779 ($ 466) $161,481 Other bonds and short-term obligations 11,625 43 (219) 11,449 -------- -------- -------- -------- Total $172,793 $ 822 ($ 685) $172,930 ======== ======== ======== ======== Securities Available for Sale December 31, 1994 -------------------------------------------- Book Unrealized Unrealized Market Value Gains Losses Value --------- ----------- ----------- -------- U.S. Government and agency obligations $ 23,953 $ - ($ 71) $ 23,882 Mortgage-backed securities 112,452 - (2,997) 109,455 Other bonds and short-term obligations 23,229 - (60) 23,169 Other securities 4,808 7 - 4,815 -------- -------- -------- -------- Total $164,442 $ 7 ($ 3,128) $161,321 ======== ======== ======== ======== Securities Held to Maturity December 31, 1994 -------------------------------------------- Book Unrealized Unrealized Market Value Gains Losses Value --------- ----------- ----------- -------- U.S. Government and agency obligations $ 17,350 $ - ($ 1,177) $ 16,173 Mortgage-backed securities 136,901 - (11,805) 125,096 Other bonds and short-term obligations 3,992 - - 3,992 -------- -------- -------- -------- Total $158,243 $ - ($12,982) $145,261 ======== ======== ======== ========
A-13 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) At December 31, 1995, the net unrealized gain, net of tax effect, on available for sale securities that was included as a separate component of stockholders' equity was $1,427. At December 31, 1994, the net unrealized loss, net of tax effect, on available for sale securities was $3,121. Proceeds from the sale of available for sale investment securities were $213,252 and $59,609 during 1995 and 1994, respectively. Gross realized gains on sales of investment securities were $13 in 1995 and $473 in 1994, while gross realized losses were $899 in 1995 and $521 in 1994. In 1995, the FASB issued a special report, "A Guide to Implementation of Statement 115," that provided additional guidance related to the application of FAS 115. In connection with the issuance of this special report, the FASB allowed all organizations to review their portfolio classifications and make a one-time reclassification of securities between categories during the period from November 15, 1995 to December 31, 1995. On December 15, 1995, the Bank transferred securities with an amortized cost of $84,299 and an unrealized loss of $1,177 from the held to maturity portfolio to the available for sale portfolio. In addition, the Bank also transferred securities with an estimated fair value of $47,280 and an unrealized gain of $299 from the available for sale portfolio to the held to maturity portfolio. The unrealized gain of $299 remains as a separate component of stockholders' equity. Subsequent to the transfer of these securities, the Bank sold approximately $82,900 of available for sale securities at a net loss of $899. The book value of securities pledged to collateralize securities sold under agreements to repurchase and other items was $40,960 and $31,757 at December 31, 1995 and 1994, respectively. The amortized cost and estimated market value of debt securities are shown below by contractual maturity. Actual maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
December 31, 1995 ----------------------------------------------------------------------- Securities Available Securities Held For Sale To Maturity -------------------------------- --------------------------------- Book Market Book Market Value Value Value Value ------------ ------------ ------------ ----------- Within 1 year $9,300 $9,300 $0 $0 1-5 years 13,187 13,251 10,593 10,625 5-10 years 3,000 2,997 10,063 10,131 over ten years 214,186 215,552 152,137 152,174 -------- -------- -------- -------- Total $239,673 $241,100 $172,793 $172,930 ======== ======== ======== ======== December 31, 1994 ----------------------------------------------------------------------- Securities Available Securities Held For Sale To Maturity -------------------------------- --------------------------------- Book Market Book Market Value Value Value Value ------------ ------------ ------------ ----------- Within 1 year $ 44,182 $ 44,111 $ 11,500 $ 10,820 1-5 years 3,000 2,940 32,969 30,744 5-10 years 2,955 2,955 66,491 60,677 over ten years 109,497 106,500 47,283 43,020 -------- -------- -------- -------- Total $159,634 $156,506 $158,243 $145,261 ======== ======== ======== ========
A-14 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. Investments in Real Estate and Real Estate Partnerships The Bank has certain subsidiaries that are engaged in various real estate activities individually or in joint ventures with unaffiliated partners. Investments in real estate are comprise the following:
December 31, --------------------------- 1995 1994 ------ ----- Operating properties Land $1,320 $1,704 Buildings and improvements, net of accumulated depreciation of $4,133 and $3,752, respectively 4,318 4,408 ------- ------- Total investment in real estate 5,638 6,112 Investments in real estate partnerships 454 587 ------- ------- Investments in real estate and real estate partnerships $6,092 $6,699 ======= =======
Net expense of real estate operations is summarized as follows: Years Ended December 31, ----------------------------- 1995 1994 1993 ---- ---- ---- Net expenses of operating real estate ($ 3) $ 303 $ 720 Writedowns on real estate 6 5,011 1,946 Net (gain)/loss on sale of real estate (230) (4,326) (34) ------- ------- ------- Net expenses of real estate operations ($ 227) $ 988 $ 2,632 ======= ======= ======= Depreciation expense of $381 in 1995, $912 in 1994, and $563 in 1993 is included in net expense of real estate operations. Losses recorded from the real estate partnerships under the equity method were $69, $987 and $346 for the same three year period and are also included in net expense of real estate operations. Loans to these partnerships at December 31, 1995 and 1994 amounted to $339 and $6,332, respectively. 6. Loans Receivable, Net Loans receivable, net, is composed of the following: December 31, --------------------------- 1995 1994 --------- --------- Residential real estate loans $ 263,551 $ 257,623 Commercial real estate loans 118,005 122,091 Commercial loans 117,674 80,296 Home equity loans 67,657 46,593 Consumer loans 6,196 6,883 --------- --------- Total loans receivable 573,083 513,486 Less: unearned discounts 566 (60) Allowance for possible losses (14,986) (15,844) --------- --------- Loans receivable, net $ 558,663 $ 497,582 ========= ========= At December 31, 1995 and December 31, 1994, residential real estate loans included loans held for sale of $6,724 and $625, respectively. A-15 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) In an effort to accelerate resolution of certain of its non-performing assets, the Bank entered into contracts for the bulk sale of certain loans during 1994. During the year ended December 31, 1994, the Bank sold loans in accordance with these contracts with a book value aggregating $66,269 of which $44,409 were then non-performing. The Bank charged-off $11,953 against the allowance for possible loan losses as a result of these sales. Risk Elements The Bank grants commercial and residential loans to customers primarily in New England. Although the Bank has a diversified portfolio, its debtors' ability to honor their contracts is substantially dependent upon the general economic conditions of the region. The Bank manages its loan portfolio to avoid concentration by industry or loan size to minimize its credit exposure. Commercial loans may be collateralized by the assets underlying the borrowers' business such as accounts receivable, equipment, inventory and real property. Residential mortgage and home equity loans are generally secured by the real property financed. Commercial real estate loans are generally secured by the underlying real property and lease agreements. The following table shows the components of non-performing assets: December 31, -------------------- 1995 1994 ------- ------- Nonaccruing loans $ 9,037 $14,472 Loans past due 90 days and still accruing 587 376 ------- ------- Total nonperforming loans 9,624 14,848 Foreclosed real estate, net 1,529 4,951 Restructured loans on accrual status 2,732 6,114 ------- ------- Total non performing assets $13,885 $25,913 ======= ======= The principal amount of non-performing loans, excluding non-performing restructured loans, aggregated approximately $9,422 and $14,750 at December 31, 1995 and 1994, respectively. Interest income that would have been recorded if the loans had been performing in accordance with their original terms aggregated $1,196, $1,683 and $2,282 for the years ended December 31, 1995, 1994 and 1993, respectively. Interest income recorded on these loans during the three years ended December 31, 1995, 1994 and 1993 was $983, $1,203 and $1,126, respectively. The principal amount of restructured loans aggregated $2,934 at December 31, 1995, and $6,212 at December 31, 1994. Interest income that would have been recorded if the loans had been performing in accordance with their original terms aggregated $378, $704 and $3,646 for the years ended December 31, 1995, 1994 and 1993, respectively. Interest income recorded on these loans amounted to $180, $570 and $2,555 for the years ended December 31, 1995, 1994 and 1993, respectively. Loans to Related Parties At December 31, 1995, and 1994, the amount of loans outstanding to directors, officers and other related parties (including real estate partnerships) was approximately $9,854 and $15,367, respectively. Included in the loans to related parties are non-accrual loans of zero and $5,053 at December 31, 1995 and 1994, respectively. Such loans were made in the ordinary course of business under the Bank's normal credit terms. During 1995 and 1994, new loans aggregating $791 and $2,124, respectively, were made or added and deductions and repayments totaled $6,304 and $23,176, respectively. Net charge-offs of zero and $850 were made against these loans in 1995 and 1994, respectively. Changes in the composition of the related parties resulted in additions to or deductions from loans outstanding to related parties. A-16 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 7. Allowance for Possible Loan Losses Changes in the allowance for possible loan losses are summarized as follows: Year ended December 31, -------------------------------- 1995 1994 1993 ------ ------ ------ Balance, beginning of year $ 15,844 $ 18,367 $ 12,176 Provision charged to operating expense 4,359 25,742 15,740 Loan charge-offs (6,068) (31,104) (11,000) Loan recoveries 851 2,839 1,451 -------- -------- -------- Balance, end of year $ 14,986 $ 15,844 $ 18,367 ======== ======== ======== As discussed in Note 1, the Bank adopted FAS 114 effective January 1, 1995. The FAS 114 analysis is applied only to the commercial and commercial real estate loan portfolios. Because of their homogeneous nature, the Bank's residential mortgage, home equity and consumer portfolios are evaluated collectively for impairment and a reserve requirement is developed under the historical loss method. Impaired loans are those loans for which, based on current information, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. All commercial and commercial real estate non-accrual loans are considered impaired loans, however the impaired classification may also include other loans which in Management's judgment meet the criteria described above. At December 31, 1995, the recorded investment in loans that are considered impaired under FAS 114 was $8.0 million. Included in this amount is $0.9 million of impaired loans for which the related FAS 114 allowance is $0.3 million and $7.1 million of impaired loans for which the FAS 114 allowance is zero. The average recorded investment in impaired loans during the year ended December 31, 1995 was approximately $9.8 million. For the year ended December 31, 1995, the Bank recognized interest income on these impaired loans of $0.3 million which approximated the net cash received. 8. Foreclosed Real Estate, Net Foreclosed real estate, net consists of the following: December 31, -------------------------- 1995 1994 ------ ------ Residential $231 $481 Commercial 2,073 5,012 ------ ------ 2,304 5,493 Less allowance (775) (542) ------ ------ Foreclosed real estate, net $1,529 $4,951 ====== ====== In an effort to accelerate resolution of certain of its non-performing assets, the Bank entered into a contract for the bulk sale of certain foreclosed real estate during 1994. During the year ended December 31, 1994, the Bank sold foreclosed real estate in accordance with this contract with a book value aggregating $4,743. The Bank charged-off $1,210 against the allowance for foreclosed real estate as a result of this sale. A-17 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Changes in the allowance for foreclosed real estate are summarized as follows: Year Ended December 31, ------------------------------ 1995 1994 1993 ------ ------ ----- Balance, beginning of period $ 542 $ 3,420 $ 2,068 Provision charged to expense 836 6,034 7,975 Dispositions, net (603) (8,912) (6,623) ------- ------- ------- Balance, end of period $ 775 $ 542 $ 3,420 ======= ======= ======= Foreclosed real estate expense is summarized as follows:
Year Ended December 31, ----------------------------- 1995 1994 1993 ------ ------ ------ Net expense of operating foreclosed real estate ($ 225) $ 547 $ 1,687 Writedowns and net (gain) loss on foreclosed real estate, 746 4,923 10,047 net ------- ------- ------- Foreclosed real estate expense $ 521 $ 5,470 $11,734 ======= ======= =======
9. Bank Premises, Furniture and Fixtures, Net Major categories of fixed assets are as follows: December 31, -------------------- 1995 1994 ------ ------ Buildings and improvements $ 27,529 $ 24,867 Leasehold improvements 6,114 6,051 Furniture and fixtures 14,828 13,298 -------- -------- 48,471 44,216 Less accumulated depreciation (22,765) (20,803) -------- -------- Bank premises, furniture and fixtures, net $ 25,706 $ 23,413 ======== ======== Depreciation expense aggregated $2,646, $2,693 and $2,526 for the years ended December 31, 1995, 1994 and 1993, respectively, and is included in occupancy expense and furniture and equipment expense. Rental income of $1,393, $1,368 and $1,120 for the years ended December 31, 1995, 1994, and 1993, respectively, is also included in occupancy expense. 10. Deposits Deposits consist of the following: December 31, ------------------------- 1995 1994 ---- ---- Money market accounts $203,313 $235,168 Demand deposits 71,539 51,932 NOW accounts 57,271 56,297 Savings accounts 185,555 184,513 Time deposits Time deposits under $100 337,099 302,670 Time deposits of $100 or more 30,609 23,053 -------- -------- Total deposits $885,386 $853,633 ======== ======== A-18 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 11. Federal Home Loan Bank Advances Pursuant to a blanket pledge agreement with the Federal Home Loan Bank of Boston ("FHLB"), advances are secured by the Bank's stock in the FHLB, certain qualifying first mortgage loans, mortgage-backed and mortgage-related securities, and other securities not otherwise pledged. Advances from the FHLB at December 31, 1995 and 1994 are summarized as follows: December 31, ------------------------------------------------------ 1995 1994 ----------------------- ------------------------ Weighted Weighted Average Average Year of Maturity Amount Rate Amount Rate - ---------------- -------- -------- --------- -------- 1996 $40,000 5.75% $ - - 2015 1,500 6.23% - - ------- ----- ------- ----- $41,500 5.76% $ - - ======= ===== ======= ===== At December 31, 1995 and December 31, 1994, there were no commitments for additional advances from the FHLB. 12. Securities Sold Under Agreements to Repurchase At December 31, 1995, securities sold under agreements to repurchase totaled $31,101. These agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the Consolidated Balance Sheet The Bank's activity in securities sold under agreements to repurchase for the years ended December 31 is summarized as follows: Year Ended December 31, -------------------------- 1995 1994 1993 ---- ---- ---- Maximum month-end balance during the period $39,552 -- -- Average balance during the period $19,297 -- -- Weighted average interest rate during the period 5.87% -- -- Weighted average interest rate at end of period 5.49% -- -- At December 31, 1995, securities sold under agreements to repurchase had maturity ranges from May 1996 to December 1998 with a weighted average maturity at December 31, 1995 of 771 days. At December 31, 1995, mortgage-backed securities with carrying values totaling $32,765 and estimated fair values totaling $32,969 were pledged as collateral for securities sold under agreements to repurchase. It is the Bank's policy to enter into repurchase agreements only with major brokerage firms that are primary dealers in government securities. A-19 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 13. Loans Payable Loans payable consist of the following:
December 31, ------------------------- 1995 1994 ------ ----- Mortgage note payable, principal and interest are payable in equal monthly installments of $18. This fully amortizing mortgage note bears interest at an interest rate of 7.5% and matures on October 25, 2015. Mortgage-backed securities with carrying values of $2,151 and estimated fair values of $2,201 were pledged as collateral for this mortgage note. $2,266 $2,314 Note issued by the Bank's Employee Stock Ownership Plan ("ESOP"), and guaranteed by the Bank. This note is subject to mandatory redemption through the operation of a sinking fund commencing on the last business day of June 1995 and continuing on the last business day of each June and December thereafter. The note bears interest at a variable rate per annum equal to the Prime Rate as published from time to time in the Wall Street Journal. The interest rate at December 31, 1995 was 8.50%. The proceeds for the issuance of the note were used by the Bank's ESOP solely for the purpose of purchasing 445,000 shares of the Bank's common stock. 3,204 -- Other loans payable -- 78 ------ ------ $5,470 $2,392 ====== ======
Aggregate required principal payments on the loans payable at December 31, 1995 for the next five years and thereafter are as follows: 1996 $ 407 1997 411 1998 416 1999 421 2000 425 2001 and thereafter 3,390 ------ $5,470 ====== At December 31, 1995, mortgage-backed securities having a carrying value of $4,325 and an estimated fair value of $4,402 were pledged to collateralize a letter of credit supporting the ESOP note, which honors demands for payment by the Note Trustee presented in accordance with the terms of the letter of credit. At December 31, 1995, the Bank also had an available, but unused, line of credit in the amount of $14,932 with the FHLB. A-20 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 14. Fair Market Value of Financial Instruments The following table presents the Bank's assets, liabilities, and unrecognized financial instruments at both their respective carrying or notional amounts and fair values.
December 31, 1995 December 31, 1994 ------------------- ------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- -------- ---------- ------- Financial Assets: Cash and due from banks $ 30,377 $ 30,377 $ 30,100 $ 30,100 Federal funds sold and interest-bearing deposits 8,045 8,045 25,620 25,620 Investment securities 19,777 419,914 319,564 306,582 Loans receivable, net 58,663 577,772 497,582 487,265 Accrued interest and dividends receivable 7,109 7,109 5,116 5,116 Financial Liabilities: Deposits $885,386 $886,529 $853,633 $851,539 Federal Home Loan Bank advances 41,500 41,543 - - Securities sold under agreements to repurchase 31,101 31,189 - - Loans payable 5,470 5,746 2,392 1,799 Notional Fair Notional Fair Amount Value Amount Value --------- -------- ---------- ------- Unrecognized Financial Instruments: Standby letters of credit $ 252 $ 3 $ 146 $ 1 Commitments to extend credit 133,084 - 103,568 -
A discussion of the methodologies and assumptions used by the Bank in determining these fair values is included in Note 1 under the subheading "Fair Values of Financial Instruments." 15. Pension Plan and Other Employee Benefit Plans The Bank's pension plan covers all employees who meet certain age and service requirements. Vested benefits, paid at retirement, are computed based upon a formula considering length of service and average compensation. Plan assets consist of marketable equity securities and United States Government and agency obligations. Net periodic pension cost for 1995, 1994 and 1993 included the following components: 1995 1994 1993 ---- ---- ---- Service cost - current period $ 631 $ 847 $ 786 Interest cost on projected benefit obligation 725 680 719 Actual return on assets (1,549) (474) (1,108) Net amortization and deferral 799 (213) 481 ------- ------- ------- Net periodic pension cost $ 606 $ 840 $ 878 ======= ======= ======= Assumptions used in the accounting for pension cost in 1995, 1994 and 1993 were as follows:
1995 1994 1993 ------ ----- ------ Discount rate 7.0% 8.0% 8.0% Average remaining service 28 years 28 years 29 years Expected long-term rate of return on plan assets 8.0% 8.0% 8.0% -------- -------- --------
A-21 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The discount rate is the estimated rate at which the obligation for pension benefits could effectively be settled. The average wage increase assumption of 5% reflects the Bank's best estimate of the future compensation levels of the individual employees covered by the plan. The expected long-term rate of return on plan assets reflects the average rate of earnings that the Bank estimates will be generated on the assets of the plan. The funded status of the plan is as follows: October 31, ---------------------- 1995 1994 ------ ------ Accumulated benefit obligation Vested benefits $ 6,292 $ 6,356 Nonvested benefits 278 210 -------- -------- Accumulated benefit obligation $ 6,570 $ 6,566 ======== ======== Projected benefit obligation ($10,170) ($10,167) Plan assets at fair value 8,808 8,237 -------- -------- Projected benefit obligation in excess of plan assets (1,362) (1,930) Unrecognized net (gain)/loss (2,103) (911) Unrecognized net transition asset being recognized over (316) (334) 25 years -------- -------- Accrued pension cost ($ 3,781) ($ 3,175) ======== ======== As discussed in Note 1, the Bank formed an ESOP with the completion of the Conversion in February, 1995. ESOP compensation expense for the year ended December 31, 1995 was $749. The ESOP shares as of December 31, 1995 were as follows (dollars in thousands except share amounts): 1995 ------ Allocated shares -- Shares released for allocation 54,812 Unreleased shares 390,188 ------- Total ESOP shares 445,000 ======= Fair value of unreleased shares $6,389 ======= 16. Stock Plans Stock Option Plan As discussed in Note 1, the Bank formed the Stock Option and Restricted Stock Plans in 1995 for the benefit of directors, officers and employees of the Bank and its wholly owned subsidiaries. A summary of the Bank's Stock Option Plan follows: Year Ended December 31, 1995 ------------- Options outstanding, beginning of year -- Granted 415,600 Exercised -- Cancelled -- ------- Options outstanding, end of year 415,600 ======= Option price per share $12.25 ------- A-22 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Of the 415,600 options granted in 1995, 376,415 shares represent incentive stock options and 39,185 shares represent non-qualified stock options. At December 31, 1995 there were options on 140,650 shares available for future grants under the Stock Option Plan. There were no options exercisable under the Stock Option Plan at December 31, 1995. Restricted Stock Plan A summary of the Bank's Restricted Stock Plan follows: Year Ended December 31, 1995 ------------ Balance, beginning of year - Granted 148,200 Cancelled - ------- Balance, end of year 148,200 ======= Market price at date of grant $12.25 ------- The fair market value of the share allocations, based on the market price at date of grant, is recorded as unearned compensation. Unearned compensation is amortized over the periods to be benefited. In 1995, the Bank recorded $230 of compensation expense related to the Restricted Stock Plan. At December 31, 1995, there were 74,300 shares available for grant under the Restricted Stock Plan. There were no shares vested under the Restricted Stock Plan at December 31, 1995. 17. Fees and Other Income Fees and other income are composed of the following: Year Ended December 31, ------------------------ 1995 1994 1993 ---- ---- ---- Loan charges and fees $3,221 $3,213 $3,776 Service charges on deposit accounts 5,191 4,122 4,123 Other charges and fees 355 1,547 1,421 ------ ------ ------ $8,767 $8,882 $9,320 ====== ====== ====== 18. Other Operating Expenses Other operating expenses are composed of the following: Year Ended December 31, --------------------------- 1995 1994 1993 ---- ---- ---- Marketing and public relations $ 1,339 $ 1,638 $ 1,526 Insurance 2,440 3,270 3,324 Professional services 2,902 4,076 3,399 Outside processing 2,893 2,683 2,027 Other 4,194 3,442 3,166 ------- ------- ------- $13,768 $15,109 $13,442 ======= ======= ======= A-23 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 19. Income Taxes The components of the income tax benefit for the years ended December 31 are as follows: 1995 1994 1993 ---- ---- ---- Current Federal $ 136 $ - ($3,384) State 99 - - Deferred Federal (6,363) - - State 369 - - ------- ------- ------- ($5,759) $ - ($3,384) ======= ======= ======= A reconciliation of the statutory income tax rate to the consolidated effective income tax rate as well as a reconciliation of expected income tax benefit, computed at the applicable statutory rate, to the actual income tax benefit for the three years ended December 31, 1995, 1994, and 1993 follows:
1995 1994 1993 -------------------------- ------------------------- ---------------------- Percentage Percentage Percentage of pretax of pretax of pretax Amount income Amount loss Amount loss ------ ---------- ------ ---------- ------ ----------- Federal income tax at statutory rate $1,938 34.00% ($9,148) (34.00%) ($6,004) (34.00%) Change in valuation allowance (8,002) (140.38%) 9,952 36.99% 2,733 15.48% State income taxes 309 5.42% - -% - 0.00% Other (4) (0.07%) (804) (2.99%) (113) (0.64%) ------- -------- ------ ------- ------- ------- ($5,759) (101.03%) $ - 0.00% ($3,384) (19.16%) ======= ======== ====== ======= ======= =======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 are as follows: 1995 1994 --------- -------- Deferred Tax Assets: Allowance for loan losses $ 5,622 $ 5,909 Accrued pension 1,720 1,412 Employee stock awards 132 - Net operating loss carryforwards 4,261 6,147 Alternative minimum tax credit carryforwards 298 298 Investment tax credit carryforwards 1,721 1,721 Other 1,549 1,924 -------- -------- Total gross deferred tax assets 15,303 17,411 -------- -------- Deferred Tax Liabilities: Investment in real estate and Bank premises (1,442) (989) Other - (553) -------- -------- Total gross deferred tax liabilities (1,442) (1,542) -------- -------- Net deferred tax asset prior to valuation allowance 13,861 15,869 Valuation allowance (7,867) (15,869) -------- -------- Net deferred tax asset after valuation allowance $ 5,994 $ - ======== ======== A-24 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The components of deferred tax (benefit) expense for the years ended December 31 follow:
1995 1994 ---- ---- Change in Deferred Tax Assets: Allowance for loan losses $ 287 ($ 2,492) Accrued pension (308) (405) Employee stock awards (132) - Net operating loss carryforwards 1,886 (5,164) Alternative minimum tax credit carryforwards - - Investment tax credit carryforwards - - Other 375 152 ------- ------ Total change in gross deferred tax assets 2,108 (7,909) ------- ------ Change in Deferred Tax Liabilities: Investment in real estate and Bank premises 453 (3,460) Other (553) 501 ------- ------ Total change in gross deferred tax liabilities (100) (2,959) ------- ------ Net deferred tax (benefit) expense prior to change in valuation allowance 2,008 (10,868) Change in Valuation allowance (8,002) 10,868 ------- ------ Net deferred tax (benefit) expense ($ 5,994) $ - ======= =======
At December 31, 1994 in accordance with FAS 109, Management evaluated the income tax benefits associated with the deductible temporary differences, based on the weight of available evidence, as to whether it is more likely than not that the income tax benefits would be realized, and as a result, a 100% valuation allowance was established. Management reviews the valuation allowance on a periodic basis and, based upon all available facts and circumstances at that time, may adjust the level of the allowance. At December 31, 1995 Management evaluated the weight of available evidence and concluded that it is more likely than not that the Bank will realize a significant portion of the net deferred tax asset and has reduced the valuation allowance from $15,869 at December 31, 1994 to $7,867 at December 31, 1995. Factors influencing Management's judgment include, among other things, changes in the levels of actual and expected future taxable income and anticipated reversals of net deductible temporary differences. The net change in the total valuation allowance for the year ended December 31, 1995 was a decrease of $8,002 and for the year ended December 31, 1994 was an increase of $10,868. At December 31, 1995, the Bank had investment tax credit carryforwards of approximately $1,721 which expire in years from 1998 through 2008. In addition, the Bank had alternative minimum tax credit carryforwards of approximately $298 which have an indefinite utilization period. At December 31, 1995, the Bank had net tax operating loss carryforwards of approximately $4,261 which will expire 2009. If certain substantial direct or indirect changes in the Bank's ownership should occur, there would be an annual limitation on the amount of carryforwards (including certain net unrealized built-in losses) which can be utilized for regular and alternative minimum tax purposes. 20. Commitments, Contingencies and Financial Instruments with Off-Balance Sheet Risk Off-Balance Sheet Instruments The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk A-25 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) in excess of the amount recognized in the Balance Sheet. The contract or notional amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank uses the same credit policies in making commitments and standby letters of credit as it does for on- balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the counterparty. The Bank's commitments to extend credit, which includes unused lines of credit and commitments to fund loans, were approximately $133,084 and $103,568 at December 31, 1995 and 1994, respectively. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank's commitments under standby letters of credit were $252 and $146 at December 31, 1995 and 1994, respectively. Commitments to sell loans are contracts for delayed delivery of loans in which the Bank agrees to make delivery at a specific future date of a specified instrument, at a specific price or yield. Risks arise from the possible inability to meet the terms of the contracts and from movements in interest rates. The Bank had commitments to sell $16,054 and $4,243 of loans at December 31, 1995 and 1994, respectively. Leases The Bank leases certain of its branch office facilities and equipment under nonfinancing leases having various maturities to 2010. Certain of the leases require payment of real estate taxes, insurance and maintenance. The future minimum rental payments required under these leases are approximately as follows: Year Ended December 31, - ----------------------- 1996 $ 332 1997 250 1998 215 1999 216 2000 230 2001 - 2010 919 ------ $2,162 ====== Total rental expense for 1995, 1994, and 1993 amounted to approximately $431, $461, and $401, respectively. Real Estate Partnerships The Bank is a limited partner in three limited partnerships. Under the terms of the partnership agreements, the Bank is committed to make approximate future capital contributions as follows: Year Ended December 31, - ----------------------- 1996 $134 1997 30 1998 - ---- $164 ==== A-26 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Litigation The Bank is involved in litigation arising in the normal course of business. Management does not believe that the ultimate liabilities arising from such litigation, if any, would be material in relation to the consolidated results of operations or financial position of the Bank. 21. Quarterly Consolidated Financial Information (Unaudited) Following is the quarterly financial information of the Bank for 1995 and 1994.
First quarter Second quarter Third quarter Fourth quarter --------------------- --------------------- ------------------- ---------------------- 1995 1994 1995 1994 1995 1994 1995 1994 ---- ---- ---- ---- ---- ---- ---- ---- Net interest and dividend income $ 9,260 $ 8,467 $ 9,251 $ 8,853 $ 9,439 $ 8,191 $ 9,410 $ 8,609 Provision for possible loan losses 1,153 10,795 1,202 5,243 1,002 7,704 1,002 2,000 Net gain (loss) on sale of loans (6) (114) (4) (327) 72 (77) 180 13 Net gain (loss) on sale of securities 4 46 10 (137) - (24) (899) 67 Fees and other income 2,048 2,094 2,188 2,192 2,099 1,939 2,432 2,657 Noninterest expense 9,325 11,306 8,888 12,199 8,746 9,560 8,466 10,549 Income tax expense (benefit) 39 - 74 - 50 - (5,922) - -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 789 ($11,608) $ 1,281 ($ 6,861) $ 1,812 ($ 7,235) $ 7,577 ($ 1,203) ======== ======== ======== ======== ======== ======== ======== ======== Earnings per share and pro forma earnings per share Primary $ 0.15 $ (2.25) $ 0.25 $ (1.34) $ 0.35 $ (1.39) $ 1.43 $ (0.24) Fully diluted $ 0.15 $ (2.25) $ 0.25 $ (1.34) $ 0.34 $ (1.39) $ 1.43 $ (0.24)
A-27 Report of Independent Accountants To the Board of Directors and Stockholders of Springfield Institution for Savings In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Springfield Institution for Savings and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for the years in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Bank's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The financial statements of Springfield Institution for Savings for the year ended December 31, 1993 were audited by other independent accountants whose report dated January 21, 1994 expressed an unqualified opinion on those statements. As discussed in Notes 1 and 4, the Bank changed its method of accounting for investments in debt and equity securities in 1994. /s/Price Waterhouse LLP Boston, Massachusetts January 24, 1996 A-28 EXHIBIT B FORM OF EMPLOYMENT AND SEVERANCE AGREEMENT FOR SENIOR VICE PRESIDENTS OF SPRINGFIELD INSTITUTION FOR SAVINGS This AGREEMENT is made as of [date] by and between ___________ (the "Executive") and SPRINGFIELD INSTITUTION FOR SAVINGS, a Massachusetts savings bank (the "Bank"). WHEREAS, the Bank recognizes the substantial contribution the Executive has made and is expected to make to the Bank and wishes to protect his position therewith for the period provided in this Agreement; and WHEREAS, the Executive has been elected to, and has agreed to serve in the position of Senior Vice President of the Bank, a position of substantial responsibility; NOW, THEREFORE, in consideration of the contribution and responsibilities of the Executive, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: I. TERM OF AGREEMENT. The term of this Agreement shall be deemed to have commenced as of the date hereof and shall continue for a period of twelve (12) full calendar months thereafter. Commencing on the first anniversary date of this Agreement and continuing at each anniversary date thereafter, the term of this Agreement shall renew for an additional year unless written notice is provided to the Executive by the Bank, or to the Bank by the Executive, at least ninety (90) days and not more than one hundred eighty (180) days prior to any such anniversary date, that this Agreement shall cease at the end of the then current term hereof. II. DEFINITIONS. For purposes of this Agreement, (a) "Affiliate" means any person or entity of any kind effectively controlling, effectively controlled by or effectively under common control with the Bank. (b) "Board" means the board of trustees of the Bank, if the Bank is a mutual savings bank, and the board of directors of the Bank, if the Bank is a stock savings bank. (c) "Change in Control" means a change in control of the Bank of a nature that would be required to be reported in response to Item 1 of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than any change in control directly related to or in connection with the conversion of the Bank from a state-chartered mutual savings bank to a state-chartered stock savings bank; a change in control of the Bank within the meaning of 12 U.S.C. ss.1817(i), the Change in Bank Control Act, and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. ss.303.4(a), other than any change in control directly related to or in connection with the conversion of the Bank from a state-chartered mutual savings bank to state-chartered stock savings bank; individuals who constitute the Board immediately after the consummation of the process of converting the Bank from a mutual-form savings bank to a stock- form savings bank (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to such consummation whose election was approved by a vote of at least three-quarters of the directors then comprising the Incumbent Board, or whose nomination for election by the Bank's shareholders was approved by the Bank's nominating committee then serving under the Board, shall be, for purposes of B-1 this clause (iii), considered as though he or she was a member of the Incumbent Board (but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents; approval by the depositors or shareholders of the Bank of a reorganization, merger or consolidation, or the consummation of any such reorganization, merger or consolidation, other than, in any case any such transaction occurring in connection with or directly related to the conversion of the Bank from a state-chartered mutual savings bank to a state-chartered stock savings bank, or a reorganization, merger or consolidation with respect to which all or substantially all of the individuals and entities who were the beneficial owners, immediately prior to such reorganization, merger or consolidation, of the Voting Interest in the Bank beneficially own, directly or indirectly, immediately after such reorganization, merger or consolidation more than eighty percent (80%) of the Voting Interest of the corporation or other entity resulting from such reorganization, merger or consolidation in substantially the same proportions as their respective ownership, immediately prior to such reorganization, merger or consolidation, of the Voting Interest in the Bank; approval by the depositors or shareholders of the Bank, as the case may be, of a complete liquidation or dissolution of the Bank, or the sale or other disposition of all or substantially all of the assets of the Bank, or the occurrence of any such liquidation, dissolution, sale or other disposition, other than, in any case, to a Subsidiary, directly or indirectly, of the Bank, or any Affiliate, or in connection with or directly related to any conversion of the Bank from a state-chartered mutual savings bank to a state-chartered stock savings bank; and/or the solicitation of proxies from shareholders or depositors of the Bank by someone other than the current management of the Bank and without the approval of the Board, seeking depositor or shareholder approval of a plan or reorganization, merger or consolidation of the Bank with one or more corporations as a result of which the depositors' or the shareholders' interests in the Bank are actually exchanged for or converted into securities not issued by the Bank. No failure on the part of the Executive to exercise any rights upon the occurrence of a Change in Control shall be deemed a waiver of or otherwise impair the rights of the Executive in respect of any subsequent events or circumstances constituting a Change in Control. (d) "Code" means the Internal Revenue Code of 1986, as amended, and as in effect from time to time, and/or any successor code thereto. (e) "Excise Tax" means any excise tax imposed under Section 4999 of the Code and/or any successor section thereto. (f) "Good Reason" means, and shall be deemed to exist if, without the written consent of the Executive, the Bank fails to appoint or reappoint the Executive as [Executive\Senior] Vice-President of the Bank, there occurs any reduction of base salary or material reduction in other benefits or any material change by the Bank to the Executive's function, duties, or responsibilities in effect on the date hereof, which change would cause the Executive's position with the Bank to become one of lesser responsibility, importance, or scope from the position and attributes thereof in effect on the date hereof, or there occurs any material breach of this Agreement by the Bank. (g) "Subsidiary" means any corporation in which the Bank has a direct or indirect legal or beneficial ownership interest, but only if the Bank owns or controls, directly or indirectly, securities possessing at least 50% of the total combined voting power of all classes of securities in any such corporation. (h) "Voting Interest" means securities of any class or classes or other ownership interests having general voting power under ordinary circumstances to elect members of a board of directors or trustees of any entity. III. PAYMENTS TO EXECUTIVE UPON TERMINATION. (a) The provisions of Section 4(a) hereof shall apply upon: (i) the involuntary termination of the Executive's employment at any time during the term of this Agreement, other than Termination for Cause (as defined below), following the occurrence of a Change in Control; or (ii) the voluntary termination of the Executive's employment for Good Reason at any time during the term of this Agreement, following the occurrence of a Change of Control. B-2 (b) The provisions of Section 4(b) shall apply upon the involuntary termination of the Executive's employment at any time during the term of this Agreement, other than for Termination for Cause, prior to the occurrence of a Change in Control. (c) The term "Termination for Cause" shall mean termination because of a material loss to the Bank or one of its Subsidiaries caused by the Executive's personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses) or final cease and desist order, or any material breach of this Agreement. For purposes of this Section, no act, or the failure to act, on Executive's part shall be "willful" unless done, or omitted to be done, not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank or its Subsidiaries. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, the Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause (except as required by the Employment Retirement Income Security Act of 1974, as amended ("ERISA") or other applicable law). Any stock options and limited rights granted to Executive under any stock option plan or unvested awards granted to Executive under any recognition and retention plan of the Bank, or any Subsidiary or Affiliate thereof, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause and shall not be exercisable by Executive at any time subsequent to such Termination for Cause. 4. TERMINATION BENEFITS. (a) Upon the termination of the Executive's employment by the Bank as described in Section 3(a) hereof, the Bank shall be obligated to make a lump sum severance payment, within thirty (30) days of such termination to the Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, in an amount equal to one (1) year's salary (at the then applicable annual salary of the Executive). In addition, the Executive shall be entitled to any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs of the Bank. (b) Upon the termination of the Executive's employment by the Bank as described in Section 3(b) hereof, the Bank shall be obligated to make a lump sum severance payment within thirty (30) days of such termination to the Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, in an amount equal to one (1) year's salary (at the then applicable annual salary of the Executive). In addition, the Executive shall be entitled to any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs, if any, of the Bank. 5. NOTICE OF TERMINATION. (a) Any purported termination by the Bank, or by the Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (b) "Date of Termination" shall mean the date specified in the Notice of Termination which, in the instance of Termination for Cause, shall be immediate. 6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and the Executive, except that this Agreement shall not affect or operate to reduce B-3 any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. Nothing in this Agreement shall confer upon the Executive the right to continue in the employ of the Bank or shall impose on the Bank any obligation to employ or retain the Executive in its employ for any period. 7. NO ATTACHMENT. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment,encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. 8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and inure to the benefit of, the Executive, the Bank and their respective successors and assigns. 9. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 10. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 11. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of this reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 12. GOVERNING LAW. The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of The Commonwealth of Massachusetts. 13. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Springfield, Massachusetts as hereinbelow provided. If a dispute or controversy hereunder arises and, within thirty (30) days of each party's written notice thereof, such dispute or controversy has not been resolved by mutual accord, then such dispute or controversy shall be conclusively determined by three arbitrators, one arbitrator being selected by the Executive, one arbitrator being selected by the Bank and the third being selected by the two arbitrators so selected. In the event of their inability to agree on the selection of a third B-4 arbitrator, the third arbitrator shall be designated in accordance with the rules of the American Arbitration Association then in effect. In the event that within ten (10) business days after the above-referenced 30-day period expires without resolution of any dispute or controversy by mutual accord any party shall not have selected its arbitrator and given written notice thereof to the other party, such arbitrator shall be selected in accordance with the rules of the American Arbitration Association as then in effect. All determinations made by the arbitrators selected pursuant to the provisions of this Section shall be by majority vote and shall be final. Notice of any such determination shall be forthwith given to each party. Judgment may be entered on the arbitrators' award in any court having jurisdiction; provided, however, that the Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 14. INDEMNIFICATION AND ATTORNEYS' FEES. (a) The Bank shall indemnify, hold harmless and defend the Executive against reasonable costs, including legal fees, incurred by him in connection with his consultation with legal counsel or arising out of any action, suit or proceeding in which he may be involved, as a result of his efforts, in good faith, to defend or enforce the terms of this Agreement. (b) In the event any dispute or controversy arising under or in connection with the Executive's termination is resolved in favor of the Executive, whether by judgment, arbitration or settlement, the Executive shall be entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe benefits and any compensation and benefits due the Executive under this Agreement. (c) The Bank shall indemnify, hold harmless and defend Executive for all acts or omissions taken or not taken by him in good faith while performing services for the Bank to the same extent and upon the same terms and conditions as other similarly situated officers and directors of the Bank. If and to the extent that the Bank maintains, at any time during its employment of the Executive an insurance policy covering the other officers and directors of the Bank against law suits, the Bank shall use its best efforts to cause Executive to be covered under such policy upon the same terms and conditions as other similarly situated officers and directors. IN WITNESS WHEREOF, SPRINGFIELD INSTITUTION FOR SAVINGS has caused this Agreement to be executed by its duly authorized officer, and the Executive has signed this Agreement, as of the ____ day of _______________, 1994. ATTEST: SPRINGFIELD INSTITUTION FOR SAVINGS _____________________ BY:_____________________________ Secretary Name: F. William Marshall, Jr. Title: President and Chief Executive Officer [SEAL] WITNESS: _____________________________ ____________________________ [Name of Executive] B-5 FORM F-2 EXHIBIT C
SPRINGFIELD INSTITUTION FOR SAVINGS COMPUTATION OF PRO FORMA PRIMARY AND FULLY DILUTED EARNINGS PER SHARE (In Thousands Except Per Share Amounts) Twelve Months Ended December 31, -------------------------------- 1995 1994 1993 ---- ---- ---- Primary: Net income (loss) $ 11,459 ($26,907) ($14,275) Pro forma income on net proceeds -- 1,189 1,189 Pro forma ESOP adjustment -- (1,028) (1,028) Pro forma RSP adjustment -- (230) (230) -------- -------- -------- Pro forma net income (loss) $ 11,459 ($26,976) ($14,344) ======== ======== ======== Pro forma weighted average shares outstanding during the period 5,562 5,562 5,562 Unearned ESOP shares (431) (431) (431) Stock options considered outstanding during the period 25 25 25 Restricted stock shares considered outstanding during the period 18 18 18 -------- -------- -------- Total shares 5,174 5,174 5,174 ======== ======== ======== Pro forma net income (loss) per share $ 2.21 ($ 5.21) ($ 2.77) ======== ======== ======== Fully Diluted: Net income (loss) $ 11,459 ($26,907) ($14,275) Pro forma income on net proceeds -- 1,189 1,189 Pro forma ESOP adjustment -- (1,028) (1,028) Pro forma RSP adjustment -- (230) (230) -------- -------- -------- Pro forma net income (loss) $ 11,459 ($26,976) ($14,344) ======== ======== ======== Pro forma weighted average shares outstanding during the period 5,562 5,562 5,562 Unearned ESOP shares (431) (431) (431) Stock options considered outstanding during the period 60 60 60 Restricted stock shares considered outstanding during the period 30 30 30 -------- -------- -------- Total shares 5,221 5,221 5,221 ======== ======== ======== Pro forma net income (loss) per share $ 2.19 ($ 5.17) ($ 2.75) ======== ======== ========
Pro forma net income (loss) for the years ended December 31, 1995, 1994, and 1993, respectively, assume that the stock issued in the conversion had been issued as of the beginning of the year. This computation includes the impact of the Restricted Stock Plan ("RSP") and the Stock Option Plan which were approved by the stockholders at the Annual Meeting of the Stockholders held on May 31, 1995. For the year ended December 31, 1994 and 1993 the fully diluted earnings per share calculation is antidilutive and therefore, the primary earnings per share is shown on Consolidated Statement of Operations in accordance with APB 15. C-1 EX-99.4 5 EXHIBIT 99.4 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Springfield Institution for Savings We have audited the accompanying consolidated statement of operations, changes in stockholders' equity and cash flows of Springfield Institution for Savings and subsidiaries for the year ended December 31, 1993. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Springfield Institution for Savings and subsidiaries for the year ended December 31, 1993 in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Springfield, Massachusetts January 21, 1994 EX-99.5 6 EXHIBIT 99.5 SIS BANK - ------------------------------------------------------------------------------- Springfield Institution for Savings 1441 Main Street Springfield, MA 01103 March 27, 1996 Telephone (413) 748-8000 Dear Stockholder: You are cordially invited to attend the 1996 Annual Meeting of the Stockholders (the "Annual Meeting") of Springfield Institution for Savings (the "Bank") to be held on Thursday, May 9, 1996 at 10:00 a.m. local time, at the Springfield Marriott Hotel, Springfield, Massachusetts. The Annual Meeting has been called for the following purposes: 1. To approve the formation of a holding company for the Bank pursuant to the Agreement and Plan of Reorganization dated as of January 31, 1996 (the "Plan of Reorganization") between the Bank and SIS Bancorp, Inc. (the "Company"), a newly-formed Massachusetts corporation organized at the direction of the Bank. Pursuant to the Plan of Reorganization, the Company would acquire all of the outstanding common stock, par value $1.00 per share, of the Bank (the "Bank Common Stock") other than shares held by stockholders, if any, exercising dissenters' appraisal rights, in a share-for-share exchange for the common stock, par value $.01 per share, of the Company. The Bank will thereby become a wholly-owned subsidiary of the Company; 2. To elect five Directors for a three-year term; 3. To elect a Clerk; 4. To approve an amendment to the 1995 Management Stock Option Plan to increase the number of shares of Bank Common Stock reserved for issuance thereunder by 250,000 shares; and 5. To transact such other business as may properly come before the meeting or any adjournments or postponements thereof. The accompanying Proxy Statement of the Bank and Prospectus of the Company provides detailed information concerning the matters to be voted on at the Annual Meeting. Also, enclosed is the Bank's 1995 FDIC Form F-2 and 1995 Annual Report to Stockholders, which contain additional information and review of results for the fiscal year ended December 31, 1995. It is important that your shares be represented at the Annual Meeting. Whether or not you plan to attend the Annual Meeting, you are requested to complete, date, sign and return the enclosed proxy card in the enclosed postage paid envelope. Thank you for returning your proxy. We appreciate the support you have given the Bank. Sincerely, /s/ John M. Naughton John M. Naughton Chairman of the Board SPRINGFIELD INSTITUTION FOR SAVINGS 1441 Main Street Springfield, Massachusetts 01102 Telephone: (413) 748-8000 ------------ NOTICE OF ANNUAL MEETING OF STOCKHOLDERS To Be Held on Thursday, May 9, 1996 ------------ Springfield, Massachusetts March 27, 1996 To the Holders of Common Stock of Springfield Institution for Savings: Notice is Hereby Given that the Annual Meeting of Stockholders of Springfield Institution for Savings (the "Bank") will be held at the Springfield Marriott Hotel, 1500 Main Street, Springfield, Massachusetts at 10:00 a.m. local time on Thursday, May 9, 1996 for the following purposes: 1. To approve the formation of a holding company for the Bank pursuant to the Agreement and Plan of Reorganization dated as of January 31, 1996 (the "Plan of Reorganization"), a copy of which is attached as Appendix A to the Proxy Statement-Prospectus accompanying this Notice, between the Bank and SIS Bancorp, Inc. (the "Company"), a newly-formed Massachusetts corporation organized at the direction of the Bank. Pursuant to the Plan of Reorganization the Company would acquire all the outstanding common stock, par value $1.00 per share, of the Bank (the "Bank Common Stock"), other than shares held by stockholders, if any, exercising dissenters' appraisal rights, in a share-for-share exchange for the common stock, par value $0.01 per share, of the Company (the "Company Common Stock"). The Bank will thereby become a wholly-owned subsidiary of the Company (Proposal One) (the "Reorganization"); 2. To elect five Directors of the Bank for a three-year term (Proposal Two); 3. To elect a Clerk of the Bank (Proposal Three); 4. To approve an amendment to the 1995 Management Stock Option Plan to increase the number of shares of Common Stock reserved for issuance thereunder from 445,000 to 695,000; and 5. To transact such other business as may properly come before the meeting or any adjournments or postponements thereof. If the Plan of Reorganization is approved by the stockholders at the Annual Meeting and effected by the Bank, any stockholder (i) who files with the Bank before the taking of the vote on the approval of the Plan of Reorganization a written objection to the Plan of Reorganization, stating that he or she intends to demand payment for his or her shares if the Reorganization is consummated, and (ii) whose shares are not voted in favor of the Plan of Reorganization, has the right to demand in writing from the Bank, within twenty days after the date of mailing to him of notice in writing that the Reorganization has become effective, payment for his shares and an appraisal of the value thereof. The Bank and any such stockholder shall in such cases have the rights and duties and shall follow the procedure set forth in Sections 85 through 98, inclusive, of Chapter 156B of the General Laws of Massachusetts, a copy of which is attached as Appendix B to the Proxy Statement-Prospectus accompanying this Notice. The Board of Directors has fixed the close of business on March 13, 1996 as the record date for determination of stockholders entitled to notice of, and to vote at, the Annual Meeting and any adjournments or postponements thereof. Only holders of Bank Common Stock of record at the close of business on that date will be entitled to notice of and to vote at the Annual Meeting and any adjournments thereof. In the event there are not sufficient votes to approve any one or more of the foregoing proposals at the time of the Annual Meeting, the Annual Meeting may be adjourned in order to permit further solicitation of proxies by the Bank. By Order of the Board of Directors /s/ Michael E. Tucker Michael E. Tucker, Esquire Clerk IMPORTANT EVEN THOUGH YOU MAY PLAN TO ATTEND THE ANNUAL MEETING IN PERSON, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE ANNUAL MEETING AND DESIRE TO WITHDRAW YOUR PROXY AND VOTE IN PERSON, YOU MAY DO SO. SIS BANK 1441 Main Street Springfield, Massachusetts 01102 ------------ PROXY STATEMENT OF SPRINGFIELD INSTITUTION FOR SAVINGS ANNUAL MEETING OF SHAREHOLDERS May 9, 1996 ------------ PROSPECTUS OF SIS BANCORP, INC. Shares of Common Stock $0.01 par value per share This Proxy Statement-Prospectus serves as a Proxy Statement in connection with the solicitation of proxies by the Board of Directors of Springfield Institution for Savings (the "Bank" or "SISBank") for the 1996 Annual Meeting of Stockholders of the Bank (the "Annual Meeting"), to be held on Thursday, May 9, 1996 at 10:00 a.m. local time, at the Springfield Marriott Hotel, 1500 Main Street, Springfield, Massachusetts, and at any adjournments or postponements thereof. This Proxy Statement-Prospectus, the accompanying Notice of Annual Meeting and the accompanying proxy card are first being mailed to stockholders on or about March 27, 1996. The Annual Meeting has been called for the following purposes: (1) to consider and vote upon the formation of a holding company for the Bank by the approval of the Agreement and Plan of Reorganization dated as of January 31, 1996 (the "Plan of Reorganization"), between the Bank and SIS Bancorp, Inc. (the "Company") pursuant to which the Bank will become a wholly-owned subsidiary of the Company and each issued and outstanding share of common stock of the Bank, par value $1.00 per share (other than shares held by stockholders, if any, exercising dissenters' rights) will be exchanged for one share of common stock of the Company, par value $0.01 per share (the "Reorganization"); (2) to elect a class of five Directors of the Bank for a three-year term; (3) to elect a Clerk of the Bank; (4) to amend the 1995 Management Stock Option Plan to increase the number of shares reserved for issuance thereunder; and (5) to transact such other business as may properly come before the Annual Meeting or any adjournments or postponements thereof. This document also serves as the Prospectus of the Company with respect to the issuance of a maximum of 5,755,400 shares (assuming that the Reorganization is completed prior to June 1, 1996; otherwise, a maximum of 5,835,800 shares) of the Company's common stock, par value $0.01 per share ("Company Common Stock"), to the stockholders of the Bank in exchange for shares of the Bank's common stock, par value $1.00 per share ("Bank Common Stock"), upon consummation of the Reorganization. The number of shares of Company Common Stock to be issued will be based upon the exchange ratio of one share of Company Common Stock for each share of Bank Common Stock. The maximum number of shares of Company Common Stock referred to above is based on the 5,718,200 shares of Bank Common Stock that are outstanding as of the Record Date and the 37,200 shares of Bank Common Stock that are subject as of the Record Date to vested options to purchase such shares and the additional 80,480 shares of Bank Common Stock that will become subject as of June 1, 1996 to vested options to purchase such shares. Shares of Bank Common Stock held by stockholders, if any, exercising dissenters' appraisal rights will not be exchanged as part of the Reorganization. THE SECURITIES TO BE ISSUED BY SIS BANCORP, INC. IN THE REORGANIZATION HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER OF BANKS OF THE COMMONWEALTH OF MASSACHUSETTS OR BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSIONER OR THE FDIC OR THE SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY STATEMENT-PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. IN RELIANCE UPON THE EXEMPTION PROVIDED BY SECTION 3(a)(12) OF THE SECURITIES ACT OF 1933, AS AMENDED, THE SECURITIES OF SIS BANCORP, INC. TO BE ISSUED IN THE REORGANIZATION HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR WITH ANY OTHER GOVERNMENTAL AGENCY. ------------ THE SHARES OF COMPANY COMMON STOCK OFFERED HEREBY ARE NOT DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. ------------ The date of this Proxy Statement-Prospectus is March 27, 1996. AVAILABLE INFORMATION The Bank is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as administered by the Federal Deposit Insurance Corporation (the "FDIC"), and in accordance therewith files reports and other information with the FDIC. Reports, proxy statements and other information filed by the Bank pursuant to the informational requirements of the Exchange Act can be inspected and copied at the public reference facilities maintained by the FDIC at 550 Seventeenth Street, N.W., Room No. F-643, Washington, D.C. 20429, telephone no. 202-898-8913. The Bank Common Stock is listed for quotation on the NASDAQ National Market System; consequently, reports, proxy statements and other information concerning the Bank may also be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Company has been formed at the direction of the Bank solely for the purpose of effecting the Reorganization. The Company has not issued any shares of its capital stock to date and is not subject to the requirements of the Exchange Act. The Company is applying to have the shares of Company Common Stock to be issued in the Reorganization approved for inclusion on the NASDAQ National Market System, effective upon consummation of the Reorganization. Although the Company anticipates obtaining such approval, no assurance can be given that such approval will be received. If the Reorganization is consummated, the Company will become subject to the reporting and proxy statements requirements of the Exchange Act and, in accordance therewith, will file reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). In addition, in connection with the annual meeting of shareholders of the Company, proxy statements accompanied or preceded by annual reports to shareholders will contain financial statements that have been examined and reported upon, with an opinion expressed by an independent auditor. No person has been authorized to give any information or to make any representation not contained in this Proxy Statement-Prospectus, and, if given or made, such information or representation must not be relied upon as having been authorized by the Company. Neither the delivery hereof nor any distribution of securities hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the Company or the Bank since the date hereof or that the information in this Proxy Statement-Prospectus is correct as of any time subsequent to the date hereof. Information contained herein is subject to completion or amendment. This Proxy Statement-Prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. A copy of the Bank's Annual Report to Stockholders for the year ended December 31, 1995 accompanies this Proxy Statement-Prospectus. Additional copies of such Annual Report may be obtained without charge by any stockholder of the Bank upon written request to Ting Chang, Vice President-Investor Relations, Springfield Institution for Savings, 1441 Main Street, Springfield, Massachusetts 01102. This Proxy Statement-Prospectus hereby incorporates by reference the Bank's Annual Report on Form F-2, as filed with the FDIC and included with this Proxy Statement-Prospectus mailed to stockholders, for the fiscal year ended December 31, 1995. CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Company and the Bank desire to take advantage of the new "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. This Proxy Statement-Prospectus contains certain "forward-looking statements" including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Company and the Bank wish to caution readers that the following important factors, among others, may have affected and could in the future affect the Bank's and the Company's actual results and could cause the Bank's and/or the Company's actual 2 results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf of the Bank and/or the Company herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Company and the Bank must comply, the cost of such compliance and the potentially material adverse effects if the Bank and/or the Company were not in substantial compliance either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Bank's and/or the Company's organization, compensation and benefit plans; (iii) the effect on the Bank's or the Company's competitive position within its market area of increasing consolidation within the banking industry and increasing competition from larger regional and out-of-state banking organizations as well as nonbank providers of various financial services; (iv) the effect of unforeseen changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the local, regional or national economies. 3 TABLE OF CONTENTS Section Page - ------- ---- SUMMARY OF PROXY STATEMENT-PROSPECTUS................................. 6 VOTING, REVOCATION AND SOLICITATION OF PROXIES........................ 11 Annual Meeting........................................................ 11 Record Date........................................................... 11 Proxies............................................................... 11 Quorum; Vote Required................................................. 12 PROPOSAL ONE-FORMATION OF HOLDING COMPANY............................. 13 Recommendation of Directors........................................... 13 Description of the Plan of Reorganization............................. 13 Reasons for the Holding Company Formation............................. 14 Financial Resources of the Company.................................... 15 Conditions of the Reorganization...................................... 16 Rights of Dissenting Stockholders..................................... 17 Income Tax Consequences............................................... 18 COMPARISON OF STOCKHOLDER RIGHTS...................................... 21 Capital Stock......................................................... 22 Common Stock.......................................................... 22 Preferred Stock....................................................... 23 Directors............................................................. 23 Meetings of Stockholders.............................................. 24 Stockholder Vote Required to Approve Certain Transactions............. 25 Provisions Relating to Exercise of Business Judgment by Board of Directors............................................... 26 Beneficial Ownership Limitation....................................... 26 Indemnification and Limitation of Liability........................... 27 Amendment of Charter and Articles..................................... 27 Amendment of By-laws.................................................. 27 Legal Investments..................................................... 28 Anti-Takeover Provisions.............................................. 28 CAPITALIZATION........................................................ 29 MARKET FOR STOCK AND DIVIDENDS........................................ 30 DESCRIPTION OF COMPANY CAPITAL STOCK.................................. 31 General............................................................... 31 Common Stock.......................................................... 31 Preferred Stock....................................................... 31 Transfer Agent and Registrar.......................................... 32 Changes in Control.................................................... 32 BUSINESS OF THE COMPANY............................................... 33 General............................................................... 33 Property.............................................................. 33 Competition........................................................... 33 Employees............................................................. 34 REGULATION............................................................ 34 Holding Company Regulation............................................ 34 Other Regulatory Considerations....................................... 35 Federal Securities Laws............................................... 38 4 Section Page - ------- ---- MANAGEMENT OF THE COMPANY............................................. 39 Directors............................................................. 39 Committees............................................................ 40 Executive Officers.................................................... 40 Compensation.......................................................... 40 Employee Benefit Plans................................................ 40 PROPOSAL TWO-ELECTION OF CLASS OF DIRECTORS........................... 40 Recommendation of Directors........................................... 41 MANAGEMENT OF THE BANK................................................ 41 Directors and Nominees................................................ 41 Meetings of Board of Directors and Committees......................... 42 Principal Officers of the Bank........................................ 44 Compensation of Directors............................................. 45 Executive Compensation................................................ 45 Compensation Committee Report......................................... 49 Comparative Performance Graph......................................... 51 Employment Agreements................................................. 51 Benefits Under Plans.................................................. 53 Security Ownership of Management and Directors........................ 56 Transactions with Certain Related Persons............................. 56 Certain Business Relationships........................................ 57 Prohibition on Beneficial Ownership of Five Percent of Common Stock... 57 PROPOSAL THREE-ELECTION OF CLERK...................................... 57 Recommendation of Directors........................................... 58 PROPOSAL FOUR-INCREASE IN AUTHORIZED SHARES UNDER THE 1995 MANAGEMENT STOCK OPTION PLAN..................................................... 58 Proposal to Stockholders.............................................. 58 Description of the 1995 Management Stock Option Plan.................. 58 Federal Income Tax Consequences of the 1995 Management Stock Option Plan................................................... 60 Required Vote......................................................... 61 Recommendation of Directors........................................... 61 STOCKHOLDER PROPOSALS................................................. 62 INDEPENDENT ACCOUNTANTS............................................... 62 OTHER MATTERS......................................................... 62 COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT 1934..... 62 Appendix A Agreement and Plan of Reorganization....................... A-1 Appendix B Provisions of Massachusetts General Laws Relating to Rights of Dissenting Stockholders................................ B-1 Appendix C Articles of Organization and By-Laws of SIS Bancorp, Inc.... C-1 5 SUMMARY OF PROXY STATEMENT-PROSPECTUS The following is a brief summary of certain information contained elsewhere in this Proxy Statement-Prospectus. This summary is not intended to be a complete statement of all material features of the matters being considered and voted on by the stockholders of the Bank and is qualified in its entirety by reference to the full text of this Proxy Statement-Prospectus, including the Appendices hereto, and the documents referred to herein. Date, Time and Place of Annual Meeting The Annual Meeting of Stockholders (the "Annual Meeting") of Springfield Institution for Savings (the "Bank" or "SISBank") will be held at Springfield Marriott Hotel, 1500 Main Street, Springfield, Massachusetts at 10:00 a.m. local time on Thursday, May 9, 1996. Purposes of the Annual Meeting The purposes of the Annual Meeting are to consider and vote upon proposals: (1) to consider and vote upon the formation of a holding company for the Bank by the approval of the Agreement and Plan of Reorganization dated as of January 31, 1996 (the "Plan of Reorganization"), between the Bank and SIS Bancorp, Inc. (the "Company"), pursuant to which the Bank will become a wholly-owned subsidiary of the Company and each issued and outstanding share of common stock of the Bank, par value $1.00 per share ("Bank Common Stock"), other than shares held by stockholders, if any, exercising dissenters' appraisal rights, will be exchanged for one share of common stock of the Company, par value $0.01 per share ("Company Common Stock"); (2) to elect a class of five Directors of the Bank for a three-year term; (3) to elect a Clerk of the Bank; (4) to amend the 1995 Management Stock Option Plan to increase the number of shares reserved for issuance thereunder; and (5) to transact such other business as may properly come before the Annual Meeting or any adjournments or postponements thereof. Record Date The Board of Directors has fixed the close of business on March 13, 1996 as the record date (the "Record Date") for the determination of stockholders entitled to notice of and to vote at the Annual Meeting and any adjournments thereof. Only holders of record of Bank Common Stock at the close of business on the Record Date will be entitled to notice of and to vote at the Annual Meeting or any adjournments thereof. At the close of business on the Record Date there were 5,718,200 shares of Bank Common Stock issued and outstanding, and each such outstanding share is entitled to one vote. As of such date there were approximately 1,213 holders of record of the Bank Common Stock. On the Record Date, the Directors and principal officers of the Bank beneficially owned in the aggregate 295,286 shares of Bank Common Stock or 5.16% of the issued and outstanding shares of Bank Common Stock which may be voted at the Annual Meeting, all of which are expected to be voted at the Annual Meeting in favor of the Reorganization and the Board of Directors' recommendations regarding the election of Directors and Clerk of the Bank and the amendment of the 1995 Management Stock Option Plan. Stockholder Vote Required The presence, in person or by proxy, of at least a majority of the total number of outstanding shares of Bank Common Stock is necessary to constitute a quorum at the Annual Meeting for the transaction of business. A quorum being present, the affirmative vote of two-thirds of the issued and outstanding shares of Bank Common Stock eligible to be cast by stockholders of record of the Bank at the close of business on the Record Date is required to approve the Plan of Reorganization (Proposal One). The affirmative vote of a plurality of the votes cast at the Annual Meeting is required to approve the election of each of the persons within the proposed class of five Directors as a Director of the Bank (Proposal Two). The affirmative vote of a majority of the shares 6 present and voting, in person or by proxy, is necessary to approve the election of a Clerk of the Bank (Proposal Three). The affirmative vote of a majority of the issued and outstanding shares of Bank Common Stock eligible to be cast by stockholders of record of the Bank at the close of business on the Record Date is required to approve the proposed amendment to the 1995 Management Stock Option Plan (Proposal Four). PROPOSAL ONE-FORMATION OF HOLDING COMPANY Proposal to Stockholders At the Annual Meeting, stockholders of the Bank are being asked to approve the formation of a holding company for the Bank, to be accomplished by approving the Plan of Reorganization pursuant to which the Company, a newly-formed Massachusetts corporation organized at the direction of the Bank, will acquire all of the issued and outstanding shares of Bank Common Stock in exchange for an equal number of shares of Company Common Stock. Upon the effective date of the transactions contemplated by the Plan of Reorganization, the outstanding Bank Common Stock, other than shares held by stockholders, if any, exercising dissenters' appraisal rights, will be exchanged for Company Common Stock on a one-for-one basis (the "Reorganization"). The Bank will then be a wholly-owned subsidiary of the Company and the stockholders of the Bank will then be stockholders of the Company. A copy of the Plan of Reorganization is attached to this Proxy Statement-Prospectus as Appendix A and should be read in its entirety. See "Proposal One-Formation of Holding Company." Recommendation of Directors THE BOARD OF DIRECTORS OF THE BANK HAS APPROVED THE PLAN OF REORGANIZATION AND RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR APPROVAL OF THE PLAN OF REORGANIZATION. Parties to the Plan of Reorganization Springfield Institution for Savings. The Bank is a Massachusetts-chartered savings bank organized in 1827 and headquartered in Springfield, Massachusetts. The conversion of the Bank from a savings bank in mutual form to a savings bank in stock form was completed in February 1995. As of the date of this Proxy Statement-Prospectus, the Bank had authorized capital of 25,000,000 shares of common stock, par value $1.00 per share, of which there were 5,718,200 shares issued and outstanding, and 5,000,000 shares of preferred stock, par value $1.00 per share, none of which was issued and outstanding. The Bank is engaged principally in the business of attracting deposits from the general public and investing those deposits in real estate mortgage, construction, consumer and commercial loans, and in various securities. The Bank conducts its business from its main office in Springfield and from a network of 20 branches in Massachusetts. SIS Bancorp, Inc. The Company is a newly-formed Massachusetts corporation organized at the direction of the Bank. Pursuant to the Plan of Reorganization, the Company will acquire all of the issued and outstanding shares of Bank Common Stock in exchange for an equal number of shares of Company Common Stock. As of the date of this Proxy Statement-Prospectus, the Company had authorized capital of 250,000 shares of common stock, par value $0.01 per share, and 50,000 shares of preferred stock, par value $0.01 per share, none of which was issued and outstanding. Prior to the effective time of the Reorganization, and as a condition thereto, the Company will amend its existing articles of organization to increase its authorized capital to 25,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share. Upon completion of the Reorganization, the Bank will be a wholly-owned subsidiary of the Company. See "Business of the Company." The principal executive offices of both the Bank and the Company are located at 1441 Main Street, Springfield, Massachusetts 01102. The telephone number for both offices is (413) 748-8000. 7 Reasons for Formation of Holding Company The Board of Directors of the SISBank believes that the holding company structure will better suit the current and future interests of the SISBank shareholders and customers. The Board of Directors has determined that the establishment of a bank holding company will provide additional flexibility to respond to the changing and expanding needs of SISBank's present and future customers for financial services, thereby improving SISBank's competitive position. Moreover, it is expected that formation of a bank holding company will facilitate expansion and entry into other financial areas either through the creation of new subsidiaries or through the acquisition of other companies, including banks. The Board of Directors believes that such growth should result in enhanced long-term shareholder value. See "Proposal One-Formation of Holding Company-Reasons for Holding Company Formation." Regulation and Supervision After the holding company formation, the Company and the Bank will be subject to extensive regulation. The Company will be subject to regulation by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"), the Secretary of State of the Commonwealth of Massachusetts and the SEC, and may, in certain circumstances, be subject to regulation by the Commissioner of Banks of the Commonwealth of Massachusetts (the "Commissioner of Banks"). The Bank will continue to be subject to federal and state law, including regulation by the FDIC and the Commissioner of Banks. Company Common Stock will be registered with the SEC pursuant to the Exchange Act. If the Bank abandons the Reorganization, the Bank Common Stock would continue to be registered with the FDIC. See "Regulation." Required Regulatory Approvals An application will be submitted to the Commissioner of Banks to obtain his approval of the Plan of Reorganization and the formation of the holding company. In addition, the Company is required to provide prior notice to the Federal Reserve Bank of Boston (the "Reserve Bank") of its proposed acquisition of all of the issued and outstanding capital stock of the Bank in accordance with the Plan of Reorganization. See "Proposal One-Formation of Holding Company-Conditions of the Reorganization." The Bank and the Company have the right under the terms of the Plan of Reorganization to abandon the Reorganization if, among other things, the necessary regulatory approvals cannot be obtained or if the conditions or obligations associated with such regulatory approval make the Reorganization inadvisable in the opinion of the Bank or the Company. Any delays which are encountered in seeking any of the foregoing regulatory approvals could result in a delay in the consummation of the Reorganization. See "Proposal One-Formation of Holding Company-Regulation." Market for Stock and Dividends The Bank Common Stock has been traded on the National Association of Securities Dealers Automated Quotation ("NASDAQ") System under the symbol "SISB" since the Bank's conversion from mutual to stock form in February 1995. Following the formation of the holding company, the Company expects that the Company Common Stock will be traded on the NASDAQ National Market System under the symbol "SISB." While the Company does not anticipate paying any cash dividends on the Company Common Stock in the near future, the Company's Board of Directors would be expected to periodically review whether any cash dividend should be paid. Tax Consequences The Bank will receive a legal opinion to the effect that neither the Company, the Bank nor the stockholders of the Bank (except dissenting stockholders) will recognize gain or loss for federal income tax purposes as a 8 result of the holding company formation, and that the stockholders of the Bank who exercise dissenters' rights will recognize gain or loss in the transaction for federal income tax purposes. The Bank also has net operating loss carryforwards and tax credit carryforwards, the rate of utilization of which could be impacted by the holding company formation. See "Proposal One-Formation of Holding Company-Income Tax Consequences." Dissenters' Rights Pursuant to Massachusetts law, holders of Bank Common Stock have dissenters' appraisal rights in connection with the formation of the holding company. The Bank and any such stockholder shall in such cases have the rights and duties and shall follow the procedure set forth in Sections 85 to 98, inclusive, of Chapter 156B of the General Laws of Massachusetts, a copy of which is attached to this Proxy Statement-Prospectus as Appendix B and should be read in its entirety. If the Reorganization is completed, any stockholders of the Bank who intend to exercise dissenters' rights must carefully follow the procedures described therein. See "Proposal One-Formation of Holding Company-Rights of Dissenting Stockholders." Comparison of Stockholder Rights The Bank, as a Massachusetts savings bank, is regulated under Massachusetts banking laws. The Company, as a Massachusetts business corporation, is governed by the corporate laws of Massachusetts. Although the Articles of Organization and By-laws of the Company and the Amended and Restated Charter and By-laws of the Bank are similar, there are certain important differences of which stockholders of the Bank should be aware. Copies of the Articles of Organization and By-laws of the Company are attached to this Proxy Statement-Prospectus as Appendix C and should be read in their entirety. See "Comparison of Stockholder Rights." PROPOSAL TWO-ELECTION OF CLASS OF DIRECTORS Proposal to Stockholders The Bank's Amended and Restated Charter and By-laws provide that the Board of Directors shall be divided into three classes as nearly equal in size as possible, with the Directors in each class serving for a term of three years. As the term of one class expires, a successor class is elected at each annual meeting of stockholders. At the Annual Meeting, stockholders of the Bank are being asked to elect William B. Hart, Jr., Thomas O'Brien, Teresita Alicea, Paulette Henderson-Johnson and John H. Southworth, the five nominees proposed by the Board of Directors of the Bank, as Directors of the Bank to serve until the 1999 annual meeting of stockholders and until their successors are elected and qualified. See "Proposal Two-Election of Class of Directors." Recommendation of Directors THE BOARD OF DIRECTORS OF THE BANK RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE ELECTION OF THE NOMINEES PROPOSED BY THE BOARD OF DIRECTORS OF THE BANK AS DIRECTORS OF THE BANK. PROPOSAL THREE-ELECTION OF CLERK Proposal to Stockholders Under Massachusetts law, the Clerk of the Bank is required to be elected by the stockholders at an annual meeting or special meeting duly called for that purpose. At the Annual Meeting, stockholders of the Bank are being asked to elect Michael E. Tucker, the nominee proposed by the Board of Directors, as the Clerk of the 9 Bank to serve until the 1997 annual meeting of stockholders and until his successor is elected and qualified. See "Proposal Three-Election of Clerk." Recommendation of Directors THE BOARD OF DIRECTORS OF THE BANK RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE ELECTION OF MICHAEL E. TUCKER AS CLERK OF THE BANK. PROPOSAL FOUR-INCREASE IN AUTHORIZED SHARES UNDER THE 1995 MANAGEMENT STOCK OPTION PLAN Proposal to Stockholders The Compensation Committee of the Bank's Board of Directors (the "Compensation Committee") has recommended to the Board of Directors, and the Board of Directors has approved, subject to receipt of the required shareholder and regulatory approvals, an amendment to the Bank's 1995 Management Stock Option Plan (the "Management Stock Option Plan"), pursuant to which the number of shares authorized for issuance under such plan would be increased from 445,000 to 695,000. The additional shares are intended to attract new employees and to retain and reward existing employees of the Bank. The terms of options awarded under the Management Stock Option Plan are established by the Compensation Committee, acting in its discretion, subject to certain limitations established by the terms of the Management Stock Option Plan. See "Proposal Four-Increase in Authorized Shares under the 1995 Management Stock Option Plan-Description of the 1995 Management Stock Option Plan." Recommendation of Directors THE BOARD OF DIRECTORS OF THE BANK RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE AMENDMENT TO INCREASE THE NUMBER OF SHARES AUTHORIZED FOR ISSUANCE UNDER THE MANAGEMENT STOCK OPTION PLAN. 10 SPRINGFIELD INSTITUTION FOR SAVINGS ------------ SIS BANCORP, INC. ------------ VOTING, REVOCATION AND SOLICITATION OF PROXIES Annual Meeting This Proxy Statement-Prospectus is being furnished in connection with the solicitation of proxies by the Board of Directors of the Bank for use at the Annual Meeting of Stockholders to be held at Springfield Marriott Hotel, 1500 Main Street, Springfield, Massachusetts at 10:00 a.m. local time on Thursday, May 9, 1996, and any adjournments thereof. As more fully described in this Proxy Statement-Prospectus, the Annual Meeting has been called (1) to consider and vote upon a proposal to form a holding company for the Bank by the approval of the Plan of Reorganization pursuant to which the Bank will become a wholly-owned subsidiary of the Company and each issued and outstanding share of Bank Common Stock, other than shares held by stockholders, if any, exercising dissenters' appraisal rights, will be exchanged for one share of Company Common Stock, (2) to elect a class of five Directors of the Bank for a three-year term, (3) to elect a Clerk of the Bank; (4) to amend the 1995 Management Stock Option Plan to increase the number of shares reserved for issuance thereunder; and (5) to transact such other business as may properly come before the Annual Meeting or any adjournments or postponements thereof. See "Proposal One-Formation of Holding Company." Record Date The Board of Directors of the Bank has fixed the close of business on March 13, 1996 as the Record Date for the determination of stockholders entitled to notice of and to vote at the Annual Meeting and any adjournments thereof. Only holders of record of Bank Common Stock at the close of business on the Record Date will be entitled to notice of and to vote at the Annual Meeting and any adjournments thereof. At the close of business on the Record Date, there were 5,718,200 shares of Bank Common Stock issued and outstanding and entitled to vote at the Annual Meeting and any adjournments thereof. As of such date there were approximately 1,213 holders of record of Bank Common Stock. The holders of each share of Bank Common Stock outstanding as of the close of business on the Record Date will be entitled to one vote for each share held of record upon each matter properly submitted to the Annual Meeting or any adjournments thereof. Proxies Holders of Bank Common Stock are requested to complete, date, sign and promptly return the accompanying proxy card in the enclosed envelope which requires no postage if mailed in the United States. If the enclosed form of proxy is properly executed and returned to the Bank in time to be voted at the Annual Meeting, the shares represented thereby will, unless such proxy has previously been revoked, be voted in accordance with the instructions marked thereon. Executed proxies with no instructions indicated thereon will be voted (1) FOR the approval of the Plan of Reorganization, (2) FOR the election of the five nominees of the Board of Directors of the Bank as Directors, (3) FOR the election of Michael E. Tucker as Clerk of the Bank, (4) FOR the approval of the amendment to the 1995 Management Stock Option Plan and (5) in such manner as management's proxy-holders shall decide on such other matters as may properly come before the Annual Meeting. The presence of a stockholder at the Annual Meeting will not automatically revoke a stockholder's proxy. A stockholder may, however, revoke a proxy at any time prior to the voting thereof on any matter (without, however, affecting any vote taken prior to such revocation) by filing with the Clerk of the Bank a written notice of revocation, by delivering to the Bank a duly executed proxy bearing a later date, or by attending the Annual 11 Meeting and voting in person. All written notices of revocation and other communications with respect to revocation of proxies in connection with the Annual Meeting should be addressed as follows: Springfield Institution for Savings, 1441 Main Street, Springfield, Massachusetts 01102, Attention: Michael E. Tucker, Clerk. It is not anticipated that any matters other than those set forth in proposals (1)-(4) contained in this Proxy Statement-Prospectus will be brought before the Annual Meeting. If any other matters properly come before the Annual Meeting, the persons named as proxies will vote upon such matters in their discretion in accordance with their best judgment. In addition to use of the mails, proxies may be solicited personally or by telephone or telegraph by officers, Directors and employees of the Bank who will not be specially compensated for such solicitation activities. Arrangements will also be made with brokerage houses and other custodians, nominees and fiduciaries for forwarding solicitation materials to the beneficial owners of shares held of record by such persons, and the Bank will reimburse such persons for their reasonable out-of-pocket expenses incurred in that connection. The Bank has also retained Morrow & Co., Inc., a proxy soliciting firm, to assist in solicitation of proxies at a fee of $7,500, plus reimbursement of certain out-of-pocket costs. The cost of soliciting proxies will be borne by the Bank, including the fee of $7,500. Quorum; Vote Required The presence, in person or by proxy, of at least a majority of the total number of outstanding shares of Bank Common Stock is necessary to constitute a quorum at the Annual Meeting for the transaction of business. Abstentions and "broker non-votes" (as defined below) will be counted as present for purposes of determining the presence or absence of a quorum for the transaction of business at the Annual Meeting. A quorum being present, the affirmative vote of the holders of two-thirds of the issued and outstanding shares of Bank Common Stock eligible to be cast by stockholders of record at the close of business on the Record Date is required to approve the Plan of Reorganization (Proposal One). By voting for the Plan of Reorganization, stockholders of the Bank shall be deemed to authorize the Bank to take all appropriate action to implement the Plan of Reorganization. Abstentions and broker non-votes will not be counted as votes "for" the proposal to approve the Plan of Reorganization and, therefore, will have the effect of votes against this proposal. The affirmative vote of a plurality of the votes cast at the Annual Meeting is required to elect each of the persons within the proposed class of five Directors as a Director of the Bank (Proposal Two). Abstentions and broker non-votes will not be counted as "votes cast" for purposes of electing a class of five Directors and, therefore, will not affect the election of Directors. The affirmative vote of a majority of the shares present and voting, in person or by proxy, is necessary to elect a Clerk of the Bank (Proposal Three). Abstentions and broker non-votes will not be included among the votes deemed to be cast at the Annual Meeting for purposes of electing a Clerk of the Bank and, therefore, will not have the effect of either votes "for" or votes "against" this proposal. The affirmative vote of the holders of a majority of the issued and outstanding shares of Bank Common Stock eligible to be cast by stockholders of record at the close of business on the Record Date is required to approve the proposal to amend the 1995 Management Stock Option Plan (Proposal Four). Abstentions and broker non-votes will not be counted as votes "for" the proposal to amend the 1995 Management Stock Option Plan and, therefore, will have the effect of votes against this proposal. A "broker non-vote" is a proxy from a broker or other nominee indicating that such person has not received instructions from the beneficial owner or other person entitled to vote the shares which are the subject of the proxy on a particular matter with respect to which the broker or other nominee does not have discretionary voting power. The Directors and principal officers of the Bank have indicated that they intend to vote all shares of Bank Common Stock which they are entitled to vote in favor of each of the Proposals presented herein. On the Record Date, the Directors and principal officers of the Bank in the aggregate had the right to vote approximately 295,286 shares of Bank Common Stock (including shares allocated to the accounts of principal officers under the ESOP described below), representing approximately 5.16% of the outstanding Bank Common Stock as of such date. See "Management of the Bank." 12 The Bank's Employee Stock Ownership Plan (the "ESOP") held on the Record Date 445,000 shares of Bank Common Stock, of which 54,812 shares had been allocated to 363 ESOP members, all of whom are employees of the Bank. Under the ESOP Trust Agreement, the trustee of the ESOP is directed to vote allocated shares in accordance with the instructions of the members to whom the shares have been allocated. In addition, the trustee is directed to vote unallocated and unvoted shares in the same proportion as he is instructed to vote the allocated shares. Any such action would be subject, however to the trustee's exercise of its fiduciary duties under applicable law. See "Management of the Bank-Benefits Under Plans-Employee Stock Ownership Plan." PROPOSAL ONE-FORMATION OF HOLDING COMPANY The following descriptions are qualified in their entirety by reference and are made subject to the Plan of Reorganization attached hereto as Appendix A, certain provisions of the General Laws of Massachusetts relating to the rights of dissenting stockholders attached hereto as Appendix B, and the Articles of Organization and By-laws of the Company attached hereto as Appendix C. Recommendation of Directors The Boards of Directors of the Bank and of the Company have each approved the Plan of Reorganization, which provides for the acquisition of all outstanding shares of Bank Common Stock by the Company in exchange for an equal number of shares of Company Common Stock pursuant to the provisions of Section 26B of Chapter 172 of the General Laws of Massachusetts. The Plan of Reorganization will not take effect unless it is approved by the affirmative vote of two-thirds of the total votes eligible to be cast by stockholders of record as of the close of business on the Record Date. Unless authority to do so has been limited in a proxy, it is the intention of the persons named as proxies to vote the shares to which the proxy relates for the approval of the Plan of Reorganization. THE BOARD OF DIRECTORS OF THE BANK BELIEVES THAT THE PLAN OF REORGANIZATION IS IN THE BEST INTERESTS OF THE BANK AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR APPROVAL OF THE PLAN OF REORGANIZATION. Description of the Plan of Reorganization The Company has been organized as a Massachusetts corporation at the direction of the Bank for the purpose of becoming the holding company of the Bank. The Company and the Bank have entered into the Plan of Reorganization. Under the Plan of Reorganization, the Company will become the owner of all of the outstanding shares of Bank Common Stock, and each stockholder of the Bank who does not exercise dissenters' appraisal rights with respect to the Plan of Reorganization will become the owner of one share of Company Common Stock for each share of Bank Common Stock held immediately prior to the consummation of the Reorganization. Upon the effective date of the Reorganization, each share of Bank Common Stock will be automatically exchanged for one share of Company Common Stock. The Reorganization will become effective (the "Effective Date") on the first business day following the date on which the Bank and the Company advise the Commissioner of Banks in writing that all the conditions precedent to the Reorganization becoming effective have been satisfied and that the Plan of Reorganization has not been abandoned by the Bank or the Company. As a condition to the consummation of the Reorganization, the Company and the Bank must receive certain regulatory approvals. See "-Conditions of the Reorganization." Neither the Company nor the Bank can predict whether such approvals will be obtained or whether such approvals will be on terms satisfactory to the Company and the Bank. Accordingly, the consummation of the Reorganization may be subject to a delay which may, under certain circumstances, be significant. If the stockholders approve the Plan of Reorganization at the Annual Meeting, the Company and the Bank shall have the right to consummate the Reorganization, subject to the satisfaction of the conditions contained in the Plan of Reorganization, at any time thereafter. 13 The number of shares of Company Common Stock to be issued on the Effective Date will be equal the number of shares of Bank Common Stock issued and outstanding immediately prior thereto, less the number of shares of Bank Common Stock, if any, held by dissenting stockholders. Shares of Company Common Stock which would have been issued had dissenting stockholders not dissented will remain as authorized but unissued shares of Company Common Stock. Any shares of Company Common Stock which are outstanding prior to the Effective Date, all of which, if any, would be held by the Bank, will be redeemed at par value as part of the Reorganization and retired to the status of authorized and unissued shares. The outstanding stock certificates of Bank Common Stock which, prior to the Reorganization, represented shares of Bank Common Stock, will thereafter for all purposes represent an equal number of shares of Company Common Stock, except for certificates held by dissenting stockholders and as set forth below. After the Effective Date, the Company will issue and deliver to the transfer agent (the "Transfer Agent") for the Bank and the Company certificates representing the number of shares of Company Common Stock issuable in connection with the Reorganization. The Company and the Bank will notify the stockholders by mail at their addresses as shown on the Bank's records and, as may be required, by publication that they may present their certificates to the Transfer Agent for exchange. Stockholders may exchange their present stock certificates representing Bank Common Stock for new certificates representing Company Common Stock by surrendering their Bank Common Stock certificates to the Transfer Agent. They will then receive in exchange therefor a certificate representing an equal number of shares of Company Common Stock. Until so exchanged, stockholders' present stock certificates representing Bank Common Stock will for all purposes represent an equal number of shares of Company Common Stock and the holders of those certificates will have all the other rights of stockholders of the Company. However, the Company at any time may withhold any dividends that may be declared on shares of Company Common Stock until stockholders present their Bank Common Stock certificates to the Transfer Agent for exchange. In such case, upon delivery of such certificates or as soon thereafter as practicable, such persons shall be entitled to receive from the Company or the Transfer Agent an amount equal to all accrued dividends (without interest thereon and less the amount of taxes, if any, which may have been imposed or paid thereon or which are required by law to be withheld in respect thereof) on the shares represented thereby. After consummation of the Reorganization, the Bank, as a subsidiary of the Company, will continue to serve the communities it presently serves from its existing office locations. The assets, property, rights and powers, debts, liabilities, obligations and duties of the Bank will not be changed by the Reorganization, except for the proposed initial transfer of $250,000 from the Bank's stockholders' equity to the Company. See "Financial Resources of the Company." Similarly, the Amended and Restated Charter, By-laws and name of the Bank will not be affected by consummation of the Reorganization. Pursuant to the Plan of Reorganization, upon consummation of the Reorganization the director and management incentive stock option plans and director and management restricted stock plans of the Bank (the "Stock Option Plans" and the "Restricted Stock Plans", respectively), will become the director and management incentive stock option plans and director and management restricted stock plans of the Company. In addition, it is expected that upon consummation of the Reorganization the Company will become a participating employer of the Bank's ESOP so that employees of the Company will be eligible to participate in the Bank's ESOP. Certain officers of the Bank will initially serve as the principal officers of the Company. See "Management of the Company." The Reorganization will be treated as a "pooling of interests" for accounting purposes. Reasons for the Holding Company Formation The Board of Directors of the Bank believes that a holding company structure will better suit the current and future interests of the Bank's shareholders and customers. The Board of Directors has determined that the establishment of a bank holding company will provide additional flexibility to respond to the changing and expanding needs of the Bank's present and future customers for financial services, thereby improving the Bank's competitive position and increasing long-term value to stockholders. In addition, a holding company structure will provide greater flexibility for meeting the future financial needs of the Bank or other subsidiaries of the Company. The Company, unlike the Bank, will not generally be subject to any regulatory limitations on the 14 amounts which it can invest in its subsidiaries and other businesses. In addition, the Company, unlike the Bank, will not be required to obtain the prior approval of the Commissioner of Banks before issuing shares of its capital stock. The Company will also be permitted, in accordance with applicable regulations of the Federal Reserve Board to purchase or redeem its equity securities. Although current Massachusetts banking laws would permit the Bank to purchase its own stock, federal limitations on the permissible activities and investments of state-chartered banks imposed by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") may prohibit such purchases by the Bank. See "Regulation." With a parent holding company as a potential source of additional capital, the Bank should be better able to undertake necessary capital expenditures and/or grow its assets, both of which may improve the Bank's competitive position within its market area. There are no current agreements or understandings with respect to any investments or the issuance (other than pursuant to the Stock Option Plan and the Restricted Stock Plans) of any additional shares of capital stock by either the Bank or the Company. Formation of a holding company should also improve the competitive position of the Bank in an evolving and consolidating market. The holding company structure should facilitate the Bank's expansion and entry into other areas of financial services, either through the creation of new subsidiaries of the parent holding company or through the acquisition of or affiliation with other banks as well as other companies engaged in bank-related activities. In its present form, the only practical way for the Bank to increase its size or affiliate with another banking institution is by merger with, or acquisition of substantially all the assets of, the other institution. In either case, the acquired entity is absorbed by the acquirer and ceases to operate as an ongoing business organization. A holding company structure, however, would permit an acquired entity to operate on a more autonomous basis as a wholly-owned subsidiary of the Company. For example, the acquired institution could retain its own directors, officers, corporate name and local identity. This more autonomous operation may be decisive in acquisition negotiations. The Board of Directors of the Bank believes that if the Company can build a multibank franchise composed of well-established community banks with strong ties to local consumers and small businesses, then the consolidated Company, by benefitting from improved economies of scale and expanded managerial and financial resources, should be able to provide in a cost effective manner an expanded range of superior quality products and services, which will, in turn, enable the Company to compete more effectively with the larger regional and out-of-state banking organizations operating within the Company's market area. While the Bank, from time to time, explores acquisition and affiliation possibilities, neither the Bank nor the Company has any current agreements or understandings for the acquisition of or affiliation with any financial institution or other company and there are no assurances that any such acquisitions or affiliations will occur. It is recognized that some increased costs, including administrative expenses and franchise and other taxes, will be incurred in the formation and operation of the Company. However, such increased costs are not expected to have a material adverse effect on the consolidated financial results of the Company and the Bank. Financial Resources of the Company The Bank currently intends to transfer $250,000 as a capital contribution to the Company immediately prior to the effective time of the Reorganization. Upon consummation of the Reorganization, the shares of the Company to be issued to the Bank in connection with such capital contribution, will be redeemed at par value and retired to the status of authorized and unissued shares. See "Capitalization." Immediately following the Reorganization, therefore, the assets of the Company, on an unconsolidated basis, will consist of the initial transfer of funds by the Bank and all of the then outstanding shares of Bank Common Stock. See "Capitalization." A transfer of $250,000 to the Company would reduce the Bank's stockholders' equity as of December 31, 1995, to approximately $81,219,000 on an unconsolidated basis. If this transfer to the Company had been made on December 31, 1995, the Bank's tier 1 leverage capital ratio, tier 1 risk-based capital ratio and total risk-based capital ratio would have been approximately 7.55%, 12.49% and 13.73% respectively, each of which is in excess of the Bank's minimum regulatory requirements and would permit the Bank to qualify as a "well capitalized" depositary institution for the purposes of current FDIC capital regulations. 15 The actual amount of funds which may be transferred, however, is subject to change and may be greater or less, depending on a number of factors, including the Company's future financial requirements and applicable regulatory restrictions. In this regard, the Bank may also lend funds to the Company, either as part of or in addition to the transfer of funds being made at the time of the Reorganization or thereafter. The funds provided to the Company by the Bank may be used by the Company for various corporate purposes, including the payment of expenses to be incurred by the Company in the ordinary course of business. See "-Income Tax Consequences." Additional financial resources may be available to the Company in the future through borrowings, debt or equity financings, or dividends from the Bank, other acquired entities or new businesses. Some or all of the foregoing will be subject to compliance with certain regulatory restrictions. At the time of the Reorganization, the Bank may also transfer to the Company an amount equal to actual year to date and anticipated 1996 earnings and profits, as determined for tax purposes. In addition, the Bank may lend amounts to the Company both prior to the consummation of the Reorganization and thereafter. Such loans would be subject to certain restrictions under Section 23A the Federal Reserve Act, as amended, and other regulatory limitations. There can be no assurance, however, as to the amount of additional financial resources which will be available to the Company. Dividends from the Bank to the Company will also be subject to tax and regulatory limitations and requirements. See "-Income Tax Consequences" and "Market for Stock and Dividends." Conditions of the Reorganization The Plan of Reorganization provides that it shall not become effective until all of the following first shall have occurred: (i) the Plan of Reorganization shall have been approved by a vote of the holders of two-thirds of the outstanding shares of Bank Common Stock, (ii) the Plan of Reorganization shall have been approved by the Commissioner of Banks under Section 26B of Chapter 172 of the General Laws of Massachusetts, (iii) the Company shall have provided notice to the Reserve Bank of its proposed acquisition of all of the capital stock of the Bank in accordance with the Plan of Reorganization as required under the regulations of the Federal Reserve Board contained at 12 C.F.R. (S)225.15 and neither the Reserve Bank nor the Federal Reserve Board shall have objected to the Reorganization within thirty days after the date of the Reserve Bank's receipt of such notice, (iv) the Bank and the Company shall have received a favorable opinion from counsel concerning the federal income tax consequences of the Reorganization, (v) the shares of Company Common Stock to be issued in exchange for Bank Common Stock pursuant to the Reorganization shall be registered or qualified for issuance to the extent required under applicable state securities laws, and (vi) the Bank and the Company shall have obtained all other necessary consents, permissions and approvals and taken all other actions required or otherwise deemed to be necessary or appropriate, including the amendment of the Company's articles of organization to increase its authorized capital to 25,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share, for the holding company formation. It is expected that an application will be filed with the Commissioner of Banks promptly after the date of this Proxy Statement-Prospectus to obtain approval of the Plan of Reorganization. The Commissioner of Banks will not approve the Plan of Reorganization unless and until the Plan of Reorganization has been approved by the Bank's stockholders. The Company will also file the required notice of the Reorganization with the Reserve Bank at approximately the same time as the application to the Commissioner of Banks is submitted. See "Regulation-Holding Company Regulation." The Bank has received an opinion of counsel regarding the federal income tax consequences of the Reorganization. See "Income Tax Consequences." If the Plan of Reorganization is approved by the Bank's stockholders at the Annual Meeting, the holding company formation is expected to become effective as soon thereafter as the required regulatory approvals are received. The Bank and the Company have the right under the terms of the Plan of Reorganization to abandon the Reorganization if, among other things, the necessary regulatory approvals cannot be obtained or if the conditions or obligations associated with any such regulatory approval make the Reorganization inadvisable in the opinion of the Bank or the Company. 16 If the Plan of Reorganization is not approved at the Annual Meeting or all of the necessary regulatory approvals are not obtained, the Bank will continue to operate without a holding company structure. All expenses in connection with the Reorganization will be paid by the Bank whether or not the Plan of Reorganization is approved by its stockholders or the Reorganization is consummated. In addition, the Plan of Reorganization also provides that it may be abandoned by either the Board of Directors of the Bank or the Company if the Board of Directors of the Bank or the Company, as the case may be, determines that consummation of the Reorganization would be inadvisable for any reason. An application will be filed with the NASDAQ System for the listing of the shares of Company Common Stock to be issued in the Reorganization in substitution for the currently outstanding shares of Bank Common Stock using the symbol "SISB," subject to completion of the Reorganization. The Bank expects that approval for this substitution will be received prior to consummation of the Reorganization. See "Market for Stock and Dividends." Rights of Dissenting Stockholders Any holder of Bank Common Stock (i) who files with the Bank before the taking of the vote on the approval of the Plan of Reorganization, written objection to the Plan of Reorganization, stating that he intends to demand payment for his shares if the Reorganization is consummated, and (ii) whose shares are not voted in favor of the Plan of Reorganization, has or may have the right to demand in writing from the Bank, within 20 days after the date of mailing to him of notice in writing that the Reorganization has become effective, payment for his shares and an appraisal of the value thereof. In the event that the Reorganization is completed, the Bank and any such dissenting stockholder will be required to follow the procedure set forth in Sections 85 to 98, inclusive, of Chapter 156B of the General Laws of Massachusetts. If the Board of Directors of either the Bank or the Company determines that consummation of the Reorganization is inadvisable for any reason and consequently exercises the right under the Plan of Reorganization to abandon the Reorganization, no stockholder of the Bank will have any right to demand payment for his shares of Bank Common Stock or an appraisal of the value thereof, whether under the statutory provisions summarized herein or otherwise, notwithstanding any prior notice filed with the Bank or any other action that may be taken by the stockholder for the purposes of exercising or otherwise perfecting the statutory rights of appraisal described herein. A brief summary of the applicable sections of the General Laws of Massachusetts is set forth below. However, this summary does not purport to be a complete statement of the procedures to be followed by stockholders desiring to exercise their rights to dissent from the Reorganization and is qualified in its entirety be express reference to such sections, which are included in this Proxy Statement-Prospectus as Appendix B. A holder of Bank Common Stock intending to exercise his dissenter's right to receive payment for his shares must file with the Bank, before the Annual Meeting or at the Annual Meeting but before the vote on the Plan of Reorganization, written objection to the Plan of Reorganization stating that he intends to demand payment for his shares if the Reorganization is consummated and must not vote in favor of the Reorganization at the Annual Meeting. Within 10 days after the Reorganization becomes effective, the Bank will give written notice of such effectiveness by registered or certified mail to each holder of Bank Common Stock who filed such written objection and who did not vote in favor of the Plan of Reorganization. Such written notice of effectiveness will be addressed to the stockholder at his last known address as it appears in the stock record books of the Bank. Within 20 days after the mailing of such notice, any holder of Bank Common Stock to whom the Bank was required to give such notice may make written demand for payment for his shares from the Bank and in such event, the Bank will be required to pay to him the fair value of his shares within 30 days after the expiration of the period during which such demand may be made. If during such 30-day period the Bank and the dissenting stockholder fail to agree as to the fair value of such shares, the Bank or such stockholder may have the fair value of the stock of all dissenting stockholders determined by judicial proceedings by filing a bill in equity in the Superior Court in Hampden County, Massachusetts, within four months after such 30-day period. For the purposes of any such Superior Court determination, the value of the shares of the Bank is to be determined as of the day preceding the date of the vote of the stockholders approving the Plan of Reorganization and shall be 17 exclusive of any element of value arising from the expectation or accomplishment of the Reorganization. Upon making such written demand for payment, the dissenting stockholder will not thereafter be entitled to notices of meetings of stockholders, to vote, or to dividends unless no suit is filed within four months to determine the value of the stock, any such suit is dismissed as to that stockholder, or the stockholder withdraws his objection in writing with the written approval of the Bank. Failure to affirmatively vote against the Plan of Reorganization does not constitute a waiver of a dissenting stockholder's right to receive payment for his shares of Bank Common Stock, provided that such dissenting stockholder has furnished the requisite notice of objection prior to the stockholders' vote on the Plan of Reorganization and such stockholder does not in fact affirmatively vote in favor of the Plan of Reorganization. Likewise, an affirmative vote against the Plan of Reorganization does not entitle a stockholder to receive payment for his shares of Bank Common Stock unless such stockholder has also furnished the requisite notice of objection and undertaken the additional steps summarized in the preceding paragraph required to perfect his dissenters' rights of appraisal. The enforcement by a dissenting stockholder of his right to receive payment for his Bank Common Stock in the manner provided by Sections 85 through 98 of Chapter 156B of the General Laws of Massachusetts will be his exclusive remedy, except that a stockholder shall not be excluded from bringing or maintaining an appropriate proceeding to obtain relief on the ground that consummation of the Reorganization will be or is illegal or fraudulent as to him. Income Tax Consequences General. The Bank and its subsidiaries are subject to those rules of federal income taxation which are generally applicable to corporations under the Internal Revenue Code of 1986, as amended (the "Code"). As members of an affiliated group of corporations within the meaning of Section 1504 of the Code, the Bank and its subsidiaries file a consolidated federal income tax return, which has the effect, among other things, of eliminating or deferring the tax consequences of certain intercompany transactions, including dividends, in the computation of consolidated taxable income for federal tax purposes. The Bank and its subsidiaries report their income using a calendar taxable year and the accrual method of accounting. Tax Opinion. The Bank will not seek a ruling from the Internal Revenue Service concerning the federal income tax consequences of the proposed holding company formation, but will instead rely on an opinion to be received from its counsel, Sullivan & Worcester LLP. Unlike a private letter ruling from the Internal Revenue Service, an opinion of counsel has no binding effect on the Internal Revenue Service. The Bank has been advised by Sullivan & Worcester LLP in substance that the Reorganization will qualify as tax-free under the Code, and in particular that the Reorganization will have the following consequences: 1. No gain or loss will be recognized by the stockholders of the Bank upon the exchange of their Bank Common Stock solely for Company Common Stock (Section 351(a) of the Code). 2. No gain or loss will be recognized by the Bank as a result of the proposed Reorganization. 3. No gain or loss will be recognized by the Company upon the receipt of shares of Bank Common Stock solely in exchange for Company Common Stock (Section 1032(a) of the Code). 4. The basis of the Bank Common Stock received by the Company will be the same as the basis of that stock in the hands of the stockholders of the Bank immediately prior to the proposed transaction (Section 362(a)(1) of the Code). 5. The holding period of the Bank Common Stock in the hands of the Company will include the period during which such stock was held by the stockholders of the Bank (Section 1223(2) of the Code). 6. The basis of the Company Common Stock to be received by each stockholder of the Bank will be the same as the basis of the Bank Common Stock surrendered in exchange therefor (Section 358(a)(1) of the Code). 18 7. The holding period of the Company Common Stock to be received by each stockholder of the Bank will include the holding period of the Bank Common Stock surrendered in exchange therefor, provided that the Bank Common Stock was a capital asset in the hands of such stockholder (Section 1223(1) of the Code). 8. The affiliated group of which the Bank is the common parent immediately prior to the proposed Reorganization will remain in existence after the proposed Reorganization and the Company will become the common parent of the affiliated group, except where the Bank is treated under the Treasury Regulations as continuing to be the common parent (Cf. Rev. Rul. 82-152, 1982-2 C.B. 205), and thus dividend distributions paid by the Bank to the Company will not be included in computing the taxable income of the Company (Treasury Regulation Section 1.1502-13(f)(2)). 9. Stockholders of the Bank who exercise their dissenters' appraisal rights and receive cash in exchange for their shares of Bank Common Stock will recognize taxable income or loss for federal income tax purposes in connection with the transaction. The amount and tax treatment of that income or loss (e.g., whether it constitutes dividend income, ordinary income or loss, short-term capital gain or loss or long-term capital gain or loss) will turn upon a number of factual considerations peculiar to the individual stockholder. Any stockholder of the Bank considering exercising dissenter's appraisal rights with respect to any shares of Bank Common Stock should consult his personal income tax advisor for specific advice with respect to the federal income tax consequences of that exercise. Net Operating Loss Carryforwards. The Bank has a federal tax operating loss carryforward aggregating approximately $12.185 million at December 31, 1995 that ultimately expires in 2009. In addition, the Bank has made allowances on its financial statements for both losses on loans and losses on real estate owned, and the majority of such allowances are anticipated to give rise to deductible tax losses in future years. Losses which the Bank has not yet recognized for tax purposes that may be utilized to offset taxable income in the current or a past or future year are sometimes referred to as "Built-in Losses," and gains which the Bank has not yet recognized for tax purposes are sometimes referred to as "Built-in Gains." If an "ownership change," discussed below, occurs with respect to the Bank and its subsidiaries, either in connection with this Reorganization or in future years as a result of transactions unrelated to this Reorganization, the Bank and its subsidiaries would become subject to a limitation on their ability to use their net operating loss carryforwards and other tax benefit items to offset taxable income. Such limitation, were it to become applicable, would also apply to the recognition for tax purposes of Built-In Losses, if the excess of any Built-In Losses of the Bank and its subsidiaries over their Built-in Gains (the "Net Unrealized Built-In Losses" of the Bank and its subsidiaries) exceed the lesser of (i) 15 percent of the fair market value of the assets of the Bank and its subsidiaries immediately before the ownership change, or (ii) $10 million. The determination whether an ownership change has occurred is made by (i) determining, in the case of any 5% stockholder, the number of percentage points by which such 5% stockholder's interest has increased at the end of any three-year testing period relative to such stockholder's lowest percentage ownership at any time during such testing period, and (ii) aggregating such percentage point increases for all 5% stockholders during the applicable testing period. For purposes of the preceding sentence, any direct or indirect holder, taking into account certain attribution rules, of 5% or more of the Bank's Common Stock is a 5% stockholder, and all holders of less than 5% collectively are generally treated as a single 5% stockholder known as a public group. An ownership change will occur as of the end of any three-year testing period if the aggregate percentage point increases for all 5% stockholders for such testing period exceeds 50 percentage points. Under certain "segregation rules," stockholders who individually acquired less than 5% of the Bank's Common Stock pursuant to the February, 1995 stock issuance are treated as a single 5% stockholder (the "New Public Group") that is separate from the public group of less-than-5% stockholders that existed prior to the February, 1995 offering (the "Depositor Group"). In general, a member of the New Public Group is presumed not to have owned any of the Bank's Common Stock prior to the February, 1995 offering, except to the extent that the Bank had actual knowledge that such person was also a member of the Depositor Group. However, regulations provide for a "cash issuance exception" to these segregation rules which provides that if a 19 corporation with Net Unrealized Built-in Losses or a net operating loss carryforward issues stock for cash, an amount of the stock issued equal to the lesser of (i) one-half of the percentage ownership of the direct public groups before the cash issuance, or (ii) the total amount of stock issued in the transaction less the amount of issued stock owned by 5% stockholders (other than a direct public group) immediately after the issuance, are not be subject to the segregation rules. As applied to the Bank's February, 1995 stock issuance, the cash issuance exception would create a presumption that the Bank's pre-conversion owners (i.e., it depositors) purchased 50% of the Bank Common Stock issued in February, 1995. The Bank has treated the February, 1995 stock issuance as eligible for the cash issuance exception and has taken the position that no ownership change occurred as a result of such stock issuance on the basis that, immediately following such stock issuance, the Depositor Group was deemed to own 50% of the Bank Common Stock, the New Public Group owned 42% of the Bank Common Stock, and the Bank's ESOP owned 8% of the Bank Common Stock. Accordingly, the Bank experienced aggregate percentage point increases for all 5% stockholders of exactly 50 percentage points as a result of its mutual to stock conversion in February, 1995. Thus, if the Reorganization causes any further increases in stock ownership by a 5% stockholder, an ownership change will occur and the limitations on the use of net operating loss carryovers and Built-in Losses discussed above will become applicable to the Bank and the Company. The regulations under Section 382 of the Code require that the identity and ownership percentages of 5% stockholders be determined by looking up and through chains of corporate ownership. Such regulations further permit the direct public groups of the Company after the Reorganization to be treated as identical to the direct public groups of the Bank before the Reorganization, if all Bank Common Stock (including restricted shares) is exchanged for identical amounts of Company Common Stock and if no Company Common Stock is issued other than in exchange for Bank Common Stock. Accordingly, if all the stockholders of the Bank before the Reorganization own the same percentage of Company Common Stock immediately after the Reorganization that they owned of Bank Common Stock before the Reorganization, each of the Depositor Group, the New Public Group, and the Bank's ESOP will after the Reorganization be deemed to own the same percentage of Company Common Stock (and indirectly, Bank Common Stock) that it owned of Bank Common Stock before the Reorganization, and the Reorganization will not, by itself, cause an ownership change under Section 382 of the Code. Stockholders are cautioned, however, that any redemption of Bank Common Stock or Company Common Stock, including without limitation any repurchase required to be made from a stockholder who dissents from the Reorganization, would likely cause an ownership change under Section 382 of the Code. Under the segregation rules discussed above, (i) such a redemption would be treated as though made proportionately from the Depositor Group and the New Public Group; and (ii) each of the Depositor Group and the New Public Group would have to be further segregated into two smaller direct public groups, those who tendered shares in the redemption and those who did not, with each such smaller direct public group treated as separate 5% stockholders for purposes of ownership change determinations. Although there is some ambiguity regarding when such segregation would be effective, the application of the foregoing rules would likely result in an increase in the percentage ownership by the Depositor Group and the New Public Group that would be sufficient to trigger an ownership change. In addition, even though he may ultimately accept Company Common Stock in lieu of pursuing his dissent remedy, a Bank shareholder who perfected his statutory dissent rights under Chapter 156B of the General Laws of Massachusetts would have the option, upon the consummation of the Reorganization, to have his stock redeemed. Whether this option were deemed exercised (and hence whether a redemption would have occurred that would likely constitute an ownership change) is determined under Section 382(1)(3)(A) of the Code, which provides that unless regulations provide otherwise, an option to acquire stock is treated as exercised if such exercise results in an ownership change. Under the regulations, an option to acquire stock is not treated as exercised unless its issuance or transfer satisfies an ownership test, a control test, or an income test. Whether an option satisfies one or more of these tests depends on all the relevant facts and circumstances, but each of these tests requires that a principal purpose of the issuance, transfer or structuring of the option is to avoid or ameliorate the impact of an ownership change under Section 382 of the Code. In addition, the regulations provide a safe harbor that customary rights of first refusal are not treated as exercised for purposes of these ownership, control or income tests, and further provide that an analogous safe harbor is to apply in the case of put (rather than call) options. Accordingly, a dissenting stockholder's right to put his stock for fair value (in lieu of accepting Company Common Stock) should not be deemed exercised any earlier than actual exercise, 20 but there can be no assurance that the IRS would agree with such treatment, or that such treatment would be sustained if challenged. If an ownership change occurs with respect to the Bank and its subsidiaries, an annual limitation (the "Section 382 limitation") would be imposed pursuant to Section 382 of the Code on the rate at which its net operating loss carryforward (and recognized Built-In Losses to the extent of Net Unrealized Built-in Losses) could be deducted against taxable income. The Section 382 limitation is generally computed by multiplying the value of the Bank immediately before the ownership change by the then applicable long-term tax exempt rate published by the IRS for this purpose (the long-term tax exempt rate was 5.31% for the month of March, 1996, per IRS tables). For this purpose, it is unclear whether the value of the Bank would include the equity received in the February, 1995 stock offering. The limitation on the use of Built-In Losses would apply with respect to Built-In Losses recognized in any taxable year any portion of which falls within the 5-year period beginning on the date of the ownership change. Accordingly, if the Section 382 limitation were to apply to the Bank and its subsidiaries to limit the rate of utilization of such losses, it is uncertain whether the Bank and its subsidiaries would be able to fully utilize their net operating loss carryforward and Built-In Losses. Section 383 of the Code provides rules that restrict a corporation's ability to utilize tax credit carryforwards and net capital loss carryforwards after an ownership change. These rules are similar to and work in conjunction with the provisions of Section 382 of the Code, described above. As of December 31, 1995, the Bank had approximately $2.19 million of tax credit carryforwards which would become subject to the limitations of Section 383 if an ownership change occurred. State and Local Income Taxation. The Bank will after the Reorganization continue to be subject to the annual Massachusetts excise tax equal to 11.72% (reduced to 10.5% over a phase-in period through 1999) of its net income. Also, the Bank has a number of non-bank subsidiaries that will after the Reorganization continue to be subject either to the general excise tax rules applicable to ordinary business corporations in Massachusetts, or to the 1.32% excise tax on gross income applicable to Massachusetts securities corporations. The Company will after the Reorganization be subject to an annual Massachusetts excise tax equal to 10.5% of its net income, for which purpose there is no exclusion or deduction for dividends received from the Bank (except that after January 1, 1999, there would be a dividends received deduction for 95% of the dividends received from the Bank). The Company expects that for the near future it will not have dividend income from the Bank materially in excess of the Company's deductible operating expenses, and therefore that the Massachusetts excise tax on the Company's net income will be minimal. Further, if the Company's dividend income from the Bank and other gross income should in the future exceed its operating expenses, thus resulting in an increased Massachusetts excise tax on net income, then the Company will consider applying to the Massachusetts Department of Revenue for classification as a Massachusetts securities corporation. If so classified, the annual Massachusetts excise tax would be 0.33% of the Company's gross income. COMPARISON OF STOCKHOLDER RIGHTS As a result of the holding company formation, stockholders of the Bank, whose rights are presently governed by the Massachusetts banking laws, will become stockholders of the Company, a Massachusetts business corporation, and as such their rights will be governed by the Massachusetts Business Corporation Law. Certain differences in the rights of stockholders arise from this change in governing law. In addition, although the Amended and Restated Charter and the By-laws of the Bank (such Amended and Restated Charter being referred to herein as the "Charter") and the Articles of Organization, as they will be amended prior to the Effective Time to increase the Company's authorized capital stock, and the By-laws of the Company (such Articles of Organization, as so amended, being referred to herein as the "Articles") are similar in substance, there are certain differences in their respective provisions. The material differences and some of the important similarities of the rights of stockholders of the Bank and the Company are discussed below. The following discussion does not purport to be a complete statement of such similarities and differences affecting the rights of 21 stockholders of the Bank but is intended as a summary only. The Articles and By-laws of the Company, copies of which are attached as Appendix C to this Proxy Statement-Prospectus, should be reviewed carefully by each stockholder. Capital Stock Authorized and Issued Stock. The Bank has 25,000,000 shares of authorized common stock, par value $1.00 per share, of which 5,718,200 shares were issued and outstanding as of the Record Date and 556,250 shares were reserved for issuance under the Stock Option Plans and 66,800 shares were reserved for issuance under the Restricted Stock Plans. The Bank also has 5,000,000 shares of authorized but unissued preferred stock, par value $1.00 per share. The Articles of the Company provide for the same authorized capital as that of the Bank, of which no shares are currently issued and outstanding, except that the per share par value of the authorized common and preferred stock of the Company is $0.01, rather than $1.00. After the consummation of the Reorganization, the Company will have the same number of issued and outstanding shares, shares reserved for issuance under its stock option plan and restricted stock plans, and non-reserved shares available for future issuance, all subject to the exercise of dissenters' appraisal rights, as are presently so issued, reserved and otherwise available for future issuance by the Bank. See "Description of the Company Capital Stock." Issuance of Stock. Under the provisions of Massachusetts banking law, the issuance of capital stock by the Bank requires the prior approval of the Commissioner of Banks. In contrast, the Company is able to issue shares of capital stock without obtaining prior approval of the Commissioner of Banks. The issuance of capital stock by the Company, however, would be subject to registration under the Securities Act of 1933, as amended (the "Securities Act"), unless such issuance was not in connection with a public offering or was otherwise subject to an exemption from such registration requirements, whereas the capital stock of the Bank is exempt in all cases from such registration. There are no current agreements or understandings with respect to the issuance of any additional shares of the Company capital stock. Pre-emptive Rights. The stockholders of the Company, like the stockholders of the Bank, will not be entitled to pre-emptive rights with respect to any shares of capital stock which may be issued. Rights of Issuer to Repurchase Stock. Under applicable state and federal banking laws, the Bank is authorized to purchase shares of its own stock if such purchase is undertaken in accordance with certain regulatory requirements, including the prior approval of the FDIC. Under the Massachusetts Business Corporation Law, the Company will be allowed to purchase shares of its own stock in the open market or otherwise. Any purchase by the Company will be subject to applicable law, including prior notice to the Federal Reserve Board under certain circumstances. See "Regulation-Holding Company Regulation." Common Stock Dividend Rights. The stockholders of the Bank are entitled to dividends when and as declared by the Bank's Board of Directors. Under applicable Massachusetts law and FDIC regulations governing the payment of dividends by stock savings banks, such as the Bank, the board of directors is generally empowered to pay dividends out of the bank's net profits, to the extent that the board of directors considers such payment advisable, and the bank remains adequately capitalized. Massachusetts law also imposes various specific restrictions upon a bank's payment of dividends, including the requirement that on the date a dividend is declared the bank's capital and surplus must equal at least 10% of its deposit liabilities or a sufficient amount must be transferred from net profits to surplus so that the surplus account shall equal one hundred percent of the capital stock account prior to the payment of such dividend. The Bank is not subject to any regulatory agreement, order or directive that would restrict its ability to pay dividends to the fullest extent otherwise permitted by applicable law and regulation. A Massachusetts business corporation, such as the Company, may pay dividends or repurchase or redeem its shares of capital stock; however, a director who votes to authorize a dividend, repurchase or redemption which is in violation of the corporation's articles of organization or which renders the corporation insolvent may be 22 jointly and severally liable for such improper dividend, repurchase or redemption. Stockholders to whom a corporation makes any such distribution (except a distribution of stock of the corporation), if the corporation is, or is thereby rendered, insolvent, are liable to the corporation for the amount of such distribution made, or for the amount of such distribution which exceeds that which could have been made without rendering the corporation insolvent, but in either event only to the extent of the amount paid or distributed to them, respectively. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of the past year's net income, and only if prospective earnings retention is consistent with the organization's expected future needs. The policy further provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its subsidiary banks. The Federal Reserve Board also requires by regulation that a bank holding company seeking to purchase or redeem any of its equity securities must provide prior notice to the appropriate regional Federal Reserve Bank, which may disapprove of such proposed purchase or redemption, if the gross consideration for such purchase or redemption, when aggregated with the net consideration paid by the holding company for all such purchases or redemptions during the preceding twelve months, exceeds 10% of the holding company's consolidated net worth, except that such prior notice requirements do not apply to any holding company that is "well capitalized" in accordance with Federal Reserve Board regulations, has received a composite "1" or "2" rating in its most recent examination and is not subject to any unresolved regulatory issues. Principal sources of revenues for the Company will be dividends received from the Bank and other subsidiaries and interest earned on short-term investments and advances to subsidiaries. See "Market for Stock and Dividends." Any issuance of preferred stock with a preference over Company Common Stock as to dividends may affect the dividend rights of common stockholders. Voting Rights. All voting rights in the Bank are currently vested in the holders of the issued and outstanding Bank Common Stock. Each share of Bank Common Stock is entitled to one vote on all matters, without any right to cumulative voting in the election of Directors. Following the formation of the holding company structure, all voting rights in the Company will be vested in the holders of Company Common Stock and each share of Company Common Stock will be entitled to one vote on all matters, without any right to cumulative voting in the election of Directors. In each case, any issuance of preferred stock with voting rights may affect the voting rights of common stockholders. Preferred Stock Under both the Charter of the Bank and the Articles of the Company, the respective Boards of Directors of the Bank and the Company are authorized to issue preferred stock in series and to fix the voting powers, designations, preferences, or other rights of the shares of each such series and the qualifications, limitations, and restrictions thereon. The issuance of preferred stock by the Bank and by the Company is subject to the approval of a majority vote of the Board of Directors of the Bank or the Company, as the case may be. The issuance of preferred stock by the Bank is also subject to approval by the Commissioner of Banks. Preferred stock issued by the Company after the Reorganization may rank prior to the Company Common Stock as to dividend rights, or liquidation preferences, or both, may have full or limited voting rights (including multiple voting rights and voting rights as a class), and may be convertible into shares of Company Common Stock. The Company has no present plans or understandings for the issuance of any preferred stock. Directors Number and Staggered Terms. The Charter and By-laws of the Bank provide that the Board of Directors shall consist of not less than seven nor more than 25 members. The By-laws of the Company provide for the 23 number of Directors of the Company to be fixed from time to time by its Board of Directors, which number will not in any case be less than three, unless at the time there is an Interested Stockholder in which case a majority vote of the Continuing Directors is also required to fix such number. The Board of Directors of the Company will initially be composed of seven Directors. Both the Charter of the Bank and the Articles of the Company provide for three classes of Directors with one class elected each year for three year staggered terms, so that ordinarily no more than approximately one-third of the Directors will stand for election in any one year and that there will be no cumulative voting in the election of Directors. Removal. The Charter of the Bank and the Articles of the Company both provide that Directors may be removed from office, but only for cause, and then only by the affirmative vote of not less than eighty percent of the outstanding shares entitled to vote at a duly constituted meeting of stockholders. The Articles of the Company define cause to mean only the following: (i) conviction of a felony, (ii) declaration of unsound mind by order of court, (iii) gross dereliction of duty, (iv) commission of an act involving moral turpitude, or (v) commission of an action which constitutes intentional misconduct or a knowing violation of law if such action in either event results both in an improper substantial personal benefit and a material injury to the Company. The term "cause" is not defined in the Charter of the Bank. Vacancies. The By-laws of the Bank provide that any vacancy occurring on the Board of Directors caused by resignation, removal or death of a Director, may be filled by the vote of a majority of the remaining Directors unless there is an Interested Stockholder in which case the affirmative vote of a majority of the Continuing Directors then in office is required. Any vacancy caused by an increase in the size of the Bank's Board of Directors may be filled by the existing Directors. All Directors of the Bank elected to fill vacancies shall serve until the next election of Directors by the stockholders. Similarly, the By-laws of the Company provide that any vacancy occurring on the Board of Directors of the Company, including vacancies resulting from an enlargement of the Board, shall be filled solely by the affirmative vote of a majority of the remaining Directors, unless at the time there is an Interested Stockholder (as defined below), in which case the affirmative vote of a majority of the Continuing Directors (as defined below) is required. In contrast to the Bank, any Director of the Company so chosen would hold office for the remainder of the term of the class of Directors to which the Director has been elected, not just until the next annual meeting of stockholders. The Charter of the Bank also provides that a maximum of two additional Directors may be elected in any fiscal year by vote of a majority of the Directors then in office. The Articles of the Company has no such limitation on the election of additional Directors during any period by such action of the Directors then in office. The term "Interested Stockholder" is defined in both the Charter of the Bank and the Articles of the Company to mean generally any beneficial owner of more than 4.9% of the outstanding voting stock or, from and after February 7, 1998 (the third anniversary of the Bank's conversion from mutual to stock form), 10% of the outstanding stock of the Bank or the Company, as the case may be, and certain assignees of such Interested Stockholder. The term "Continuing Directors" is defined in both the Charter of the Bank and the Articles of the Company to mean generally Directors and certain successor Directors who are not affiliates of any Interested Stockholder and who were Directors prior to the time that any Interested Stockholder became an Interested Stockholder. Meetings of Stockholders The Charter of the Bank provides that a special meeting of stockholders may be called only by the President or by a majority of the total number of Directors that the Bank would have if there were no vacancies (the "Whole Board"). If at the time of such call there is an Interested Stockholder, the call of such a meeting shall also require the affirmative vote of a majority of the Continuing Directors then in office. The Company's Articles similarly provides that a special meeting of stockholders may be called only by the President, or by a majority of the Whole Board, provided that if at the time of any such call there is an Interested Stockholder, such call shall also require the affirmative vote of a majority of the Continuing Directors then in office. The Bank's Charter and the Company's Articles also provide that only those matters set forth in the call of the special meeting may be considered or acted upon at such special meeting, unless otherwise provided by law. 24 The Bank's By-laws set forth certain advance notice and informational requirements and time limitations on any Director nomination or any new business which a stockholder wishes to propose for consideration at a meeting of stockholders. Any such nomination or new business, to be timely, shall be delivered to, or mailed and received at, the principal executive offices of the Bank not less than 70 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting, provided that in the event that the date of the annual meeting is advanced by more than twenty days or delayed by more than seventy days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of the seventieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Notwithstanding the above, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Bank at least eighty days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice would be considered timely, but only with respect to nominees for any new positions created by such increase, if delivered to the Clerk of the Bank at its principal executive offices not later than the close of business on the tenth day following the day on which such public announcement was first made by the Bank. Stockholder proposals that do not satisfy these requirements may be rejected by the Board of Directors. The By-laws of the Company contain substantially the same provisions for Director nominations and new business proposals by stockholders. Stockholder Vote Required to Approve Certain Transactions Massachusetts law provides that certain agreements of merger or consolidation, or the sale, lease or exchange of all or substantially all of the property and assets, of a Massachusetts stock savings bank or corporation must be approved by the affirmative vote of holders of two-thirds of the shares of each class of stock outstanding and entitled to vote thereon or, if the charter or articles of organization so provide, the vote of a lesser proportion, but not less than a majority. Additionally, Massachusetts law provides that no vote of the stockholders of the surviving Massachusetts bank or corporation is required, unless its charter or articles of organization otherwise provide, to approve a merger if (i) the agreement of merger does not amend in any respect the bank's or the corporation's charter or articles of organization, (ii) the number of shares of the surviving bank's or corporation's stock to be issued in the merger does not exceed 15% of the shares of the same class outstanding immediately prior to the effective date of the merger and (iii) the issuance of authorized but unissued stock pursuant to a merger by vote of the directors has been authorized by the by-laws or a vote of the stockholders. A Massachusetts corporation owning at least 90% of the outstanding shares of each class of stock of another corporation may merge such corporation into itself without a vote of the stockholders. The Charter of the Bank provides that any Business Combination (as defined below) involving the Bank and an Interested Stockholder must be approved by the holders of at least 80% of the outstanding shares of the Bank's voting stock (the "Bank Voting Requirement") voting together as a single class. The Bank Voting Requirement does not apply and the affirmative vote of only a majority of the Bank's voting stock is required, if (i) the Business Combination is approved by an affirmative vote of a majority of both the Continuing Directors and the Board of Directors or (ii) certain "fair price" (defined generally to mean, among other things, that the consideration to be received by stockholders in such Business Combination shall be in the same form and kind as the consideration paid by the Interested Stockholder for the Bank's capital stock owned by such person and shall be at least equal to the highest of the following: (A) the highest per share price paid by such Interested Stockholder in acquiring any of its holdings of Bank Common Stock within the two year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or in the transaction through which such person became an Interested Stockholder; (B) the highest Fair Market Value (as defined in the Charter) per share of Bank Common Stock on any date during the one-year period prior to and including the Announcement Date; and (C) the price per share equal to (1) the Fair Market Value per share of common stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder, multiplied by (2) a fraction (x) the numerator of which is the highest per share price paid by the Interested Stockholder for any share of Bank Common Stock acquired by it within the two-year 25 period immediately prior to and including the Announcement Date and (y) the denominator of which is the Fair Market Value per share of Bank Common Stock on the first day in such two-year period on which the Interested Stockholder acquired any shares of Bank Common Stock) and other criteria are met. As defined in the Charter, a "Business Combination" includes, among other things (i) any merger or consolidation of the Bank with an Interested Stockholder or affiliate thereof, (ii) the sale, lease, exchange, mortgage, pledge, transfer or other disposition by the Bank of assets having a fair market value of $1,000,000 or more to or with an Interested Stockholder or an affiliate thereof, (iii) the purchase, exchange, lease or other acquisition by the Bank of all or substantially all the assets or business of any Interested Stockholder or affiliate thereof, (iv) the issuance or transfer by the Bank of any securities of the Bank to an Interested Stockholder or any affiliate thereof in exchange for cash, securities or other property (or a combination thereof) having a fair market value of $1,000,000 or more, (v) the adoption of a plan or proposal for the liquidation or dissolution of the Bank proposed by or on behalf of an Interested Stockholder or an affiliate thereof and (vi) any transaction that has the effect of increasing the proportionate share of any class of equity security of the Bank that is beneficially owned by an Interested Stockholder or any affiliate thereof. The Articles of the Company address business combinations involving Interested Stockholders in substantially the same manner as the Bank's Charter. The Articles further provide, however, that an affirmative vote of the holders of a majority of the voting power of the then outstanding voting stock of the Company, voting together as a single class, may authorize any (i) sale, lease or exchange of all or substantially all of its assets or (ii) consolidation or merger of the Company with or into any other corporation that would otherwise, pursuant to Chapter 156B of the Massachusetts General Laws, have required an affirmative vote of the holders of two-thirds of the voting power of the Company's then outstanding voting stock voting together as a single class, provided that, in either case, such transaction has previously been approved by a vote of a majority of the Board of Directors (and, if at the time of such action there is an Interested Stockholder, an additional vote of a majority of the Continuing Directors). This additional provision in the Articles of the Company facilitates the approval by a majority (rather than the statutory two-thirds) vote of outstanding shares of voting stock of certain business combinations that do not involve an Interested Stockholder or affiliate thereof and are approved by the Board of Directors. Provisions Relating to Exercise of Business Judgment by Board of Directors The Charter of the Bank provides that its Board of Directors, when evaluating any tender or exchange offer, merger, acquisition or similar offer of another person, shall in connection with the exercise of its judgment in determining what is in the best interests of the Bank and its stockholders, give due consideration to all relevant factors including, without limitation, the social and economic effects of acceptance of such an offer on the Bank's present and future account holders, borrowers and employees, on the communities in which the Bank operates or is located and on the ability of the Bank to fulfill its objectives under applicable statutes and regulations. The Articles of the Company contain a provision that is substantially the same. Beneficial Ownership Limitation Both the Charter of the Bank and the Articles of the Company contain a prohibition against any person directly or indirectly offering to acquire, or acquiring, beneficial ownership (as defined in the Charter and the Articles) of more than 4.9% of any class of outstanding equity securities of the Bank or the Company, as the case may be, prior to February 7, 1998 (the third anniversary of the date of consummation of the Bank's conversion from mutual to stock form), or directly or indirectly offering to acquire, or acquiring, beneficial ownership of more than 10% of any class of outstanding equity securities of the Bank or the Company at any time from and after February 7, 1998. Both the Charter of the Bank and the Articles of the Company contain an exception from this limitation for any offer to the Bank or the Company made by the underwriters acting on behalf of the Bank or the Company in connection with a public offering by the Bank or the Company of its capital stock. In addition, the Charter of the Bank provides an exception for any acquisition of shares of capital stock which has been approved by an affirmative vote of not less than two-thirds of the votes of each class of shares entitled to be cast by stockholders at a duly constituted meeting of stockholders. The Articles of the 26 Company make this exception available upon the affirmative vote of not less than two-thirds of the Board of Directors then in office (or, if there is an Interested Shareholder at the time of such vote, then also the affirmative vote of not less than two-thirds of the Continuing Directors then in office). The Charter of the Bank also contains an exception from this limitation for the formation by the Bank of a holding company. Indemnification and Limitation of Liability The By-laws of both the Bank and the Company provide for the indemnification of each director, officer, employee and agent against all expenses and liabilities reasonably incurred by or imposed on him in connection with any proceeding or threatened proceeding in which he may become involved by reason of his being or having been a director or officer, so long as such person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Bank or the Company, as the case may be. The By-laws of the Company further provide that (a) if the Company is merged into or consolidated with another corporation and the Company is not the surviving corporation, the surviving corporation shall assume the indemnification obligations of the Company under the By-laws with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring at or prior to the date of such merger or consolidation; (b) if the By-laws are invalidated on any ground by any court of competent jurisdiction, the Company shall nevertheless indemnify and advance expenses to each indemnitee as to any expenses (including reasonable attorneys' fees), judgments, fines, liabilities, losses, and amounts paid in settlement in connection with any action, suit, proceeding or investigation, whether civil, criminal or administrative, including an action by or in the right of the Company, to the fullest extent permitted by any applicable portion of the By-laws that have not been invalidated and to the fullest extent permitted by applicable law; and (c) if the Massachusetts General Laws are amended after adoption of the Company's By-laws to expand further the indemnification permitted to an indemnitee, the Company shall indemnify all such persons to the fullest extent permitted by the Massachusetts General Laws, as so amended. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to Directors, officers, or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the SEC such indemnification, in the event of any such actual liability under the Securities Act, is against public policy as expressed in the Securities Act and is therefore unenforceable. The Charter of the Bank provides that its directors shall not be personally liable to the Bank or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Bank or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for any unlawful distributions to stockholders or loans to officers or directors, or (iv) for any transaction from which the director derived an improper personal benefit. The Articles of the Company contain provisions to substantially the same effect. Amendment of Charter and Articles The Charter of the Bank and the Articles of the Company each provide that an amendment to either of the respective documents must first be approved by a majority of the Directors of the Bank or the Company then in office, respectively, and thereafter by an affirmative vote of at least eighty percent (80%) of the voting power of the then outstanding voting stock of the Bank or the Company, as the case may be (except that certain provisions may be amended by a majority vote of the stockholders). In addition, if, at any time within a sixty-day period prior to the meeting of stockholders at which such amendment is to be considered there is an Interested Stockholder, the amendment must also be approved by an affirmative vote of a majority of the Continuing Directors then in office, prior to approval by the stockholders. Amendment of By-laws The Charter of the Bank and the Articles of the Company provide that the By-laws may be adopted or amended either by the Board of Directors or the stockholders of the Bank or the Company, as the case may be. Such action by the Board of Directors shall require the affirmative vote of at least a majority of the Directors 27 then in office at a duly constituted meeting of the Board of Directors, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall also require the affirmative vote of at least a majority of the Continuing Directors then in office, at such a meeting. Such action by the stockholders of the Bank or the Company, as the case may be, shall require (i) approval by the affirmative vote of a majority of its Board of Directors then in office at a duly constituted meeting of such Board of Directors, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall also require the affirmative vote at such meeting of at least a majority of the Continuing Directors then in office, (ii) unless waived by the affirmative vote of such Board of Directors (and, if applicable, Continuing Directors) specified in the preceding sentence, the submission by the stockholders of written proposals for adopting, altering, amending, changing or repealing the By-laws that comply in all respects with the provisions of the By-laws governing such submissions and (iii) the affirmative vote of at least 80% of the votes eligible to be cast by stockholders at a duly constituted meeting of stockholders called expressly for such purpose. Legal Investments Under the laws of some jurisdictions, shares of Bank Common Stock may be legal investments for certain institutions and fiduciaries, whereas shares of Company Common Stock may not be legal investments for such investors. Anti-Takeover Provisions Chapter 110D of the Massachusetts General Laws covers "control share acquisitions" affecting corporations incorporated in Massachusetts that have at least 200 stockholders and possess certain statutory indicia reflecting additional substantial ties to Massachusetts (as would be the case with the Company). Chapter 110D limits the voting rights of shares held by persons who have acquired 20% or more of the voting power of the target corporation. Under this statute, shares acquired in a control share acquisition retain the same voting rights as all other shares of the same class or series only to the extent authorized by a vote of the majority of all shares entitled to vote for the election of directors, excluding such acquired shares. A corporation that is otherwise subject to Chapter 110D may expressly provide in its articles of organization or bylaws that the statute does not apply. Chapter 110D by its terms would apply to the Company, but not apply to the Bank. The Company has not included any "opt out" provision in either the Articles or By-laws of the Company. Chapter 110F of the Massachusetts General Laws provides that if any acquirer buys 5% or more of a target company's stock, where the target company has at least 200 stockholders and possesses certain statutory indicia reflecting substantial ties or nexus to Massachusetts, without the prior approval of the target company's board of directors, such acquirer generally may not, for a period of three years, (i) complete the acquisition of the target company through a merger, (ii) pledge or sell any assets of the target company or (iii) engage in other self-dealing transactions with the target company. The prior board of directors approval requirement does not apply if the acquirer buys at least 90% of the target company's outstanding stock in the transaction in which it crosses the 5% threshold or if the acquirer, after crossing the threshold, obtains the approval of the target company's board of directors and two-thirds of the target company's stock held by persons other than the acquirer. A corporation that would otherwise be covered by Chapter 110F may expressly provide in its articles of organization that the statute does not apply. Chapter 110F by its terms would apply to both the Bank and the Company. Neither the Charter of the Bank nor the Articles of the Company contains any such "opt out" provision. The foregoing does not purport to be a complete description of the differences between the statutory and other rights of stockholders of the Bank and the Company. Such differences can be determined more completely by reference to the Massachusetts Business Corporation Law and various applicable banking laws, the Company's Articles and By-laws and the Bank's Charter and By-laws. 28 CAPITALIZATION The following tables set forth (i) the consolidated capitalization of the Bank at December 31, 1995; (ii) the pro forma consolidated capitalization of the Bank as of December 31, 1995 after giving effect to the Reorganization (which reflects the transfer of $250,000 from the Bank's retained earnings to the Company), and (iii) the pro forma capitalization of the Company on a consolidated basis after giving effect to the Reorganization. The pro forma consolidated capitalization of the Company as of December 31, 1995 will be substantially the same (with certain differences resulting from the Company's lower par value on its capital stock) as the consolidated capitalization of the Bank as of that date. This pro forma capitalization of the Company assumes no exercise of dissenters' appraisal rights. The pro forma capitalization of the Bank, however, is changed as a result of the $250,000 proposed transfer by the Bank to the Company.
As of December 31, 1995 ---------------------------- Bank Bank (Actual (Pro Forma Consolidated) Consolidated) ------------- -------------- (Dollars in Thousands) Deposits.................................................................. $885,386 $885,386 Federal Home Loan Bank advances........................................... 41,500 41,500 Securities sold under agreements to repurchase............................ 31,101 31,101 Loans payable............................................................. 5,470 5,470 Mortgagors' escrow deposits............................................... 4,193 4,193 ------------- -------------- Total Deposits and borrowings......................................... $967,650 $967,650 Stockholder's equity: Preferred stock ($1.00 par value; 5,000,000 shares authorized; none issued and outstanding)................................................ $ - $ - Common stock ($1.00 par value; 25,000,000 shares authorized; 5,710,700 shares issued and outstanding)......................................... $ 5,710 $ 5,710 Unearned Compensation................................................... (4,937) (4,937) Additional paid-in capital.............................................. 35,887 35,887 Retained earnings....................................................... 43,083 42,833 (1) Unrealized gain (loss) on investment securities available for sale...... 1,726 1,726 ------------- -------------- Total stockholders' equity............................................ $81,469 $81,219 - ------ (1) Reflects transfer of $250,000 from the Bank's retained earnings to the Company.
29
As of December 31, 1995 ----------------------- Company (Pro Forma Consolidated) ----------------------- (Dollars in Thousands) Deposits...................................................................... $885,386 Federal Home Loan Bank advances............................................... 41,500 Securities sold under agreements to repurchase................................ 31,101 Loans payable................................................................. 5,470 Mortgagors' escrow deposits................................................... 4,193 --------- Total Deposits and borrowings............................................. $967,650 Stockholder's equity: Preferred stock ($0.01 par value; 5,000,000 shares authorized; none issued and outstanding)................................................................ $ - Common stock ($0.01 par value; 25,000,000 shares authorized; 5,710,700 shares issued and outstanding)..................................................... $ 57(2) Unearned Compensation....................................................... (4,937) Additional paid-in capital.................................................. 41,540 (2) Retained earnings........................................................... 43,083 Unrealized gain (loss) on investment securities available for sale.......... 1,726 -------- Total stockholders' equity.................................................... $ 81,469 - ------ (2) Reflect the change from $1 par value common stock of the Bank to $.01 par value common stock of the Company.
MARKET FOR STOCK AND DIVIDENDS On February 7, 1995, the Bank completed its conversion from a Massachusetts-chartered savings bank in mutual form to a Massachusetts-chartered savings bank in stock form by the sale of 5,562,500 shares of Common Stock, par value $1.00 per share, at a price of $8.00 per share. Since its issuance, Bank Common Stock has been quoted on the NASDAQ System under the symbol "SISB." Since February 8, 1995, Bank Common Stock has been traded on the NASDAQ National Market System. An application is being filed to substitute Company Common Stock for Bank Common Stock on the NASDAQ National Market System upon completion of the Reorganization under the symbol "SISB". The following table sets forth the high and low closing prices per share for the calendar quarters indicated for Bank Common Stock on the NASDAQ System based upon information provided by NASDAQ. There is no assurance that trading in Company Common Stock will be at prices similar to those at which Bank Common Stock has been traded. Bank Common Stock ------------------ High Low ------ ---- 1995 1st Quarter (from February 8, 1995)... $11 1/16 $ 9 5/8 2nd Quarter................................ $13 1/16 $10 7/8 3rd Quarter................................ $16 $12 7/8 4th Quarter................................ $17 1/8 $14 5/8 1996 1st Quarter (through March 13, 1996).. $18 3/4 $16 1/4 30 On January 30, 1996, the last full trading day prior to the execution of the Plan of Reorganization, the closing sale price of Bank Common Stock was $173/4 On March 13, 1996, the closing sale price of Bank Common Stock was $167/8. As of the Record Date, the Bank had approximately 1,213 stockholders of record who held 5,718,200 outstanding shares of Bank Common Stock. This does not reflect the number or persons or entities who held their Bank Common Stock in nominee or "street" name through various brokerage firms. To date, the Bank has not paid any dividends on the Bank Common Stock. While the Bank does not anticipate paying any cash dividends on the Bank Common Stock in the near future, the Board of Directors will be periodically reviewing whether any cash dividend should be paid. DESCRIPTION OF COMPANY CAPITAL STOCK General Under the Articles of the Company, the Company is authorized to issue up to 25,000,000 shares of common stock, par value $0.01 per share, and up to 5,000,000 shares of preferred stock, par value $0.01 per share. No shares of Company Common Stock are currently issued and outstanding. Pursuant to the Plan of Reorganization, the Company is deemed to have agreed to reserve 623,050 shares of Company Common Stock in the aggregate for future issuance under the Stock Option Plans and the Restricted Stock Plans, subject to any future amendments to the Stock Option Plans and/or the Restricted Stock Plans that may increase the number of shares of Company Common Stock that may be issued under said plans. The Plan of Reorganization provides that upon consummation of the Reorganization, the Stock Option Plans and the Restricted Stock Plans will become the director and employee stock option plans and the director and management restricted stock plans of the Company, and as a result thereof the Company shall assume all of the Bank's obligations under the Stock Option Plans and the Restricted Stock Plans in accordance with the terms thereof. See "Comparison of Stockholder Rights" for a discussion of the rights of holders of Company Common Stock as compared to the rights of holders of Bank Common Stock. Common Stock Voting Rights. Stockholders are entitled to one vote per share on any matters subject to stockholder approval, including the election of Directors. The Articles of the Company do not provide for cumulative voting in connection with the election of Directors, and therefore holders of a majority of the Company Common Stock will be able to elect all of the Directors standing for election in each year, subject to the rights of the holders of shares of preferred stock, if and when issued. The By-laws of the Company provide, subject to the rights of the holders of shares of preferred stock, if and when issued, that the number of Directors shall be fixed by the Board of Directors, which number shall not in any case be less than three, unless at the time there is an Interested Stockholder, in which case a majority vote of the Continuing Directors then in office is also required to fix such number of Directors. The terms "Interested Stockholder" and "Continuing Directors" are defined in the Articles. Each Director will serve for a term of three years, with approximately one-third of the Directors being elected annually on a staggered basis. Pre-emptive Rights. Holders of Company Common Stock have no pre-emptive rights as to the purchase of any shares issued in the future. Therefore, the Board of Directors may sell shares of capital stock without first offering them to the then stockholders of the Company. Assessability. Under Massachusetts law, Company Common Stock is non-assessable. Preferred Stock The Board of Directors of the Company is authorized to issue shares of preferred stock in series and to fix the voting powers, designations, preferences, or other special rights of the shares of each such series and the 31 qualifications, limitations, and restrictions thereon. Such preferred stock issued by the Company after the Reorganization may rank prior to Company Common Stock as to dividend rights, liquidation preferences, or both, may have full or limited voting rights, and may be convertible into shares of Company Common Stock. Transfer Agent and Registrar The transfer agent and registrar for Company Common Stock shall be Chemical Bank. Changes in Control Articles and By-Laws. A number of provisions of the Company's Articles and By-laws deal with matters of corporate governance and the rights of stockholders. Certain provisions of the Articles and By-laws of the Company relating to stock ownership and transfer, the Board of Directors and business combinations may be deemed to have an "anti-takeover" effect, and may discourage takeover attempts not first approved by the Directors (including takeovers which certain stockholders might deem to be in their interests). These provisions, like the comparable provisions in the Charter of the Bank, affect stockholder rights and should be given careful attention. Although the Board of Directors of the Company is not aware of any effort that might be made to gain control of the Company after the Reorganization, the Board of Directors believes that these provisions are appropriate to protect the interests of the Company and its stockholders from hostile takeovers that the Board of Directors believes would not be in the best interests of the Company and all of its stockholders. A general summary of certain of these provisions can be found under the heading "Comparison of Stockholder Rights." That description is necessarily general and reference should be made in each case to the Articles and By-laws of the Company, copies of which are attached to this Proxy Statement-Prospectus as Appendix C. Massachusetts Law: Chapters 110D and 110F of the Massachusetts General Laws, which are summarized above under the caption "Comparison of Stockholder Rights-Anti-takeover Provisions", provide certain statutory limitations, in addition to those contained in the Company's Articles and By-laws, on offers to acquire and acquisitions of certain threshold percentages of the outstanding voting stock of the Company under circumstances in which such transactions have not been previously approved by the Company's Board of Directors. Federal Law. The Change in Bank Control Act, as amended, and regulations adopted thereunder by the Federal Reserve Board generally requires persons who at any time intend to acquire control, directly or indirectly, of the Company to give 60 days' prior written notice to the Federal Reserve Board. "Control" for the purpose of the Change in Bank Control Act and related Federal Reserve Board regulations exists in situations in which the acquiring party has voting control of at least 25% of any class of the Company's voting stock, control in any manner over the election of a majority of the Company's directors or the power to direct the management or policies of the Company. "Control" is presumed to exist where the acquiring party will acquire voting control of 10% or more of any class of the Company's voting stock if (i) the class of voting securities is registered under Section 12 of the Exchange Act or (ii) no other person will own a greater percentage of that voting stock immediately after the transaction. The Company Common Stock will be registered under Section 12 of the Exchange Act following the Reorganization. The Change in Bank Control Act and underlying regulations authorize the Federal Reserve Board to disapprove a proposed acquisition of control on certain specified grounds. Acquisitions of control of the Company that would be subject to the prior approval of the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended (the "BHCA"), which are described in the following paragraph, are not also subject to the prior notice requirements of the Change in Bank Control Act. The BHCA and regulations adopted thereunder require prior Federal Reserve Board approval before any Company or other entity may acquire control of the Company. "Control" for this purpose involves ownership, control or possession of power to vote or proxies with respect to 25% or more of any class of the voting stock of the Company, control in any manner of the election of a majority of the directors of the Company or a determination by the Federal Reserve Board, after a hearing, that the person or entity exercises a controlling influence over the management or policies of the Company. In the latter instance, the Federal Reserve Board 32 presumes that acquisition of 5% or more of the voting stock of a bank holding company constitutes acquisition of control, absent other considerations, and therefore is likely to require prior Federal Reserve Board approval. The Exchange Act requires that a purchaser of any class of the Company's securities registered under the Exchange Act notify the SEC and the Company within ten days after its purchases exceed 5% of the outstanding shares of the security. This statement must disclose the background and identity of the purchaser, the source and amount of funds for the purchase, the number of shares owned and, if the purpose of the transaction is to acquire control of the Company, any plans to materially alter the Company's business or corporate structure. In addition, any tender offer to acquire Company Common Stock is subject to the limitations and disclosure requirements of the Exchange Act. For further information on certain of these matters, see "Regulation" and "Proposal One-Formation of Holding Company-Comparison of Stockholder Rights." BUSINESS OF THE COMPANY General The Company is a business corporation organized under the laws of The Commonwealth of Massachusetts on January 18, 1996. The only office of the Company, and its principal place of business, is located at the main office of the Bank at 1441 Main Street, Springfield, Massachusetts 01102 and its telephone number is (413) 748-8000. The Company was organized for the sole purpose of becoming the holding company of the Bank. Upon completion of the holding company formation, the Bank will be a wholly-owned subsidiary of the Company, which will thereby become a bank holding company under federal law. Each stockholder of the Bank, upon completion of the holding company formation, will become a stockholder of the Company without change in the number of shares owned or in respective ownership percentages, subject to dissenters' appraisal rights. The Company has not yet undertaken any business activities and there are no operating business activities currently proposed for the Company. In the future, following the consummation of the Reorganization, the Company may become an operating company or acquire commercial banks or thrift institutions or companies engaged in bank-related activities. There are no current agreements or understandings with respect to any acquisition and no assurance can be given that any such acquisitions will occur. Upon formation of the holding company, the Company will own all of the outstanding Bank Common Stock and will have received a transfer of approximately $250,000 in funds from the Bank. Pending use of these funds for other corporate purposes, the Company intends to invest these funds in U.S. government securities or other short-term investments permitted by law. See "Proposal One-Formation of Holding Company-Financial Resources of the Company." The Company may enter into a management agreement for the purpose of rendering certain services to the Bank after completion of the holding company formation. No proposal and no terms of any agreement, however, have been considered. Property Initially, the Company will neither own nor lease any real or personal property. Instead, the Company intends to utilize the premises, equipment and furniture of the Bank without the direct payment of any rental fees to the Bank. Competition It is expected that for the near future the primary business of the Company will be the ongoing business of the Bank. Therefore, the competitive conditions to be faced by the Company will be the same as those faced by 33 the Bank. In addition, many banks and financial institutions have formed holding companies or may form holding companies in the future. It is likely that these holding companies will attempt to acquire commercial banks, thrift institutions or companies engaged in bank-related activities. The Company, therefore, will face competition in undertaking any such acquisitions and in operating subsequent to any such acquisitions. Employees At the present time, the Company does not intend to employ any persons other than its management. See "Management of the Company." It will utilize the support staff of the Bank from time to time without the payment of any fees, except to the extent as may be required by applicable law. If the Company acquires other financial institutions or pursues other lines of business, it may at such time hire additional employees. REGULATION Holding Company Regulation General. Upon consummation of the Reorganization, the Company, as the sole shareholder of the Bank, will become a bank holding company and will register as such with the Federal Reserve Board. Bank holding companies are subject to comprehensive regulation by the Federal Reserve Board under the BHCA and the regulations of the Federal Reserve Board. As a bank holding company, the Company will be required to file with the Federal Reserve Board annual reports and such additional information as the Federal Reserve Board may require and will be subject to regular examinations by the Federal Reserve Board. The Federal Reserve Board also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. Under the BHCA, a bank holding company must obtain Federal Reserve Board approval before: (1) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company. The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the Federal Reserve Board includes, among other things, operating a savings institution, mortgage company, finance company, credit card company or factoring company, performing certain data processing operations, providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers' checks and United States Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers. The Holding Company has no present plans to engage in any of these activities. Dividends. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board's view that a bank holding company should pay cash dividends only to the extent that the company's net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the company's capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate 34 for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve Board pursuant to FDICIA, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company's bank subsidiary is classified as "undercapitalized." Bank holding companies are required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration of the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of their consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption of it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve Board order, or any condition imposed by, or written agreement with, the Federal Reserve Board. This prior notice requirement does not apply to bank holding companies that are "well capitalized" in accordance with applicable Federal Reserve Board regulations, have received a "1" or "2" rating in their most recent examination and that have no unresolved regulatory issues. Capital Requirements. The Federal Reserve Board has established capital requirements for bank holding companies that generally parallel the capital requirements applicable to state non-member banks, such as the Bank, under regulations promulgated by the FDIC. If the Federal Reserve Board's capital guidelines were applied to the Company, assuming the consummation of the Reorganization, the Company's levels of consolidated regulatory capital on a pro forma basis as of December 31, 1995 would exceed the Federal Reserve Board's minimum requirements, as follows: Amount Percent (1) ------- ----------- (Dollars in Thousands) Tier 1 Leverage Capital........................ $79,197 7.57% Minimum Tier 1 (leverage) requirement.......... $52,301 5.00% Excess......................................... $26,896 2.57% Tier 1 Risk-based Capital...................... $79,197 12.52% Minimum Tier 1 (risk-based) requirement........ $37,941 6.00% Excess......................................... $41,256 6.52% Total Risk-based capital....................... $87,045 13.77% Minimum total risk-based capital requirement... $63,235 10.00% Excess......................................... $23,810 3.77% - ------ (1) The "minimum" capital ratios shown are those required for an institution to qualify as "well capitalized". The Company would be deemed to be "well capitalized" under applicable Federal Reserve Board regulations on the basis of the capital measures set forth above. Other Regulatory Considerations Banks, thrifts and bank holding companies are subject to extensive government regulation through Federal and state statutes and regulations which are subject to changes that may have significant impact on the way in which such entities may conduct business. The likelihood and potential effects of any such changes cannot be predicted. Legislation enacted in recent years has substantially increased the level of competition among commercial banks, thrift institutions and nonbanking institutions, including insurance companies, brokerage firms, mutual funds, investment banks and major retailers. In addition, the enactment of recent banking legislation such as FDICIA and the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") have affected the banking industry by, among other things, broadening the regulatory powers of the federal banking agencies in a number of areas and enabling banks and bank holding companies to expand the geographic area in which they may provide banking services. The following summary is qualified in its entirety by the text of the relevant statutes and regulations. 35 Interstate Banking Legislation. On September 29, 1994 the Interstate Act became law. Under the new law, different types of interstate transactions and activities will be permitted, each with different effective dates. Interstate transactions and activities provided for under the new law include: (i) bank holding company acquisitions of separately held banks in a state other than a bank holding company's home state; (ii) mergers between insured banks with different home states, including consolidations of affiliated insured banks; (iii) establishment of interstate branches either de novo or by branch acquisition; and (iv) affiliated banks acting as agents for one another for certain banking functions without regard to state law prohibitions on interstate branching or unauthorized banking. In general, nationwide interstate bank acquisitions became permissible one year after the date of enactment, irrespective of state law limitations. Interstate mergers will be permissible on July 1, 1997, unless a state either passes legislation either to prevent or to permit the earlier occurrence of interstate mergers. States may at any time enact legislation permitting interstate de novo branching. Banks may act as agents for affiliated depository institutions beginning within one year after enactment. Each of the transactions and activities must be approved by the appropriate federal bank regulator, with separate and specific criteria established for each category. Once the applicable effective date has occurred (and, in the case of interstate mergers and de novo branching, subject to applicable state law "opt-out" or "opt-in" provisions), the appropriate federal bank regulator may approve the respective interstate transactions only if certain criteria are met. First, in order for a banking institution (a bank or bank holding company) to receive approval for an interstate transaction, it must be "adequately capitalized" and "adequately managed." The phrase "adequately capitalized" is generally defined as meeting or exceeding all applicable federal regulatory capital standards, while the phrase "adequately managed" is left undefined. Second, the appropriate federal bank regulator must consider the applicant's and its affiliated institutions' records under the CRA, as well as the applicant's record under applicable state community reinvestment laws. The new law applies deposit "concentration limits" to interstate acquisition and merger transactions. Specifically, a banking institution may not receive federal approval for interstate expansion if it and its affiliates would control (i) more than 10% of the deposits held by all insured depository institutions in the United States, or (ii) 30% or more of the deposits of all insured depository institutions in any state in which the banks or branches involved in the transactions (or any affiliated depository institution) overlap. States may, by statute, regulation or order, raise or lower the 30% limit. In addition, the new law preempts certain existing state law restrictions on interstate banking (such as regional compacts and reciprocity requirements), effective one year after enactment. However, in order to receive federal approval for an interstate merger or de novo branching transaction, an applicant still also must comply with any non-discriminatory host state filing and other requirements. FDICIA FDICIA, which was enacted on December 19, 1991, provides for, among other things, increased funding for the Bank Insurance Fund ("BIF") of the FDIC and expanded regulation of depository institutions and their affiliates, including parent holding companies. A summary of certain provisions of FDICIA and its implementing regulations is provided below. Risk Based Deposit Insurance Assessments. A significant portion of the additional funding to the BIF is in the form of borrowings to be repaid by insurance premiums assessed on BIF members. FDICIA also provides authority for special assessments against insured deposits and for the development of a general risk-based assessment system. As of January 1, 1996, the FDIC has set assessment rates for BIF-insured institutions ranging from 0.00% to 0.27% of deposits (subject to payment by each institution of an annual statutory minimum amount of $2,000), based on a risk assessment of the institution. 36 Each financial institution is assigned to one of three capital groups-"well capitalized", "adequately capitalized" or "undercapitalized"-and further assigned to one of three subgroups within each capital group, on the basis of supervisory evaluations, the institution's financial condition and the risk posed to the applicable insurance fund. A well capitalized institution is one that has a total risk-based capital ratio of 10% or more, a Tier 1 risk-based capital ratio of 6% or more, and a leverage ratio of 5% or more. An adequately capitalized institution has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more, and a leverage ratio of 4% or more, but does not qualify as a well-capitalized institution. An undercapitalized institution is one that does not meet either of the foregoing definitions. The actual assessment rate applicable to a particular institution, therefore, depends in part upon the risk assessment classification so assigned to the institution by the FDIC. As of December 31, 1995, the Bank was classified as "well capitalized" under these provisions. Prompt Corrective Actions. FDICIA also provides the federal banking agencies with broad powers to take prompt corrective action to resolve problems of insured depository institutions, depending upon a particular institution's level of capital. FDICIA establishes five tiers of capital measurement for regulatory purposes ranging from "well capitalized" to "critically undercapitalized." Under prompt corrective action regulations adopted by the federal banking agencies in December 1992, a depository institution is (a) "well capitalized" if it has a total risk-based capital ratio of 10% or more, a Tier 1 risk-based capital ratio of 6% or more, a leverage ratio of 5% or more and is not subject to any written agreement, order or capital directive or prompt corrective action directive issued by the primary regulator to meet and maintain a specific capital measure; (b) "adequately capitalized" if it is not well capitalized and has a total risk-based capital ratio of 8% or more, a Tier 1 risk-based capital ratio of 4% or more and a leverage ratio of 4% or more (3% or more if the bank is rated composite 1 under the CAMEL rating system in its most recent examination and is not experiencing or anticipating significant growth); (c) "undercapitalized" if it has a total risk-based capital ratio that is less than 8%, a Tier 1 risk-based capital ratio that is less than 4% or a leverage ratio that is less than 4% (less than 3% if the bank is rated composite 1 under the CAMEL rating system in its most recent examination and is not experiencing or anticipating significant growth); (d) "significantly undercapitalized" if the bank has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a leverage ratio that is less than 3%; and (e) "critically undercapitalized" if the depository institution has a ratio of tangible equity to total assets that is equal to or less than 2%. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position under certain circumstances. At December 31, 1995, the Bank had capital ratios sufficient to be characterized as "well capitalized" under the prompt corrective action regulations. Undercapitalized and significantly undercapitalized depository institutions must submit capital restoration plans to their federal regulator and may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. In addition, significantly undercapitalized depository institutions also are prohibited from awarding bonuses or increasing compensation of senior executive officers until approval of a capital restoration plan. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator. Brokered Deposits and Pass-Through Deposit Insurance Limitations. FDICIA also imposed limits on depository institutions, except well capitalized depository institutions, accepting, renewing or rolling over brokered deposits. A depository institution that is adequately capitalized may not accept, renew or roll over any brokered deposit unless it obtains a waiver of FDICIA's limitations from the FDIC. Even if an adequately capitalized institution receives such a waiver, it may offer yields on brokered deposits only within specified limits. An undercapitalized depository institution may not accept brokered deposits. The definitions of "well capitalized", "adequately capitalized" and "undercapitalized" generally conform to the definitions described above for prompt corrective action. 37 In addition, "pass-through" insurance coverage may not be available for certain employee benefit accounts and eligible deferred compensation plans maintained by depository institutions that cannot accept brokered deposits. Safety and Soundness Guidelines. FDICIA also required the federal banking agencies to develop regulations for all insured depository institutions and depository institutions holding companies prescribing standards relating to internal controls, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, and such other operational and managerial standards as the banking agencies deem appropriate. The Community Development and Regulatory Improvement Act of 1994 amended FDICIA by allowing the federal banking agencies to publish guidelines rather than regulations concerning safety and soundness. In August, 1995, the federal banking agencies issued guidelines establishing standards for safety and soundness. These interagency guidelines relate to the management policies of financial institutions and are designed to implement the safety and soundness criteria outlined in FDICIA. If the relevant federal banking agency determines that an institution fails to meet any standard established by such guidelines, such agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to submit an acceptable plan within the time allowed by the relevant agency or fails to implement an accepted plan, the agency must require the institution to correct the deficiency and, until the deficiency has been corrected, the agency may, and in some cases must, take other supervisory actions. Action taken by a federal banking agency under these guidelines may be taken independently of, in conjunction with, or in addition to any other enforcement action available to such agency. At this time, management does not believe that the safety and soundness guidelines will have any material effect on the current practices of the Bank. FDICIA also contains a variety of other provisions that may affect the Bank's respective operations, including reporting requirements, regulatory guidelines for real estate lending, "truth in savings" provisions, and the requirements that a depository institution give 90 days' prior notice to customers and regulatory authorities before closing any branch. Certain of the provisions in FDICIA have recently been or will be implemented through the adoption of regulations by the various federal banking agencies and, therefore, their precise impact cannot be addressed at this time. The federal banking agencies continue to indicate their desire to raise capital requirements applicable to banking organizations, and have amended their risk-based capital regulations to provide for the consideration of, concentration of credit rate risk and non-traditional banking activities in the determination of a bank's minimum capital requirements. The amendments are intended to require that banks effectively measure and monitor these credit risks and that they maintain capital adequate for that risk. The federal bank regulators intend to consider these risks when assessing a bank's capital adequacy, and the new regulations may require banks to maintain additional capital beyond that otherwise required. Failure to meet the minimum regulatory capital requirements could subject a banking institution to a variety of enforcement remedies available for federal regulatory authorities, including the termination of deposit insurance by the FDIC and seizure of the institution. CRA Regulations The federal bank regulatory agencies have jointly issued amendments to the regulations implementing the CRA that substantially revises the current CRA framework effective July 1, 1995. They rely more than the previous CRA regulations upon objective criteria of the performance of institutions under three key assessment tests: a lending test, a service test and an investment test. At this time it is not known what effect this amendment to the CRA regulations will have upon the current practices of the Bank. Federal Securities Laws Following consummation of the Reorganization, the Company will register the shares of Company Common Stock to be issued in the Reorganization under the Exchange Act. Accordingly, the Company will be required to file periodic and other reports with the SEC, and will be subject to the insider trading, proxy solicitation and other requirements of the SEC under the Exchange Act on the same basis as the Bank is currently subject through 38 regulation by the FDIC. Following consummation of the Reorganization, the Bank Common Stock will no longer be registered under the Exchange Act and, as a consequence, the Bank will no longer be required to comply with the reporting and proxy requirements of the Exchange Act. Shares of the Company Common Stock received in the Reorganization by persons who are not affiliates of the Bank or the Company may be resold without registration or other limitation under the Securities Act. Shares received by affiliates of the Bank may be resold only if registered or if they qualify for an exemption from registration under the Securities Act. The possible exemptions include those provided in Rules 144 and 145 under the Securities Act. The conditions imposed by the exemption under Rule 145 are substantially the same as the conditions imposed by Rule 144 discussed below, other than the holding period requirement, which is not required under Rule 145. The Rule 145 conditions cease to be applicable after two years, but resales by any affiliate of the Bank who remains an affiliate of the Company will continue to require an exemption from registration such as Rule 144. In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated) who has beneficially owned shares of Company Common Stock that constitute restricted securities and have been outstanding and not held by any "affiliate" of the Company for a period of two years is entitled to sell within any three-month period a number of shares that does not exceed the greater of one percent of the then outstanding shares of Company Common Stock or the average weekly reported trading volume of the Company Common Stock during the four calendar weeks preceding the date on which notice of such sale is given, provided certain requirements as to the manner of sale, notice of sale and the availability of current public information are satisfied (which requirements as to the availability of current public information are expected to be satisfied commencing within 90 days after the consummation of the Reorganization). Affiliates of the Company must comply with the foregoing restrictions and requirements of Rule 144 as to both restricted and non-restricted securities, except that the two-year holding period requirement generally does not apply to shares of the Company Common Stock that are not "restricted securities". Under Rule 144(k), a person who is not deemed an "affiliate" of the Company at any time during the three months preceding a sale by such person, and who has beneficially owned shares of Company Common Stock that were not acquired from the Company or an "affiliate" of the Company within the previous three years, would be entitled to sell such shares without regard to volume limitation, manner of sales provisions, notification requirements or the availability of current public information concerning the Company. As defined in Rule 144, an "affiliate" of an issuer is a person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such issuer. MANAGEMENT OF THE COMPANY Directors The initial Directors of the Company consist of 7 persons, 5 of whom currently serve as Directors of the Bank. The Directors of the Company are divided into three classes, as nearly equal in number as possible, with one class elected each year at the annual meeting of stockholders. The Directors in each class serve for a term of three years and until their successors are duly elected and qualified. As the term of one class expires, a successor class is elected at each annual meeting of stockholders to serve until the next annual meeting. The names of the initial Directors of the Company and their terms are set forth below (See also "Management of the Bank"): Term of Office Names Expires - -------------------------------- -------------- Class I: John M. Naughton 1997 Sister Mary Caritas (Geary) S.P. 1997 Class II: Charles L. Johnson 1998 F. William Marshall, Jr. 1998 Class III: William B. Hart, Jr. 1999 Thomas O'Brien 1999 Stephen A. Shatz 1999 39 Committees The By-laws of the Company provide that the Company's Board of Directors may establish various committees from time to time. It is anticipated that the initial committees of the Company's Board of Directors will be an executive committee and an audit committee. The Company's Board of Directors has not yet determined the size or composition of these committees. Executive Officers The initial officers of the Company are: F. William Marshall, Jr., President and Chief Executive Officer; John F. Treanor, Treasurer and Chief Financial Officer; and Michael E. Tucker, Clerk and General Counsel. All of these persons hold similar positions with the Bank. Information concerning their principal occupations and business experience during the past five years and other biographical data is set forth under "Management of the Bank-Executive Officers." Compensation It is expected that until the Company becomes actively involved in the acquisition of additional banks or other businesses, no separate compensation will be paid to the officers of the Company. However, the Company may determine that such compensation is appropriate in the future. It is expected that each of the Company's Directors will be paid $400 for each meeting of the full Board and of any committee on which the Director serves attended by such Director. See "Management of the Bank-Compensation." Employee Benefit Plans Upon completion of the Reorganization, the Stock Option Plans and the Restricted Stock Plans will become the director and employee stock option plans and the directors and management restricted stock plans of the Company with officers and other employees of the Bank and the Company eligible to participate according to the terms of such plans. As the officers and Directors of the Company will not initially be compensated by the Company but will continue to serve and be compensated by the Bank, no separate holding company benefit plans are anticipated at this time. The Bank intends to continue to maintain its other benefit programs. PROPOSAL TWO-ELECTION OF CLASS OF DIRECTORS The Bank's Amended and Restated By-Laws provide that the number of Directors shall be set by a majority vote of the entire Board of Directors, which has been set at 13. Under the Bank's Charter and By-Laws, this number shall be divided into three classes, as nearly equal in number as possible, with the Directors in each class serving a term of three years and until their respective successors are duly elected and qualified, or until his or her earlier resignation, death or removal. As the term of one class expires, a successor class is elected at the annual meeting of stockholders for that year. At the 1996 Annual Meeting, there are five Directors to be elected to serve until the 1999 Annual Meeting and until their respective successors are duly elected and qualified, or until his or her earlier resignation, death or removal. The Board of Directors of the Bank has nominated each of William B. Hart, Jr., Thomas O'Brien, Teresita Alicea, Paulette Henderson-Johnson and John H. Southworth, for election as a Director for a three-year term. Teresita Alicea, Paulette Henderson-Johnson and John H. Southworth are currently Directors of the Bank; their terms expire in 1996. For information with respect to the nominees and the other Directors of the Bank whose terms do not expire in 1996, including their business experience, compensation paid by the Bank, and participation on committees of the Board of Directors, see "Management of the Bank." Unless authority to do so has been withheld or limited in the proxy, it is the intention of the persons named in the proxy to vote the shares represented by each properly executed proxy for the election as a Director each of the nominees named above. The Board of Directors believes that all of the nominees will stand for election and will serve if elected as Director. However, if any person nominated by the Board of Directors fails to stand for election or is unable or refuses to accept election, the proxies will be voted for the election of such other person or persons as the Board of Directors may recommend. 40 If the Reorganization is consummated, the Bank will become a wholly-owned subsidiary of the Company and thereafter, so long as the Company remains the sole stockholder of the Bank, the Directors of the Bank will be elected by the Company. Stockholders of the Bank, who will become stockholders of the Company upon the consummation of the Reorganization, will in the future elect the Directors of the Company. If, however, the Reorganization is not consummated, the Directors of the Bank will continue to be elected by the stockholders of the Bank. Recommendation of Directors THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE ELECTION OF THE FIVE NOMINEES PROPOSED BY THE BOARD OF DIRECTORS OF THE BANK AS DIRECTORS OF THE BANK. MANAGEMENT OF THE BANK Directors and Nominees Formation of the holding company will not change the Directors of the Bank. The Directors of the Bank are divided into three classes, as nearly equal in number as possible, with one class elected each year at the annual meeting of stockholders. The Directors in each class serve for a term of three years and until their successors are duly elected and qualified. As the term of one class expires, a successor class is elected at each annual meeting of stockholders to serve until the next annual meeting. The following table sets forth certain information as of January 31, 1996 for each of the five nominees for election as Directors at the Annual Meeting and for those continuing Directors whose terms expire at the annual meetings of the Bank's stockholders in 1997 and 1998. Each individual has been engaged in his or her principal occupation for at least five years, except as otherwise indicated. Nominees (Term to Expire in 1999) Director or Trustee Name, Age and Principal Occupation Since (1) - ------------------------------------------ ----------- William B. Hart, Jr. (52)............................... N/A President, The Dunfey Group, an investment management firm Thomas O'Brien (56)..................................... N/A Dean, University of Massachusetts School of Management Teresita Alicea (50)................................... 1993 Attorney, Partner in Alicea & Nagel Paulette Henderson-Johnson (44)........................ 1993 Director, Henderson Funeral Home, Inc. John H. Southworth (68)................................. 1974 Chairman of the Board, Southworth Company, a manufacturer of business and personal paper goods 41 Continuing Directors (Term to Expire in 1997) Director or Trustee Name, Age and Principal Occupation Since (1) - ---------------------------------------------- ------------------- Mary E. Boland (56)........................... 1973 Attorney, Partner in Egan, Flanagan & Cohen(2) Sister Mary Caritas (Geary) (72).............. 1980 Retired; former President and Chief Executive Officer of Mercy Hospital Donald F. Collins (67)........................ 1973 Treasurer, Collins Electric Company(2) John M. Naughton (59)......................... 1991 Chairman of the Board of Springfield Institution for Savings, Executive Vice President, Massachusetts Mutual Life Insurance Co. Continuing Directors (Term to Expire in 1998) Director or Trustee Name, Age and Principal Occupation Since (1) - ----------------------------------------------------- ------------------- Charles L. Johnson (57).............................. 1983 Self-employed Chartered Financial Consultant(2) F. William Marshall, Jr. (53)........................ 1993 President and Chief Executive Officer, Springfield Institution for Savings(4) Gary P. Shannon (47)................................. 1988 Attorney, Partner in Doherty, Wallace, Pillsbury and Murphy, P.C. Stephen A. Shatz (53)................................ 1986 Attorney, Partner in Shatz, Schwartz & Fentin, P.C. - ------ (1) Each of the present Directors of the Bank listed above with service prior to 1995 was also a Trustee of the Bank before the Bank converted from mutual to stock form of organization in February 1995 (the "Conversion"). As a result of the Conversion, each individual became a Director in February 1995, and any date prior to this time indicates service as a Trustee of the Bank. (2) Mrs. Boland and Mr. Collins are first cousins. (3) Prior to June, 1995, Mr. Johnson was the Associate Treasurer of Smith College, Northampton, Massachusetts (4) Prior to joining the Bank in 1993, Mr. Marshall served as Chairman and Chief Executive Officer of the Bank of Ireland First Holdings, Inc. and First NH Bank. Prior to 1991, Mr. Marshall served as Executive Vice President of Shawmut National Corporation. Meetings of Board of Directors and Committees Since February 1995, the Bank has been a savings bank in stock form and had been governed by a Board of Directors consisting of 15 individuals. In March 1995, the Board voted to reduce its size to 13 members at the 1995 Annual Meeting. In connection with the Conversion, the Bank consolidated and streamlined the committees of its Board of Directors in a manner in which it believes will enable the Directors to most efficiently oversee 42 the operations of the Bank. Each of the committees of the Board of Directors of the Bank which are in effect as of the date of this Proxy Statement-Prospectus is described below. There were 12 meetings of the Board of Directors held during the year ended December 31, 1995. No Director attended fewer than 75% in the aggregate of such total number of Board of Director meetings held during such year and the total number of meetings held by each of the committees of the Board of Directors on which he or she served during that time. Executive Committee. The Executive Committee of the Board of Directors in 1995 consisted of the following six Directors: F. William Marshall, Jr. (Chairperson); John M. Naughton; Sister Mary Caritas, S.P.; Harry J. Courniotes; Stephen A. Shatz; and John H. Southworth. This committee meets approximately twice per month to review large loan proposals, the investment portfolio, and any off-balance sheet exposures of the Bank, and to generally exercise control and supervision in all matters pertaining to the interests of the Bank, subject at all times to the direction of the Board of Directors. This committee met 22 times in 1995. Audit Committee. The Audit Committee of the Board of Directors in 1995 consisted of the following five directors: Sister Mary Caritas, S.P. (Chairperson); Teresita Alicea; Harry J. Courniotes; Charles L. Johnson; and Gary P. Shannon. This committee meets at least quarterly to review and audit functions in asset quality, corporate controls, corporate governance, and financial reporting controls. This committee met 5 times in 1995. Compensation Committee. The Compensation Committee of the Board of Directors in 1995 consisted of the following four outside directors: John H. Southworth (Chairperson); Donald F. Collins; John M. Naughton; and Albert E. Steiger, Jr. The Compensation Committee meets on at least a semi-annual basis to exercise a broad oversight of human resource strategies, to examine and analyze the competitiveness of compensation programs, including short and long-term incentive programs such as the stock option allocations and restricted stock grants. This committee met 5 times in 1995. CRA/Fair Lending Committee. The CRA/Fair Lending Committee of the Board of Directors in 1995 consisted of the following four outside directors: Mary E. Boland (Chairperson); Donald F. Collins; Paulette Henderson-Johnson; and Charles L. Johnson. This committee meets at least 3 times per year to review the Bank's performance in ascertaining community needs, evaluate CRA performance, and generally assist the Bank in meeting its obligations under the Community Reinvestment Act. This committee met 4 times in 1995. Nominating Committee. The Nominating Committee of the Board of Directors in 1995 consisted of the following four outside directors: Gary P. Shannon (Chairperson); Mary E. Boland; Paulette Henderson-Johnson; John M. Naughton; and Stephen A. Shatz. This committee meets at least semi-annually to identify, with the approval of the full Board of Directors, candidates for Directors to be elected at each annual meeting of stockholders and also to consider stockholder proposals for such nominations, and to identify directors for various Board committee assignments. For information regarding procedures for submitting stockholder proposals, see "Stockholder Proposals." This committee met 3 times in 1995. 43 Principal Officers of the Bank The following table sets forth certain information regarding the principal officers of the Bank (those officers subject to Section 16 reporting requirements under the Exchange Act):
Office held Name Age Position and office with the Bank since - ------------------------------ --- --------------------------------------------------------- ----------- F. William Marshall, Jr.(1)... 53 President and Chief Executive Officer, Director 1993 Frank W. Barrett(2)........... 56 Executive Vice President, Credit and 1994 Commercial Lending Division B. John Dill(3)............... 44 Executive Vice President of Bank; President of 1987 Colebrook Corporation John F. Treanor(4)............ 48 Executive Vice President, Chief Financial 1994 Officer and Treasurer Gilbert F. Ehmke(5)........... 36 Senior Vice President, Chief Investment Officer 1995 Henry J. McWhinnie(6)......... 52 Senior Vice President, Human Resources 1994 Division Jeanne Rinaldo(7)............. 46 Senior Vice President, Residential Mortgage 1992 Division Christopher A. Sinton(8)...... 51 Senior Vice President, Retail Banking Division 1995 Michael E. Tucker(9).......... 39 Senior Vice President, General Counsel and Clerk 1993 Ting Chang(10)................ 32 Vice President, Investor Relations and Corporate Planning 1995 Laura Sotir Katz(12).......... 32 Vice President and Controller 1992 Brian Schwartz(12)............ 29 Vice President and Director of Internal Auditing 1995 - ------ (1) Mr. Marshall joined the Bank in May, 1993. He formerly served as Chairman and Chief Executive Officer of Bank of Ireland First Holdings, Inc. and First NH Bank. Prior to 1991, Mr. Marshall served as Executive Vice President of Shawmut Corporation. Mr. Marshall served as a Trustee of the Bank from May, 1993 until the Conversion of the Bank to stock form on February 8, 1995. (2) Mr. Barrett joined the Bank in January, 1994. He formerly served as Senior Vice President of Bank of Ireland First Holdings, Inc. and First NH Bank; Senior Vice President of Shawmut Bank, N.A.; and Executive Vice President of Shawmut Worcester County Bank, N.A. (3) Mr. Dill joined the Bank in 1974 and has served as Executive Vice President of the Bank since 1987 and President and Chief Executive Officer of Colebrook since 1982. (4) Mr. Treanor joined the Bank in August, 1994. He formerly served as Executive Vice President, Treasurer and Chief Financial Officer of Sterling Bancshares Corporation and Senior Vice President of Shawmut Corporation. (5) Mr. Ehmke joined the Bank in February 1995. He formerly served as Senior Vice President and Treasurer of Northeast Savings, F.A. in Hartford, Connecticut. (6) Mr. McWhinnie joined the Bank in September, 1994. He formerly served as Senior Vice President Human Resources of Bristol Savings Bank in Bristol, Connecticut and as Executive Vice President of Centerbank, Waterbury, Connecticut. (7) Mrs. Rinaldo joined the Bank in 1988 and has served as Senior Vice President since May, 1992. (8) Mr. Sinton joined the Bank in February, 1995. He formerly was Executive Vice President-Retail Banking Division of United Jersey Bank. (9) Mr. Tucker joined the Bank in 1980 and has served as Senior Vice President since December, 1993 and General Counsel since 1985. (10) Ms. Chang joined the Bank in 1989 and has served as Vice President for Investor Relations since 1995. (11) Ms. Katz joined the Bank in 1990. She previously was a certified public accountant at Ernst & Young LLP in Boston, Massachusetts. (12) Mr. Schwartz joined the Bank in May, 1995. He formerly served as Audit Manager with Shawmut National Corporation. Prior to 1993, he was Corporate Compliance Officer with MNC Financial Corporation.
44 Compensation of Directors Directors' Fees. The members of the Board of Directors receive an annual retainer of $7,500, with the Chairman of the Board receiving an additional annual retainer of $5,000. Directors are also paid $400 for each committee meeting attended, and if a Director attends more than one committee meeting on the same day, the initial meeting fee is $400 and each additional meeting fee is $200. The Chairperson of each committee will receive an additional $150 for each meeting attended. There is also a pro-rata deduction for any Director's meetings not attended by a Director. Directors who are employees of the Bank are not eligible to receive any fees otherwise paid to Directors. Stock Option Grants to Directors. Under the terms of the Director Stock Option Plan, each non-employee Director of the Bank received an option to acquire 6,600 shares of Bank Common Stock (except that the Chairman of the Board of the Bank received an option to acquire 10,000 shares) the day following stockholder approval at the 1995 Annual Meeting of the Bank, and final approval of the Commissioner of Banks, at the fair market value of $121/4 per share of Common Stock, which was the market price on the effective date of the grant. See "-Executive Compensation-Stock Option Plan." Restricted Stock Grants to Directors. Under the terms of the Director Restricted Stock Plan, each non-employee Director of the Bank was granted 2,200 shares of restricted Bank Common Stock (except that the Chairman of the Board of the Bank was granted 3,500 shares of restricted Bank Common Stock) the day following stockholder approval of said plan at the 1995 Annual Meeting of the Bank and final approval of said plan by the Commissioner of Banks. See "-Executive Compensation-Restricted Stock Plans." Executive Compensation Summary Compensation Table. The following table sets forth the compensation paid by the Bank and its subsidiaries for services rendered in all capacities during the fiscal years ended December 31, 1994 and 1995, respectively, to the Chief Executive Officer and each of the four most highly compensated principal officers of the Bank and its subsidiaries (the "Named Executive Officers").
Summary Compensation Table Long-Term Compensation Annual Compensation Awards ------------------- ------------------------- Securities Restricted Underlying All Other Salary Bonus(2) Stock Options/ Compensation(5) Name & Principal Position Year(1) ($) ($) Awards($)(3) SARs(#)(4) ($) - ----------------------------------- ------- --------- --------- ------------ ------------ --------------- F. William Marshall, Jr............ 1995 332,856 100,725 428,750 80,000(6) 24,808 President & Chief Executive Officer 1994 313,462 109,750 N/A N/A 11,171 B. John Dill....................... 1995 193,370 30,000 153,125 40,000 35,149 Executive Vice President of the Bank, President of Colebrook Corporation, a wholly-owned subsidiary of the Bank 1994 189,551 35,000 N/A N/A 21,748 Frank W. Barrett................... 1995 157,308 35,000 183,750 40,000 21,145 Executive Vice President Credit and Commercial Lending Division of the Bank 1994 148,846 37,000 N/A N/A 6,953 John F. Treanor(7)................. 1995 157,308 40,000 153,125 40,000 13,082 Executive Vice President & Chief Financial Officer, Treasurer 1994 50,769 25,000 N/A N/A 13,968 Christopher A. Sinton(8)........... 1995 112,154 24,000 49,000 15,000 28,158 Senior Vice President/ Retail Banking Division 1994 N/A N/A N/A N/A N/A 45 - ------ (1) Table includes only 1994 and 1995 since the Bank did not become a publicly traded company until February 8, 1995 and was not subject to reporting prior to these dates. (2) Amounts shown include cash compensation earned and received by the Named Executive Officers as well as amounts earned but deferred at the election of those officers. Bonuses shown for 1994 were allocated in 1994 and paid in 1995. Bonuses shown for 1995 were allocated in 1995 and paid in 1996. (3) Dollar amount shown equals the number of shares of restricted stock granted multiplied by stock price on the grant date. This valuation does not take into account the diminution of value attributable to the restrictions applicable to the shares. The shares granted are expected to vest under ordinary circumstances over 5 years at a rate of 20% per year, commencing with an initial vesting on June 1, 1996. The number and dollar value of shares of restricted stock held by the Named Executive Officers on December 31, 1995, based on a closing price for the Bank Common Stock on December 31, 1995 of $16.375, were: (i) Mr. Marshall-35,000 shares ($573,125); (ii) Mr. Dill-12,500 shares ($204,687.50); (iii) Mr. Barrett-15,000 shares ($245,625.00); (iv) Mr. Treanor-12,500 shares ($204,687.50); and (v) Mr. Sinton-4,000 shares ($65,500.00). Dividends (if any) paid in the future will be paid on all shares of restricted stock at the same rate as paid on unrestricted shares. (4) Grants of options are expected to vest under ordinary circumstances over 5 years at a rate of 20% per year, commencing with an initial vesting on June 1, 1996, but in any event will be fully vested no later than 7 years after the grant date. (5) For certain officers this includes employer match to the Bank's or a subsidiary's 401(k) Plan (Mr. Marshall-$2,310 in 1995; Mr. Dill-$4,620 in each of 1995 and 1994; Mr. Barrett-$1,200 in 1995); insurance premiums under a split-dollar plan (Mr. Marshall-$9,416 in 1995 and $11,071 in 1994; Mr. Dill-$11,889 in 1995 and $12,127 in 1994; Mr. Barrett-$6,862.50 in 1995 and 6,953 in 1994); Relocation assistance (Mr. Treanor-$13,968 in 1994; Mr. Sinton- $16,500 in 1995); cash value as of fiscal year end of shares of Bank Common Stock allocated to the officer's account under the ESOP in 1995 (each of Messrs. Marshall, Dill, Barrett and Treanor-$13,082; Mr. Sinton-$11,658). (6) Includes 40,815 qualified and 39,185 non-qualified options. (7) Mr. Treanor joined the Bank on August 29, 1994. The salary shown for 1994 was paid from August 29, 1994 to December 31, 1994. (8) Mr. Sinton joined the Bank on January 23, 1995. The salary shown was paid between January 23, 1995 and December 31, 1995.
Stock Option Plans. In connection with the Conversion of the Bank from a mutual to stock form of ownership (the "Conversion"), the Board of Directors of the Bank adopted the Stock Option Plans, which were approved by the stockholders at the first annual meeting of the Bank's stockholders on May 31, 1995. The Director Stock Option Plan authorized the granting of nonqualified stock options for 111,250 shares for issuance to non-employee Directors of the Bank, with at least 27,812 shares reserved for future awards to such persons. The Management Stock Option Plan authorized 445,000 shares reserved for issuance upon the exercise of incentive and nonqualified options granted to management and other eligible individuals, with at least 111,250 reserved for future awards to such persons. Awards under the Management Stock Option Plan are made by the Board of Directors upon recommendations made by the Compensation Committee from time to time. The option exercise price of options granted under the Stock Option Plans may not be less than 100% of the fair market value of the Common Stock on the date of grant of the option, as determined in accordance with the Stock Option Plans. The maximum option term is 10 years. Each option granted under the Director Stock Option Plan will be exercisable in installments of 20% per year commencing on the first anniversary of the date of grant. In addition, options granted to a non-employee Director will become immediately vested upon the Director's death, disability, or retirement as a Director due to attainment of maximum age, or upon a change of control of the Bank. No non-employee Director may receive a stock option award if, at the time of such award, such non-employee Director owns directly or indirectly more than l0% of the combined voting power of the Bank. The Compensation Committee may establish the terms under which options granted under the Management Stock Option Plan became exercisable, in its discretion. In addition, upon a change in control of the Bank, all options become immediately vested. No person may receive any incentive stock option if, at the time of grant, such person owns directly or indirectly more than 10% of the total combined voting power of the 46 Bank unless the option price is at least 110% of the fair market value of the Common Stock and the exercise period of such incentive option is by its terms limited to five years. Payment for shares purchased under the Stock Option Plans may be made either in cash or cash equivalents, or, if permitted by the option agreement, by exchanging shares of Common Stock of the Bank with a fair market value equal to or less than the total option price plus cash for any difference, or by a combination of the foregoing. Options generally also may be exercised by the optionee directing that certificates for the shares purchased be delivered to a licensed broker acceptable to the Bank as agent for the optionee, provided that the broker tenders to the Bank cash or cash equivalents equal to the option exercise price plus the amount of any taxes that the Bank may be required to withhold in connection with the exercise of the option. No fractional shares will be issued by the Bank on exercise of options and no cash will be paid in lieu of any fractional shares. Options granted under the Stock Option Plans are not transferable and may be exercised only by the optionee during his or her lifetime. If an employee's employment with the Bank, a subsidiary (or the Company) terminates, his or her options may remain exercisable (but not for a period longer than the period ending on the date the option would otherwise expire), if the option agreement so provides. Options granted to non-employee Directors of the Bank terminate upon the expiration of one year following the date on which the non-employee Director ceases to be a member of the Board for any reason, but not more than ten years after the date of grant. If the outstanding shares of the Bank's Common Stock are changed for a different number or kind of shares or securities of the Bank, by reason of any reorganization, recapitalization, exchange of shares, stock split, combination of shares or dividend payable in capital stock, an appropriate adjustment will be made by the Compensation Committee in the number and kind of shares subject to the Stock Option Plans, and for which options may be granted under the Stock Option Plans. Any such adjustment to outstanding options, however, will be made without a change in the total price applicable to the unexercised portion of the option but with a corresponding adjustment in the per-share option price. If the Bank merges or consolidates with one or more corporations, or if the Bank is liquidated or sells all or substantially all of its assets to another entity while any options remain outstanding, then the Compensation Committee in its discretion shall amend the terms of all outstanding options so that either (i) after the merger, consolidation or sale, each optionee is entitled to receive shares of common stock of the new entity to which he or she would have been entitled if he or she were a stockholder of the Bank at the time of the merger, consolidation or sale, or (ii) all outstanding options shall be canceled as of the effective date of any such merger, consolidation or sale, provided that each optionee receives 20 days following the effective date of such transaction to exercise his or her options in accordance with their respective terms. The Board may amend the Stock Option Plans with respect to shares of Common Stock as to which options have not been granted; however, the Bank's stockholders must approve any amendment that would (i) increase the number of shares of Bank Common Stock as to which options may be granted under the Stock Option Plans, (ii) change the requirements as to eligibility to receive options or price, amount, timing or vesting under awards to non-employee Directors, (iii) change the requirements as to eligibility to receive options for all other participants, (iv) reduce the minimum option price, or (v) increase the maximum term of options. The Board at any time may terminate or suspend the Stock Option Plans. Unless previously terminated, the Stock Option Plans will terminate automatically on May 31, 2005, the tenth anniversary of the effective date of the Stock Option Plans. No termination, suspension or amendment of the Stock Option Plans may, without the consent of the optionee to whom an option has been granted, adversely affect the rights of the holder of the option. Restricted Stock Plans. In connection with the Conversion of the Bank, the Board of Directors of the Bank adopted the Restricted Stock Plans, which were approved by the stockholders at the first annual meeting of the Bank's stockholders on May 31, 1995. Under the terms of the Restricted Stock Plans, 222,500 shares of 47 authorized but unissued Bank Common Stock, or approximately 4% of the shares of Bank Common Stock issued in connection with the Conversion, were reserved for issuance under the Restricted Stock Plans. Of such shares, 55,625 shares were reserved for issuance to non-employee Directors of the Bank, with at least 27,812 shares reserved for future awards, under the Director Restricted Stock Plan. Under the Management Restricted Stock Plan, 166,875 shares were reserved for grant to management and other employees of the Bank, with at least 27,812 shares reserved for future awards. Under the terms of the Director Restricted Stock Plan, each non-employee Director of the Bank (including any new Director first elected after Conversion) received a grant of 2,200 shares of Bank Common Stock (except that the Chairman of the Board of the Bank received a grant of 3,500 shares) the day following stockholder approval and final approval of the Commissioner of Banks. Thereafter, subject to availability, additional awards of 2,200 shares of Common Stock will be made to each newly-elected non-employee Director of the Bank on the day following his or her election. The shares awarded to a non-employee Director of the Bank under the Director Restricted Stock Plan vest in installments of 20% per year commencing on the first anniversary of the date of grant. No non-employee Director may receive any restricted stock award if, at the time of the award, such non-employee Director owns directly or indirectly more than 10% of the total combined voting power of the Bank. All shares of Bank Common Stock awarded under the Director Restricted Stock Plan to non-employee Directors of the Bank which have not yet vested terminate on the date the non-employee Director ceases to be a Director of the Bank, except that if a non-employee Director retires as a result of reaching maximum age, permanent disability or death, all shares become immediately vested. In addition, upon a change of control of the Bank, all shares will also become immediately vested. The Compensation Committee, in its discretion, determines the terms upon which Common Stock awarded to employees of the Bank under the Management Restricted Stock Plan become vested, and other terms and conditions of those awards. The following table shows individual grants of stock options to the Named Executive Officers of the Bank during the 1995 fiscal year:
Option/Stock Appreciation Right ("SAR") Grants in Last Fiscal Year Individual Grants in 1995 --------------------------- Number of Percent of Securities Total Underlying Options/SARs Options/ Granted to Exercise or Grant Date SARs Employee in Base Price Expiration Present Value Name Granted (#)(1) Fiscal Year ($/Sh) Date ($)(2) - ---------------------------- -------------- ------------ ----------- ---------- ------------- F. William Marshall, Jr. ... 80,000 24.0% $12.25 05/31/2005 $554,240 B. John Dill................ 40,000 12.0% $12.25 05/31/2005 $277,120 Frank W. Barrett............ 40,000 12.0% $12.25 05/31/2005 $277,120 John F. Treanor............. 40,000 12.0% $12.25 05/31/2005 $277,120 Christopher A. Sinton....... 15,000 4.5% $12.25 05/31/2005 $132,640 - ------ (1) None of the options granted under the Management Stock Option Plan to the Named Executive Officers and other management employees were exercisable during 1995. (2) The grant date present values assigned to the options shown in the above table are computed using the Black-Scholes option pricing model. The calculated values assume the following: risk-free rate of return of 6.63%; volatility of 28.3% calculated based on the 246 trading days prior to January 31, 1996; vesting equivalent to the term of the option; no dividend payments on the shares underlying the options; and an exercise price of $12.25. It is important to note that the values shown are theoretical; the actual value of an option will depend upon the market value of the shares underlying the option at the time the option is exercised.
48
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options/SARs at Fiscal Options/SARs at Year-End (#) Fiscal Year-End ($)(1) Shares Acquired on Exercisable/ Exercisable/ Name Exercise (#) Value Realized ($) Unexercisable Unexercisable - --------------------------- ------------------ ------------------ ---------------------- ---------------------- F. William Marshall, Jr.... -0- -0- 0/80,000 0/330,000 B. John Dill, Jr........... -0- -0- 0/40,000 0/165,000 Frank Barrett.............. -0- -0- 0/40,000 0/165,000 John F. Treanor............ -0- -0- 0/40,000 0/165,000 Christopher A. Sinton...... -0- -0- 0/15,000 0/61,875 - ------ (1) The value of unexercised, in-the-money options at December 31, 1995 is the difference between the closing price of the Bank Common Stock on December 31, 1995 ($16.375) and the per share option exercise price ($12.25), multiplied by the number of shares of Bank Common Stock underlying such options.
Compensation Committee Report The Compensation Committee has responsibility for reviewing all aspects of the compensation program for executive officers of the Bank. The Compensation Committee is comprised of four members of the Board of Directors who are not employees of the Bank and who do not receive additional remuneration for other services provided to the Bank. The four non-employee member of the Compensation Committee are John H. Southworth, Chairman; Donald F. Collins; John M. Naughton; and Albert E. Steiger, Jr. The Compensation Committee's primary objective in the area of executive compensation is to provide a means of attracting and retaining executives with the experience and capabilities necessary for the Bank to compete in a rapidly changing economic, competitive, and regulatory environment. Specific responsibilities of the Compensation Committee are to establish policies and procedures for the compensation of executive officers, including the relationship of corporate performance to executive compensation and to approve the compensation programs for the Chief Executive Officer and describe the underlying rationale for such programs. The executive compensation program is designed to provide competitive compensation opportunities for executive officers as well as to reward for superior performance when the Bank's performance so warrants. The executive compensation program has three major components-base salary, annual incentive compensation, and long-term incentive compensation. Each of these components has a separate purpose and may have a different relative value depending on the particular executive position. Base salary is the fixed component of the package. Executives will be paid a base salary that is intended to be competitive with the external marketplace and to reflect the internal value of the position. The marketplace, as determined by the Compensation Committee, consists of banking and thrift institutions of similar size and complexity which compete for similar executive talent. In order to establish competitive arrangements, compensation data is compiled from published surveys and other available sources. This data provides a competitive range within which base compensation is managed. In addition to base salary, executive officers receive normal benefits pursuant to the Bank's pension plan, 401(k) Plan and the ESOP which are similar to all other employees. Annual incentive compensation is intended to reward an executive for achieving critical annual business objectives and/or meritorious performance. If performance meets or exceeds the annual business plan, total cash compensation (base plus annual incentive) may be greater than when the annual performance objectives are not met. By managing base compensation to the market and using annual incentive compensation to reward for performance, the Bank should not overpay when performance falls below plan, but will be able to reinforce 49 performance when the Bank performs well. The amount of the annual incentive award is funded on the basis of the Bank's performance. For fiscal year 1996, award funding will be tied to the level of net income realized. The actual award paid to executives is dependent on the level of funding and the assessment of each executive's individual plan. The Compensation Committee reviews and approves the performance plan and measures each year. The Compensation Committee believes that long-term compensation is vital in aligning management's and shareholders' interests in the creation of shareholder value, and to attract and retain the necessary executive talent. The long-term compensation program is composed of stock options and management restricted stock. Options and restricted shares are intended to signify the key roles of the executives in rebuilding the franchise, retaining these executives, and directly linking their compensation to the success of the Bank. The Compensation Committee is responsible for overseeing the administration of the Management Stock Option Plan and the Management Restricted Stock Plan. The Compensation Committee has, at its discretion, the ability to allocate stock options and restricted shares among the Bank's executive officers and employees. It is expected that the primary vehicle to reward for long-term performance in the future will be through stock options. The Compensation Committee believes that its approach to executive compensation provides incentive to the Bank's executive officers in accomplishing short- and long-term goals. At the same time, by establishing an effective mix between base salary and variable compensation, executive officers are encouraged to manage the business so as to protect the interests of the customer as well as the shareholders. The Chief Executive Officer's compensation package includes the elements discussed above. Upon conversion to a public organization, a formal annual incentive plan was implemented (under which the CEO is eligible to receive an annual incentive award of up to 30% of base salary depending on the Bank's performance. In addition, restricted stock and stock options were provided to the Chief Executive Officer. For the year ending December 31, 1995, the Bank's performance met the performance plan; accordingly, the Chief Executive Officer received an incentive award equal to 30% of base salary (i.e. the target level). The Compensation Committee believes the CEO's compensation is consistent with the overall compensation strategy of the Bank and serves to focus attention on creating shareholder value. The Compensation Committee is aware that Section 162(m) of the Code prohibits the Company from deducting compensation in excess of $l,000,000 paid in any single year to each of the Chief Executive Officer and four additional named executive officers, unless the excess compensation qualifies as "performance based" compensation. The Compensation Committee believes that the deductibility of compensation paid to the Bank's executives is an important, but not the most important, factor in setting its executive compensation policy. Therefore, certain awards comprised in the executive compensation package (such as options awarded under the Management Stock Option Plan) are designed with the intention of qualifying as "performance based" compensation which will be deductible by the Bank. Where certain components of the compensation package may not qualify as "performance based" and thereby may fail to be deductible (such as awards under the Management Restricted Stock Plan), the Compensation Committee has weighed that factor along with the effectiveness of the incentives provided by that component, and has determined that, taken as a whole, that component is an appropriate and integral part of the executive compensation package. 50 Comparative Performance Graph: [Graph showing the comparative performance of the stock of Springfield Institution for Savings, the S&P 500 Composite Index and New England Banks for the period from 2/8/95 through 12/29/95. The following data points are depicted:
2/8/95 4/28/95 6/30/95 8/31/95 10/31/95 12/29/95 ------ ------- ------- ------- -------- -------- Springfield Institution for Savings $100 $123.38 $135.71 $162.34 $159.74 $170.13 S&P 500 Index $100 $110.11 $117.17 $121.36 $126.03 $134.11 New England Banks $100 $113.04 $128.97 $135.95 $140.65 $154.04]
Employment Agreements The Bank has entered into an employment and severance agreement (the "Employment Agreement") with Mr. F. William Marshall, Jr., President and Chief Executive Officer of the Bank (the "Executive"), and into employment and severance agreements (collectively, the "Agreements") with the senior vice presidents and executive vice presidents of the Bank which provide for the respective terms discussed below. The Employment Agreement and the Agreements establish, among other things, the compensation and/or severance compensation of these individuals and are intended to ensure that the Bank will be able to maintain stable and competent management. The Employment Agreement provides for a three year term of employment which began August 1994 with an automatic one-year extension at the end of each year unless prior written notice is provided by the Bank to the Executive or by the Executive to the Bank. Under the Employment Agreement, the Executive received a base salary of $325,000 beginning on April 1, 1994, which may be increased on an annual basis at the sole discretion of the Board of Directors of the Bank. In addition to such base salary, the Employment Agreement provides for, among other things, participation in annual bonus payments, disability pay, and participation in other welfare and employee benefit plans of the Bank. The Employment Agreement provides for termination by the Bank or the Executive with or without cause at any time. In the event the Bank chooses to terminate the Executive's employment without cause or if the Executive resigns from the Bank as result of a "change of control" (as defined below) or "for good reason," (defined to include (i) the failure of the Board of Directors to appoint or reappoint the officer to his or her stated offices, (ii) a material change in such officer's functions, duties or responsibilities causing the officer's position 51 with the Bank to become one of lesser responsibility, importance, or scope, (iii) any reduction in base salary or a material reduction in other benefits, or (iv) a material breach of the Employment Agreement by the Bank), the Executive will be entitled to a lump sum severance payment equal to approximately three times for a "change in control" and two times, for "good reason" respectively, his highest base salary and bonus payment at any time during the term of employment. The Bank will also be required to continue the Executive's insurance and health coverage for up to three years, as well as among other things for which the Executive is entitled to receive reimbursement, and any other compensation or benefits under the Bank's plans to which is otherwise entitled (the "Standard Entitlements"). The Executive is also entitled to certain indemnification rights upon termination without cause. In the event of death, disability or retirement, the Executive (or his beneficiaries) is entitled to receive a specified portion of his base salary and bonus for limited periods of time, and/or the continuation of welfare benefits and the Standard Entitlements. In the event of a termination for cause (as defined in the Employment Agreement), the Executive will only be entitled to the Standard Entitlements and to certain indemnification rights. In the event of a voluntary termination (as defined in the Employment Agreement) by the Executive prior to the end of the employment term, he will only be entitled to such payments or benefits as he would have received if terminated for cause by the Bank. As an alternative to the termination and Standard Entitlements arrangements specified above, in the event that the Bank terminates the Executive's employment by not extending the term of the Employment Agreement in the manner specified therein, the Executive will be entitled to receive a lump sum severance payment equal to the greater of the amount to which he would have been entitled during the balance of his employment under the Employment Agreement, or his base salary and benefits for a period of six months. Under the Employment Agreement, the Bank has agreed to indemnify the Executive and hold him harmless, to the fullest extent permitted by law, as a consequence of his being involved in a legal action by reason of the fact that he is or was a trustee, Director or officer of the Bank. Such indemnification shall continue after the Executive shall cease to be an officer, trustee or Director of the Bank. In the event any payment or benefit received by the Executive in connection with a change of control would constitute "excess parachute payments" (as defined in Section 280G of the Code), the Bank would pay the Executive an additional sum equal to such excise tax as well as the Executive's federal, state and local income tax and payroll taxes imposed on such additional sum. The Agreements entered into by the Bank with certain of its executive vice presidents (Messrs. Barrett, Dill, and Treanor) and with all of its senior vice presidents (including Mr. Sinton and Mr. Ehmke) provide for a one-year term with an automatic one year extension unless prior written notice is provided by the Bank to such officer or by such officer to the Bank. Under the Agreements, if, following a "change of control", the Bank chooses to terminate the officer's employment other then for cause or if the officer resigns from the Bank for "good reason," the officer will be entitled to a lump sum severance payment equal to (a) with respect to the senior vice presidents, such person's then applicable annual salary and (b) with respect to the executive vice presidents, two times such person's then-applicable annual salary. In the event of an involuntary termination of the officer other than for cause prior to the occurrence of a "change of control," the officer will be entitled to a lump sum severance payment equal to, with respect to both the senior vice presidents and executive vice presidents, one year's salary at such officer's then-applicable annual salary. Under the Agreements, the Bank has agreed to indemnify each senior or executive officer and hold him or her harmless (i) against reasonable costs, including legal fees, incurred by such officer in connection with such officer's consultation with legal counsel or arising out of any legal action in which such officer may be involved as a result of the Agreements and (ii) for all acts omissions taken or not taken by such officer in good faith while performing services for the Bank to the same extent as other similarly-situated officers and Directors of the Bank. For purposes of the Employment Agreement and the Agreements, a "change of control" of the Bank would include the occurrence of any of the following events: (i) an event which would be required to be reported under Item 1 of Form F-3 of the FDIC; (ii) certain events which would constitute a change in control for purposes of certain federal statutes and regulations; (iii) certain events which would have the effect of replacing a majority 52 of the members constituting the Board of Directors; (iv) the approval by the Bank's stockholders to become a party to certain mergers, reorganizations or consolidations; (v) the approval by the Bank's stockholders of certain liquidation or dissolution proceedings or the sale of all or substantially all of the assets of the Bank, or (vi) the solicitation of proxies from the Bank's stockholders by someone other than the current management of the Bank and without the approval of the Board, which person seeks to acquire the Bank. Benefits Under Plans Employee Stock Ownership Plan. In connection with the Conversion, the Bank established an employee stock ownership plan ("ESOP"), and it maintains the ESOP for all full-time employees of the Bank and its affiliates who are at least 21 years of age and are credited with at least 1,000 hours of service with the Bank or its affiliates. The ESOP currently has 445,000 shares of Common Stock available for allocation to participants in accordance with the terms of the ESOP (the "ESOP Shares"). Under the ESOP, the ESOP Shares will be allocated in the proportion that each participant's compensation bears to the aggregate compensation for all eligible participants (but no compensation over $150,000 will count toward an allocation). Each participant becomes vested in their ESOP account in installments of 20% for each year of service with the Bank and its affiliates after the effective date of the ESOP. Amounts forfeited by participants who fail to vest in their accounts will be reallocated to remaining participants in proportion to their compensation. Participants will be entitled to distribution of their vested benefits only following termination of employment or retirement, or attainment of age 701/2. Distributions will ordinarily be made in ESOP Shares, but a participant entitled to a distribution of fewer than 100 ESOP Shares may receive his or her distribution in cash. A committee appointed by the Board of Directors of the Bank administers the ESOP. The trustee of the ESOP is State Street Bank and Trust Company, Boston, Massachusetts. Under the ESOP, the Trustee is directed to vote all allocated ESOP Shares held in the ESOP in accordance with the instructions of the participants to whom such shares have been allocated, and to follow such instructions on a proportional basis in voting unallocated and unvoted shares. In addition, the trustee is directed under the ESOP to accept or reject tender offers with regard to allocated ESOP Shares in accordance with the instructions of the participants to whom such shares have been allocated and to follow such instructions on the same proportional basis with regard to unallocated shares and to such shares with respect to which no instructions are received from the participants. Any such vote of ESOP Shares or response to a tender offer for ESOP Shares would be subject, however, to the Trustee's exercise of its fiduciary duties under applicable law. As of January 1, 1996, 54,812 ESOP Shares have been allocated. The ESOP Shares were acquired in the Conversion with the proceeds of a $3,560,000 loan (the "ESOP Loan") made by Mechanics Savings Bank, a Connecticut mutual savings bank ("Mechanics") to the ESOP. The ESOP Loan is scheduled to mature on January 31, 2005 and accrues interest at the "prime rate" as published in The Wall Street Journal from time to time. The principal of the ESOP Loan is payable semi-annually in 20 equal payments, and interest is payable quarterly during the term of the ESOP Loan. The ESOP Loan is secured by a pledge of ESOP Shares, by a standby letter of credit issued by the Bank for the account of the Trustee naming Mechanics as beneficiary, and by a security interest in certain Treasury securities of the Bank. The Bank intends to make cash contributions to the ESOP from time to time in an amount at least equal to the debt service requirement of the ESOP Loan. Each year, as the ESOP Loan is repaid, ESOP shares will be released from the pledge to Mechanics and allocated to participant accounts in proportion to the principal and interest under the ESOP Loan repaid for that year to the projected principal and interest to be paid for the year plus the remaining term of the ESOP Loan. Pension Plan. The Bank provides a retirement plan for all eligible employees through the Savings Banks Employees Retirement Association ("SBERA"), an unincorporated association of savings banks operating within Massachusetts and other organizations providing services to or for savings banks. SBERA's sole purpose 53 is to enable the participating employers to provide pensions and other benefits for their employees. Each employee reaching the age of 21 and having completed at least 1,000 hours in a twelve month period beginning with such employee's date of employment automatically becomes a participant in the retirement plan. Benefits under the retirement plan are 100% vested after three years of service. The Bank's pension plan is subject to the requirements of the Employee Retirement Income Security Act of 1974, as amended, and is intended to constitute a qualified pension plan under the applicable provisions of the Internal Revenue Code of 1986, as amended. The retirement plan is a qualified defined benefit plan under which an employee is not required to make any contributions to become a participant or to earn benefits under the plan. The benefits provided at age 65 to any participant will be based on the average of the participant's highest three consecutive years of cash compensation up to $150,000, as adjusted for cost-of-living increases ("Average Compensation"). The benefits provided at age 65 will equal 1.25% of Average Compensation plus 0.6% of Average Compensation in excess of Social Security covered compensation for each year of service with the Bank up to a maximum of 25 years. Normal retirement age under the plan is 65; a reduced early retirement benefit is payable from age 50 to age 64 under certain circumstances. At January 1, 1996, the latest date for which information is available, the present value of accrued benefits was fully funded by the market values of related available assets. The following table illustrates annual pension benefits at age 65 for various levels of compensation and years of service. The average compensation shown reflects an average of the three highest consecutive years of compensation. Pension benefits are currently subject to the statutory maximum of $150,000, subject to cost-of-living adjustments. In addition, for plan years beginning on and after January 1, 1994 annual compensation earned after that date in excess of $150,000.00 may not be used in the calculation of retirement benefits. Annual Pension Benefit Based on Years of Service(1) Average 10 Years 15 Years 20 Years 25 or More Compensation Service Service Service Yrs Service(2) - -------------- -------- -------- -------- -------------- $ 60,000...... $ 9,641 14,462 19,283 24,103 80,000...... $13,341 20,102 26,683 33,353 100,000...... $17,041 25,562 34,083 42,603 120,000...... $20,741 31,112 41,483 51,853 125,000...... $21,666 32,499 43,333 54,166 150,000(3)... $26,291 39,437 52,583 65,728 - ------ (1) The annual pension benefit is computed on the basis of a single life annuity. (2) Maximum number of years of service recognized under the retirement plan is 25. (3) Federal law does not permit benefit pension plans to recognize compensation in excess of $150,000 for plan years beginning in 1994. The years of credit service for Mr. Marshall and Mr. Barrett are 2.25 years and 1.50 years respectively. Mr. Treanor joined the plan in September 1995 and Mr. Sinton is not eligible to participate until 1996. Mr. Dill is not an active participant in this plan, but has 5.0 years of credited service from previous participation. Supplemental Executive Retirement Plan. The Supplemental Executive Retirement Plan of the Bank (the "SERP") provides a select group of executive officers with a level of retirement benefit generally commensurate with that received by executives of similar banking organizations with similar responsibilities, under circumstances where such executive officer's qualified pension benefit is reduced or restricted by limitations imposed under the Code, by virtue of such executive officer's transfer to employment with the Bank in mid-career, or otherwise. The eligible executive officers under the SERP are the Chief Executive Officer of the Bank, and such other executive officers as the Compensation Committee of the Board of Directors, upon the recommendation of the Chief Executive Officer, may select from time to time. 54 The SERP provides an annual benefit at age 65 equal to 2.5% of the participant's final average earnings (averaged over the five years preceding his or her termination) multiplied by his or her years of service credited under the SERP, reduced by his or her Social Security benefit, his or her benefit under the Bank's qualified pension plan and by benefits under any other plan or arrangement specified by the Compensation Committee (the "Offsetting Benefits"); however, when combined with the Offsetting Benefits and any other benefits specified by the Compensation Committee (such as benefits under a former employer's plans), the maximum benefit under the SERP cannot exceed 60% of the participant's final average earnings. Service is generally credited under the SERP for each year the participant is employed by the Bank or its subsidiaries, but the Compensation Committee may credit a participant with additional service (which may be conditional on the occurrence of certain events, such as a change in control), or may limit credit for years of service with the Bank prior to participation in the SERP. Messrs. Marshall, Barrett and Sinton have been credited with five years of additional service under the SERP, subject in each case to Offsetting Benefits from former employer's plans. Each member of the initial group of SERP participants will be credited with five years of additional service in the event of a change in control. In addition, the SERP provides for the funding of all benefits accrued for each participant through grantor trusts upon a change in control of the Bank. The following table represents estimated annual pension benefits for retirement at age 65 under the most advantageous SERP provisions available for various levels of compensation and years of service. The figures in this table are calculated on the basis of a straight-life annuity and are based on the assumption that the SERP continues in its present form. The benefits are subject to deductions for Social Security and the value from the qualified pension plan and any other plan or arrangements specified by the Compensation Committee. Years of Service Average -------------------------------------------------------- Comp. 10 15 20 25 30 35 - -------- ------- ------- ------- ------- ------- -------- $125,000 31,250 45,875 62,500 78,125 93,750 109,375 $150,000 37,500 56,250 75,000 93,750 112,500 131,250 $175,000 43,750 65,625 87,500 109,375 131,250 153,125 $200,000 50,000 75,000 100,000 125,000 150,000 175,000 $250,000 62,500 93,750 125,000 156,250 187,500 218,750 $300,000 75,000 112,500 150,000 187,500 225,000 262,500 $400,000 100,000 150,000 200,000 250,000 300,000 350,000 $450,000 112,500 168,750 222,000 281,250 337,500 393,750 $500,000 125,000 187,500 250,000 312,500 375,000 437,500 The average compensation for purposes of this table is based on the highest average of the five consecutive years of service preceding retirement. The estimated credited years of service at retirement for each of the Named Executive Officers are as follows: Mr. Marshall-19 years; Mr. Barrett-15 years; Mr. Treanor-18 years; and Mr. Sinton-19 years. Mr. Dill does not participate in the SERP. 55 Security Ownership of Management and Directors Set forth below is a list of the number of shares of Bank Common Stock beneficially owned by each of the Directors and the Named Executive Officers and Directors and executive officers as a group.
Shares of Common Stock Beneficially Percent of Owned(1) Class(2) ------------------ ---------- William B. Hart, Jr. ......................................... 2,000 * Thomas O'Brien................................................ 3,000 * Teresita Alicea............................................... 3,450 * Paulette Henderson-Johnson.................................... 2,325(3) * John H. Southworth............................................ 7,510(4) .13 Mary E. Boland(5)............................................. 12,200(6) .21 Sister Mary Caritas, S.P. .................................... 4,075(7) * Donald F. Collins(5).......................................... 24,700(8) .43 John M. Naughton.............................................. 15,000 .26 Charles L. Johnson............................................ 7,200 .12 F. William Marshall, Jr. ..................................... 52,798 .92 Gary P. Shannon............................................... 7,825(9) .13 Stephen A. Shatz.............................................. 14,700(10) .25 Frank W. Barrett.............................................. 28,923(11) .50 B. John Dill.................................................. 27,998(12) .49 John F. Treanor............................................... 21,798 .38 Christopher A. Sinton......................................... 9,711 .16 Directors and principal officers of the bank as a group(24)... 295,286 5.16 - ------ (1) Unless otherwise noted in the footnotes to this table, each of the above-referenced persons have sole voting and investment power over the shares of Bank Common Stock beneficially owned by them. The number reported for individuals includes shares of Bank Common Stock which were granted through the Restricted Stock Plan. (2) "*" indicates less than 0.10% of the Bank's outstanding shares of Common Stock. This number includes shares of the Bank Common Stock held through the Restricted Stock Plan. (3) Includes 125 shares owned by Ms. Henderson-Johnson jointly with her son. (4) Includes 310 shares owned by Mr. Southworth's spouse. (5) Mrs. Boland and Mr. Collins are first cousins. (6) Includes 2,500 shares owned by Mrs. Boland's children. (7) Includes 1,850 shares owned jointly with Sr. Marie Thaddeus. (8) Includes 1,000 shares owned by Mr. Collins's spouse; 3,200 shares owned jointly with Mr. Collins's sister; and 14,550 shares owned directly by the Collins Electric Company Profit Sharing Plan for the benefit of Mr. Collins. (9) Includes 625 shares owned by Mr. Shannon's spouse. (10) Includes 12,500 shares owned by Mr. Shatz jointly with his spouse. (11) Includes 625 shares held by Mr. Barrett's children. (12) Includes 2,500 shares held by Mr. Dill's children.
Transactions with Certain Related Persons Some of the directors and officers of the Bank, as well as firms and companies with which they are associated, are or have been customers of the Bank and as such have had banking transactions, including loan transactions, with the Bank. As a matter of policy, loans to directors and officers are made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as to those prevailing at the time for comparable transactions to other persons and do not involve more than the normal risk of collectibility or present other unfavorable features. All loans to principal officers and Directors must be approved by the Executive Committee of the Board, and, if the credit request is greater than $500,000, by a majority of the Board of Directors. 56 Certain Business Relationships The Bank and its subsidiaries have from time to time entered into transactions with businesses and other organizations which are affiliated with the Bank's Directors. The terms and rates for all such transactions have been negotiated on an arms-length basis and are no less favorable than comparable transactions with other businesses or other organizations. During fiscal year 1995, the Bank and its subsidiaries retained the law firm of Shatz, Schwartz & Fentin P.C. in which Mr. Shatz is a partner, to perform certain legal work for the Bank and its subsidiaries. Fees and expenses paid directly by the Bank to Shatz, Schwartz & Fentin P.C. during this period totaled approximately $159,915.45. The Bank intends to continue to retain Shatz, Schwartz & Fentin P.C. for future legal work. The Bank has also engaged in transactions in which the fees and costs of such firm were paid by the borrowers of the Bank. In addition, the Bank and its subsidiaries retained the law firm of Doherty, Wallace, Pillsbury & Murphy, P.C. in which Mr. Shannon is a partner, to perform certain legal work for the Bank and its subsidiaries during fiscal year 1995. Fees and expenses paid directly by the Bank to Doherty, Wallace, Pillsbury & Murphy, P.C. during this period totaled approximately $274,770.66. In cases involving foreclosure work on loans serviced by the Bank for secondary market investors, the Bank is reimbursed by those investors. In 1995, the amount reimbursed was $175,969.89. The Bank intends to continue to retain Doherty, Wallace, Pillsbury & Murphy, P.C. for future legal work. The Bank has also engaged in transactions in which the fees and costs of such firm were paid by the borrowers of the Bank. Prior to September 30, 1995, the Bank paid premiums totaling $87,372.77 to Massachusetts Mutual Life Insurance Corporation, in which Mr. Naughton is an executive vice president, for employee benefit policies previously offered by the Bank to certain of its employees. The Bank has also paid $1,558.95 to Massachusetts Mutual Life Insurance Corporation for fees relating to the establishment and maintenance of a 401(k) Plan on behalf of certain employees who chose to participate. The 401(k) Plan is available to all full-time employees of the Bank who meet certain conditions. Prohibition on Beneficial Ownership of Five Percent of Common Stock The Charter of the Bank prohibits the ownership of more than 4.9% of the outstanding shares of any class of equity securities of the Bank by any person, other than the ESOP, for a three-year period following the Conversion. Accordingly, as of the date of this Proxy Statement-Prospectus, the Bank is not aware of any person or group acting in concert who owned in excess of 4.9% of the outstanding shares of Bank Common Stock, other than the ESOP, which holds approximately 8% of such outstanding shares. PROPOSAL THREE-ELECTION OF CLERK Under Massachusetts law, the Clerk of the Bank is to be elected by the stockholders at the annual meeting or at a special meeting duly called for that purpose. At the Annual Meeting, a Clerk of the Bank will be elected to serve until the 1997 annual meeting or until his or her successor is elected and qualified. The Board of Directors of the Bank has selected Michael E. Tucker as the nominee for Clerk. Mr. Tucker has served as the Bank's Clerk since 1995. For information with respect to Mr. Tucker, including his business experience, see "Management of the Bank." Unless otherwise specified in the proxy, it is the intention of the persons named in the proxy to vote the shares represented by each properly executed proxy for the election of Michael E. Tucker as Clerk of the Bank. The Board of Directors believes that Mr. Tucker will stand for election and will serve if elected as Clerk. However, if he fails to stand for election or is unable or refuses to accept election, the proxies will be voted for the election of such other person as the Board may recommend. 57 Recommendation of Directors THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE ELECTION OF MICHAEL E. TUCKER AS CLERK OF THE BANK. PROPOSAL FOUR-INCREASE IN AUTHORIZED SHARES UNDER THE 1995 MANAGEMENT STOCK OPTION PLAN Proposal to Stockholders In January 1996, the Compensation Committee recommended to the Board of Directors, and the Board of Directors approved, subject to required shareholder and regulatory approvals, an increase of 250,000 in the number of shares of Bank Common Stock authorized for issuance under the Management Stock Option Plan. As of the date of this Proxy Statement-Prospectus and without giving effect to this proposed increase in shares, a total of 445,000 shares had been reserved for issuance under the Management Stock Option Plan, and a total of 25,000 shares remained available for future grant under the Management Stock Option Plan. The additional shares are intended to be available to attract new employees, and to retain and reward existing employees of the Bank. The terms of options awarded under the Management Stock Option Plan are established by the Compensation Committee, acting in its discretion, subject to certain limitations established by the terms of the Management Stock Option Plan, as more fully described below (e.g., that the option exercise price must be at least fair market value on the date of grant, and the option term cannot exceed 10 years) . The Compensation Committee expects that options awarded under the Management Stock Option Plan with respect to the additional shares, if authorized, may be made on an ad hoc basis to one or more employees, or under a program to provide long term incentives to a group of key management personnel (including employees at the level of vice president or higher), which program may include options which become exercisable more rapidly if performance goals are met. Description of the 1995 Management Stock Option Plan The essential features of the Management Stock Option Plan, as proposed to be amended, are summarized below. This summary does not, however, purport to be complete and is qualified in its entirety by the terms of the Management Stock Option Plan. Copies of the Management Stock Option Plan are available upon request to the Investor Relations Department of the Bank. Purpose of the 1995 Management Stock Option Plan. The purpose of the Management Stock Option Plan is to provide incentives to officers and employees of the Bank and its wholly-owned subsidiaries (and, if the Plan of Reorganization is consummated, employees of the Company), to encourage stock ownership by such individuals, increasing their proprietary interest in the success of the Bank (and the Company) and its wholly-owned subsidiaries. The Management Stock Option Plan provides for awards of incentive stock options that qualify for favorable tax treatment under Section 422 of the Code, and nonqualified stock options. Description of the 1995 Management Stock Option Plan. The Management Stock Option Plan is administered by the Compensation Committee, which selects the officers and employees of the Bank (and, if the Plan of Reorganization is consummated, the Company) and its wholly-owned subsidiaries to whom options may be granted. The Management Stock Option Plan presently provides for the granting of options to acquire Bank Common Stock. If the Plan of Reorganization is approved by the shareholders and subsequently consummated, the Management Stock Option Plan will be assumed by the Company, and all options granted under the Plan will be options to acquire Company Common Stock. The option exercise price of options granted under the Management Stock Option Plan may not be less than 100% of the fair market value of the Common Stock on the date of the option, as determined in accordance with 58 the terms of the Plan. The maximum option term is 10 years. Each option granted will be become exercisable at such time, and remain exercisable for such period (subject to the maximum 10 year term) as the Compensation Committee shall determine and set forth in the option agreement relating thereto. The Compensation Committee has set a vesting schedule which applies generally to provide that under ordinary circumstances 20% of the options vest each year beginning one year from the date of grant, but in any event all such options shall vest no later than the seventh anniversary of the date of grant. In addition, upon a change in control of the Bank, all options will become immediately vested. (The consummation of the Plan of Reorganization will not constitute a change of control for this purpose.) No employee may receive any incentive stock option if, at the time of grant, such person owns (directly or indirectly by attribution) more than 10% of the total combined voting power of the Bank unless the option price is at least 110% of the fair market value of the Common Stock and the exercise period of such incentive stock option is limited by its terms to five years. Payment for shares purchased under the Management Stock Option Plan may be made either in cash or cash equivalents, or, if permitted by the option agreement, by exchanging shares of Common Stock of the Bank (or the Company) with a fair market value equal to or less than the total option price plus cash for any difference, or by a combination of the foregoing. Options generally also may be exercised by the optionee directing that certificates for the shares purchased be delivered to a licensed broker acceptable to the Bank (or the Company) as agent for the optionee, provided that the broker tenders to the Bank (or the Company) cash or cash equivalents equal to the option exercise price plus the amount of any taxes that the Bank (or the Company) may be required to withhold in connection with the exercise of the option. No fractional shares will be issued by the Bank (or the Company) on exercise of the options and no cash will be paid in lieu of any fractional shares. Options granted under the Management Stock Option Plan are not transferable and may be exercised only by the optionee during his or her lifetime. If an employee's employment with the Bank, a subsidiary (or the Company) terminates by reason of death or permanent and total disability, his or her options, whether or not then exercisable, may be exercised within one year after such death or disability (but not later than the date the option would otherwise expire), unless the option agreement provides otherwise. If the employee's employment terminates for any reason other than death or disability, options held by such optionee terminate three months after the date of such termination (but not later than the date the option would otherwise expire) unless the option agreement provides for a shorter or longer period prior to expiration. If the outstanding shares of the Bank's (or, if the Plan of Reorganization is consummated, the Company's) common stock are changed for a different number or kind of shares or securities, by reason of any reorganization, recapitalization, exchange of shares, stock split, combination of shares or dividend payable in capital stock, an appropriate adjustment will be made by the Compensation Committee in the number and kind of shares subject to the Management Stock Option Plan, and for which options may be granted under the Plan. Any such adjustment to outstanding options, however, will be made without a change in the total price applicable to the unexercised portion of the option, but with a corresponding adjustment in the per-share option price. If the Bank (or, if the Plan of Reorganization is consummated, the Company) merges or consolidates with one or more corporations, or if the Bank (or the Company) is liquidated or sells all or substantially all of its assets to another entity while any options remain outstanding, then the Compensation Committee in its discretion shall amend the terms of all outstanding options so that either (i) after the merger, consolidation or sale, each optionee is entitled to receive shares of common stock of the new entity to which he or she would have been entitled if he or she were a stockholder of the Bank (or the Company) at the time of the merger, consolidation or sale, or (ii) all outstanding options shall be canceled as of the effective date of any such merger, consolidation or sale, provided that each optionee receives 20 days following the effective date of such transaction to exercise his or her options in accordance with their respective terms. The Board may amend the Management Stock Option Plan with respect to shares of Common Stock as to which options have not been granted; however, the Bank's (or the Company's) stockholders must approve any amendment that would (i) increase the number of shares of Common Stock as to which options may be granted 59 under the Management Stock Option Plan, (ii) change the requirements as to eligibility to receive options, (iii) reduce the minimum option price, or (iv) increase the maximum term of options. The Board may terminate or suspend the Management Stock Option Plan at any time. Unless previously terminated, the Management Stock Option Plan will terminate automatically on May 31, 2005, the day before the tenth anniversary of the effective date of the Plan. No termination, suspension or amendment of the Management Stock Option Plan may adversely affect the rights of an optionee to whom an option has been granted, without the consent of the optionee. Federal Income Tax Consequences of the 1995 Management Stock Option Plan The grant of an option (whether it is an incentive stock option or a nonqualified stock option) will not give rise to taxable income to an optionee, or to a tax deduction for the Bank (or the Company). Incentive Stock Options. An optionee will not recognize taxable income for regular federal income tax purposes upon exercise of an incentive stock option. However, for purposes of the alternative minimum tax, the excess of the fair market value of Common Stock subject to an incentive stock option on the exercise date over the option exercise price is included in the optionee's alternative minimum taxable income in the year of exercise (except that, if the optionee is subject to certain securities law restrictions, determination of the amount included in alternative minimum taxable income will be deferred for up to six months, unless the optionee elects within 30 days following the exercise date to have taxable income determined without regard to such restrictions.) Any gain realized upon a disposition of shares of Common Stock received pursuant to the exercise of an incentive stock option will be taxed as long-term capital gain if the optionee holds the shares for at least two years after the date of grant and one year after the date of exercise. An optionee may be entitled to a credit against regular tax liability in future years for alternative minimum taxes paid with respect to the exercise of incentive stock options. The Bank (or the Company) will not be entitled to a compensation expense deduction with respect to the exercise of an incentive stock option, except as discussed below. To qualify for the foregoing tax treatment, the holder of an incentive stock option must be an employee of the Bank or a subsidiary (or of the Company) from the date the option is granted through a date within three months before the date of exercise of the option. An incentive stock option may be exercised up to one year following termination of employment on account of disability, and remain eligible for favorable tax treatment. If an optionee dies while employed or within three months of his or her termination date, both the time limit for exercising incentive stock options after termination of employment and the holding period for Common Stock received pursuant to the exercise of the option are waived for purposes of the tax requirements for incentive stock options. (The terms of the Management Stock Option Plan and the option agreement, however, will establish the period during which an option can be exercised.) If all the requirements for incentive stock option treatment are satisfied except the special two-years from grant and one-year from exercise holding periods described above, the optionee has engaged in a "disqualifying disposition" of the option stock. The optionee will recognize ordinary income upon the disqualifying disposition in an amount generally equal to the excess of the fair market value of the Common Stock at the time the option was exercised, over the option exercise price (but ordinary income will not exceed the gain recognized on an arms' length disqualifying disposition). The balance of the realized gain, if any, will be capital gain (either short-term or long-term, depending on whether the Common Stock has been held for more than one year from the exercise date). If the optionee engages in a disqualifying disposition, the Bank (or the Company) will be allowed a compensation expense deduction to the extent the optionee recognizes ordinary income on account of the disqualifying disposition (subject to the limitations on deductibility of compensation paid to certain executive officers under Section 162(m) of the Code, discussed below). Nonqualified Stock Options. Upon exercising a nonqualified stock option, an optionee will recognize ordinary income in an amount equal to the difference between the exercise price and the fair market value of the Common Stock on the date of exercise (except that, if the optionee is subject to certain securities law restrictions, 60 determination of the amount included in taxable income will be deferred for up to six months, unless the optionee elects within 30 days following the exercise date to have taxable income determined without such restrictions). If the Bank (or the Company) complies with the applicable reporting requirements, it will be entitled to a compensation expense deduction in the same amount and at the same time as the optionee recognizes ordinary income (subject to the limitations on deductibility of compensation paid to certain executive officers under Section 162(m) of the Code, discussed below). If the optionee surrenders shares of Common Stock in payment of part or all of the exercise price for a nonqualified option, no gain or loss will be recognized with respect to the shares surrendered (as long as the optionee is not surrendering shares acquired by the exercise of an incentive stock option as to which the holding requirements have not been met in order to exercise another incentive stock option) and the optionee will be treated as receiving a number of shares equivalent to those surrendered in a nontaxable exchange. The basis of the shares surrendered will be treated as the substituted tax basis for an equivalent number of option shares received, and these new shares will be treated as having been held for the same holding period as had expired with respect to the surrendered shares. The difference between the aggregate option exercise price and the aggregate fair market value of the additional shares received pursuant to the option exercise will be taxed as ordinary income. The optionee's basis in the additional shares will be equal to the amount included in the optionee's income. The optionee's gain (if any) on a subsequent disposition of the option shares will be either short-term or long-term capital gain, depending on whether the shares have been held for more than one year from the exercise date. Under current federal income tax law, the highest tax rate on ordinary income is 39.6%, and long-term capital gains are subject to a maximum tax of rate of 28%. Because of certain provisions in the law relating to the phase out of personal exemptions and certain limitations on itemized deductions, the federal income tax consequences to a particular taxpayer of receiving additional amounts of ordinary income or capital gain may be greater than would be indicated by applying the foregoing tax rates to the additional amount of income or gain. Limitation on Deduction for Compensation to Certain Executives under Section 162(m) of the Code. Section 162(m) of the Code limits the Bank's (or the Company's) deduction for compensation paid in a single year to each of the five highest paid executive officers to $1,000,000, unless the excess compensation qualifies as "performance based". All options under the Management Stock Option Plan should qualify as "performance based" because they will be granted under a plan approved by the shareholders, will be awarded by a Compensation Committee composed of independent directors, and will have an exercise price at least equal to fair market value on the date of grant. Therefore, the Bank (or the Company) should be able to deduct an amount equivalent to the ordinary income recognized by a optionee on the exercise of a nonqualified stock option or on a disqualifying disposition of an incentive stock option granted under the Plan. Required Vote At the Annual Meeting, the shareholders are being asked to approve the increase in the number of shares reserved for issuance under the Management Stock Option Plan from 445,000 to 695,000. Subject to the applicable rules regarding broker non-votes, the affirmative vote of a majority of the issued and outstanding shares of Bank Common Stock eligible to be cast by stockholders of record of the Bank at the close of business on the Record Date is required to approve the proposed amendment to the Management Stock Option Plan. Recommendation of Directors THE BOARD OF DIRECTORS OF THE BANK RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE AMENDMENT TO INCREASE THE NUMBER OF SHARES AUTHORIZED FOR ISSUANCE UNDER THE 1995 MANAGEMENT STOCK OPTION PLAN. 61 STOCKHOLDER PROPOSALS Proposals of stockholders of the Bank intended to be presented at the 1997 Annual Meeting of the Bank must be received by the Bank no later than December 31, 1996 to be included in the Bank's proxy statement and form of proxy relating to that meeting. In addition, the Bank's Amended and Restated By-Laws provide that any stockholder wishing to have a stockholder proposal considered at an annual meeting must deliver written notice of such proposal to the Clerk of the Bank as set forth in the Amended and Restated By-Laws of the Bank at its principal executive offices not less than 70 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 20 days, or delayed by more than 70 days, from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of the seventieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Any stockholder desiring to submit a proposal must comply with the Amended and Restated By-Laws of the Bank. The advance notice requirements under the Bank's Amended and Restated By-laws pertaining to stockholder director nominations are substantially similar. See "Comparison of Stockholder Rights-Meetings of Stockholders." INDEPENDENT ACCOUNTANTS Representatives of Price Waterhouse LLP, the Bank's independent accountants, are expected to be present at the Annual Meeting. They will be accorded the opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions. Price Waterhouse LLP became the auditors of the Bank for the fiscal year ending December 31, 1995 upon the approval of the Bank's Audit Committee. OTHER MATTERS Shares represented by proxies in the enclosed form will be voted as stockholders direct. Subject to applicable rules regarding broker non-votes, proxies that contain no directions to the contrary will be voted in favor of the proposal to approve the Plan of Reorganization, the election of the five nominees to serve as Directors of the Bank, the election of Michael E. Tucker as Clerk and the proposal to increase the number of shares authorized for issuance under the 1995 Management Stock Option Plan. At the time of preparation of this Proxy Statement-Prospectus, the Board of Directors of the Bank knows of no other matters to be presented for action at the Annual Meeting. As stated in the accompanying proxy card, if any other business should come before the Annual Meeting, proxies have discretionary authority to vote the shares according to their best judgment. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT 1934 With respect to the year ended December 31, 1995, Donald F. Collins, an outside director of the Bank, inadvertently failed to file with the FDIC on a timely basis one required report covering the purchase by his spouse of 1,000 shares of Bank Common Stock in April 1995. In making this disclosure, the Bank has relied solely on written representations of its directors and principal officers and copies of the reports that they have been required to file with the FDIC. WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE MEETING, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY WITHDRAW ANY PROXY GIVEN BY YOU AND VOTE YOUR SHARES IN PERSON. March 27, 1996 62 Exhibit A AGREEMENT AND PLAN OF REORGANIZATION Pursuant to Section 26B of Chapter 172 of the General Laws of Massachusetts This Agreement and Plan of Reorganization (this "Plan") is dated as of January 31, 1996 and made between Springfield Institution for Savings, a savings bank in stock form organized under Chapter 168 of the General Laws of Massachusetts (the "Bank") and SIS Bancorp, Inc., a Massachusetts business corporation (the "Holding Company"). This Plan constitutes the plan of acquisition between the Bank and the Holding Company for purposes of Section 26B of Chapter 172 of the General Laws of Massachusetts. The Bank is a savings bank in stock form, duly organized and validly existing under the laws of the Commonwealth of Massachusetts, with its principal office at 1441 Main Street, Springfield, Massachusetts 01102. As of the date hereof, the authorized capital stock of the Bank consists of 25,000,000 shares of common stock, par value $1.00 per share (the "Bank Common Stock"), of which 5,718,200 shares are issued and outstanding, 556,250 shares are reserved for issuance under the 1995 Springfield Institution for Savings Director and Management Stock Option Plans (the "Stock Option Plans") and 66,800 shares are reserved for issuance under the 1995 Springfield Institution for Savings Director and Management Restricted Stock Plans (the "Restricted Stock Plans"), and 5,000,000 shares of preferred stock, par value $1.00 per share, none of which shares are issued and outstanding. The Holding Company is a corporation, duly organized and validly existing under the laws of the Commonwealth of Massachusetts, with its principal office at 1441 Main Street, Springfield Massachusetts 01102. As of the date hereof, the authorized capital stock of the Holding Company consists of 250,000 shares of common stock, par value $0.01 per share (the "Holding Company Common Stock"), and 50,000 shares of preferred stock, par value $0.01 per share, none of which shares are issued and outstanding. Prior to the Effective Time, as such term is defined in Subsection 2.1 hereof, the Holding Company shall cause its articles of organization to be amended to increase the authorized capital stock of the Holding Company from its current number of shares to a level consisting of 25,000,000 shares of common stock, par value $0.01 per share, and 5,000,000 shares of preferred stock, par value $0.01 per share. The Bank and the Holding Company have agreed that the Holding Company will acquire all of the issued and outstanding shares of Bank Common Stock in exchange for shares of Holding Company Common Stock pursuant to the provisions of Section 26B of Chapter 172 of the General Laws of Massachusetts and of this Plan. This Plan has been adopted and approved by a vote of at least a majority of all the members of the Board of Directors of the Bank, and by a vote of at least a majority of all the members of the Board of Directors of the Holding Company. The officers of the Bank and of the Holding Company whose respective signatures appear below have been duly authorized to execute and deliver this Plan. Now Therefore, in consideration of the foregoing premises and other good and valuable consideration, the receipt and adequacy of which is hereby acknowledge, the Bank and the Holding Company agree as follows: Section 1. Approval and Filing of Plan. 1.1 This Plan shall be submitted for approval by the holders of Bank Common Stock at a meeting to be duly called and held in accordance with the by-laws of the Bank and all applicable laws and regulations. Notice of such meeting shall be mailed directly to all stockholders and published at least once a week for two successive weeks in a newspaper of general circulation in the County of Hamden, Commonwealth of Massachusetts. Both of said newspaper publications shall be at least fifteen days prior to the date of the meeting. 1.2 Subject to the approval of this Plan by the affirmative vote of the holders of at least two-thirds of the outstanding shares of Bank Common Stock as required by law, the Bank and the Holding Company shall submit A-1 this Plan to the Commissioner of Banks of the Commonwealth of Massachusetts (the "Bank Commissioner") for his approval and filing in accordance with the provisions of Section 26B of Chapter 172 of the General Laws of Massachusetts. This Plan shall be accompanied by such certificates of the respective officers of the Bank and the Holding Company as may be required by law and a written request from the Bank that this Plan not be filed by the Bank Commissioner until such future time as the Bank Commissioner shall have received from the Bank and the Holding Company the written notice described in Subsection 2.1 hereof. 1.3 If the requisite approval of this Plan is obtained at the meeting of holders of Bank Common Stock referred to in Subsection 1.1 hereof, thereafter and until the Effective Time, as hereinafter defined, the Bank shall issue certificates for Bank Common Stock, whether upon transfer or otherwise, only if such certificates bear a legend indicating that this Plan has been approved and that shares of Bank Common Stock evidenced by such certificates are subject to the acquisition by the Holding Company pursuant to this Plan. Section 2. Definition of Effective Time. 2.1 The transactions contemplated by this Plan shall become effective at 12:01 A.M. on the first business day following the date on which the Bank Commissioner duly files this Plan in accordance with the provisions of Section 26B of Chapter 172 of the General Laws of Massachusetts, which filing shall be preceded by written notice to the Bank Commissioner from the Bank and the Holding Company advising the Bank Commissioner that (i) all the conditions precedent to this Plan becoming effective specified in Section 5 hereof, other than the condition described in Subsection 5.2, have been satisfied and (ii) the Plan has not been abandoned by the Bank or the Holding Company in accordance with the provisions of Section 6 hereof. Such time is hereinafter referred to as the "Effective Time". Section 3. Actions at the Effective Time. 3.1 At the Effective Time, the Holding Company shall, without any further action on its part or on the part of the holders of Bank Common Stock, automatically and by operation of law acquire and become the owner for all purposes of all shares of Bank Common Stock issued and outstanding immediately prior to the Effective Time, and the Holding Company shall be entitled to have issued to it by the Bank a certificate or certificates representing such shares. Thereafter, the Holding Company shall have full and exclusive power to vote such shares of Bank Common Stock, to receive dividends thereon and to exercise all rights of an owner thereof. 3.2 At the Effective Time, any shares of Holding Company Common Stock which may have been previously issued and are outstanding immediately prior to the Effective Time shall be redeemed and retired and shall thereafter constitute authorized and unissued shares of Holding Company Common Stock. 3.3 At the Effective Time, the holders of the shares of Bank Common Stock issued and outstanding immediately prior to the Effective Time shall, without any further action on their part or on the part of the Holding Company, automatically and by operation of law cease to own such shares and shall instead become owners of one share of Holding Company Common Stock for each share of Bank Common Stock held by them immediately prior to the Effective Time. Thereafter, such persons shall have full and exclusive power to vote such shares of Holding Company Common Stock, to receive dividends thereon, except as otherwise provided herein, and to exercise all rights of an owner thereof. 3.4 At the Effective Time, all previously issued and outstanding certificates representing shares of Bank Common Stock (the "Old Certificates") shall automatically and by operation of law cease to represent shares of Bank Common Stock or any interest therein and each Old Certificate shall instead represent the ownership by the holder thereof of an equal number of shares of Holding Company Common Stock. No holder of an Old Certificate shall be entitled to vote the shares of Bank Common Stock formerly represented by such certificate, or to receive dividends thereon, or to exercise any other rights of ownership in respect thereof. 3.5 Notwithstanding any of the foregoing, any Dissenting Stockholder, as such term is defined in Subsection 8.1 hereof, shall have such rights as are provided by Subsection 8.2 hereof and by the laws of the Commonwealth of Massachusetts. A-2 Section 4. Actions After the Effective Time. As soon as practicable and in any event not more than thirty days after the Effective Time: 4.1 The Holding Company shall deliver to the transfer agent for the Bank and the Holding Company (the "Transfer Agent"), as agent for the then holders of the Old Certificates (other than Old Certificates representing shares of Bank Common Stock as to which dissenters' appraisal rights shall have been effected), a certificate or certificates for the aggregate number of shares of Holding Company Common Stock (the "New Certificates"), to which said holders shall be entitled. Each such holder of an Old Certificate shall surrender his Old Certificate to the Transfer Agent and receive in exchange therefor a New Certificate for an equal number of shares of Holding Company Common Stock. Until so surrendered, each Old Certificate shall be deemed, for all corporate purposes, to evidence the ownership of the number of shares of Holding Company Common Stock which the holder thereof would be entitled to receive upon its surrender, except that the Holding Company may, in its sole discretion, withhold from the holder of shares represented by such Old Certificate, distribution of any or all dividends declared by the Holding Company on such shares until such time as such Old Certificate shall be surrendered in exchange for one or more New Certificates, at which time dividends so withheld by the Holding Company with respect to such shares shall be delivered (without interest thereon and less the amount of taxes, if any, which may have been imposed or paid thereon or which are required by law to be withheld in respect thereof, to the stockholder to whom such New Certificate(s) are issued. 4.2 The Holding Company shall publish, to the extent required in accordance with applicable law, a notice to the holders of all Old Certificates, specifying the Effective Time of the transactions contemplated by this Plan and notifying such holders that they may, or if required to do so by the Holding Company in its sole discretion, shall, present their Old Certificates to the Transfer Agent for exchange. The Holding Company shall also provide notice, together with any transmittal materials that may be necessary or appropriate, by mail directly to such holders at their last known addresses as contained in the Bank's stockholder records. Section 5. Conditions Precedent. This Plan and the transactions provided for herein shall not become effective unless all of the following shall have occurred: 5.1 This Plan and the transactions contemplated hereby shall have been approved by the affirmative vote of the holders of at least two-thirds of the outstanding shares of Bank Common Stock at a meeting of such stockholders duly called and held for such purpose in accordance with the by-laws of the Bank and all applicable laws and regulations. 5.2 This Plan shall have been approved by the Bank Commissioner and a copy of this Plan with his approval endorsed thereon shall have been filed in his office, all as provided in Section 26B of Chapter 172 of the General Laws of Massachusetts. 5.3 The Holding Company shall have provided notice of this Plan to the Federal Reserve Bank of Boston (the "Reserve Bank") in accordance with 12 C.F.R. Section 225.15 and the Reserve Bank shall not have objected to the parties' consummation of the transactions contemplated hereby within thirty days after the date of the Reserve Bank's receipt of such notice or, alternatively, the Reserve Bank or the Board of Governors of the Federal Reserve System, acting pursuant to Section 3(a)(1) of the Bank Holding Company Act of 1956, as amended, shall have approved an application of the Holding Company to become a bank holding company upon the consummation of the transactions contemplated by this Plan and a period of thirty days shall have elapsed after the date of such approval. 5.4 The Bank shall have received a favorable opinion from its counsel, satisfactory in form and substance to the Bank, with respect to the federal income tax consequences of this Plan and the transactions contemplated hereby. A-3 5.5 To the extent legally required, if at all, the shares of Holding Company Common Stock to be issued to the holders of Bank Common Stock pursuant to this Plan shall have been registered or qualified for such issuance under the Securities Act of 1933, as amended, and all applicable state securities laws. 5.6 The Bank and the Holding Company shall have obtained all other consents, permissions and approvals and taken all actions required by law and agreement, or otherwise deemed necessary or appropriate by the Bank or the Holding Company, including the amendment of the Holding Company's articles of organization to increase its authorized capital stock as contemplated by this Plan, prior to the consummation of the transactions provided for by this Plan and the Holding Company's having and exercising all rights of ownership with respect to all of the outstanding shares of Bank Common Stock to be acquired by it hereunder. Section 6. Abandonment of Plan. 6.1 This Plan may be abandoned by either the Bank or the Holding Company at any time before the Effective Time in the event that: (a) The number of shares of Bank Common Stock owned by Dissenting Stockholders, as defined in Subsection 8.1 hereof, shall make consummation of the transactions contemplated by this Plan inadvisable in the opinion of the Bank or the Holding Company; (b) Any action, suit, proceeding or claim has been instituted, made or threatened relating to this Plan which shall make consummation of the transactions contemplated by this Plan inadvisable in the opinion of the Bank or the Holding Company; or (c) For any other reason consummation of the transactions contemplated by this Plan is inadvisable in the opinion of the Bank or the Holding Company. Such abandonment shall be effected by written notice by either the Bank or the Holding Company to the other of them, and shall be authorized or approved by the Board of Directors of the party giving such notice. Upon the giving of such notice, this Plan shall be terminated and shall be of no further force or effect and there shall be no liability hereunder or on account of such termination on the part of the Bank or the Holding Company or the Directors, officers, employees, agents or stockholders of either of them. In the event of such abandonment of this Plan, the Bank shall pay the fees and expenses incurred by itself and the Holding Company in connection with this Plan and the proposed transactions contemplated hereby. If either party hereto gives written notice of termination to the other party pursuant to this Section 6, the party giving such written notice shall simultaneously furnish a copy thereof to the Bank Commissioner. Section 7. Amendment of Plan. 7.1 This Plan may be amended or modified at any time by mutual agreement of the Boards of Directors of the Holding Company and the Bank (i) prior to its approval by the stockholders of the Bank, in any respect, and (ii) subsequent to such approval, in any respect, provided that the Bank Commissioner shall approve of such amendment or modification. Section 8. Rights of Dissenting Stockholders. 8.1 The term "Dissenting Stockholders" shall mean those holders of Bank Common Stock who file with the Bank before the taking of the vote on this Plan written objection to this Plan, pursuant to Section 86 of Chapter 156B of the General Laws of Massachusetts, stating that they intend to demand payment for their shares of Bank Common Stock if this Plan is consummated and whose shares are not voted in favor of this Plan. 8.2 Dissenting Stockholders who comply with the provisions of Sections 85 through 98, inclusive, of Chapter 156B of the General Laws of Massachusetts and all other applicable provisions of law shall be entitled to receive from the Bank payment of the fair value of their shares of Bank Common Stock upon surrender by such holders of the certificates which previously represented such shares of Bank Common Stock. Certificates so A-4 obtained by the Bank, upon payment of the fair value of such shares as provided by law, shall be canceled. Shares of Holding Company Common Stock, to which Dissenting Stockholders would have been entitled had they not dissented, shall be deemed to constitute authorized and unissued shares of Holding Company Common Stock and may thereafter be issued or otherwise disposed of by the Holding Company at the discretion of, and on such terms as may be fixed by, its Board of Directors. Section 9. Stock Options and Restricted Stock. By the Holding Company's having executed and delivered this Plan and by the parties' subsequent consummation of the transactions contemplated hereby, the Holding Company shall be deemed to have approved the Stock Option Plans and the Restricted Stock Plans, as may be amended from time to time, as the director and employee stock option plans and the director and management restricted stock plans of the Holding Company. The Holding Company shall be deemed to have agreed to issue Holding Company Common Stock in lieu of Bank Common Stock with respect to any grants of shares under the Restricted Stock Plans occurring after the Effective Time and pursuant to stock options outstanding under the Stock Option Plan at the Effective Time or granted under the Stock Option Plan thereafter. As of the Effective Time, each share of Bank Common Stock then issued and outstanding under the Restricted Stock Plans shall be converted into a share of Holding Company Common Stock as contemplated by Subsection 3.3 hereof, except that all of the terms and restrictions applicable to such share of Bank Common Stock immediately prior to the Effective Time shall apply to the share of Holding Company Common Stock issued in exchange therefor, and the unexercised portions of the options outstanding under the Stock Option Plan shall be assumed by the Holding Company and thereafter shall be exercisable only for shares of Holding Company Common Stock, with each such option being exercisable for a number of shares of Holding Company Common Stock equal to the number of shares of Bank Common Stock that were available thereunder immediately prior to the Effective Time, and with no change in the exercise price or any other term or condition of such option. To the extent deemed necessary or appropriate, the Holding Company and the Bank shall make appropriate amendments to the Stock Option Plans and the Restricted Stock Plans to reflect the adoption thereof as the director and employee stock option plans and the director and management restricted stock plans of the Holding Company without adverse effect upon any of the options and shares outstanding under the Stock Option Plans and the Restricted Stock Plans. Section 10. Governing Law. This Plan shall take effect as a sealed instrument and shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. Section 11. Counterparts. This Plan may be executed in several identical counterparts, each of which when executed and delivered by the parties hereto shall be an original, but all of which together shall constitute a single instrument. In making proof of this Plan, it shall not be necessary to produce or account for more than one such counterpart. A-5 In Witness Whereof, the parties hereto have caused this Agreement and Plan of Reorganization to be duly executed and delivered as of the date first above written and their corporate seals to be hereunto affixed. SPRINGFIELD INSTITUTION FOR SAVINGS By:/s/ John F. Treanor Name: John F. Treanor Title: Executive Vice President and Treasurer ATTEST: By /s/ Michael E. Tucker Name: Michael E. Tucker Title: Clerk SIS BANCORP, INC. By: /s/ F. William Marshall, Jr. Name: F. William Marshall, Jr. Title: President and CEO ATTEST: By:/s/ Michael E. Tucker Name: Michael E. Tucker Title: Clerk A-6 Exhibit B PROVISIONS OF MASSACHUSETTS GENERAL LAWS RELATING TO RIGHTS OF DISSENTING STOCKHOLDERS (Sections 85 to 98 of Chapter 156B of the Massachusetts General Laws) Section 85. Dissenting Stockholder; Right to Demand Payment for Stock; Exception. A stockholder in any corporation organized under the laws of Massachusetts which shall have duly voted to consolidate or merge with another corporation or corporations under the provisions of sections seventy-eight or seventy-nine who objects to such consolidation or merger may demand payment for his stock from the resulting or surviving corporation and an appraisal in accordance with the provisions of sections eighty-six to ninety-eight, inclusive, and such stockholder and the resulting or surviving corporation shall have the rights and duties and follow the procedure set forth in those sections. This section shall not apply to the holders of any shares of stock of a constituent corporation surviving a merger if, as permitted by subsection (c) of section seventy-eight, the merger did not require for its approval a vote of the stockholders of the surviving corporation. Section 86. Selection Applicable to Appraisal; Prerequisites. If a corporation proposes to take a corporate action as to which any section of this chapter provides that a stockholder who objects to such action shall have the right to demand payment for his shares and an appraisal thereof, sections eighty-seven to ninety-eight, inclusive, shall apply except as otherwise specifically provided in any section of this chapter. Except as provided in sections eighty-two and eighty-three, no stockholder shall have such right unless (1) he files with the corporation before the taking of the vote of the shareholders on such corporate action, written objection to the proposed action stating that he intends to demand payment for his shares if the action is taken and (2) his shares are not voted in favor of the proposed action. Section 87. Statement of Rights of Objecting Stockholders in Notice of Meeting; Form. The notice of the meeting of stockholders at which the approval of such proposed action is to be considered shall contain a statement of the rights of objecting stockholders. The giving of such notice shall not be deemed to create any rights in any stockholder receiving the same to demand payment for his stock, and the directors may authorize the inclusion in any such notice of a statement of opinion by the management as to the existence or non-existence of the right of the stockholders to demand payment for their stock on account of the proposed corporate action. The notice may be in such form as the directors or officers calling the meeting deem advisable, but the following form of notice shall be sufficient to comply with this section: "If the action proposed is approved by the stockholders at the meeting and effected by the corporation, any stockholder (1) who files with the corporation before the taking of the vote on the approval of such action, written objection to the proposed action stating that he intends to demand payment for his shares if the action is taken and (2) whose shares are not voted in favor of such action has or may have the right to demand in writing from the corporation (or, in the case of a consolidation or merger, the name of the resulting or surviving corporation shall be inserted), within twenty days after the date of mailing to him of notice in writing that the corporate action has become effective, payment for his shares and an appraisal of the value thereof. Such corporation and any such stockholder shall in such cases have the rights and duties and shall follow the procedure set forth in sections 88 to 98, inclusive, of chapter 156B of the General Laws of Massachusetts." Section 88. Notice of Effectiveness of Action Objected To. The corporation taking such action, or in the case of a merger or consolidation the surviving or resulting corporation, shall, within ten days after the date on which such corporate action became effective, notify each stockholder who filed a written objection meeting the requirements of section eighty-six and whose shares were not voted in favor of the approval of such action, that the action approved at the meeting of the corporation of which he is a stockholder has become effective. The giving of such notice shall not be deemed to create any rights in any stockholder receiving the same to demand B-1 payment for his stock. The notice shall be sent by registered or certified mail, addressed to the stockholder at his last known address as it appears in the records of the corporation. Section 89. Demand for Payment; Time for Payment. If within twenty days after the date of mailing of a notice under subsection (e) of section eighty-two , subsection (f) of section eighty-three, or section eighty-eight, any stockholder to whom the corporation was required to give such notice shall demand in writing from the corporation taking such action, or in the case of a consolidation or merger from the resulting or surviving corporation, payment for his stock, the corporation upon which such demand is made shall pay to him the fair value of his stock within thirty days after the expiration of the period during which such demand may be made. Section 90. Demand for Determination of Value; Bill in Equity; Venue. If during the period of thirty days provided for in section eighty-nine the corporation upon which such demand is made and any such objecting stockholder fail to agree as to the value of such stock, such corporation or any such stockholder may within four months after the expiration of such thirty-day period demand a determination of the value of the stock of all such objecting stockholders by a bill in equity filed in the superior court in the county where the corporation in which such objecting stockholder held stock had or has its principal office in the commonwealth. Section 91. Parties to Suit to Determine Value; Service. If the bill is filed by the corporation, it shall name as parties respondent all stockholders who have demanded payment for their shares and with whom the corporation has not reached agreement as to the value thereof. If the bill is filed by a stockholder, he shall bring the bill in his own behalf and in behalf of all other stockholders who have demanded payment for their shares and with whom the corporation has not reached agreement as to the value thereof, and service of the bill shall be made upon the corporation by subpoena with a copy of the bill annexed. The corporation shall file with its answer a duly verified list of all such other stockholders, and such stockholders shall thereupon be deemed to have been added as parties to the bill. The corporation shall give notice in such form and returnable on such date as the court shall order to each stockholder party to the bill by registered or certified mail, addressed to the last known address of such stockholder as shown in the records of the corporation, and the court may order such additional notice by publication or otherwise as it deems advisable. Each stockholder who makes demand as provided in section eighty-nine shall be deemed to have consented to the provisions of this section relating to notice, and the giving of notice by the corporation to any such stockholder in compliance with the order of the court shall be a sufficient service of process on him. Failure to give notice to any stockholder making demand shall not invalidate the proceedings as to other stockholders to whom notice was properly given, and the court may at any time before the entry of a final decree make supplementary orders of notice. Section 92. Decree Determining Value and Ordering Payment; Valuation Date. After hearing the court shall enter a decree determining the fair value of the stock of those stockholders who have become entitled to the valuation of and payment of their shares, and shall order the corporation to make payment of such value, together with interest, if any, as hereinafter provided, to the stockholders entitled thereto upon the transfer by them to the corporation of the certificates representing such stock if certificated or, if uncertificated, upon receipt of an instruction transferring such stock to the corporation. For this purpose, the value of the shares shall be determined as of the day preceding the date of the vote approving the proposed corporate action and shall be exclusive of any element of value arising from the expectation or accomplishment of the proposed corporate action. Section 93. Reference to Special Master. The court in its discretion may refer the bill or any question arising thereunder to a special master to hear the parties, make findings and report the same to the court, all in accordance with the usual practice in suits in equity in the superior court. Section 94. Notation on Stock Certificates of Pendency of Bill. On motion the court may order stockholder parties to the bill to submit their certificates of stock to the corporation for the notation thereon of the pendency of the bill and may order the corporation to note such pendency in its records with respect to any uncertificated shares held by such stockholder parties, and may on motion dismiss the bill as to any stockholder who fails to comply with such order. B-2 Section 95. Costs; Interest. The costs of the bill, including the reasonable compensation and expenses of any master appointed by the court, but exclusive of fees of counsel or of experts retained by any party, shall be determined by the court and taxed upon the parties to the bill, or any of them, in such manner as appears to be equitable, except that all costs of giving notice to stockholders as provided in this chapter shall be paid by the corporation. Interest shall be paid upon any award from the date of the vote approving the proposed corporate action, and the court may on application of any interested party determine the amount of interest to be paid in the case of any stockholder. Section 96. Dividends and Voting Rights after Demand for Payment. Any stockholder who has demanded payment for his stock as provided in this chapter shall not thereafter be entitled to notice of any meeting of stockholders or to vote such stock for any purpose and shall not be entitled to the payment of dividends or other distribution on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the date of the vote approving the proposed corporate action) unless: (1) A bill shall not be filed within the time provided in section ninety; (2) A bill, if filed, shall be dismissed as to such stockholder; or (3) Such stockholder shall with the written approval of the corporation, or in the case of a consolidation or merger, the resulting or surviving corporation, deliver to it a written withdrawal of his objections to and an acceptance of such corporate action. Notwithstanding the provisions of clauses (1) to (3), inclusive, said stockholder shall have only the rights of a stockholder who did not so demand payment for his stock as provided in this chapter. Section 97. Status of Shares Paid For. The shares of the corporation paid for by the corporation pursuant to the provisions of this chapter shall have the status of treasury stock, or in the case of a consolidation or merger the shares or the securities of the resulting or surviving corporation into which the shares of such objecting stockholder would have been converted had he not objected to such consolidation or merger shall have the status of treasury stock or securities. Section 98. Exclusive Remedy; Exception. The enforcement by a stockholder of his right to receive payment for his shares in the manner provided in this chapter shall be an exclusive remedy except that this chapter shall not exclude the right of such stockholder to bring or maintain an appropriate proceeding to obtain relief on the ground that such corporate action will be or is illegal or fraudulent as to him. B-3 EXHIBIT C-1 The Commonwealth of Massachusetts William Francis Galvin Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 ARTICLES OF ORGANIZATION (General Laws, Chapter 156B) ARTICLE I The exact name of the corporation is: SIS BANCORP, INC. ARTICLE II The purpose of the corporation is to engage in the following business activities: See Exhibit A attached hereto and made a part hereof. C-1 ARTICLE III State the total number of shares and par value, if any, of each class of stock which the corporation is authorized to issue. WITHOUT PAR VALUE WITH PAR VALUE - ------------------------------ ------------------------------------------ TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - ---- ---------------- ---- ---------------- --------- Common: Common: 250,000 $.01 Preferred: Preferred: 50,000 $.01 ARTICLE IV If more than one class of stock is authorized, state a distinguishing designation for each class. Prior to the issuance of any shares of a class, if shares of another class are outstanding, the corporation must provide a description of the preferences, voting powers, qualifications, and special or relative rights or privileges of that class and of each other class of which shares are outstanding and of each series then established within any class. See Exhibit B attached hereto and made a part hereof. ARTICLE V The restrictions, if any, imposed by the Articles of Organization upon the transfer of shares of stock of any class are: None ARTICLE VI Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: See Exhibit C attached hereto and made a part hereof. C-2 SIS BANCORP, INC. ARTICLES OF ORGANIZATION EXHIBIT A ARTICLE II: Purposes 1. Buying, selling, investing in, holding and dealing in property of every nature and description, real and personal, tangible and intangible; 2. Acquiring, investing in and holding stock in any subsidiary permitted under the Bank Holding Company Act of 1956 or Chapter 167A of the Massachusetts General Laws, as such statutes may be amended from time to time, and engaging in any other activity or enterprise permitted to a bank holding company under said statutes or other applicable law; and 3. In general, engaging in any other business which may lawfully be carried on by a corporation organized under the Business Corporation Law of the Commonwealth of Massachusetts, as amended from time to time. C-3 SIS BANCORP, INC. ARTICLES OF ORGANIZATION EXHIBIT B ARTICLE IV: Description of Each of the Different Classes of Stock A description of the different classes and series of the Corporation's capital stock and a statement of the designations and the relative rights, preferences and limitations of the shares of each class and series of capital stock are as follows: Section 4.1 Common Stock. Except as provided by law or in this Article IV (or in any supplementary sections hereto or in any certificate of establishment of any series of preferred stock), the holders of the common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote on all matters for each share held by such holder. There shall be no cumulative voting rights in the election of Directors. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of a sinking fund or a retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends; but only when and as declared by the Board of Directors. Subject to Section 6.4 of these Articles of Organization, in the event of any liquidation, dissolution or winding up of the Corporation, after there shall have been paid to or set aside for the holders of any class having preference over the common stock in the event of liquidation, dissolution or winding up of the Corporation the full preferential amounts to which they are respectively entitled, the holders of the common stock, and of any class or series of stock entitled to participate in whole or in part therewith as to distribution of assets, shall be entitled, after payment or provision for payment of all debts and liabilities of the Corporation, to receive the remaining assets of the Corporation available for distribution, in cash or in kind, in proportion to their holdings. Section 4.2 Preferred Stock. The Board of Directors of the Corporation is authorized by vote or votes, from time to time adopted, to provide for the issuance of preferred stock (the "Preferred Stock") in one or more series and to fix and state the voting powers, designations, preferences and relative participating, optional or other special rights of the shares of each series and the qualifications, limitations and restrictions thereof, including, but not limited to, determination of one or more of the following: (1) The distinctive serial designation and the number of shares constituting such series; (2) The dividend rates or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends and the participating or other special rights, if any, with respect to dividends; (3) The voting powers, if any, of shares of such series; (4) Whether the shares of such series shall be redeemable and, if so, the price or prices at which, and the terms and conditions on which, such shares may be redeemed; (5) The amount or amounts payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation; (6) Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price or prices at which such shares may be redeemed or purchased through the application of such fund; C-4 (7) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation, and if so convertible or exchangeable, the conversion price or prices, or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (8) The price or other consideration for which the shares of such series shall be issued; (9) Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of preferred stock and whether such shares may be reissued as shares of the same or any other series of stock; and (10) Such other powers, preferences, rights, qualifications, limitations and restrictions thereof as are permitted by law and as the Board of Directors of the Corporation may deem advisable. Unless otherwise provided by law, any such vote shall become effective when the Corporation files with the Secretary of State of the Commonwealth of Massachusetts a certificate of designation of one or more series of preferred stock signed by the President or any Vice President and by the Clerk, Assistant Clerk, Secretary or Assistant Secretary of the Corporation, setting forth a copy of the vote of the Board of Directors establishing and designating the series and fixing and determining the relative rights and preferences thereof, the date of adoption of such vote and a certification that such vote was duly adopted by the Board of Directors. C-5 SIS BANCORP, INC. ARTICLES OF ORGANIZATION EXHIBIT C ARTICLE VI: Other Lawful Provisions Section 6.1 Issuance of Rights. The Board of Directors is hereby authorized to create and issue, whether or not in connection with the issuance and sale of any of its stock or other securities or property, rights entitling the holders thereof to purchase or receive from the Corporation shares of stock or other securities or assets of the Corporation or any other corporation, recognizing that, under certain circumstances, the creation and issuance of such rights could have the effect of discouraging third parties from seeking, or impairing their ability to seek, to acquire a significant portion of the outstanding securities of the Corporation, to engage in any transaction which might result in a change of control of the Corporation or to enter into any agreement, arrangement or understanding with another party to accomplish the foregoing or for the purpose of acquiring, holding, voting or disposing of any securities of the Corporation. The times at which and the terms upon which such rights are to be issued will be determined by the Board of Directors and set forth in the contracts or instruments that evidence such right. The authority of the Board of Directors with respect to such rights shall include, but not be limited to, determination of the following: (1) The initial purchase price per share or other unit of the stock or other securities or property to be purchased upon exercise of such rights. (2) Provisions relating to the times at which and the circumstances under which such rights may be exercised or sold or otherwise transferred, either together with or separately from, any other stock or other securities of the Corporation. (3) Provisions which adjust the number or exercise price of such rights or amount or nature of the stock or other securities or property receivable upon exercise of such rights in the event of a combination, split or recapitalization of any stock of the Corporation, a change in ownership of the Corporation's stock or other securities or a reorganization, merger, consolidation, sale of assets or other occurrence relating to the Corporation or any stock of the Corporation, and provisions restricting the ability of the Corporation to enter into any such transaction absent an assumption by the other party or parties thereto of the obligations of the Corporation under such rights. (4) Provisions which deny the holder of a specified percentage of the outstanding stock or other securities of the Corporation the right to exercise such rights and/or cause the rights held by such holder to become void. (5) Provisions which permit the Corporation to redeem or exchange such rights, which redemption or exchange may be within the sole discretion of the Board of Directors, if the Board of Directors reserves such right to itself. (6) The appointment of a rights agent with respect to such rights. Section 6.2 No Action by Written Consent of Stockholders. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in Article IV of these Articles of Organization to elect additional Directors under specific circumstances or to consent to specific actions taken by the Corporation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing in lieu of a meeting of such stockholders. Section 6.3 Certain Business Combinations. 6.3.1. Vote Required for Certain Business Combinations. (A) In addition to any affirmative vote required by the Massachusetts General Laws or by Section 6.3.2 below, the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the then C-6 outstanding shares ofcapital stock of the Corporation entitled to vote generally in the election of Directors (the "Voting Stock"), voting together as a single class, shall be required for any Business Combination (hereinafter defined). (B) "Business Combination" shall mean: (1) any merger or consolidation of the Corporation or any Subsidiary (hereinafter defined) with (a) any Interested Stockholder (hereinafter defined) or (b) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate of an Interested Stockholder; or (2) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder, or any Affiliate of any Interested Stockholder, of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $1,000,000 or more; or (3) the purchase, exchange, lease or other acquisition by the Corporation or any Subsidiary (in a single transaction or a series of related transactions) of all or substantially all of the assets or business of any Interested Stockholder or any Affiliate of any Interested Stockholder; or (4) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value (as hereinafter defined) of $1,000,000 or more, except for any issuance or transfer pursuant to an employee benefit plan of the Corporation or any Subsidiary thereof; or (5) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of any Interested Stockholder or any Affiliate of any Interested Stockholder; or (6) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder. 6.3.2. When Higher Vote is Not Required. Section 6.3.1 above shall not be applicable to any particular Business Combination, and such Business Combination shall require only the affirmative vote of the majority of the outstanding shares of Voting Stock, if, in the case of any Business Combination that does not involve any cash or other consideration being received by the stockholders of the Corporation solely in their capacity as stockholders of the Corporation, the condition specified in the following paragraph A of this Section 6.3.2 is met or, in the case of any other Business Combination, the condition(s) specified in either of the following paragraph A or paragraph B of this Section 6.3.2 is met: (A) Approval by Continuing Directors. The Business Combination shall have been approved by a majority of the Continuing Directors (hereinafter defined) and a majority of the Board of Directors. (B) Price and Procedure Requirements. All of the following conditions shall have been met: (1) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by the holders of common stock in such Business Combination shall at least be equal to the higher of the following: (a) (if applicable) the Highest Per Share Price (hereinafter defined), including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Stockholder or any C-7 of its Affiliates for any shares of common stock acquired by it (x) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date"), or (y) in the transaction in which it became an Interested Stockholder, whichever is higher; and (b) the highest Fair Market Value per share of common stock on any date during the one-year period prior to and including the Announcement Date; and (c) (if applicable) the price per share equal to the product of (i) the Fair Market Value per share of common stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (such later date is referred to in this Section 6.3 as the "Determination Date"), whichever is higher, multiplied by (ii) a fraction, (x) the numerator of which is the Highest Per Share Price (including any brokerage commissions, transfer taxes and soliciting dealers fees) paid by the Interested Stockholder for any shares of common stock acquired by it within the two-year period immediately prior to and including the Announcement Date, and (y) the denominator of which is the Fair Market Value per share of common stock on the first day in such two-year period upon which the Interested Stockholder acquired any shares of common stock. (2) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class of outstanding Voting Stock other than common stock shall be at least equal to the highest of the following (it being intended that the requirements of this paragraph B(2) shall be required to be met with respect to every such class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (a) (if applicable) the Highest Per Share Price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (x) within the two-year period immediately prior to the Announcement Date, or (y) in the transaction in which it became an Interested Stockholder, whichever is higher; (b) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and (c) the highest Fair Market Value per share of such class of Voting Stock on any date during the one-year period prior to and including the Announcement Date; and (d) (if applicable) the price per share equal to the product of (i) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher, multiplied by (ii) a fraction, (x) the numerator of which is the Highest Per Share Price (including any brokerage commissions, transfer taxes and soliciting dealers fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it within the two-year period immediately prior to and including the Announcement Date, and (y) the denominator of which is the Fair Market Value per share of such class of Voting Stock on the first day in such two-year period upon which the Interested Stockholder acquired any shares of such class of Voting Stock. (3) The consideration to be received by holders of a particular class of outstanding Voting Stock (including common stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration to be received per share by holders of shares of such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by the Interested Stockholder. The price determined in accordance with this paragraph B(3) shall be C-8 subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event. (4) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination: (i) except as approved by a majority of the Continuing Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding stock having preference over common stock as to dividends or liquidation, (ii) there shall have been (x) no reduction in the annual rate of dividends paid on common stock (except as necessary to reflect any subdivision of common stock), except as approved by a majority of the Continuing Directors, and (y) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of common stock, unless the failure to so increase such annual rate is approved by a majority of the Continuing Directors, and (iii) neither such Interested Stockholder nor any of its Affiliates shall have beneficial ownership of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder. (5) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided, directly or indirectly, by the Corporation or any Subsidiary, whether in anticipation of or in connection with such Business Combination or otherwise. (6) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and rules and regulations promulgated thereunder, shall be mailed to stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to the Exchange Act or such rules and regulations). 6.3.3. Certain Definitions. For the purposes of these Articles of Organization: (A) A "Person" shall include an individual, a group acting in concert, a corporation, a partnership, an association or other entity, a joint venture, a pool, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities. (B) "Interested Stockholder" shall mean any Person (other than the Corporation or Subsidiary thereof) that: (1) is the beneficial owner, directly or indirectly, of more than 4.9% of the outstanding Voting Stock for the 3 year period from and after February 9, 1995 or of more than 10% of the outstanding Voting Stock thereafter; or (2) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 4.9% or more of the outstanding Voting Stock for the 3 year period from and after February 9, 1995 or of 10% or more of the outstanding Voting Stock thereafter; or (3) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933, as amended, and such assignment or succession was not approved by a majority of the Continuing Directors. C-9 (C) "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act (the "SEC Rules"). (D) "Beneficial ownership" shall be determined pursuant to Rule 13d-3 of the SEC Rules; provided, however, that, a Person shall, in any event, also be deemed the beneficial owner of any Voting Stock: (1) which such Person or any of its Affiliates or Associates, directly or indirectly, beneficially owns; or (2) which such Person or any of its Affiliates or Associates, directly or indirectly, has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding (but shall not be deemed to be the beneficial owner of any Voting Stock solely by reason of an agreement, arrangement or understanding with the Corporation to effect any transaction which is described in any one or more of the subparagraphs of paragraph A of Section 6.3.1 above), or upon the exercise of conversion rights, exchange rights, warrants, or options or otherwise, or (B) sole or shared voting or investment power with respect thereto pursuant to any agreement, arrangement, understanding, relationship or otherwise (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, with respect to shares of which neither such Person nor any such Affiliate or Associate is otherwise deemed the beneficial owner); or (3) which is beneficially owned, directly or indirectly, by any partnership, limited partnership, syndicate or other group in which such Person or any of its Affiliates or Associates participates pursuant to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock of the Corporation; provided further, however, that (1) no Director or officer of the Corporation (or any Affiliate or Associate of any such Director or officer) shall, solely by reason of any or all of such Directors or officers acting in their capacities as such, be deemed, for any purposes of these Articles of Organization, to beneficially own any Voting Stock beneficially owned by any other such Director or officer (or any Affiliate or Associate thereof), and (2) neither any tax-qualified employee benefit plan of the Corporation or any Subsidiary, nor any trustee with respect thereto or any Affiliate or Associate of such trustee (solely by reason of such capacity of such trustee), shall be deemed, for any purposes of these Articles of Organization, to beneficially own any Voting Stock held under any such plan. (E) For purposes of determining whether a Person is an Interested Stockholder pursuant to paragraph B of this Section 6.3.3, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned by such Person through application of paragraph D of this Section 6.3.3, but shall not include any other shares of Voting Stock which may be issuable by the Corporation pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options or otherwise. (F) "Subsidiary" shall mean any corporation (including without limitation, any banking or thrift institution) of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in paragraph (B) of this Section 6.3.3, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. (G) "Continuing Director" shall mean any member of the Board of Directors who is not an Affiliate or Associate of the Interested Stockholder and was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any Director who is thereafter chosen to fill any vacancy of the Board of Directors or who is elected and who, in either event, is not an Affiliate or Associate of the Interested Stockholder and in connection with his or her initial assumption of office is recommended for appointment or election by a majority of Continuing Directors then on the Board of Directors. C-10 (H) "Fair Market Value" shall mean: (1) in the case of stock, the highest closing sales price of the stock during the 30 calendar day-period immediately preceding the date in question of a share of such stock on the National Association of Securities Dealers Automated Quotation System or any system then in use, or, if such stock is admitted to trading on a principal United States securities exchange registered under the Exchange Act, Fair Market Value shall be the highest sale price reported during the 30 calendar day-period preceding the date in question, or, if no such quotations are available, the Fair Market Value on the date in question of a share of such stock as determined by the Board of Directors in good faith, in each case with respect to any class of stock, appropriately adjusted for any dividend or distribution in shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock; and (2) in the case of property other than cash or stock, the Fair Market Value of such property on the date in question as determined by the Board of Directors in good faith. (I) Reference to "Highest Per Share Price" shall in each case with respect to any class of stock reflect an appropriate adjustment for any dividend or distribution in shares of stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock. 6.3.4. Powers of the Board of Directors. A majority of the Directors of the Corporation (or, if there is an Interested Stockholder, a majority of the Continuing Directors then in office) shall have the power to determine for the purposes of this Section 6.3 on the basis of information known to them after reasonable inquiry, (A) whether a Person is an Interested Stockholder, (B) the number or percentage of any class of securities beneficially owned by any Person, (C) whether a Person is an Affiliate or Associate of another, (D) whether the requirements of Section 6.3.2 above have been met with respect to any Business Combination, (E) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more and (F) any other matters of interpretation arising under this Section 6.3 or under Section 6.6 below. The good faith determination of a majority of the Directors (or, if there is an Interested Stockholder, a majority of the Continuing Directors then in office) on such matters shall be conclusive and binding for all purposes of this Section 6.3 and of Section 6.6 below. A majority of the Directors of the Corporation (or, if there is an Interested Stockholder, a majority of the Continuing Directors then in office) shall have the further power to interpret all the terms and provisions of this Section 6.3 and of Section 6.6 below. 6.3.5. No Effect on Fiduciary Obligations of Interested Stockholders. Nothing contained in this Section 6.3 shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. Section 6.4 Standards for Board of Directors' Evaluation of Offers. The Board of Directors of the Corporation, when evaluating any offer of another Person (as defined in Section 6.3 above) to (A) make a tender or exchange offer for any equity security of the Corporation, (B) merge or consolidate the Corporation with another institution or (C) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation and its stockholders, give due consideration to all relevant factors including, without limitation, the social and economic effects of acceptance of such offer on the Corporation's and/or its Subsidiaries' present and future account holders, borrowers and employees; on the communities in which the Corporation and its Subsidiaries operate or are located; and on the ability of the Corporation to fulfill the objectives of a bank holding company under applicable statutes and regulations. C-11 Section 6.5 Pre-emptive Rights. Holders of the capital stock of the Corporation shall not be entitled to pre-emptive rights with respect to any shares of the capital stock of the Corporation which may be issued. Section 6.6 Beneficial Ownership Limitation. No person shall directly or indirectly offer to acquire or acquire beneficial ownership (as that term is defined in Section 6.3.3 above of more than 4.9% of the outstanding shares of any class of equity securities of the Corporation during the period up to and through February 6, 1998 or at any time thereafter more than ten percent (10%) of the outstanding shares of any class of equity securities of the Corporation. This limitation shall not apply (A) to any acquisition of shares of capital stock of the Corporation which has been expressly approved in advance by an affirmative vote of not less than two-thirds of the Board of Directors then in office (or, if there shall be an Interested Stockholder at the time of such vote, then also by the affirmative vote of not less than two-thirds of the Continuing Directors then in office) or (B) to any offer to the Corporation made by the underwriters selected by the Corporation in connection with a public offering by the Corporation of the Corporation's capital stock. For the purposes of determining the number of shares of equity securities owned hereunder by any Person, the number of shares of equity securities deemed to be outstanding shall include shares deemed owned by such Person through the application of paragraph D of Section 6.3.3 above but shall not include any other shares of equity securities which may be issuable by the Corporation pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options or otherwise. In the event that beneficial ownership of any class of equity securities is acquired in violation of this Section 6.6, (i) all shares of common or preferred stock beneficially owned by any Person in excess of 4.9% or ten percent (10%), as the case may be, of the total number of outstanding shares of such class shall not be counted as shares entitled to vote, shall not be voted by any Person or counted as voting shares in connection with any matter submitted to the stockholders for a vote, and shall not be counted as outstanding for purposes of determining the affirmative vote necessary to approve any matter submitted to the stockholders for a vote, and (ii) the Board of Directors may cause all securities beneficially owned by any Person in excess of 4.9% or ten percent (10%), as the case may be, of the total number of outstanding shares of such class of equity securities to be transferred to an independent trustee for sale to the Corporation or on the open market at a price which shall be the lesser of the purchase or the market price. The expenses of such trustee shall be paid out of the proceeds from such sale. The term "offer" as used in this Section 6.6 includes every offer to buy or acquire, solicitation of an offer to sell, tender offer for or request or invitation for tender of, a security or interest in a security of value. Section 6.7 Directors. The Corporation shall be under the direction of a Board of Directors. The number of Directors shall not be fewer than three. The Board of Directors shall be divided into three classes as nearly equal in number as possible, with one class to be elected each year. The initial directors of the Corporation shall hold office as follows: the directors initially elected to Class I shall hold office for a term expiring at the annual meeting of stockholders to be held in 1997, the directors initially elected to Class II shall hold office for a term expiring at the annual meeting of stockholders to be held in 1998, and the directors initially elected to Class III shall hold office for a term expiring at the annual meeting of stockholders to be held in 1999, with the members of each such class to hold office until their respective successors are duly elected and qualified. At each annual meeting, or special meeting in lieu thereof, of stockholders of the Corporation, the successors to the class of directors whose term expires at the meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election and until their respective successors are elected and qualified. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in any certificate of establishment with respect thereto to elect additional Directors under specific circumstances, any Director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the then outstanding Voting Stock, voting together as a single class. At least thirty days prior to such meeting of stockholders, written notice C-12 shall be sent to the Director whose removal will be considered at the meeting. For purposes of this Section 6.7, "cause" shall be defined to mean only the following: (i) conviction of a felony, (ii) declaration of unsound mind by order of court, (iii) gross dereliction of duty, (iv) commission of an act involving moral turpitude, or (v) commission of an action which constitutes intentional misconduct or a knowing violation of law if such action in either event results both in an improper substantial personal benefit and a material injury to the Corporation. Section 6.8 Directors' Liability. No Director shall be personally liable to the Corporation or its stockholders for monetary damages for any breach of such Director's fiduciary duty as a Director, notwithstanding any provision of law imposing such liability; provided, however, that, to the extent required by applicable law, this provision shall not eliminate the liability of a Director (i) for any breach of such Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under provisions of the Massachusetts General Laws imposing liabilities on Directors in respect of distributions to the stockholders of the Corporation or loans to officers or Directors of the Corporation, or (iv) any transaction from which such Director derived any improper personal benefit. This provision shall not eliminate the liability of a Director for any act or omission occurring prior to the date upon which this provision becomes effective. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any Director of the Corporation for or with respect to any acts or omissions of such Director occurring prior to the date of such amendment or repeal. Section 6.9 Transactions with Interested Persons. 6.9.1. Unless entered into in bad faith or in violation of any provision of these Articles of Organization, no contract or transaction by the Corporation shall be void, voidable or in any way affected by reason of the fact that it is with an Interested Person. 6.9.2. For the purposes of this Section 6.9, "Interested Person" means any Person in any way interested in the Corporation whether as a director, officer, stockholder, employee or otherwise, and any other entity in which any such Person is in any way interested. 6.9.3. Unless such contract or transaction was entered into in bad faith or in violation of any provision of these Articles of Organization, no Interested Person, because of such interest, shall be liable to the Corporation or to any other Person for any loss or expense incurred by reason of such contract or transaction or shall be accountable for any gain or profit realized from such contract or transaction. 6.9.4. The provisions of this Section 6.9 shall be operative notwithstanding the fact that the presence of an Interested Person was necessary to constitute a quorum at a meeting of Directors or stockholders of the Corporation at which such contract or transaction was authorized or that the vote of an Interested Person was necessary for the authorization of such contract or transaction. Section 6.10 Acting as a Partner. To the extent not prohibited by applicable law, the Corporation may be a partner in any business enterprise which it would have power to conduct by itself. Section 6.11 Stockholders Meetings. Meetings of stockholders may be held at such place in the Commonwealth of Massachusetts or, if permitted by applicable law, elsewhere in the United States as the Board of Directors may determine. Section 6.12 Call of Special Meetings. Special meetings of the stockholders for any purpose or purposes may be called at any time only by the President or by the Board of Directors pursuant to a resolution adopted by a majority of the total number of Directors that the Corporation would have if there were no vacancies (the "Whole Board"); provided, however, that if there is an Interested Stockholder, any such call shall also require the affirmative vote of a majority of the Continuing Directors then in office. Only those matters set forth in the call of the special meeting may be considered or acted upon at such special meeting, unless otherwise required by law. C-13 Section 6.13 Amendment of Bylaws. The Bylaws of the Corporation may be adopted, altered, amended, changed or repealed by the Board of Directors or the stockholders of the Corporation. Such action by the Board of Directors shall require the affirmative vote of at least a majority of the Directors then in office at a duly constituted meeting of the Board of Directors, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall also require the affirmative vote of at least a majority of the Continuing Directors then in office, at such a meeting. Such action by the stockholders shall require (i) approval by the affirmative vote of a majority of Directors then in office, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall also require the affirmative vote of at least a majority of the Continuing Directors then in office, at such meeting, (ii) unless waived by the affirmative vote of a majority of the Directors then in office (and, if applicable, Continuing Directors) specified in the preceding sentence, the submission by the stockholders of written proposals for adopting, altering, amending, changing or repealing the Bylaws that comply in all respects with the provisions of the Bylaws governing such submissions and (iii) the affirmative vote of at least eighty percent (80%) of the voting power of the then outstanding Voting Stock voting together as a single class at a duly constituted meeting of stockholders called expressly for such purpose. Section 6.14 Amendment of Articles of Organization. No amendment, addition, alteration, change or repeal of any Article of these Articles of Organization shall be made, unless the same is first approved by the affirmative vote of a majority of the Board of Directors of the Corporation then in office, and thereafter approved by the affirmative vote of stockholders holding not less than eighty percent (80%) of the voting power of the then outstanding Voting Stock voting together as a single class cast at a duly constituted meeting, or, in the case of Articles I, II and III hereof by not less than a majority of the voting power of the then outstanding Voting Stock voting together as a single class cast at a duly constituted meeting; provided, however, that if, at any time within the sixty day period immediately preceding the meeting at which the stockholder vote is to be taken, there is an Interested Stockholder, such amendment, addition, alteration, change or repeal shall also require the affirmative vote of not less than a majority of the Continuing Directors then in office, prior to approval by the stockholders. Unless otherwise provided by law, any amendment, addition, alteration, change or repeal so acted upon shall be effective on the date it is filed with the Secretary of State of the Commonwealth of Massachusetts or on such other date as specified in such amendment, addition, alteration, change or repeal or as the Secretary of State may specify. Section 6.15 Reduced Shareholder Vote Approval for Certain Transactions. The Corporation may, by an affirmative vote of the holders of a majority of the voting power of the then outstanding Voting Stock voting together as a single class cast at a duly constituted meeting, authorize any (i) sale, lease or exchange of all or substantially all of its assets (a "Sale") or (ii) consolidation or merger of the Corporation with or into any other corporation (a "Merger", and together with a Sale, a "Transaction") that would otherwise, pursuant to Chapter 156B of the Massachusetts General Laws, have required an affirmative vote of the holders of two-thirds of the voting power of the then outstanding Voting Stock voting together as a single class cast at a duly constituted meeting; provided however, that such Transaction has previously been approved by a vote of at least a majority of the Board of Directors then in office (and, if at the time of such action there shall be an Interested Stockholder, an additional vote of at least a majority of the Continuing Directors then in office). This Section 6.15 is intended to apply to any Transaction that would not otherwise constitute a Business Combination that is subject to the provisions of Section 6.3 above. C-14 ARTICLE VII The effective date of organization of the corporation shall be the date approved and filed by the Secretary of the Commonwealth. If a later effective date is desired, specify such date which shall not be more than thirty days after that date of filing. ARTICLE VIII The information contained in Article VIII is not a permanent part of the Articles of Organization. a. The street address (post office boxes are not acceptable) of the principal office of the corporation in Massachusetts is: 1441 Main Street, Springfield, Massachusetts 01102-3034 b. The name, residential address and post office address of each director and officer of the corporation is as follows:
Name Residential Address Post Office Address President: F. William Marshall, Jr. 87 Ely Road SIS Bancorp, Inc. Longmeadow, MA 01106 1441 Main Street Springfield, MA 01102-3034 Treasurer: John F. Treanor 10 Dutton Circle " Medford, MA 02155 Clerk: Michael E. Tucker 26 Lawler Drive " Easthampton, MA 01027 Directors: John M. Naughton 75 Churchill Drive " Longmeadow, MA 01106 F. William Marshall, Jr. See Above " John F. Treanor See Above "
c. The fiscal year (i.e., tax year) of the corporation shall end on the last day of the month of: December d. The name and business address of the resident agent, if any, of the corporation is: N/A ARTICLE IX By-laws of the corporation have been duly adopted and the president, treasurer, clerk and directors whose names are set forth above, have been duly elected. IN WITNESS WHEREOF AND UNDER THE PAINS AND PENALTIES OF PERJURY, I, whose signature appear below as incorporator and whose name and business or residential address are clearly typed or printed beneath each signature do hereby associate with the intention of forming this corporation under the provisions of General Laws, Chapter 156B and do hereby sign these Articles of Organization as incorporator this 18th day of January, 1996. /s/ Stephen J. Coukos Stephen J. Coukos, Esq. SULLIVAN & WORCESTER One Post Office Square Boston, MA 02109 C-15 THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF ORGANIZATION (General Laws, Chapter 156B) I hereby certify that, upon examination of these Articles of Organization, duly submitted to me, it appears that the provisions of the General Laws relative to the organization of corporations have been complied with, and I hereby approve said articles; and the filing fee in the amount of $300 having been paid, said articles are deemed to have been filed with me this 18th day of January 1996. Effective date:_________________________________ /s/ William Francis Galvin WILLIAM FRANCIS GALVIN Secretary of the Commonwealth FILING FEE: One tenth of one percent of the total authorized capital stock, but not less than $200.00. For the purpose of filing, shares of stock with a par value less than $1.00, or no par stock, shall be deemed to have a par value of $1.00 per share. TO BE FILLED IN BY CORPORATION Photocopy of document to be sent to: Stephen J. Coukos, Esq. SULLIVAN & WORCESTER One Post Office Square Boston, MA 02109 Telephone: 617-338-2912 C-16 [FORM OF ARTICLES OF AMENDMENT TO BE FILED PRIOR TO REORGANIZATION] THE COMMONWEALTH OF MASSACHUSETTS OFFICE OF THE MASSACHUSETTS SECRETARY OF STATE MICHAEL J. CONNOLLY, Secretary ONE ASHBURTON PLACE, BOSTON, MASSACHUSETTS 02108 ARTICLES OF AMENDMENT General Laws, Chapter 156B, Section 72 We, F. William Marshall, Jr., President, and Michael E. Tucker, Clerk, of SIS Bancorp, Inc. (EXACT Name of Corporation) located at: 1441 Main Street, Springfield, Massachusetts 01102 (MASSACHUSETTS Address of Corporation) do hereby certify that these ARTICLES OF AMENDMENT affecting Articles NUMBERED: 3 (Number those articles 1, 2, 3, 4, 5 and/or 6 being amended hereby) of the Articles of Organization were duly adopted at a meeting held on __________ 1996, by vote of: the sole incorporator in accordance with the rights and powers accorded thereto under Ch. 156B M.G.L. ss.44. C-17 To CHANGE the number of shares and the par value (if any) of any type, class or series of stock which the corporation is authorized to issue, fill in the following: The total presently authorized is: WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCK - ------------------------------ ------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - ---- ---------------- ---- ---------------- --------- COMMON: COMMON: 250,000 $0.01 PREFERRED: PREFERRED: 50,000 $0.01 CHANGE the total authorized to: WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCK - ------------------------------ ------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - ---- ---------------- ---- ---------------- --------- COMMON: COMMON: 25,000,000 $0.01 PREFERRED: PREFERRED: 5,000,000 $0.01 C-18 The foregoing amendment will become effective when these articles of amendment are filed in accordance with Chapter 156B, Section 6 of The General Laws unless these articles specify, in accordance with the vote adopting the amendment, a later effective date not more than thirty days after such filing, in which event the amendment will become effective on such later date. LATER EFFECTIVE DATE:__________ IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereunto signed our names this day of , in the year 1996. ______________________________________________President F. William Marshall, Jr. ______________________________________________ Clerk Michael E. Tucker C-19 THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF AMENDMENT GENERAL LAWS, CHAPTER 156B, SECTION 72 I hereby approve the within articles of amendment and, the filing fee in the amount of $ having been paid, said articles are deemed to have been filed with me this day of 19 MICHAEL J. CONNOLLY Secretary of State TO BE FILLED IN BY CORPORATION PHOTOCOPY OF ARTICLES OF AMENDMENT TO BE SENT To: Stephen J. Coukos, Esq. SULLIVAN & WORCESTER LLP One Post Office Square Boston, MA 02109 Telephone: 617-338-2912 C-20 EXHIBIT C-2 BYLAWS OF SIS BANCORP, INC. ARTICLE 1 Organization The name of this Company is SIS Bancorp, Inc. The Company shall have and fully exercise all powers and authority, both express and implied, available to it under applicable law. ARTICLE 2 Offices Section 2.1 Principal Office. The principal office of the Company shall be located at 1441 Main Street, Springfield, Massachusetts and may be changed from time to time by the Board of Directors of the Company, subject to applicable law. Section 2.2 Additional Offices. The Company may have such additional offices, either within or without the Commonwealth of Massachusetts, as the Board of Directors may from time to time designate or the business of the Company may require, subject to applicable law. ARTICLE 3 Stockholders Section 3.1 Annual Meeting. The annual meeting of the stockholders of the Company shall be held on the last Wednesday in April of each year, if not a legal holiday, and if a legal holiday then on the next succeeding business day, at 10:00 a.m., local time, at the principal executive offices of the Company, or at such other date, place and/or time as may be fixed by resolution of the Board of Directors. Section 3.2 Special Meeting. Subject to the rights of the holders of any series of preferred stock, par value $0.01 per share (the "Preferred Stock"), or any other series or class of stock as set forth in the Articles of Organization (as defined in Section 10.3 of these Bylaws) to elect additional directors under specified circumstances, special meetings of the stockholders may be called only by the President or by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors that the Company would have if there were no vacancies (the "Whole Board"); provided, however, that if at the time of such call there is an Interested Stockholder, any such call shall also require the affirmative vote of a majority of the Continuing Directors then in office. As used in these Bylaws, the terms "Interested Stockholder" and "Continuing Director" shall have the same respective meanings assigned to them in the Articles of Organization. Any determination of beneficial ownership of securities under these Bylaws shall be made in the manner specified in the Articles of Organization. Section 3.3 Place of Meeting. The Board of Directors may designate the place of meeting for any meeting of the stockholders. If no designation is made by the Board of Directors, the place of meeting shall be the principal executive offices of the Company. Section 3.4 Notice of Meeting. A written notice of all annual and special meetings of stockholders stating the hour, date, place and purposes of such meetings shall be given by the Clerk or an Assistant Clerk (or other person authorized by these Bylaws or by law) not less than seven days nor more than fifty days before the C-21 meeting to each stockholder entitled to vote thereat or to each stockholder who, under the Articles of Organization or under these Bylaws, is entitled to such notice by mailing it addressed to such stockholder at the address of such stockholder as it appears on the stock transfer books of the Company. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid. In the case of a special meeting the notice shall also state the purpose or purposes thereof. Any previously scheduled meeting of the stockholders may be postponed by resolution of the Board of Directors upon public notice given prior to the time previously scheduled for such meeting of stockholders. Section 3.5 Waiver of Notice. Notice of any stockholders' meeting may be waived in writing by any stockholder either before or after the time stated therein for convening of the meeting, and, if any person present in person or by proxy at a stockholders' meeting does not protest, prior to or at the commencement of the meeting, the lack of proper notice, such person shall be deemed to have waived notice of such meeting. Section 3.6 Quorum and Adjournment. Except as otherwise provided by law or by the Articles of Organization, the holders of a majority of the voting power of the then outstanding shares of the Company entitled to vote generally in the election of directors (the "Voting Stock"), represented in person or by proxy, shall constitute a quorum at a meeting of stockholders, except that when specified business is to be voted on by a class or series voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum for the transaction of such business. The chairman of the meeting or a majority of the voting power of the shares of Voting Stock so represented may adjourn the meeting from time to time, whether or not there is such a quorum (or in the case of specified business to be voted on as a class or series, the chairman or a majority of the shares of such class or series so represented may adjourn the meeting with respect to such specified business). No notice of the time and place of adjourned meetings need be given except as required by law. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Section 3.7 Proxies. Stockholders may vote either in person or by written proxy dated not more than six months before the meeting named therein. Proxies shall be filed with the Clerk of the meeting, or of any adjournment thereof, before being voted. Except as otherwise limited therein, proxies shall entitle the persons authorized thereby to vote at any adjournment of such meeting, but they shall not be valid after final adjournment of such meeting. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by or on behalf of any one of them unless at or prior to the exercise of the proxy the Company receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. Section 3.8 Notice of Stockholder Business and Nominations. (A) Annual Meetings of Stockholders. (1) Nominations of persons for election to the Board of Directors of the Company and the proposal of business to be considered by the stockholders may be made at an annual meeting of the stockholders (a) pursuant to the Company's notice of meeting delivered pursuant to Section 3.4 of these Bylaws, (b) by or at the direction of the President or the Board of Directors pursuant to a resolution adopted by a majority of the Whole Board (unless there is an Interested Stockholder, in which case the affirmative vote of a majority of the Continuing Directors then in office shall also be required) or (c) by any stockholder of the Company who is entitled to vote at the meeting, who complied with the notice procedures set forth in clauses (2) and (3) of paragraph (A) of this Section 3.8 and who was a stockholder of record at the time such notice is delivered to the Clerk of the Company. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this Section 3.8, the stockholder must have given timely notice thereof in writing to the Clerk of the Company. To be timely, a stockholder's notice shall be delivered to the Clerk at the principal executive offices of the Company not less than seventy days nor more C-22 than ninety days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than twenty days, or delayed by more than seventy days, from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the ninetieth day prior to such annual meeting and not later than the close of business on the later of the seventieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to regulations promulgated by the Securities and Exchange Commission (the "SEC"), or any successor agency thereto, pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Company's books, and of such beneficial owner and (ii) the class and number of shares of the Company which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Section 3.8 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Company at least eighty days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by these Bylaws shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Clerk at the principal executive offices of the Company not later than the close of business on the tenth day following the day on which such public announcement is first made by the Company. (B) Special Meeting of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Company's notice of meeting pursuant to Section 3.4 of these Bylaws. (C) General. (1) Only persons who are nominated in accordance with the procedures set forth in these Bylaws shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in these Bylaws. (2) Except as otherwise provided by law, the Articles of Organization or these Bylaws, the Chief Executive Officer of the Company as chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in these Bylaws and, if any proposed nomination or business is not in compliance with these Bylaws, to declare that such defective proposal or nomination shall be disregarded. (3) For purposes of these Bylaws, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Company with the SEC pursuant to Section 13, 14 or 15(d) of the Exchange Act. (4) Notwithstanding the foregoing provisions of these Bylaws, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in these Bylaws. Nothing in these Bylaws shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Company's proxy statement pursuant to rules promulgated under the Exchange Act or (ii) of the holders of any series of Preferred Stock to elect directors under specified circumstances. C-23 Section 3.9 Procedure for Election of Directors; Required Vote. Election of directors at all meetings of the stockholders at which directors are to be elected shall be by written ballot, and except as otherwise set forth in the Articles of Organization with respect to the right of the holders of any series of Preferred Stock or any other series or class of stock to elect additional directors under specified circumstances, a plurality of the votes cast thereat shall elect the directors. Except as otherwise provided by law, the Articles of Organization or these Bylaws, all matters submitted to the stockholders at any meeting shall be decided by the affirmative vote of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the matter and shall be the act of the stockholders. Section 3.10 No Stockholder Action by Written Consent. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in the Articles of Organization to elect additional directors under specific circumstances or to consent to specific actions taken by the Company, any action required or permitted to be taken by the stockholders of the Company must be effected at an annual or special meeting of stockholders of the Company and may not be effected by any consent in writing by such stockholders. ARTICLE 4 Board of Directors Section 4.1 General Powers. The business and affairs of the Company shall be managed by or under the direction of its Board of Directors. In addition to the powers and authorities by these Bylaws expressly conferred upon them, the Board of Directors may exercise all such powers of the Company and do all such lawful acts and things as are not by law or by the Articles of Organization or by these Bylaws required to be exercised or done by the stockholders. Section 4.2 Composition and Term. The Board of Directors shall be composed of: (a) those persons elected by the incorporator(s) of the Company to serve as the initial directors of the Company in accordance with Section 12 of Chapter 156B of the Massachusetts General Laws, such persons to serve as directors until the respective expiration dates of their terms as established by said incorporator(s) and until their successors are elected and qualified and (b) such other persons who are elected as directors from time to time as provided herein. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in the Articles of Organization to elect directors under specified circumstances, the number of directors shall be fixed from time to time exclusively pursuant to a resolution adopted by a majority of the Whole Board (provided that if at the time of such action there is an Interested Stockholder, a majority vote of the Continuing Directors then in office shall also be required), but shall consist of not less than three directors. The directors, other than those who may be elected by the holders of any series of Preferred Stock or any other series or class of stock as set forth in the Articles of Organization, shall be divided into three classes as nearly equal in number as possible, and designated as Class I, Class II and Class III. Members of each Class shall hold office until their successors shall have been duly elected and qualified. At each succeeding annual meeting of stockholders of the Company, (i) the successors of the Class of directors whose term expires at that meeting shall be elected by a plurality vote of all votes cast at such meeting to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election, and until their successors are elected and qualified and (ii) if authorized by a resolution of the Board of Directors, directors may be elected to fill any vacancy on the Board of Directors, regardless of how such vacancy shall have been created. Section 4.3 Qualification. Each director shall have such qualifications as are required by applicable law. Any director who becomes in any manner disqualified, shall vacate his office forthwith. To the extent required by law, each director, when appointed or elected, shall take an oath that he will faithfully perform the duties of his office. The oath, to the extent so required, shall be taken before a notary public or justice of the peace, who is not an officer of the Company, and a record of the oath shall be made a part of the records of the Company. C-24 To the extent required by law, members of the Board of Directors shall be citizens and residents of the Commonwealth of Massachusetts. Section 4.4 Regular Meetings. A regular meeting of the Board of Directors shall be held without notice other than these Bylaws immediately after, and at the same place as, each annual meeting of stockholders. The Board of Directors may, by resolution, provide the time and place for the holding of additional regular meetings without notice other than such resolution. Section 4.5 Special Meetings. Special meetings of the Board of Directors shall be called at the request of the Chairman of the Board, if one is elected, the President, or a majority of the Board of Directors. The person or persons authorized to call special meetings of the Board of Directors may fix the place and time of the meetings. Section 4.6 Notice. Notice of any special meeting shall be given to each director at his or her business or residence in writing by hand delivery, first-class or overnight mail or courier service, telegram or facsimile transmission or orally by telephone communication. If mailed, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, at least five days before such meeting. If by telegram, overnight mail, or courier service such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph company or its notice is delivered to the overnight mail or courier service company at least twenty-four hours before such meeting. If by facsimile transmission, such notice shall be deemed adequately delivered when the notice is transmitted at least twenty-four hours before such meeting. If by telephone or by hand delivery, the notice shall be given at least twelve hours prior to the time set for the meeting. Neither business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice of such meeting, except for amendments to these Bylaws as provided under Article 8 of these Bylaws. A meeting may be held at any time without notice if all the directors are present or if those not present waive notice of the meeting as provided in Section 4.7 of these Bylaws. Section 4.7 Waiver of Notice. Notice of any directors' meeting may be waived in writing by all the directors and, if any director present at a directors' meeting does not protest prior to or at the commencement of the meeting the lack of proper notice, he shall be deemed to have waived notice of such meeting. Section 4.8 Quorum. A majority of the Whole Board shall constitute a quorum for the transaction of business, but if at any meeting of the Board of Directors there shall be less than a quorum present, a majority of the directors present may adjourn the meeting from time to time without further notice. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 4.9 Vacancies. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in the Articles of Organization to elect additional directors under specified circumstances, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, unless there is an Interested Stockholder, in which case such vacancy may only be filled by vote of a majority of the Continuing Directors then in office. A director so chosen shall hold office for the remainder of the full term of the Class of directors in which the vacancy occurred or the new directorship was created and until such director's successor has been elected and qualified. No decrease in the number of authorized directors shall shorten the term of any incumbent director. Section 4.10 Presumption of Assent. A director of the Company who is present at a meeting of the Board of Directors at which action on any Company matter is taken shall be presumed to have assented to the action taken unless his dissent or abstention shall be entered in the minutes of the meeting or unless he shall file a written dissent to such action with the person acting as the Clerk of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Clerk of the Company within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action. C-25 Section 4.11 Manner of Participation. Members of the Board of Directors or of committees elected by the Board pursuant to Section 4.15 may participate in meetings of the Board or such committee by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person but shall not constitute attendance for the purpose of compensation pursuant to Section 4.12, unless the Board of Directors by resolution so provides. Section 4.12 Compensation of Directors. The Board of Directors shall have authority to fix fees of directors, including a reasonable allowance for expenses actually incurred in connection with their duties. Section 4.13 Resignation. Any director may resign at any time by sending a written notice of such resignation to the principal executive office of the Company addressed to the Chairman of the Board, the President or the Clerk. Unless the resigning director otherwise specifies in the notice of resignation, such resignation shall take effect upon receipt by the Chairman of the Board, the President or the Clerk. Section 4.14 Limitation on Service by Directors. A director upon attaining the age of seventy (70) shall retire from service as a director of the Company. In special circumstances, a person may be nominated as a Director who has attained the age of seventy (70) because of the special contribution such person may make to the business and management of the Company. Section 4.15 Committees. The Board of Directors may, by resolution adopted by a majority of the Whole Board, designate one or more committees, including without limitation an executive committee, each committee to consist of three (3) or more directors elected by the Board of Directors. The Board of Directors may elect one or more directors as alternate members of any such committee, who may take the place of any absent member or members at a meeting of such committee. If a member of any such committee shall be absent from any meeting, or disqualified from voting thereat, the remaining member or members present and not disqualified from voting, whether or not such member or members constitute a quorum, may, by unanimous vote, appoint another member of the Board of Directors to act at the meeting in place of an absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors, and except as otherwise provided by law, the Articles of Organization or these Bylaws, shall have and may exercise, when the Board of Directors is not in session, all the powers and authority of the Board of Directors in the direction of the Company. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Unless otherwise specified in the resolution of the Board of Directors designating the committee, the majority of the total number of members of the committee shall constitute a quorum for the transaction of business, and the vote of the majority of the members of the committee present at any meeting of which there is a quorum shall be the act of the committee. Each such committee shall keep regular minutes of its meetings and report the same to the Board of Directors, when required. Section 4.16 Removal. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in the Articles of Organization to elect additional directors under specified circumstances, any director may be removed from office at any time, but only for cause and then only by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the then outstanding Voting Stock, voting together as a single class. ARTICLE 5 Officers Section 5.1 Enumeration. The officers of the Company shall consist of a President, a Treasurer, a Clerk and such other officers, including, without limitation, a Chairman of the Board, a Clerk and one or more Vice Presidents as the Board of Directors may determine to be necessary for the management of the Company. C-26 Section 5.2 Election. The President, Treasurer and the Clerk (and, if any, the Secretary) shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders. Other officers shall be elected by the Board of Directors at such first meeting of the Board of Directors or at any other meeting. Section 5.3 Qualification. Any two or more offices may be held by any person. The President shall be a Director. Any officer may be required by the Board of Directors to give bond for the faithful performance of his duties in such amount and with such sureties as the Board of Directors may determine. Section 5.4 Tenure. Except as otherwise provided by law, by the Articles of Organization, or by these Bylaws, the President, Treasurer and Clerk (and, if any, the Secretary) shall hold office until the first meeting of the Board of Directors following the next annual meeting of the stockholders and until their respective successors are chosen and qualified and all other officers shall hold office until the first meeting of the Board of Directors following the next annual meeting of stockholders, or for such shorter term as the Board of Directors may fix at the time such officers are chosen. The Chief Executive Officer may resign at any time by written notice to the Board of Directors or the Clerk. Any other officer may resign at any time by written notice to the Chief Executive Officer. Such resignation shall be effective upon receipt unless the resignation otherwise provides. Election or appointment of an officer, employee or agent shall not of itself create contract rights. The Board of Directors may, however, authorize the Company to enter into an employment contract with any officer in accordance with law, but no such contract right shall impair the right of the Board of Directors to remove any officer at any time in accordance with Section 5.5 hereof. Section 5.5 Removal. Except as otherwise provided by law or the Articles of Organization, the Board of Directors may remove any officer with or without cause by the affirmative vote of a majority of the Whole Board; provided, however, that if at the time of such removal there is an Interested Stockholder, the affirmative vote of a majority of the Continuing Directors then in office shall also be required. Any such removal, other than for cause, shall be without prejudice to the contract rights, if any, of the persons involved. Any officer may be removed for cause only after ten days' written notice and opportunity to be heard by the Board of Directors. Section 5.6 Absence or Disability. In the event of the absence or disability of any officer, the Board of Directors may designate another officer to act temporarily in place of such absent or disabled officer. Section 5.7 Vacancies. Any vacancy in any office may be filled for the unexpired portion of the term by the Board of Directors. Section 5.8 Chief Executive Officer. The President shall be the Chief Executive Officer, unless the Board of Directors shall elect a Chairman of the Board and designate such Chairman to be the Chief Executive Officer. The Chief Executive Officer shall, subject to the direction of the Board of Directors, have general supervision and control of the Company's business and shall preside, when present, at all meetings of the stockholders. Section 5.9 Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Board of Directors. If a Chairman of the Board is not elected or is absent, the President shall preside at all meetings of the Board of Directors. The Chairman of the Board shall have such other powers and shall perform such other duties as the Board of Directors may from time to time designate. If the Chairman of the Board is not the Chief Executive Officer, he shall also have such powers and perform such duties as the Chief Executive Officer may from time to time designate. Section 5.10 The President. The President, if he is the Chief Executive Officer, shall preside at all meetings of the stockholders. If a Chairman of the Board is not elected or is absent, the President shall preside at all meetings of the Board of Directors. If the President is not the Chief Executive Officer, he shall have such powers and perform such duties as the Chief Executive Officer may from time to time designate. C-27 Section 5.11 Vice Presidents, Treasurer and Other Officers. Any Vice President, the Treasurer and any other officers whose powers and duties are not otherwise specifically provided for herein shall have such powers and shall perform such duties as the Chief Executive Officer may from time to time designate. Section 5.12 Clerk and Assistant Clerks. The Clerk shall keep a record of the meetings of stockholders. If a Secretary is not elected or is absent, the Clerk shall keep a record of the meetings of the Board of Directors. In the absence of the Clerk, an Assistant Clerk, if one is elected, shall perform the Clerk's duties. Otherwise a Temporary Clerk designated by the person presiding at the meeting shall perform the Clerk's duties. Section 5.13 Secretary and Assistant Secretaries. The Secretary, if one is elected, shall keep a record of the meetings of the Board of Directors. In the absence of the Secretary, any Assistant Secretary, the Clerk, any Assistant Clerk or a Temporary Secretary designated by the person presiding at such meeting shall perform the Secretary's duties. ARTICLE 6 Stock Certificates and Transfers Section 6.1 Certificates of Stock. Unless otherwise provided by the Board of Directors, each stockholder shall be entitled to a certificate of the capital stock of the Company in such form as may from time to time be prescribed by the Board of Directors. Such certificate shall be signed by the President or a Vice President and by the Treasurer or an Assistant Treasurer. Such signatures may be facsimile if the certificate is signed by a transfer agent or by a registrar, other than a Director, officer or employee of the Company. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Company with the same effect as if he were such officer at the time of its issue. Every certificate for shares of stock which are subject to any restriction on transfer and every certificate issued when the Company is authorized to issue more than one class or series of stock shall contain such legend with respect thereto as is required by law. Section 6.2 Transfers. Subject to any restrictions on transfer and unless otherwise provided by the Board of Directors, shares of stock may be transferred on the books of the Company by the surrender to the Company or its transfer agent of the certificate therefor properly endorsed or accompanied by a written assignment and power of attorney properly executed, with transfer stamps (if necessary) affixed, and with such proof of the authenticity of signature as the Company or its transfer agent may reasonably require. Section 6.3 Record Holders. Except as otherwise required by law, by the Articles of Organization or by these Bylaws, the Company shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote, regardless of any transfer, pledge or other disposition of such stock, until the shares have been transferred on the books of the Company in accordance with the requirements of these Bylaws. It shall be the duty of each stockholder to notify the Company of his address and any changes thereto. Section 6.4 Record Date. The Board of Directors may fix in advance a time of not more than sixty days before the date of any meeting of the stockholders, the date for the payment of any dividend or the making of any distribution to stockholders or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting, and any adjournment thereof, or the right to receive such dividend or distribution or the right to give such consent or dissent. In such case, only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the Company after the record date. If no record date is fixed and the transfer books are not closed, (a) the record date for determining stockholders having the right to notice of or to vote at a meeting of stockholders shall be the close of business C-28 on the day next preceding the day on which notice is given, and (b) the record date for determining stockholders for any other purpose shall be the close of business on the date on which the Board of Directors acts with respect thereto. Section 6.5 Replacement of Certificates. In case of the alleged loss, destruction or mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms as the Board of Directors may prescribe. Section 6.6 Issuance of Capital Stock. Except as provided by law, the Board of Directors shall have the authority to issue or reserve for issue from time to time the whole or any part of the capital stock of the Company which may be authorized from time to time, to such persons or organizations, for such consideration, whether cash, property, services or expenses and on such terms as the Board of Directors may determine, including, without limitation, the granting of options, warrants or conversion or other rights to subscribe to said capital stock. Section 6.7 Dividends. Subject to applicable law, the Articles of Organization and these Bylaws, the Board of Directors may from time to time declare, and the Company may pay, dividends on outstanding shares of its capital stock. ARTICLE 7 Indemnification Section 7.1 Indemnification and Insurance. (A) Each person who was or is made a party or is threatened to be made a party to or is otherwise involved (including, without limitation, as a witness) in any action, suit or proceeding, whether civil, derivative, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, partner, trustee, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to any employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action or inaction in an official capacity as a director, officer, partner, trustee, employee or agent or in any other capacity while serving as a director, officer, partner, trustee, employee or agent, shall be indemnified and held harmless by the Company against all expense, liability and loss (including, without limitation, attorneys' fees and disbursements, judgments, fines, excise taxes or penalties under the Employee Retirement Income Security Act of 1974, as amended, and amounts paid or to be paid in settlement) reasonably incurred by such indemnitee in connection with such proceeding, provided that such indemnitee shall have acted in good faith in the reasonable belief that such action was in, or not opposed to, the best interests of the Company or such corporation, partnership, joint venture, trust or other enterprise, as the case may be, or with respect to any employee benefit plan, the best interests of the participants or beneficiaries of such employee benefit plan; provided, however, that except as provided in paragraph (C) of this Section 7.1 with respect to proceedings seeking to enforce rights to indemnification, the Company shall indemnify any such indemnitee seeking indemnification in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors. (B) The right to indemnification conferred in paragraph (A) of this Section 7.1 shall include the right to be paid by the Company the expenses (including attorneys' fees and disbursements) incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, to the extent required by applicable law, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Company of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay C-29 all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this paragraph (B) or otherwise. (C) If a claim under paragraphs (A) or (B) of this Section 7.1 is not paid in full by the Company within thirty days after a written claim has been received by the Company, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right of an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the Company shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth under applicable law. Neither the failure of the Company (including its Board of Directors, independent legal counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth under applicable law, nor an actual determination by the Company (including its Board of Directors, independent legal counsel or stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Company to recover an advancement of expenses pursuant to the terms of an undertaking, the burden or proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under these Bylaws or otherwise shall be on the Company. (D) The right to indemnification and the advancement of expenses conferred in this Section 7.1 shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Articles of Organization, provision of these Bylaws, agreement, vote of stockholders or disinterested directors or otherwise. (E) The Company may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Company or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under applicable law. (F) The Company may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and rights to the advancement of expenses, to any employee or agent of the Company to the fullest extent of the provisions of these Bylaws with respect to the indemnification and advancement of expenses of directors and officers of the Company. (G) The rights to indemnification and to the advancement of expenses conferred in paragraphs (A) and (B) of this Section 7.1 shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. Section 7.2 Merger or Consolidation. If the Company is merged into or consolidated with another corporation and the Company is not the surviving corporation, the surviving corporation shall assume the obligations of the Company under this Article 7 with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring at or prior to the date of such merger or consolidation. Section 7.3 Savings Clause. If this Article 7 or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify and advance expenses to C-30 each indemnitee as to any expenses (including reasonable attorneys' fees), judgments, fines, liabilities, losses, and amounts paid in settlement in connection with any action, suit, proceeding or investigation, whether civil, criminal or administrative, including an action by or in the right of the Company, to the fullest extent permitted by any applicable portion of this Article 7 that shall not have been invalidated and to the fullest extent permitted by applicable law. Section 7.4 Subsequent Legislation. If the Massachusetts General Laws are amended after adoption of this Article 7 to expand further the indemnification permitted to an indemnitee, then the Company shall indemnify all such persons to the fullest extent permitted by the Massachusetts General Laws, as so amended. ARTICLE 8 Amendments Section 8.1 Amendments. These Bylaws may be altered, amended, changed or repealed by the Board of Directors or the stockholders of the Company, provided notice of the proposed change was given in the notice of the meeting and, in the case of the Board of Directors, in a notice given no less than twenty-four hours prior to the meeting. Such action by the Board of Directors shall require the affirmative vote of at least a majority of the Directors then in office at a duly constituted meeting of the Board of Directors, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall also require the affirmative vote of at least a majority of the Continuing Directors then in office, at such a meeting. Such action by the stockholders shall require (i) approval by the affirmative vote of a majority of Directors then in office, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall also require the affirmative vote of at least a majority of the Continuing Directors then in office, at such meeting, (ii) unless waived by the affirmative vote of a majority of the Directors then in office (and, if applicable, the affirmative vote of a majority of the Continuing Directors then in office) specified in the preceding sentence, the submission by the stockholders of written proposals for adopting, altering, amending, changing or repealing the Bylaws that comply in all respects with the provisions of these Bylaws governing such submissions and (iii) the affirmative vote of at least eighty percent (80%) of the voting power of the then outstanding Voting Stock voting together as single class at a duly constituted meeting of stockholders called expressly for such purpose. ARTICLE 9 Special Corporate Acts Section 9.1 Execution of Negotiable Instruments. All checks, drafts, notes, bonds, bills of exchange, and orders for the payment of money shall be signed by such officer or officers of the Company as the Board of Directors shall determine from time to time. The Board of Directors may authorize the use of facsimile signatures of any officer or employee in lieu of manual signatures. Section 9.2 Execution of Deeds, Contracts, Etc. Subject always to the specific directions of the Board of Directors or the Executive Committee, all deeds, mortgages, assignments, extensions, releases, partial releases, and discharges of mortgages made by the Company and all other written contracts, agreements and undertakings to which the Company shall be a party shall be executed in its name by the Chairman of the Board of Directors, the President, any Executive Vice President, any Senior Vice President, any Vice President, or such other officer as may be designated by the Chairman of the Board of Directors or the President, and, when requested, the Clerk or an Assistant Clerk shall attest to such signatures and affix the corporate seal to the instruments. Section 9.3 Endorsement of Stock Certificates. Subject always to the specific directions of the Board of Directors or the Executive Committee, any share or shares of stock issued by any corporation and owned by the Company (including reacquired shares of stock of the Company) may, for sale or transfer, be endorsed in the name of the Company by the Chairman of the Board of Directors, the President or such other officer as may be C-31 designated by the Chairman of the Board of Directors or the President, and his signature shall be attested to by the Clerk or an Assistant Clerk who shall affix the corporate seal. Section 9.4 Voting of Shares Owned by Company. Subject always to the specific directions of the Board of Directors or the Executive Committee, any share or shares of stock issued by any other corporation and owned or controlled by the Company may be voted at any stockholders' meeting of the other corporation by the President or Chief Executive Officer of the Company, or in the absence by such other officer as may be designated by the President or Chief Executive Officer. Whenever, in the judgment of the President or the Chief Executive Officer, or in their absence, of any such other officer as may be designated by the President or Chief Executive Officer, it is desirable for the Company to execute a proxy or give a stockholders' consent in respect to any share or shares of stock issued by any other corporation and owned or controlled by the Company, the proxy or consent shall be executed in the name of the Company by the President of Chief Executive Officer without necessity of any authorization by the Board of Directors. Any person or persons designated in the manner above stated as the proxy or proxies of the Company shall have full right, power and authority to vote the share or shares of stock issued by the other corporation. ARTICLE 10 Miscellaneous Provisions Section 10.1 Fiscal Year. Except as otherwise determined by the Board of Directors, the fiscal year of the Company shall be the twelve months ending December 31 or on such other date as may be required by law. Section 10.2 Seal. The Board of Directors shall have power to adopt and alter the seal of the Company. Section 10.3 Articles of Organization. All references in these Bylaws to the Articles of Organization shall be deemed to refer to the Articles of Organization of the Company, as amended and in effect from time to time. C-32 EX-99.6 7 EXHIBIT 99.6 FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C. FORM F-4 QUARTERLY REPORT under Section 13 of the Securities Exchange Act of 1934 For the Quarter Ended March 31, 1996 23297 (FDIC Certificate Number) -------------- SPRINGFIELD INSTITUTION FOR SAVINGS (exact name of bank as specified in charter) COMMONWEALTH OF MASSACHUSETTS (State or other jurisdiction of incorporation or organization) 1441 Main Street Springfield, Massachusetts 01102 (address of principal office) 04-1859200 (I.R.S. Employer Identification No.) Telephone: (413) 748-8000 (Bank's telephone number, including area code) Indicate by check mark whether the bank (1) has filed all reports to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The Bank has 5,718,200 shares of common stock, par value $1.00 per share, outstanding as of March 31, 1996. --------------- CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Bank desires to take advantage of the new "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. This Report contains certain "forward-looking statements" including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. The Bank wishes to caution readers that the following important factors, among others, may have affected and could in the future affect the Bank's actual results and could cause the Bank's actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf on the Bank herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Bank must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Bank's organization, compensation and benefit plans; (iii) the effect on the Bank's competitive position within its market area of the increasing consolidation within the banking and financial services industries, including the increased competition from larger regional and out-of-state banking organizations as well as nonbank providers of various financial services; (iv) the effect of unforeseen changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the local, regional or national economies. SPRINGFIELD INSTITUTION FOR SAVINGS FORM F-4 INDEX PAGE NO. Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Operations for the three months ended March 31, 1996 and 1995........ 1 Condensed Consolidated Statements of Financial Condition at March 31, 1996 and December 31, 1995................... 2 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1996 and 1995........ 3 Condensed Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 1996 and 1995................................... 5 Notes to the Unaudited Financial Statements................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 7 Exhibits A. Computation of Pro Forma Earnings per Share................... 24
SPRINGFIELD INSTITUTION FOR SAVINGS CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands Except Per Share Amounts) (Unaudited) Three Months Ended March March ---------------------------- 1996 1995 ---- ---- Interest and dividend income Loans $ 11,552 $ 10,618 Investment securities available for sale 4,126 2,656 Investment securities held to maturity 2,946 2,284 Federal funds sold and interest bearing deposits 214 464 --------- --------- Total interest and dividend income 18,838 16,022 --------- --------- Interest expense Deposits 8,077 6,716 Borrowings 1,190 46 --------- --------- Total interest expense 9,267 6,762 --------- --------- Net interest and dividend income 9,571 9,260 Less: Provision for possible loan losses 700 1,153 --------- --------- Net interest and dividend income after provision for possible loan losses 8,871 8,107 Noninterest income: Net gain (loss) on sale of loans 270 (6) Net gain (loss) on sale of securities 2 4 Fees and other income 2,309 2,048 --------- --------- Total noninterest income 2,581 2,046 --------- --------- Noninterest expense: Operating expenses: Salaries and employee benefits 4,250 4,036 Occupancy expense of bank premises, net 782 900 Furniture and equipment expense 542 459 Other operating expenses 3,116 3,535 --------- --------- Total operating expenses 8,690 8,930 --------- --------- Foreclosed real estate expense 160 330 Net expense of real estate operations (14) 65 --------- --------- Total noninterest expense 8,836 9,325 Income before income tax expense 2,616 828 Income tax expense 212 39 --------- --------- Net income $ 2,404 $ 789 ========= ========= Earnings per share and pro forma earnings per share: Primary $ 0.45 $ 0.15 Fully diluted $ 0.45 $ 0.15 Weighted average and pro forma weighted average shares outstanding: Primary 5,336,487 5,117,500 Fully diluted 5,336,487 5,117,500
See accompanying Notes to the Unaudited Financial Statements 1
SPRINGFIELD INSTITUTION FOR SAVINGS CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In Thousands Except Share Amounts) (Unaudited) March 31, December 31, ------------- -------------- 1996 1995 ---- ---- ASSETS Cash and due from banks $ 28,646 $ 30,377 Federal funds sold and interest bearing deposits 6,045 8,045 Investment securities available for sale 300,265 246,984 Investment securities held to maturity (fair value: $184,191 at March 31, 1996 and $172,930 at December 31, 1995) 184,349 172,793 Loans receivable, net of allowance for possible loan losses ( $14,619 at March 31, 1996 and $ 14,986 at December 31, 1995) 561,157 558,663 Accrued interest and dividends receivable 7,393 7,109 Investments in real estate and real estate partnerships 6,101 6,092 Foreclosed real estate, net 502 1,529 Bank premises, furniture and fixtures, net 25,590 25,706 Other assets 15,122 13,680 ----------- ----------- Total assets $ 1,135,170 $ 1,070,978 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 911,124 $ 885,386 Federal Home Loan Bank advances 48,497 41,500 Securities sold under agreements to repurchase 61,215 31,101 Loans payable 3,204 5,470 Mortgage escrow 6,168 4,193 Accrued expenses and other liabilities 20,725 21,859 ----------- ----------- Total liabilities 1,050,933 989,509 ----------- ----------- Commitments and contingent liabilities Stockholders' equity: Preferred stock ($1 par value; 5,000,000 shares authorized: no shares issued and outstanding) -- -- Common stock ($1 par value; 25,000,000 shares authorized; shares issued and outstanding: 5,718,200 at March 31, 1996 and 5,710,700 at December 31, 1995) 5,718 5,710 Unearned compensation (4,649) (4,937) Additional paid-in capital 36,197 35,887 Retained earnings 45,486 43,083 Net unrealized gains (losses) on investment securities available for sale 1,485 1,726 ----------- ----------- Total stockholders' equity 84,237 81,469 ----------- ----------- Total liabilities and stockholders' equity $ 1,135,170 $ 1,070,978 ----------- -----------
See accompanying Notes to the Unaudited Financial Statements 2
SPRINGFIELD INSTITUTION FOR SAVINGS CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars In Thousands) Three Months Ended March 31, 1996 1995 --------- ---------- Cash Flows From Operating Activities Net income (loss) $ 2,404 $ 789 Adjustments to reconcile net income (loss) to net cash (used for)/ provided by operating activities Provision for possible loan losses 700 1,153 Provision for foreclosed real estate - 311 Depreciation 747 787 Amortization of premium on investment securities, net 588 25 Investment security (gains) (2) (4) Loss (income) from equity investment in partnerships (87) (3) (Gain) loss on sale of loans (270) 6 Disbursements for mortgage loans held for sale (33,322) (5,757) Receipts from mortgage loans held for sale 33,592 5,752 Loss on sale of fixed assets and real estate - 1 Changes in assets and liabilities: (Increase) decrease in other assets, net (1,549) 665 Decrease in accrued expenses and other liabilities (904) (13,297) ------- ------- Net cash (used for)/provided by operating activities 1,897 (9,572) ------- ------- Cash Flows From Investing Activities Proceeds from sales of investment securities - available for sale 6,600 - Proceeds from maturities and principal payments received on investment securities - available for sale 46,750 33,905 Purchase of investment securities - available for sale (107,484) (36,973) Proceeds from maturities and principal payments received on investment securities - held to maturity 11,728 2,890 Purchase of investment securities -held to maturity (23,436) (23,286) Net decrease in investment in real estate - (2) Net change in loans receivable (3,819) (19,759) Net change in foreclosed real estate 1,368 78 Proceeds from sale of loans 284 161 Proceeds from sale of fixed assets and leases - 1 Purchase of fixed assets (553) (1,122) ------- ------- Net cash (used for)/provided by investing activities (68,562) (44,107) ------- -------
See accompanying Notes to the Unaudited Financial Statements 3
SPRINGFIELD INSTITUTION FOR SAVINGS CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars In Thousands) Three Months Ended March 31, 1996 1995 --------- ---------- Cash flows from financing activities Net proceeds from stock conversion - 35,946 Net increase (decrease) in deposits 25,738 (6,283) Net increase in borrowings 34,845 3,470 Net increase in mortgagors' escrow deposits 1,975 2,540 Net decrease in unearned compensation 376 - --------- -------- Net cash provided by/(used for) financing activities 62,934 35,673 --------- -------- (Decrease) in cash and cash equivalents (3,731) (18,006) Cash and cash equivalents, beginning of year 38,422 55,720 --------- -------- Cash and cash equivalents, at quarter end $ 34,691 $ 37,714 ========= ======== Supplemental disclosures of cash flow information: Cash paid during the year for interest to depositors and interest on debt $ 9,220 $ 6,647 Non-cash investing activities: Transfers to foreclosed real estate, net $ 341 $ 8
See accompanying Notes to the Unaudited Financial Statements 4
SPRINGFIELD INSTITUTION FOR SAVINGS CONDENSED CONSOLIDATED CHANGES IN STOCKHOLDERS' EQUITY For The Three Months Ended March 31, 1996 and 1995 (Dollars In Thousands) Net unrealized gain (loss) on investment Additional securities Common Unearned Paid-In Retained available Stock Compensation Capital Earnings for sale Total --------- ------------ ----------- -------- ------------- ----- Balance at December 31, 1995 $ 5,710 ($ 4,937) $ 35,887 $ 43,083 $ 1,726 $ 81,469 Net income - - - 2,404 - 2,404 Issuance of common stock - Unearned compensation 8 (241) 309 - - 76 Decrease in unearned compensation - 529 - - - 529 Change in unrealized gain (loss) on investment securities available for sale - - - - (241) (241) -------- -------- -------- -------- -------- -------- Balance at March 31, 1996 $ 5,718 ($ 4,649) $ 36,196 $ 45,487 $ 1,485 $ 84,237 ======== ======== ======== ======== ======== ======== Balance at December 31, 1994 $ - $ - $ - $ 31,624 ($ 3,121) $ 28,503 Net income - - - 789 - 789 Issuance of common stock 5,562 - 33,944 - - 39,506 Unearned compensation - (3,560) - - - (3,560) Decrease in unearned compensation - - - - - - Change in unrealized gain (loss) on investment securities available for sale - - - - 2,761 2,761 -------- -------- -------- -------- -------- -------- Balance at March 31, 1995 $ 5,562 ($ 3,560) $ 33,944 $ 32,413 ($ 360) $ 67,999 ======== ======== ======== ======== ======== ========
See accompanying Notes to the Unaudited Consolidated Financial Statements 5 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO THE UNAUDITED FINANCIAL STATEMENTS 1. Condensed Consolidated Financial Statements The Condensed Consolidated Financial Statements of Springfield Institution for Savings (the "Bank") included herein are unaudited, and in the opinion of Management all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the financial condition, results of operations and cash flows, as of and for the periods covered herein, have been made. Certain information and note disclosures normally included in Condensed Consolidated Financial Statements prepared in accordance with generally accepted accounting principles have been omitted as they are included in the most recent Federal Deposit Insurance Corporation ("FDIC") Form F-2 Annual Report and accompanying Notes to the Financial Statements for the year ended December 31, 1995. Management believes that the disclosures contained herein are adequate to make a fair presentation. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the Bank's Consolidated Financial Statements and the Notes thereto included in the Bank's 1995 FDIC Form F-2 Annual Report. The results for the three month interim periods covered hereby are not necessarily indicative of the operating results for a full year. 2. New Accounting Pronouncements Effective January 1, 1996, the Bank adopted Statement of Financial Accounting Standards ("SFAS") No. 122, "Accounting for Mortgage Service Rights". SFAS 122 amends certain provisions of SFAS 65, "Accounting for Certain Mortgage Banking Activities", to eliminate the accounting distinction between rights to service mortgage loans for others that are acquired through loan origination activities and those acquired through purchase transactions. During the quarter ended March 31, 1996 the Bank recognized $0.1 million of income as a result of this new standard. 3. Dividend Policy While it is not anticipated that the Bank will be paying any cash dividends on its common stock in the near future, the Board of Directors of the Bank will be periodically reviewing whether any cash dividend should be paid. 4. Earnings Per Share and Pro Forma Earnings Per Share Net income per share for the three months ended March 31, 1996 is computed on weighted shares outstanding for the period. Net income per share for the three months ended March 31, 1995 is computed on a pro forma basis as if the stock issued in the conversion had been issued as of the beginning of the period. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Overview Springfield Institution for Savings is a state chartered, stock form savings bank headquartered in Springfield, MA. The Bank provides a wide variety of financial services which include retail and commercial banking, residential mortgage origination and servicing, commercial real estate lending and consumer lending. The Bank serves its primary market of Hampden and Hampshire Counties through a network of 21 retail branches. The Bank completed a successful conversion from mutual to stock form (the "Conversion") on February 7, 1995. Through the issuance of 5,562,500 shares of common stock, the Bank received proceeds of $35.9 million, net of Conversion related costs and the Bank's Employee Stock Ownership Plan (the "ESOP"). The Bank's revenues are derived principally from interest payments on its loan portfolios and mortgage-backed and other investment securities. The Bank's primary sources of funds are deposits, borrowings and principal and interest payments on loans and mortgage-backed securities. Results of Operations for the Three Months Ended March 31, 1996 and March 31, 1995 The Bank reported net income of $2.4 million, or $0.45 per share, for the first quarter of 1996 as compared to net income of $0.8 million, or $.15 per share, on a pro forma basis, for the same period last year. The improved results are attributable to increased net interest margin and noninterest income, and lower provisions for possible loans losses and noninterest expenses. Net Interest Income Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income is affected by the mix and volume of assets and liabilities, and the movement and level of interest rates. The following table sets forth, for the period indicated, average balances, interest income and expense, and yields earned or rates paid on the major categories of assets and liabilities. Non-accrual loans have been included in the appropriate average balance loan category, but unpaid interest on non-accrual loans has not been included for purposes of determining interest income. In addition, investment securities available for sale are reflected at amortized cost. 7
Three Months Ended March 31, ------------------------------------------------------------------------- 1996 1995 --------------------------------------- -------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- --------- ---------- ------- -------- ---------- (Dollars in Thousands) Interest-earning assets: Fed funds sold and interest-bearing deposits $ 15,792 $ 214 5.36% $ 31,988 $ 464 5.80% Investment securities held to maturity 174,574 2,946 6.75% 161,866 2,284 5.64% Investment securities available for sale 260,110 4,126 6.35% 167,804 2,656 6.33% Residential real estate loans 255,386 5,033 7.88% 259,688 5,019 7.73% Commercial real estate loans 118,681 2,444 8.24% 120,048 2,440 8.13% Commercial loans 111,522 2,492 8.84% 81,944 1,858 9.07% Home equity loans 69,350 1,486 8.62% 50,815 1,159 9.12% Consumer loans 6,858 97 5.66% 6,754 142 8.41% ---------- ------- ----- -------- ------- ----- Total interest-earning assets 1,012,273 18,838 7.44% 880,907 16,022 7.28% Allowance for loan losses (15,422) (16,145) Non-interest-earning assets 80,504 69,878 ---------- -------- Total assets $1,077,355 $18,838 $934,640 $16,022 ========== ======= ======== ======= Interest-bearing liabilities Deposits Savings accounts $188,855 $1,177 2.51% $183,687 $1,124 2.48% NOW accounts 54,246 168 1.25% 53,305 187 1.42% Money market accounts 203,808 1,696 3.35% 225,691 1,720 3.09% Time deposit accounts 370,581 5,036 5.47% 329,531 3,685 4.54% ---------- ------- ----- -------- ------- ----- Total Interest-bearing Deposits 817,490 8,077 3.97% 792,214 6,716 3.44% Borrowed funds 83,721 1,190 5.62% 2,097 46 8.90% ---------- ------- ----- -------- ------- ----- Total interest-bearing liabilities 901,211 9,267 4.14% 794,311 6,762 3.45% Non-interest-bearing liabilities 96,523 87,124 Stockholders' equity 79,621 53,205 ---------- -------- Total liabilities and stockholders' equity $1,077,355 $9,267 $934,640 $6,762 ========== ======= ======== ======= Net interest income/spread $9,571 3.30% $9,260 3.83% ======= ===== ======= ===== Net interest margin as a % of interest- earning assets 3.78% 4.20% ===== =====
Net interest income for the three months ended March 31, 1996 was $9.6 million compared to $9.3 million for the three months ended March 31, 1995, an increase of $0.3 million or 3.2%. This increase is primarily due to a $131.4 million increase in average earning assets partially offset by a 42 basis point decrease in net interest margin. Total interest income was $18.8 million for the three months ended March 31, 1996, an increase of $2.8 million or 17.5% from the same period last year. This increase is attributable to higher levels of interest-earning assets and weighted average yields. Interest-earning assets totaled $1.01 billion in the first quarter of 1996 compared to $880.9 million for the first quarter of 1995, an increase of $131.4 million or 14.9%. Average investments increased $105.0 million reflecting the reinvestment of proceeds from the Conversion and leveraging a portion of the Bank's capital position. Average loans increased $42.6 million as the Bank continued to focus on the commercial (small business) and home equity market segments, which grew by $29.6 million or 36.1% and $18.5 million or 36.4%, respectively. The average yield on interest-earning assets was 7.44% for the first quarter of 1996 compared to 7.28% for the first quarter of 1995, an increase of 16 basis points or 2.2% reflecting the repricing of adjustable rate loans and investment securities to market rates and lower levels of non-accruing loans. 8 Total interest expense was $9.3 million for the three months ended March 31, 1996 compared to $6.8 million during the same period in 1995, an increase of $2.5 million or 36.8%. This increase is attributable to increases in interest-bearing deposits, higher deposit rates and the use of borrowings as a source of funds. Interest-bearing deposits totaled $817.5 million for the quarter ended March 31, 1996 compared to $792.2 million for the same period in 1995, an increase of $25.3 million or 3.2%. This growth occurred primarily in Time deposits, which increased $41.1 million principally as a result of the new "Can't Lose CD" product (which pays a rate equal to the prime rate less 350 basis points), partially offset by a $21.9 million reduction in Money Market balances, reflecting a shift to higher yielding Time deposits as well as outflow to other investment vehicles such as annuities and mutual funds. The average rate paid on deposits was 3.97% in the first quarter of 1996 compared to 3.44% in the first quarter of 1995, an increase of 53 basis points or 15.4% reflecting continued competitive pricing pressures on consumer deposits as well as the introduction of the Can't Lose CD, partially offset by a lower interest rate environment. Borrowings averaged $83.7 million for the three months ended March 31, 1996 reflecting the Bank's leveraged ESOP as well as the use of Federal Home Loan Bank ("FHLB") advances and repurchase agreements to leverage a portion of the Bank's capital. The following table presents the changes in net interest income resulting from changes in interest rates or changes in the volume of interest-earning assets and interest-bearing liabilities during the periods indicated. Changes which are attributable to both rate and volume have been allocated evenly between the change in rate and volume components. Three months ended March 31, 1996 versus 1995 ------------------------------- Increase (Decrease) Due to ------------------------------- Volume Rate Net --------- -------- -------- (In Thousands) Interest earning assets: Federal funds sold and interest bearing deposits ($ 227) ($ 23) ($ 250) Investment securities held to maturity 197 465 662 Investment securities available for sale 1,463 7 1,470 Residential real estate loans (84) 98 14 Commercial real estate loans (28) 32 4 Commercial loans 666 (32) 634 Home equity loans 410 (83) 327 Consumer loans 2 (47) (45) ------ ------ ------ Total interest-earning assets 2,399 417 2,816 ------ ------ ------ Interest bearing liabilities: Deposits: Savings accounts 32 21 53 NOW accounts 3 (22) (19) Money market accounts (174) 150 (24) Time deposit accounts 508 843 1,351 ------ ------ ------ Total interest-bearing deposits 369 992 1,361 Borrowed funds 1,475 (331) 1,144 ------ ------ ------ Total interest-bearing liabilities 1,844 661 2,505 ------ ------ ------ Change in net interest income $ 555 ($ 244) $ 311 ====== ====== ====== 9 Provision for Possible Loan Losses The Bank provided $0.7 million for its provision for possible loan losses in the first quarter of 1996 compared to $1.2 million in the first quarter of 1995. This decrease of $0.5 million reflects a reduction in nonperforming assets. The provision for possible loan losses is based upon Management's judgment of the amount necessary to maintain the allowance for possible loan losses at a level which is considered adequate. For further discussion of this topic please refer to the section titled "Allowance for Possible Loan Losses" in the Balance Sheet Analysis section of this document. Non-interest Income Non-interest income is composed of fee income for bank services and gains or losses from the sale of assets. The components of non-interest income for the periods presented are as follows: Three months ended March 31, -------------------- 1996 1995 ------- -------- Net gain (loss) on sale of loans $ 270 ($ 6) Net gain (loss) on sale of securities 2 4 Loan charges and fees 723 807 Deposit related fees 1,403 1,088 Other charges and fees 183 153 ------- ------- $ 2,581 $ 2,046 ======= ======= Net gain (loss) on sale of loans increased $0.3 million as a result of the growth in residential mortgage refinancing activities due to a more favorable interest rate environment. The Bank originates fixed rate mortgages for sale in the secondary market and generally holds adjustable rate mortgages in the Bank's loan portfolio. Deposit service charges and fees increased $0.4 million due primarily to increased service charges on noninterest bearing accounts. Salaries and Benefits Expense Salaries and benefits expense totaled $4.3 million for the first quarter of 1996 compared to $4.0 million for the same period in 1995, an increase of $0.3 million reflecting standard wage increases as well as the introduction of new benefit programs to include the ESOP and a 401(k) plan. Occupancy Expense Total occupancy expense was $0.8 million for the three months ended March 31, 1996, a decrease of $0.1 million from the same period in 1995 as a result of the improved operating results of SIS Center, the Bank's corporate headquarters. 10 Other Operating Expense The components of other operating expense for the periods presented are as follows: Three months ended March 31, -------------------------- 1996 1995 ---- ---- Marketing and public relations $ 383 $ 308 Insurance 101 801 Professional services 640 647 Outside processing 957 895 Other 1,035 884 ------ ------ $3,116 $3,535 ====== ====== Marketing and public relations expense increased $0.1 million reflecting a higher level of advertising expenses directed towards the consumer strategy for obtaining consumer deposit accounts in connection with its increased emphasis on community banking activities. Insurance expense includes FDIC deposit insurance expense, which totaled $1 thousand in the first quarter of 1996 compared to $0.7 million in the same period in 1995. This decrease is attributable to a significant reduction in FDIC premiums. Other operating expenses increased $0.2 million primarily due to costs associated with growth in consumer deposit accounts as a result of the consumer strategy. Foreclosed Real Estate Expense Foreclosed real estate expense reflects losses on sales, writedowns and net operating results of foreclosed properties. These expenses were $0.2 million for the first quarter of 1996 compared to $0.3 million for the same period in 1995. This $0.1 million decrease reflects lower levels of foreclosed properties. Net Expense of Real Estate Operations The Bank has certain subsidiaries that are engaged in various real estate investments directly or in joint ventures with unaffiliated partners. The Bank has terminated its real estate development activities and is in the process of selling its remaining real estate investments. Net expense of real estate operations reflects the net operating results of these activities, writedowns on real estate properties and gains/losses on sales of these properties. Net expense of real estate operations of zero and $0.1 million for the three months ended March 31, 1996 and March 31, 1995, respectively, reflects normal operating results. Income Taxes The Bank recorded $0.2 million of state and federal alternative minimum tax provision in the first quarter of 1996 compared to $39 thousand in the first quarter of 1995. This increase in taxes resulted from the increase in pretax earnings between the periods ended March 31, 1995 and 1996. 11 BALANCE SHEET ANALYSIS - COMPARISON AT MARCH 31, 1996 TO DECEMBER 31, 1995 Total assets increased from $1.07 billion at December 31, 1995 to $1.14 billion at March 31, 1996. This increase reflects growth in the investment portfolio achieved through an increase in deposits and wholesale borrowings. Investments The Bank's investment portfolio increased $64.8 million from $419.8 million at December 31, 1995 to $484.6 million at March 31, 1996. The Bank engages in investment activities for both investment and liquidity purposes. The Bank maintains an investment securities portfolio which consists primarily of U.S. Government and Agency securities, corporate obligations, Federal Home Loan Bank stock, and marketable equity securities. Other short-term investments held by the Bank periodically include interest-bearing deposits and federal funds sold. The Bank also maintains a mortgage-backed securities portfolio consisting of securities issued and guaranteed by the Federal National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC") in addition to publicly traded mortgage-backed securities issued by private financial intermediaries which are rated "AA" or higher by rating agencies of national prominence. Effective January 1, 1994, the Bank adopted SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities", and now holds both "available for sale" and "held to maturity" portfolios. Securities which the Bank has the intent and ability to hold until maturity are classified as held-to-maturity and are carried at amortized cost, while those securities which have been identified as assets that may be sold prior to maturity or assets for which there is not a positive intent to hold to maturity are classified as available-for-sale and are carried at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. At March 31, 1996, the net unrealized gain on the available for sale portfolio that was included as a separate component of stockholders' equity was $1.5 million. In 1995, the Financial Accounting Standards Board ("FASB") issued a special report, "A Guide to Implementation of Statement 115," that provided additional guidance related to the application of SFAS 115. In connection with the issuance of this special report, the FASB allowed all organizations to review their portfolio classifications and make a one-time reclassification of securities between categories during the period from November 15, 1995 to December 31, 1995. On December 15, 1995, the Bank transferred securities with an amortized cost of $84.3 million and an unrealized loss of $1.2 million from the held to maturity portfolio to the available for sale portfolio. In addition, the Bank also transferred securities with an estimated fair value of $47.3 million and an unrealized gain of $0.3 million from the available for sale portfolio to the held to maturity portfolio. The unrealized gain of $0.3 million remains as a separate component of stockholders' equity. Subsequent to the transfer of these securities, the Bank sold $82.9 million of available for sale securities at a net loss of $0.9 million. The table below sets forth certain information regarding the amortized cost and fair value of the Bank's investment portfolio at the dates indicated. 12
March 31, 1996 -------------------------------------------------------------- Available for Sale Held to Maturity ---------------------------- --------------------------- (Dollars in Thousands) Amortized Amortized Cost Fair Value Cost Fair Value ----------- ------------ ---------- ------------ U.S. government and agency obligations $ 8,858 $ 8,837 $ - $ - Mortgage-backed securities 279,885 280,940 173,276 173,096 Other bonds and short term obligations 2,675 2,675 11,073 11,095 Other securities 7,819 7,813 - - -------- -------- -------- -------- Total $299,237 $300,265 $184,349 $184,191 ======== ======== ======== ======== December 31, 1995 -------------------------------------------------------------- Available for Sale Held to Maturity ---------------------------- --------------------------- (Dollars in Thousands) Amortized Amortized Cost Fair Value Cost Fair Value ----------- ------------ ---------- ------------ U.S. government and agency obligations $ 7,700 $ 7,699 $ - $ - Mortgage-backed securities 222,673 224,101 161,168 161,481 Other bonds and short term obligations 9,300 9,300 11,625 11,449 Other securities 5,884 5,884 - - -------- -------- -------- -------- Total $245,557 $246,984 $172,793 $172,930 ======== ======== ======== ========
13 Loan Portfolio Composition Gross loans comprised $575.1 million or 50.7% of total assets as of March 31, 1996. The following table sets forth information concerning the Bank's loan portfolio in dollar amounts and percentages, by type of loan at March 31, 1996 and at December 31, 1995.
March 31, 1996 December 31, 1995 ------------------------------- ------------------------------- Percent of Percent of Amount Total Amount Total ---------- ------------ -------- ------------ (Dollars in Thousands) Residential real estate loans $254,269 44.21% $263,551 45.99% Commercial real estate loans 120,442 20.94% 118,005 20.59% Commercial loans 123,181 21.42% 117,674 20.53% Home equity loans 70,541 12.27% 67,657 11.81% Consumer loans 6,698 1.16% 6,196 1.08% -------- ------- --------- ------- Total loans receivable, gross 575,131 100.00% 573,083 100.00% Less: Unearned income and fees (645) (566) Allowance for possible loan losses 14,619 14,986 -------- -------- Total loans receivable, net $561,157 $558,663 ======== ========
The Bank continues to emphasize the origination of loans secured by first mortgages on one to four family residences, and offers a variety of fixed and adjustable rate mortgage loan products. The Bank originates fixed rate mortgages for sale in the secondary market and generally holds adjustable rate mortgages in the Bank's loan portfolio. During the first quarter of 1996, many borrowers refinanced adjustable rate mortgages to take advantage of lower fixed rates. These fixed rate loans were subsequently sold, offsetting new originations during the quarter and resulting in a $9.2 million decrease in residential real estate loans between December 31, 1995 and March 31, 1996. During the three months ended March 31, 1996 commercial loan balances increased $5.5 million, reflecting the Bank's continued focus on lending activities in the small business market. Home equity loans outstanding have increased $2.9 million since December 31, 1995 resulting from the Bank's pricing approach, the waiver of closing costs and the active promotion of these products. The Bank has discontinued offering most types of personal installment loans. This decision was made based on the low volumes achieved by the Bank and the highly competitive nature of consumer products offered by bank and non-bank competitors. The Bank continues to offer student loans and overdraft protection lines associated with the transaction accounts of its consumer customers. Student loans are subsidized by the government and held by the Bank while the student is in school. These loans are sold to the Student Loan Marketing Association when the student graduates and repayment begins. 14 Non-performing Assets Non-performing assets totaled $12.6 million as of March 31, 1996 compared to $13.9 million as of December 31, 1995, a decrease of $1.3 million or 9.4%. The following table sets forth information regarding the components of non-performing assets for the periods presented:
March 31, 1996 December 31, 1995 ---------------- ------------------- (Dollars in Thousands) Non-accrual loans (1): Residential real estate loans $ 2,774 $ 2,553 Commercial real estate loans 6,938 5,745 Commercial loans 874 638 Home equity loans 175 90 Consumer loans 17 11 ------- ------- Total non-accrual loans 10,778 9,037 ------- ------- Loans past due 90 days still accruing (2) 154 587 ------- ------- Total non-performing loans 10,932 9,624 Foreclosed real estate (3) 502 1,529 Restructured loans on accrual status (4) 1,167 2,732 ------- ------- Total non-performing assets $12,601 $13,885 ======= ======= Total non-performing loans to total gross loans 1.90% 1.68% Total non-performing assets to total assets 1.11% 1.30% Allowance for possible losses to non-performing loans 133.73% 155.71% (1) Non-accrual loans are loans that are contractually past due in excess of 90 days, for which the Bank has stopped the accrual of interest, or loans which are not past due but on which the Bank has stopped the accrual of interest based on Management's assessment of the circumstances surrounding these loans. (2) Accruing loans past due 90 days or more are loans which have not been placed on non-accrual status as, in management's opinion, the collection of the loan, in full, is not in doubt. (3) Foreclosed real estate includes OREO, defined as real estate acquired through foreclosure or acceptance of a deed in lieu of foreclosure. The Bank carries foreclosed real estate at net realizable value, which approximates fair value less estimated selling costs. (4) Restructured loans are loans for which concessions, including reduction of interest rates or deferral of interest or principal payments have been granted due to the borrower's financial condition. Restructured loans on non-accrual status are reported in the non-accrual loan category. Restructured loans on accrual status are those loans that have complied with terms of a restructuring agreement for a satisfactory period (generally six months).
15 Allowance for Possible Loan Losses The allowance for possible loan losses reflects an amount that in Management's judgment is adequate to provide for potential losses in the loan portfolio. In addition, examinations of the adequacy of the loan loss reserve are conducted periodically by various regulatory agencies. The Bank's loan loss reserve methodology emphasizes an evaluation of non-performing loans and those loans that have been identified as having a higher risk of becoming non-performing loans. The overall analysis is a continuing process that gives consideration to such factors as size and risk characteristics of the loan portfolio, the risk rating of individual credits, general economic conditions, historic delinquency and charge-off experience and the borrowers' financial capabilities and the underlying collateral, including, when appropriate, independent appraisals of real estate properties. In addition, Management periodically reviews the methodology of allocating reserves to the various loan categories based on similar factors. The Bank's allowance for possible loan losses is decreased by loan charge-offs and increased by provisions for possible loan losses and recoveries on loans previously charged-off. When commercial and residential real estate loans are foreclosed, the loan balance is compared with the fair value of the property. If the net carrying value of the loan at the time of foreclosure exceeds the fair value of the property less estimated selling costs, the difference is charged to the allowance for possible loan losses and the fair value of the property becomes the new cost basis of the real estate owned. The Bank has or obtains current appraisals on real estate owned at the time it obtains possession of the property. Real estate owned is subsequently carried at the lower of cost or fair value less estimated selling costs with any further adjustments reflected as a charge against operations. The Bank assesses the value of real estate owned on a periodic basis. The Bank maintains an allowance for estimated losses, which at March 31, 1996 amounted to zero, to account for declines in the carrying value of foreclosed real estate. The allowance for possible loan losses at March 31, 1996 was $14.6 million, compared to $17.0 million at March 31, 1995. The activity in the allowance for possible loan losses for the three months ended March 31, 1996 and 1995 was as follows: 16 Three months ended March 31, ------------------------ 1996 1995 --------- --------- (Dollars In Thousands) Balance at beginning of period $ 14,986 $ 15,844 Provision for loan losses 700 1,153 Charge-offs: Residential real estate loans - (122) Commercial real estate loans (1,866) - Commercial loans - (36) Home equity loans (63) (25) Consumer loans (18) (32) -------- ------- Total charge-offs (1,947) (215) -------- ------- Recoveries: Residential real estate loans 408 - Commercial real estate loans 407 81 Commercial loans 45 69 Home equity loans 11 19 Consumer loans 9 32 -------- ------- Total recoveries 880 201 -------- ------- Net charge-offs (1,067) (14) -------- ------- Balance at end of period $ 14,619 $ 16,983 ======== ======== Ratio of allowance for loan losses to total loans at the end of the period 2.54% 3.19% Ratio of allowance for loan losses to non- performing loans at the end of the period 133.73% 101.67% 17 At March 31, 1996, the recorded investment in loans that are considered impaired under SFAS 114 was $8.2 million. Included in this amount is $0.9 million of impaired loans for which the related SFAS 114 allowance is $0.2 million and $7.3 million of impaired loans for which the SFAS 114 allowance is zero. The average recorded investment in impaired loans during the three months ended March 31, 1996 was approximately $9.7 million. For the three month period ended March 31, 1996, the Bank recognized interest income on these impaired loans of $0.2 million. The following table shows the allocation of the allowance for possible loan losses to the various types of loans as well as the percentage of loans in each category to total loans.
March 31, 1996 December 31, 1995 ----------------------------- ----------------------------- % of % of Loans in Loans in Category Category to Total to Total Amount Loans Amount Loans ------- ---------- -------- ---------- Residential real estate loans . . . . . . . . . . . . . $1,581 44.21% $1,881 45.99% Commercial real estate loans . . . . . . . . . . . . . 7,891 20.94% 6,784 20.59% Commercial loans . . . . . . . . . . . . . . . . . . . . 4,387 21.42% 5,480 20.53% Home equity loans . . . . . . . . . . . . . . . . . . . 545 12.27% 672 11.81% Consumer loans . . . . . . . . . . . . . . . . . . . . . 215 1.16% 169 1.08% ------- ------- ------- ------- Total allowance for possible loan losses . . . . . . . . . . . . . . . $14,619 100.00% $14,986 100.00% ======= ======= ======= =======
18 Deposit Distribution The principal source of funds for the Bank are deposits from local consumers and businesses. There were no brokered deposits at March 31, 1996. The Bank's deposits consist of demand and NOW accounts, passbook and statement savings accounts, Money Market accounts and Time deposit accounts. Total deposits were $911.1 million at March 31, 1996 compared to $885.4 million at December 31, 1995, an increase of $25.7 million. This growth occurred primarily in Savings accounts and Demand deposits, which increased $8.9 million and $10.2 million, respectively. These balances continue to grow as customers take advantage of free savings and checking accounts offered as a result of the Bank's consumer deposit strategy to attract and retain core deposits which provides the Bank with a lower cost source of funds. The following table presents the composition of deposits for the periods indicated: March 31, 1996 December 31, 1995 -------------------- ---------------------- (Dollars in Thousands) Percent Percent of of Amount Total Amount Total --------- --------- --------- -------- Demand deposits $ 81,736 8.97% $ 71,539 8.08% NOW accounts 56,303 6.18% 57,271 6.47% Savings accounts 194,523 21.35% 185,555 20.96% Money market accounts 206,433 22.66% 203,313 22.96% Time deposits 372,129 40.84% 367,708 41.53% -------- ------- -------- ------- Total deposits $911,124 100.00% $885,386 100.00% ======== ======= ======== ======= 19 Regulatory Capital Under current FDIC capital regulations, state-chartered, non-member banks (i.e., banks that are not members of the Federal Reserve System), such as the Bank, are required to comply with three separate minimum capital requirements: a "Tier 1 leverage capital ratio" and two "risk-based" capital requirements: "Tier 1 risk-based capital ratio" and "Total risk-based capital ratio". The Tier 1 leverage capital ratio is expressed as a percentage of Tier 1 capital to total quarterly average assets. Tier 1 capital generally includes common stockholders' equity (including retained earnings), qualifying noncumulative perpetual preferred stock and any related surplus and minority interests in the equity accounts of fully consolidated subsidiaries. In addition, deferred tax assets are allowable up to a certain limit. Intangible assets, other than properly valued purchased mortgage servicing rights up to certain specified limits, must be deducted from Tier 1 capital. The unrealized gain or loss on securities available for sale is not included as a component of Tier 1 capital under the current guidelines. The Tier 1 risk-based capital ratio is expressed as a percentage of Tier 1 capital to total risk-weighted assets. Risk- weighted assets are calculated by assigning assets to one of several broad categories (0%, 20%, 50%, or 100%) based primarily on credit risk. The aggregate dollar value of the amount in each category is then multiplied by the risk-weight associated with the category. Risk weights for all off-balance sheet items are determined by a two-step process. First, the "credit equivalent amount" of off-balance sheet items is determined in most cases by multiplying the off-balance sheet item by a credit conversion factor. Second, the credit equivalent amount is treated like any balance sheet asset and generally is assigned to the appropriate risk category. The resulting weighted values from each of the risk categories are added together, and this sum is the Bank's total risk-weighted assets that comprise the denominator of the risk-based capital ratios. The Total risk-based capital ratio is expressed as a percentage of "Qualifying total capital" to total risk-weighted assets. Qualifying total capital consists of the sum of Tier 1 capital plus Tier 2 capital, which consists of cumulative perpetual preferred stock, mandatory convertible debt, term subordinated debt, and a certain portion of the allowance for loan losses up to a maximum of 1.25% of risk-weighted assets. The following table reflects the regulatory capital position of the Bank as of March 31, 1996 and December 31, 1995 as well as the March 31, 1996 minimum regulatory capital requirements for well-capitalized institutions. March 31, December 31, FDIC 1996 1995 Requirement -------- ------------ ----------- Tier 1 leverage captial ratio 7.68% 7.57% 5.00% Tier 1 risk-based capital ratio 12.92% 12.52% 6.00% Total risk-based capital ratio 14.18% 13.77% 10.00% 20 Interest Rate Risk Management The operations of the Bank are subject to the risk of interest rate fluctuations to the extent that there is a substantial difference in the amount of the Bank's assets and liabilities repricing or maturing within specific time periods. An asset-sensitive position indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specific time horizons, which would generally imply a favorable impact on net interest income in periods of rising interest rates and a negative impact in periods of falling interest rates. A liability-sensitive position would generally imply a negative impact on net interest income in periods of rising interest rates and a positive impact in periods of falling interest rates. The objective of the Bank's interest rate risk management process is to identify, manage and control its interest rate risk within established limits in order to produce consistent earnings that are not contingent upon favorable trends in interest rates. This is attained by monitoring the levels of interest rates, the relationships between the rates paid on assets and the rates paid on liabilities, the absolute amount of assets and liabilities which reprice or mature over similar periods, and the effect of all of these factors on the estimated level of net interest income. There are a number of industry standards used to measure a financial institution's interest rate risk position. Most common among these is the one-year gap which is the difference between assets, liabilities, and off-balance sheet instruments that will mature or reprice within one year expressed as a percentage of total assets. Using Management's estimates of asset prepayments and core deposit decay in its computation, the Bank estimates that its cumulative one-year gap position was a positive $98.4 million or 8.67% of total assets at March 31, 1996. The Bank also utilizes income simulation modeling in measuring its interest rate risk and managing its interest rate sensitivity. Income simulation not only considers the impact of changing market interest rates on forecasted net interest income, but also takes into consideration other factors such as yield curve relationships, the volume and mix of assets and liabilities, customer preferences and general market conditions. The following table sets forth the amounts of assets and liabilities outstanding at March 31, 1996, which are anticipated by the Bank to mature or reprice in each of the future time periods shown using certain assumptions based on its historical experience, the current interest rate environment, and other data available to management. Management believes that these assumptions approximate actual experience and considers such assumptions reasonable, however, the interest rate sensitivity of the Bank's assets and liabilities could vary substantially if different assumptions were used or actual experience differs from the assumptions used. Management periodically reviews and, when appropriate, changes assumptions used in creating this table. 21
GAP Position at March 31, 1996 -------------------------------------------------------------------------------------- (Dollars in Thousands) More than six Less than months less six months than one year 1 - 5 Years Over 5 Yrs TOTAL ------------- --------------- ------------- ----------- --------- Assets: Federal funds sold and interest bearing deposits $ 6,045 $ - $ - $ - $ 6,045 Investment securities 260,086 147,596 50,578 26,354 484,614 Residential real estate 91,282 56,608 89,240 14,657 251,787 Commercial real estate 30,855 23,090 59,554 - 113,499 Commercial loans 61,046 7,471 52,799 1,174 122,490 Home equity 61,920 399 6,162 2,157 70,638 Consumer loans 5,309 227 828 221 6,585 Other Assets - - - 79,512 79,512 -------- -------- -------- -------- ---------- Total assets $516,543 $235,391 $259,161 $124,075 $1,135,170 ======== ======== ======== ======== ========== Liabilities & stockholders' equity: Savings accounts $ 29,178 $ 29,178 $136,167 $ - $ 194,523 NOW accounts 8,446 8,446 39,411 - 56,303 Money market accounts 61,930 61,930 82,573 - 206,433 Time deposits 197,026 113,304 61,799 - 372,129 Borrowed funds 96,443 15,022 206 1,245 112,916 Other liabilities & stockholders' equity 16,292 16,292 48,877 111,405 192,866 -------- -------- -------- -------- ---------- Total liabilities & stockholders' equity $409,315 $244,172 $369,033 $112,650 $1,135,170 ======== ======== ======== ======== ========== Period GAP position $107,228 ($8,781) ($109,872) $11,425 Net period GAP as a percentage of total 9.45% -0.77% -9.68% assets 1.01% Cumulative GAP $107,228 $98,447 ($11,425) - Cumulative GAP as a percentage of total assets 9.45% 8.67% -1.01% - For purposes of the above interest sensitivity analysis: Residential loans held for sale at March 31, 1996 totaling $4.4 million are in the less than six month interest sensitivity period. Fixed rate assets are schedule by contractual maturity and adjustable rate assets are schedule by their next repricing date. In both cases, assets that have prepayment optionality are adjusted for the Bank's estimate of prepayments. Loans do not include non accrual loans of $10.8 million. Loans do not include the allowance for loan loss of $14.6 million. In certain deposit categories where there is no contractual maturity, Management assumed the sensitivity characteristics listed below based on the current interest rate environment and the Bank's historical experience. Management reviews these assumptions on a quarterly basis and may modify them as circumstances dictate. - Savings accounts are assumed to decay at an annual rate of 30% - NOW accounts assumed to decay at an annual rate of 30% - Money market accounts are assumed to decay at an annual rate of 60% - Non-interest bearing accounts of $81.7 million are included in other liabilities and are assumed to decay at an annual rate of 40%.
22 Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, while certain assets and liabilities may have similar contractual maturities or periods to repricing, they may react in different ways to changes in market interest rates. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Finally, the ability of borrowers to service their adjustable rate mortgages may decrease in the event of an interest rate increase. Liquidity Liquidity measures the ability of the Bank to meet its maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund its operations and to provide for customer credit needs. The Bank's principal sources of funds are deposits, advances from the FHLB of Boston, repurchase agreements, repayments and maturities on loans and securities, proceeds from the sale of securities in the available-for-sale portfolio, and funds provided by operations. While scheduled loan and security amortization and maturities are relatively predictable sources of funds, deposit flows and loan and security prepayments are greatly influenced by economic conditions, the general level of interest rates and competition. The Bank utilizes particular sources of funds based on comparative costs and availability. The Bank generally manages the pricing of its deposits to maintain a steady deposit balance, but has from time to time decided not to pay rates on deposits as high as its competition, and when necessary, will supplement deposits with longer term and/or less expensive alternative sources of funds such as advances from the FHLB and repurchase agreements. Liquidity management is both a daily and long-term responsibility of Management. The Bank adjusts its investments in cash and cash equivalents based upon Management's assessment of expected loan demand, projected security maturities, expected deposit flows, yields available on interest-bearing deposits, and the objectives of its asset/liability management program. If the Bank requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and collateral eligible for repurchase agreements. Because the Bank has a stable retail deposit base, Management believes that significant borrowings will not be necessary to maintain its current liquidity position. The Bank's ongoing principal use of capital resources remains the origination of single-family residential mortgage loans, commercial real estate loans, commercial loans, and consumer loans secured by residential real estate. 23 Form F-4 Exhibit A SPRINGFIELD INSTITUTION FOR SAVINGS COMPUTATION OF PRO FORMA PRIMARY AND FULLY DILUTED EARNINGS PER SHARE (In Thousands Except Per Share Amounts)
Three Months Ended March 31, ------------------------------- Primary: 1996 1995 --------- -------- Net income $2,404 $789 Weighted average and pro forma weighted average shares outstanding during the period 5,562 5,562 Unearned ESOP shares (391) (445) Stock options considered outstanding during the period 105 - Restricted stock shares considered outstanding during the period 60 - ------ ------ Total shares 5,336 5,117 ====== ====== Net income per share $0.45 $0.15 ====== ====== Three Months Ended March 31, ------------------------------- Fully Diluted: 1996 1995 --------- -------- Net income $2,404 $789 Weighted average and pro forma weighted average shares outstanding during the period 5,562 5,562 Unearned ESOP shares (391) (445) Stock options considered outstanding during the period 105 - Restricted stock shares considered outstanding during the period 60 - ------ ------ Total shares 5,336 5,117 ====== ====== Net income per share $0.45 $0.15 ====== ======
Net income per share for the three months ended March 31, 1996 is computed on weighted shares outstanding for the period. Net income per share for the three months ended March 31, 1995 is computed on a pro forma basis as if the stock issued in the conversion had been issued as of the beginning of the period presented. This computation includes the impact of the Restricted Stock Plan ("RSP") and the Stock Option Plan which were approved by stockholders at the Annual Meeting of the Stockholders held on May 31, 1995. 24 SIGNATURES Under the requirements of the Securities Exchange Act of 1934, as amended, the Bank has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SPRINGFIELD INSTITUTION FOR SAVINGS May 13, 1996 /s/ F. William Marshall, Jr. Date F. William Marshall, Jr. President & Chief Executive Officer May 13, 1996 /s/ John F. Treanor Date John F. Treanor Executive Vice President and Chief Financial Officer 25 -----END PRIVACY-ENHANCED MESSAGE-----