-----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, Lk2zpQfK4IWmMxpgcP2MeLRFvkPqoACbNvfaraFj6OjuqmNjHEMT89hRGwu7d43K izUhVig2uByi3Y+B4V1Ndw== 0000908737-96-000296.txt : 19961118 0000908737-96-000296.hdr.sgml : 19961118 ACCESSION NUMBER: 0000908737-96-000296 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIS BANCORP INC CENTRAL INDEX KEY: 0001013049 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] STATE OF INCORPORATION: MA FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-20809 FILM NUMBER: 96663842 BUSINESS ADDRESS: STREET 1: P O BOX 3034 STREET 2: 1441 MAIN STREET CITY: SPRINGFIELD STATE: MA ZIP: 01102-3034 BUSINESS PHONE: 4137488000 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended 09/30/96 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 000-20809 SIS BANCORP, INC. (Exact Name of Issuer as Specified in its Charter) Massachusetts 04-3303264 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) SIS BANCORP, INC. 1441 Main Street Springfield, Massachusetts 01102 (Address of Principal Executive Offices) (Zip Code) (413) 748-8000 (Issuers Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate the number of shares outstanding of the registrant's common stock, as of the latest practicable date: 5,722,600 shares as of November 12, 1996. CAUTIONARY STATEMENT FOR PURPOSES 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. SIS Bancorp, Inc. and its subsidiaries (the "Company") wishes to caution readers that the following important factors, among others, may have affected and could in the future affect the Company's actual results and could cause the Company's actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf on the Company herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Company 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 Company's organization, compensation and benefit plans; (iii) the effect on the Company'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. SIS BANCORP, INC. AND SUBSIDIARIES FORM 10-Q INDEX PAGE NO. PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 1996 and 1995.....................1 Condensed Consolidated Statements of Financial Condition at September 30, 1996 and December 31, 1995.................................2 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1996 and 1995...............................3 Condensed Consolidated Statements of Changes in Stockholders' Equity for the nine months ended September 30, 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 PART II OTHER INFORMATION Item 1. Legal Proceedings..............................................27 Item 2. Changes in Securities..........................................27 Item 3. Default upon Senior Securities.................................27 Item 4. Submission of Matters to a Vote of Security Holders............27 Item 5. Other Information..............................................27 Item 6. Exhibits and Reports on Form 8-K...............................27 SIGNATURES.................................................................28
SIS BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands Except Per Share Amounts) (Unaudited) (Unaudited) Three Months Ended Nine Months Ended ---------------------------- --------------------------- September September September September 1996 1995 1996 1995 ------------ ------------- ------------ ------------ Interest and dividend income Loans $ 12,472 $ 11,868 $ 35,946 $ 33,897 Investment securities available for sale 5,934 3,154 15,230 8,484 Investment securities held to maturity 3,279 2,912 9,494 7,965 Federal funds sold and interest bearing deposits 121 353 380 970 ------------ ------------- ------------ ------------ Total interest and dividend income 21,806 18,287 61,050 51,316 ------------ ------------- ------------ ------------ Interest expense Deposits 8,270 8,014 24,338 22,258 Borrowings 2,291 834 5,439 1,108 ------------ ------------- ------------ ------------ Total interest expense 10,561 8,848 29,777 23,366 ------------ ------------- ------------ ------------ Net interest and dividend income 11,245 9,439 31,273 27,950 Less: Provision for possible loan losses 750 1,002 2,200 3,357 ------------ ------------- ------------ ------------ Net interest and dividend income after provision for possible loan losses 10,495 8,437 29,073 24,593 Noninterest income: Net gain (loss) on sale of loans 105 72 537 62 Net gain (loss) on sale of securities 62 - 64 14 Fees and other income 2,761 2,099 7,645 6,335 ------------ ------------- ------------ ------------ Total noninterest income 2,928 2,171 8,246 6,411 ------------ ------------- ------------ ------------ Noninterest expense: Operating expenses: Salaries and employee benefits 4,408 3,966 12,900 11,674 Occupancy expense of bank premises, net 810 887 2,387 2,592 Furniture and equipment expense 558 482 1,614 1,398 Other operating expenses 3,846 3,356 10,617 10,671 ------------ ------------- ------------ ------------ Total operating expenses 9,622 8,691 27,518 26,335 ------------ ------------- ------------ ------------ Foreclosed real estate expense 29 93 252 535 Net expense of real estate operations (8) (38) (170) 88 ------------ ------------- ------------ ------------ Total noninterest expense 9,643 8,746 27,600 26,958 Income before income tax expense 3,780 1,862 9,719 4,046 Income tax (benefit) expense (6,421) 50 (5,931) 164 ------------ ------------- ------------ ------------ Net income $ 10,201 $ 1,812 $ 15,650 $ 3,882 ============ ============= ============ ============ Earnings per share and pro forma earnings per share: (1) Primary $ 1.85 $ 0.35 $ 2.86 $ 0.76 Fully diluted $ 1.84 $ 0.34 $ 2.82 $ 0.75 Weighted average and pro forma weighted average shares outstanding: (1) Primary 5,511,554 5,244,741 5,475,422 5,139,672 Fully diluted 5,556,512 5,264,355 5,543,980 5,180,213 (1) Net income per share for the three and nine months ended September 30, 1996 and the three months ended September 30, 1995 is computed on weighted average shares outstanding for the period. Net income per share for the nine months ended September 30, 1995 is computed on a pro forma basis as if the conversion of the Bank from mutual to stock form had been completed as of the beginning of the period presented. See accompanying Notes to the Unaudited Financial Statements
1
SIS BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In Thousands Except Share Amounts) (Unaudited) September 30, December 31, 1996 1995 ----------------- ---------------- ASSETS Cash and due from banks $ 34,709 $ 30,377 Federal funds sold and interest bearing deposits 17,545 8,045 Investment securities available for sale 386,050 246,984 Investment securities held to maturity (fair value: $193,819 at September 30, 1996 and $172,930 at December 31, 1995) 194,132 172,793 Loans receivable, net of allowance for possible losses ($ 15,488 at September 30, 1996 and $ 14,986 at December 31, 1995) 592,051 558,663 Accrued interest and dividends receivable 8,440 7,109 Investments in real estate and real estate partnerships 4,858 6,092 Foreclosed real estate, net 512 1,529 Bank premises, furniture and fixtures, net 25,660 25,706 Other assets 20,609 13,680 ----------------- ---------------- Total asset $ 1,284,566 $ 1,070,978 ================= ================ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 954,132 $ 885,386 Federal Home Loan Bank advances 48,189 41,500 Securities sold under agreements to repurchase 151,144 31,101 Loans payable 3,026 5,470 Mortgage escrow 6,294 4,193 Accrued expenses and other liabilities 24,721 21,859 ----------------- ---------------- Total liabilities 1,187,506 989,509 ----------------- ---------------- Stockholders' equity: Preferred stock ($.01 par value; 5,000,000 shares authorized: no shares issued and outstanding) - - Common Stock ($.01 par value; 25,000,000 shares authorized; shares issued and outstanding: 5,722,600 in 1996 and 5,710,700 in 1995) 57 57 Unearned compensation (4,282) (4,937) Additional paid in capital 42,469 41,790 Retained earnings 58,483 42,833 Net unrealized gain (loss) on investment securities available for sale 333 1,726 ----------------- ---------------- Total stockholders' equity 97,060 81,469 ----------------- ---------------- Total liabilities and stockholders' equity $ 1,284,566 $ 1,070,978 ================= ================ See accompanying Notes to the Unaudited Financial Statements
2
SIS BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars In Thousands) (Unaudited) Nine Months Ended September 30, 1996 1995 --------------- -------------- Cash Flows From Operating Activities Net income $ 15,650 $ 3,882 Adjustments to reconcile net income to net cash provided by/ (used for) operating activities Provision for possible loan losses 2,200 3,357 Provision for foreclosed real estate - 556 Depreciation 2,271 2,270 Amortization of premium on investment securities, net 1,585 615 ESOP and restricted stock expenses 1,104 515 Investment security (gains) (64) (14) (Income) loss from equity investment in partnerships (47) 39 (Gain) on sale of loans (537) (62) Disbursements for mortgage loans held for sale (65,258) (44,473) Receipts from mortgage loans held for sale 65,795 44,535 Loss on sale of fixed assets and real estate 343 158 Changes in assets and liabilities: (Increase) in other assets, net (8,501) (2,351) Decrease (increase) in accrued expenses and other liabilities 3,092 (12,307) --------------- -------------- Net cash provided by/(used for) operating activities 17,633 (3,280) --------------- -------------- Cash Flows From Investing Activities Proceeds from sales of investment securities - available for sale 30,863 - Proceeds from maturities and principal payments received on investment securities - available for sale 90,816 73,862 Purchase of investment securities - available for sale (262,977) (105,633) Proceeds from maturities and principal payments received on investment securities - held to maturity 37,211 15,291 Purchase of investment securities - held to maturity (58,991) (50,046) Proceeds from sale of investments in real estate partnerships 475 - Net change in loans receivable (40,489) (45,527) Net change in foreclosed real estate 1,862 334 Proceeds from sale of loans 4,056 912 Proceeds from sale of fixed assets and leases 267 - Purchase of fixed assets (2,029) (3,834) --------------- -------------- Net cash (used for) investing activities (198,936) (114,641) --------------- -------------- See accompanying Notes to the Unaudited Financial Statements
3
SIS BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Dollars In Thousands) (Unaudited) Nine Months Ended September 30, 1996 1995 --------------- -------------- Cash Flows from Financing Activities Net proceeds from stock conversion - 35,911 Net increase in deposits 68,746 22,274 Net increase in borrowings 124,288 62,821 Net increase in mortgagors' escrow deposits 2,101 1,536 --------------- -------------- Net cash provided by financing activities 195,135 122,542 --------------- -------------- Increase in cash and cash equivalents 13,832 4,621 Cash and cash equivalents, beginning of year 38,422 55,720 --------------- -------------- Cash and cash equivalents, end of period $ 52,254 $ 60,341 =============== ============== Supplemental disclosures of cash flow information: Cash paid during the year for interest to depositors and interest on debt $ 29,861 $ 23,348 Non-cash investing activities: Transfers to foreclosed real estate, net $ 845 $ 244 See accompanying Notes to the Unaudited Financial Statements
4
SIS BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY For The Nine Months Ended September 30, 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 $ 57 $ (4,937) $ 41,790 $ 42,833 $ 1,726 $ 81,469 Net income - - - 15,650 - 15,650 Unearned compensation - (315) 297 - - (18) Decrease in unearned compensation - 970 382 - - 1,352 Change in unrealized gain (loss) on investment securities available for sale - - - - (1,393) (1,393) ------------ ------------- ------------ ------------ ---------------- ------------- Balance at September 30, 1996 $ 57 $ (4,282) $ 42,469 $ 58,483 $ 333 $ 97,060 ============ ============= ============ ============ ================ ============= Balance at December 31, 1994 $ - $ - $ - $ 31,624 $ (3,121) $ 28,503 Net income - - - 3,882 - 3,882 Issuance of common stock 56 - 39,665 (250) - 39,471 Unearned compensation - (3,560) - - - (3,560) Decrease in unearned compensation - 312 203 - - 515 Change in unrealized gain (loss) on investment securities available for sale - - - - 4,211 4,211 ------------ ------------- ------------ ------------ ---------------- ------------- Balance at September 30, 1995 $ 56 $ (3,248) $ 39,868 $ 35,256 $ 1,090 $ 73,022 ============ ============= ============ ============ ================ ============= See accompanying Notes to the Unaudited Consolidated Financial Statements
5 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED FINANCIAL STATEMENTS 1. Holding Company Formation SIS Bancorp, Inc., a Massachusetts Corporation, was organized by Springfield Institution for Savings (the "Bank") for the purpose of reorganizing the Bank into a holding company structure. The Company acquired 100% of the outstanding shares of the Bank's common stock, par value $1.00 per share, in a 1:1 exchange for shares of the Company's common stock, par value $.01 per share (the "Company Common Stock"). Upon the effectiveness of such share-for-share exchange (the "Reorganization") on June 21, 1996, the Bank became the wholly-owned subsidiary of the Company and the Bank's former stockholders became stockholders of the Company. The Reorganization was accounted for as a pooling of interests, and accordingly, the information included in the financial statements and their accompanying notes presents the combined results of the Bank and the Company as if the merger had been effected on January 1, 1995. 2. Condensed Consolidated Financial Statements The Condensed Consolidated Financial Statements of the Company 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 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 (the "Form F-2") filed by the Bank for the year ended December 31, 1995. The Form F-2 was included as Exhibit 99.3 in the registration statement on Form 8-A filed by the Company with the Securities and Exchange Commission on June 3, 1996. 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 Form F-2. The results for the three and nine month interim periods covered hereby are not necessarily indicative of the operating results for a full year. 3. New Accounting Pronouncements Effective January 1, 1996, the Company 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. The adoption of this statement did not have a material affect on the Company's financial position as of September 30, 1996 or on the results of its operations for the three and nine month periods then ended. 4. Dividend Policy While the Company does not pay a cash dividend on its common stock at this time, the Board of Directors of the Company periodically reviews the appropriateness of a cash dividend in light of the Company's existing policies. 5. Earnings Per Share and Pro Forma Earnings Per Share Net income per share for the three and nine months ended September 30, 1996 and the three months ended September 30, 1995 is computed on weighted shares outstanding for the period. Net income per share for the nine months ended September 30, 1995 is computed on a pro forma basis as if the stock issued in the conversion of the Bank from mutual to stock form had been issued as of the beginning of the period. 6. Income Taxes The Company 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. In accordance with FAS 109, income tax benefits associated with deductible temporary differences are evaluated periodically based on the weight of available evidence as to whether it is more likely than not that the income tax benefits will be realized. In the third quarter of 1996 the Company recorded an income tax benefit of $8.0 resulting primarily from two non-recurring tax events. The Company recognized a one time gain of $2.8 million as a result of the recently enacted Small Business Jobs Protection Act of 1996. In addition, Management reevaluated the realizability of its deferred tax asset and determined that, based on the weight of available evidence, it was more likely than not that it would be realized. Accordingly, the Company recognized the remainder of its deferred tax asset of $5.2 million. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (DOLLARS IN THOUSANDS) Overview As discussed in Note 1 of the financial statements included in this filing, SIS Bancorp, Inc., a Massachusetts corporation (the "Company"), was organized by Springfield Institution for Savings (the "Bank") for the purpose of reorganizing the Bank into a holding company structure ("the Reorganization"). Upon the effectiveness of the Reorganization, the Bank became the wholly-owned subsidiary of the Company and the Bank's former stockholders became stockholders of the Company. The Company's Common Stock is quoted on the NASDAQ National Market System under the symbol "SISB", which had previously been used by the Bank. The Bank 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 22 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 Company'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 September 30, 1996 and September 30, 1995 The Company reported net income of $10.2 million, or $1.84 per share, for the third quarter of 1996 as compared to net income of $1.8 million, or $0.34 per share for the same period last year. The financial results for the quarter were affected by two nonrecurring tax events totaling $8.0 million. The Company recognized a one time gain of $2.8 million as a result of the recently enacted Small Business Job Protection Act of 1996. In addition, the Company recognized the remainder of its deferred tax asset of $5.2 million. The Company also experienced improved results in core earnings primarily attributed to increased net interest income and noninterest income, partially offset by higher 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 September 30, --------------------------------------------------------------------------------------- 1996 1995 ----------------------------------------- ------------------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost -------------- ----------- ------------ --------------- ------------ ------------ Interest-earning assets: Fed funds sold and interest-bearing deposits $ 9,029 $ 122 5.29% $ 23,829 $ 353 5.80% Investment securities held to maturity 193,415 3,279 6.78% 199,396 2,912 5.84% Investment securities available for sale 353,556 5,933 6.71% 182,225 3,154 6.92% Residential real estate loans 241,064 4,764 7.90% 273,150 5,474 8.02% Commercial real estate loans 119,211 2,596 8.71% 113,013 2,363 8.36% Commercial loans 139,128 3,053 8.59% 102,886 2,495 9.49% Home equity loans 87,201 1,834 8.37% 60,292 1,396 9.13% Consumer loans 4,373 225 20.58% 6,354 140 8.81% -------------- ----------- ------------ --------------- ------------ ------------ Total interest-earning assets 1,146,977 21,806 7.60% 961,545 18,287 7.61% Allowance for loan losses (15,195) (16,219) Non-interest-earning assets 86,001 71,154 -------------- --------------- Total assets $ 1,217,783 $ 21,806 $ 1,016,480 18,287 ============== =========== =============== ============ Interest-bearing liabilities Deposits Savings accounts $ 196,741 $ 1,236 2.50% $ 185,510 $ 1,168 2.50% NOW accounts 56,639 156 1.10% 54,436 177 1.29% Money market accounts 208,641 1,740 3.32% 206,811 1,740 3.34% Time deposit accounts 389,219 5,137 5.25% 359,883 4,929 5.43% -------------- ----------- ------------ --------------- ------------ ------------ Total interest-bearing deposits 851,240 8,269 3.86% 806,640 8,014 3.94% Borrowed funds 162,513 2,292 5.52% 53,543 834 6.10% -------------- ----------- ------------ --------------- ------------ ------------ Total interest-bearing liabilities 1,013,753 10,561 4.14% 860,183 8,848 4.08% Non-interest-bearing liabilities 115,809 85,959 -------------- --------------- Total liabilities 1,129,562 946,142 Stockholders' equity 88,221 70,338 -------------- --------------- Total liabilities and stockholders' equity $ 1,217,783 $ 10,561 $ 1,016,480 $ 8,848 ============== =========== =============== ============ Net interest income/spread $11,245 3.46% $9,439 3.53% =========== ============ ============ ============ Net interest margin as a % of interest- earning assets 3.92% 3.93% ============ ============
Net interest income for the three months ended September 30, 1996 was $11.2 million compared to $9.4 million for the three months ended September 30, 1995, an increase of $1.8 million or 19.1%. This increase is primarily due to a $185.4 million increase in average interest-earning assets. Total interest income was $21.8 million for the three months ended September 30, 1996, an increase of $3.5 million or 19.2% from the same period last year. This increase is attributable to higher levels of interest-earning assets. Average interest-earning assets totaled $1.1 billion in the third quarter of 1996 compared to $961.5 million in the third quarter of 1995, an increase of $185.4 million or 19.3%. Total investments increased $165.4 million and were funded by higher deposit levels and borrowed funds. Total loans increased $34.9 million as the Company continued to focus on the commercial and home equity market segments, which grew by $36.2 million or 35.2% and $26.5 million or 43.7%, respectively. Residential real estate loan balances declined $32.1 million or 11.8%, reflecting significant refinancing activity during the first quarter of 1996 combined with a decrease in adjustable rate mortgage production volume for the nine months ended September 30, 1996 versus the same period in 1995. The Company originates long-term fixed rate mortgages for sale in the secondary market and generally holds adjustable rate mortgages in the Company's loan portfolio. 8 Total interest expense was $10.6 million for the three months ended September 30, 1996 compared to $8.8 million during the same period in 1995, an increase of $1.7 million or 19.4%. This increase is attributable to increases in interest-bearing deposits and borrowed funds. Interest-bearing deposits totaled $851.2 million for the quarter ended September 30, 1996 compared to $806.6 million for the same period in 1995, an increase of $44.6 million or 5.5%. This growth occurred primarily in Time and Savings deposits, which increased $29.3 and $11.2 million respectively. Time deposits increased as a result of a new nine month CD product, which was introduced in the second quarter of 1996. Management believes that savings deposit growth reflects the continued success of the totally free savings account, a key feature of the Company's consumer strategy. Borrowed funds averaged $162.5 million for the three months ended September 30, 1996 compared to $53.5 million for the same period in 1995 reflecting the use of Federal Home Loan Bank ("FHLB") advances and repurchase agreements to leverage a portion of the Company'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 September 30, 1996 versus 1995 --------------------------------------------------- Increase (Decrease) Due to --------------------------------------------------- Volume Rate Net -------------- -------------- --------------- Interest-earning assets: Federal funds sold and interest bearing deposits $ (210) $ (21) $ (231) Investment securities held to maturity (94) 461 367 Investment securities available for sale 2,922 (142) 2,780 Residential real estate loans (640) (71) (711) Commercial real estate loans 132 101 233 Commercial loans 837 (279) 558 Home equity loans 584 (146) 438 Consumer loans (73) 158 85 -------------- -------------- --------------- Total interest-earning assets 3,458 61 3,519 -------------- -------------- --------------- Interest-bearing liabilities: Deposits: Savings accounts 71 - 71 NOW accounts 7 (28) (21) Money market accounts 15 (15) - Time deposit accounts 394 (189) 205 -------------- -------------- --------------- Total deposits 487 (232) 255 Borrowed funds 1,617 (159) 1,458 -------------- -------------- --------------- Total interest-bearing liabilities 2,104 (391) 1,713 -------------- -------------- --------------- Change in net interest income $ 1,354 $ 452 $ 1,806 ============== ============== ===============
9 Provision for Possible Loan Losses The Company added $0.8 million to its provision for possible loan losses in the third quarter of 1996 compared to $1.0 million in the third quarter of 1995. 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 "Balance Sheet Analysis - Comparison of September 30, 1996 to December 31, 1995 - Allowance for Possible Loan Losses." 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 September 30, ---------------------------------- 1996 1995 ------------- ------------- Net gain (loss) on sale of loans $ 105 $ 72 Net gain (loss) on sale of securities 62 - Loan charges and fees 948 726 Deposit related fees 1,592 1,269 Other charges and fees 221 104 ------------- ------------- $ 2,928 $ 2,171 ============= ============= Loan charges and fees increased $0.2 million primarily due to commercial loan prepayment fees. Deposit service charges increased $0.3 million due primarily to fees associated with the Company's larger noninterest bearing account base. Other charges and fees increased $0.1 million reflecting an increase in brokerage fees. Salaries and Benefits Expense Salaries and benefits expense totaled $4.4 million for the third quarter of 1996 compared to $4.0 million for the same period in 1995, an increase of $0.4 million reflecting standard wage increases, higher ESOP and restricted stock expenses as a result of increases in the Company's stock price, and an increase in staffing related to new branch openings and branch related support for the Company's consumer strategy. 10 Other Operating Expense The components of other operating expense for the periods presented are as follows: Three months ended September 30, ---------------------------------- 1996 1995 ------------- --------------- Marketing and public relations $ 752 $ 337 Insurance 93 752 Professional services 854 643 Outside processing 1,035 541 Other 1,112 1,083 ------------- --------------- $ 3,846 $ 3,356 ============= =============== Marketing and public relations expense increased $0.4 million, reflecting the expanded use of television advertising directed towards the Company's consumer strategy. Insurance expense includes FDIC deposit insurance expense, which totaled $1 thousand in the third quarter of 1996 compared to $0.6 million in the same period in 1995. This decrease is attributable to a significant reduction in FDIC premiums. Professional services increased $0.2 million due to legal expenses related to the Reorganization and litigation matters occurring in the normal course of business. Outside processing increased $0.5 million, reflecting higher transaction and account volume associated with increased account activity resulting from the Company's consumer strategy, as well as costs associated with the outsourcing of the Company's item processing operations in 1996. Net Expense of Real Estate Operations The Company has certain subsidiaries that are engaged in various real estate investments, directly or in joint ventures with unaffiliated partners. The Company 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 for the three months ended September 30, 1996 remained consistent with levels in the comparable prior year quarter. Income Taxes For the three month period ended September 30, 1996 the Company recorded an income tax benefit of $6.4 million compared with income tax expense of $0.1 million for the three month period ended September 30, 1995. The decrease in income tax expense was the result of two non-recurring tax events totaling a benefit of $8.0 million. The Company recognized a one time gain of $2.8 million as a result of the recently enacted Small Business Jobs Protection Act of 1996. In addition, during the quarter, Management reevaluated the realizability of its deferred tax asset and determined that, based on the weight of available evidence, it was more likely than not that it would be realized. Accordingly, the Company recognized the remainder of its deferred tax asset of $5.2 million. The increase in income tax expense exclusive of these two items is the result of increased pre-tax earnings in 1996. 11 Results of Operations for the Nine Months Ended September 30, 1996 and September 30, 1995 The Company reported net income of $15.7 million, or $2.82 per share, for the nine months ended September 30, 1996 as compared to net income of $3.9 million, or $0.75 per share, on a pro forma basis, for the same period last year. The financial results were affected by two nonrecurring tax events totaling $8.0 million which occurred in the third quarter of 1996. The Company recognized a one time gain of $2.8 million as a result of the recently enacted Small Business Job Protection Act of 1996. In addition, the Company recognized the remainder of its deferred tax asset of $5.2 million. The Company also experienced improved results in core earnings primarily attributed to increased net interest income and noninterest income as well as lower provisions for possible loan losses. 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. 12
Nine Months Ended September 30, ------------------------------------------------------------------------------------- 1996 1995 ----------------------------------------- ---------------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost -------------- ----------- ------------ ------------ ------------ ------------ Interest-earning assets: Fed funds sold and interest-bearing deposits $ 9,404 $ 380 5.31% $ 21,913 $ 971 5.84% Investment securities held to maturity 186,354 9,494 6.79% 181,658 7,965 5.85% Investment securities available for sale 312,169 15,230 6.51% 171,893 8,484 6.58% Residential real estate loans 246,932 14,557 7.86% 267,122 15,738 7.86% Commercial real estate loans 119,139 7,613 8.52% 118,590 7,320 8.23% Commercial loans 126,587 8,386 8.70% 92,321 6,535 9.33% Home equity loans 77,748 4,911 8.44% 55,939 3,865 9.25% Consumer loans 6,103 479 10.48% 6,542 438 8.93% -------------- ----------- ------------ ------------ ------------ ------------ Total interest-earning assets 1,084,436 61,050 7.51% 915,878 51,316 7.47% Allowance for loan losses (15,255) (16,425) Non-interest-earning assets 83,851 70,128 -------------- ------------ Total assets $ 1,153,032 $ 61,050 $ 969,581 $ 51,316 ============== =========== ============ ============ Interest-bearing liabilities Deposits Savings accounts $ 193,874 $ 3,631 2.50% $ 185,019 $ 3,447 2.49% NOW accounts 56,101 485 1.15% 53,612 550 1.37% Money market accounts 206,425 5,137 3.32% 214,432 5,212 3.25% Time deposit accounts 377,253 15,085 5.34% 344,830 13,049 5.06% -------------- ----------- ------------ ------------ ------------ ------------ Total deposits 833,653 24,338 3.90% 797,893 22,258 3.73% Borrowed funds 129,272 5,439 5.53% 23,220 1,108 6.29% -------------- ----------- ------------ ------------ ------------ ------------ Total interest-bearing liabilities 962,925 29,777 4.13% 821,113 23,366 3.80% Non-interest-bearing liabilities 106,574 84,263 -------------- ------------ Total liabilities 1,069,499 905,376 Total stockholders' equity 83,533 64,205 -------------- ------------ Total liabilities and stockholders' equity $ 1,153,032 $ 29,777 $ 969,581 $ 23,366 ============== =========== ============ ============ Net interest income/spread $31,273 3.38% $27,950 3.67% =========== ============ ============ ============ Net interest margin as a % of interest- earning assets 3.85% 4.07% ============ ============
Net interest income for the nine months ended September 30, 1996 was $31.3 million compared to $28.0 million for the nine months ended September 30, 1995, an increase of $3.3 million or 11.9%. This increase is primarily due to a $168.6 million increase in average interest-earning assets partially offset by a 22 basis point decrease in net interest margin. Total interest income was $61.1 million for the nine months ended September 30, 1996, an increase of $9.7 million or 19.0% from the same period last year. This increase is primarily attributable to higher levels of interest-earning assets. Average interest-earning assets totaled $1.1 billion for the nine months ended September 30, 1996 compared to $915.9 million for the same period in 1995, an increase of $168.6 million or 18.4%. Total investments increased $145.0 million and were funded by higher deposit levels and borrowed funds. Total loans increased $36.1 million as the Company continued to focus on the commercial and home equity market segments, which grew by $34.3 million or 37.1% and $21.9 million or 39.2%, respectively. Residential real estate loan balances declined $20.2 million or 7.6%, reflecting significant refinancing activity to fixed rate products during the first quarter of 1996, as well as a decline in production for adjustable rate mortgage products. The Company originates long-term fixed rate mortgages for sale in the secondary market and generally holds adjustable rate mortgages in the Company's loan portfolio. 13 Total interest expense was $29.8 million for the nine months ended September 30, 1996 compared to $23.4 million during the same period in 1995, an increase of $6.4 million or 27.4%. This increase is attributable to increases in interest-bearing deposits, rates paid on deposits and borrowed funds. Interest-bearing deposits totaled $833.7 million for the nine months ended September 30, 1996 compared to $797.9 million for the same period in 1995, an increase of $35.8 million or 4.5%. This growth occurred primarily in Time deposits, which increased $32.4 million. The average rate paid on deposits was 3.90% for the nine months ended September 30, 1996 compared to 3.73% for the nine months ended September 30, 1995, an increase of 17 basis points or 4.6% principally reflecting repricing of the existing portfolio as well as continued competitive pricing pressures. Borrowed funds averaged $129.3 million for the nine months ended September 30, 1996, reflecting the use of FHLB advances and repurchase agreements to leverage a portion of the Company'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.
Nine months ended September 30, 1996 versus 1995 --------------------------------------------------- Increase (Decrease) Due to --------------------------------------------------- Volume Rate Net -------------- -------------- --------------- Interest-earning assets: Federal funds sold and interest bearing deposits $ (529) $ (61) $ (590) Investment securities held to maturity 223 1,306 1,529 Investment securities available for sale 6,884 (138) 6,746 Residential real estate loans (1,190) 9 (1,181) Commercial real estate loans 34 259 293 Commercial loans 2,347 (497) 1,850 Home equity loans 1,450 (404) 1,046 Consumer loans (32) 73 41 -------------- -------------- --------------- Total interest-earning assets 9,187 547 9,734 -------------- -------------- --------------- Interest-bearing liabilities: Deposits: Savings accounts 165 19 184 NOW accounts 24 (89) (65) Money market accounts (197) 122 (75) Time deposit accounts 1,262 774 2,036 -------------- -------------- --------------- Total deposits 1,254 826 2,080 Borrowed funds 4,761 (430) 4,331 -------------- -------------- --------------- Total interest-bearing liabilities 6,015 396 6,411 -------------- -------------- --------------- Change in net interest income $ 3,172 $ 151 $ 3,323 ============== ============== ===============
14 Provision for Possible Loan Losses The Company added $2.2 million to its provision for possible loan losses for the nine months ended September 30, 1996 compared to $3.4 million for the same period in 1995. This decrease of $1.2 million reflects an improvement in the credit quality profile of the loan portfolio. 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 "Balance Sheet Analysis Comparison of September 30, 1996 to December 31, 1995 - Allowance for Possible Loan Losses." 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: Nine months ended September 30, ------------------------------------- 1996 1995 --------------- --------------- Net gain/(loss) on sale of loans $ 537 $ 62 Net gain/(loss) on sale of securities 64 14 Loan charges and fees 2,428 2,321 Deposit related fees 4,539 3,558 Other charges and fees 678 456 --------------- --------------- $ 8,246 $ 6,411 =============== =============== Net gain on sale of loans increased $0.5 million due to an increase in the amount of loans sold on a servicing released basis. Deposit service charges increased $1.0 million due primarily to fees associated with the Company's larger noninterest bearing account base. Other charges and fees increased $0.2 million reflecting an increase in brokerage fees. Salaries and Benefits Expense Salaries and benefits expense totaled $12.9 million for the nine months ended September 30, 1996 compared to $11.7 million for the same period in 1995, an increase of $1.2 million reflecting standard wage increases, the introduction of new benefit programs including ESOP, restricted stock and 401(k) plans, and higher ESOP and restricted stock expenses as a result of increases in the Company's stock price. Occupancy Expense Total occupancy expense was $2.4 million for the nine months ended September 30, 1996, a decrease of $0.2 million from the same period in 1995 primarily as a result of the improved operating results of SIS Center, the Company's corporate headquarters. 15 Other Operating Expense The components of other operating expense for the periods presented are as follows: Nine months ended September 30, ------------------------------------------ 1996 1995 ----------------- ----------------- Marketing and public relations $ 1,629 $ 1,009 Insurance 287 2,444 Professional services 2,344 2,115 Outside processing 3,090 2,240 Other 3,267 2,863 ----------------- ----------------- $ 10,617 $ 10,671 ================= ================= Marketing and public relations expense increased $0.6 million, reflecting the expanded use of television advertising directed towards the Company's consumer strategy. Insurance expense includes FDIC deposit insurance expense, which totaled $2 thousand for the nine months ended September 30, 1996 compared to $2.0 million in the same period in 1995. This decrease is attributable to a significant reduction in FDIC premiums. Professional services increased $0.2 million due to legal expenses related to the Reorganization and litigation matters occurring in the normal course of business. Outside processing increased $0.9 million, reflecting higher transaction and account volume associated with increased account activity resulting from the Company's consumer strategy, as well as costs associated with the outsourcing of the Company's item processing operations in 1996. Other operating expenses increased $0.4 million primarily due to supplies and postage costs associated with growth in consumer deposit accounts as a result of the Company's 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 $0.3 million for the nine months ended September 30, 1996 compared to $0.5 million for the same period in 1995. This $0.2 million decrease reflects lower levels of foreclosed properties. Net Expense of Real Estate Operations The Company has certain subsidiaries that are engaged in various real estate investments, directly or in joint ventures with unaffiliated partners. The Company 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 for the nine months ended September 30, 1996 remains consistent with the levels in the comparable prior year period. Income Taxes For the nine month period ended September 30, 1996 the Company recorded an income tax benefit of $5.9 million compared with income tax expense of $0.2 for the nine month period ended September 30, 1995. The decrease in income tax expense was the result of two non-recurring tax events in the third quarter of 1996 totaling a benefit of $8.0 million. The Company recognized a one time gain of $2.8 million as a result of the recently enacted Small Business Jobs Protection Act of 1996. In addition, during the quarter, Management reevaluated the realizability of its deferred tax asset and determined that, based on the weight of available evidence, it was more likely than not that it would be realized. Accordingly, the Company recognized the remainder of its deferred tax asset of $5.2 million. The increase in income tax expense exclusive of these two items is the result of increased pre-tax earnings in 1996. 16 BALANCE SHEET ANALYSIS - COMPARISON OF SEPTEMBER 30, 1996 TO DECEMBER 31, 1995 Total assets increased from $1.1 billion at December 31, 1995 to $1.3 billion at September 30, 1996. This increase reflects growth in loans and investments funded through an increase in deposits and wholesale borrowings. Investments The Company's investment portfolio increased $160.4 million from $419.8 million at December 31, 1995 to $580.2 million at September 30, 1996. The Company engages in investment activities for both investment and liquidity purposes. The Company maintains an investment securities portfolio which consists primarily of U.S. Government and Agency securities, corporate obligations, asset-backed securities, collateralized mortgage obligations, Federal Home Loan Bank stock, and marketable equity securities. Other short-term investments held by the Company periodically include interest-bearing deposits and federal funds sold. The Company 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 Company ("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. Securities which the Company 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. The table below sets forth certain information regarding the amortized cost and fair value of the Company's investment portfolio at the dates indicated.
September 30, 1996 ------------------------------------------------------------------------ Available for Sale Held to Maturity -------------------------------- -------------------------------- Amortized Amortized Cost Fair Value Cost Fair Value -------------- ------------- ------------- ------------- U.S. government and agency obligations $ 22,062 $ 22,049 $ - $ - Mortgage-backed securities 337,668 338,075 159,060 158,803 Other bonds and short term obligations 11,289 11,240 35,072 35,016 Other securities 14,681 14,686 - - -------------- ------------- ------------- ------------- Total $ 385,700 $ 386,050 $ 194,132 $ 193,819 ============== ============= ============= =============
December 31, 1995 ------------------------------------------------------------------------ Available for Sale Held to Maturity -------------------------------- -------------------------------- 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 ============== ============= ============= =============
17 Loan Portfolio Composition Gross loans comprised $606.6 million or 47.2% of total assets as of September 30, 1996. The following table sets forth information concerning the Company's loan portfolio in dollar amounts and percentages, by type of loan at September 30, 1996 and at December 31, 1995.
September 30, 1996 December 31, 1995 ----------------------------- ----------------------------- Percent of Percent of Amount Total Amount Total ------------- -------------- ------------- ------------- Residential real estate loans $ 244,067 40.24% $ 263,551 45.99% Commercial real estate loans 121,803 20.08% 118,005 20.59% Commercial loans 144,431 23.81% 117,674 20.53% Home equity loans 91,554 15.09% 67,657 11.81% Consumer loans 4,707 0.78% 6,196 1.08% ------------- -------------- ------------- ------------- Total loans receivable, gross 606,562 100.00% 573,083 100.00% Less: Unearned income and fees (977) (566) Allowance for possible loan losses 15,488 14,986 ------------- ------------- Total loans receivable, net $ 592,051 $ 558,663 ============= =============
The Company continues to actively originate loans secured by first mortgages on one to four family residences, and offers a variety of fixed and adjustable rate mortgage loan products. The Company originates long-term fixed rate mortgages for sale in the secondary market and generally holds adjustable rate mortgages in the Company's loan portfolio. During the nine months ended September 30, 1996, the Company experienced an increase in prepayments in its adjustable rate mortgage portfolio due to lower interest rates. These prepayments offset new originations and resulted in a $19.5 million decrease in residential real estate loans between December 31, 1995 and September 30, 1996. During the nine months ended September 30, 1996, commercial loan balances increased $26.8 million, reflecting the Company's continued focus on lending activities in the local business market. Home equity loans outstanding have increased $23.9 million since December 31, 1995 resulting from the Company's pricing strategy, the waiver of closing costs and the active promotion of these products. The decrease in the Company's consumer loan portfolio from December 31, 1995 to September 30, 1996 reflects the July 10, 1996 sale of the Company's student loan portfolio and a runoff in personal installment loan balances partially offset by an increase of $0.8 million in overdraft protection lines. Effective July 1, 1996, the Company discontinued the origination of student loans. The Company will provide applications to prospective borrowers and refer these customers to the Student Loan Marketing Association. The Company has discontinued offering most types of personal installment loans. This decision was made based on the low volumes achieved by the Company and the highly competitive nature of consumer products offered by bank and non-bank competitors. 18 Non-performing Assets Non-performing assets totaled $7.6 million as of September 30, 1996 compared to $13.9 million as of December 31, 1995, a decrease of $6.3 million or 45.2%. The following table sets forth information regarding the components of non-performing assets for the periods presented:
September 30, 1996 December 31, 1995 -------------------- -------------------- Non-accrual loans (1): Residential real estate loans $ 1,149 $ 2,553 Commercial real estate loans 2,805 5,745 Commercial loans 859 638 Home equity loans 221 90 Consumer loans 27 11 -------------------- -------------------- Total non-accrual loans 5,061 9,037 -------------------- -------------------- Loans past due 90 days still accruing (2) 1,143 587 -------------------- -------------------- Total non-performing loans 6,204 9,624 Foreclosed real estate (3) 512 1,529 Restructured loans on accrual status (4) 887 2,732 -------------------- -------------------- Total non-performing assets $ 7,603 $ 13,885 ==================== ==================== Total non-performing loans to total gross loans 1.05% 1.72% Total non-performing assets to total assets 0.59% 1.30% Allowance for possible losses to non-performing loans 249.65% 155.71% (1) Non-accrual loans are loans that are contractually past due in excess of 90 days, for which the Bank has discontinued the accrual of interest, or loans which are not past due but on which the Bank has discontinued 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).
Potential Problem Loans The Bank maintains a "watch list" of potential problem loans, which are performing loans that have potential weaknesses that require Management's attention. These potential weaknesses may stem from a variety of factors including, among other things, economic or market conditions, adverse trends in the obligor's operations or balances sheet weaknesses. Potential problem loans totaled $15.6 million or 1.2% of total assets at September 30, 1996 compared to $20.7 million or 1.9% of total assets at December 31, 1995. 19 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 Company'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 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 Company'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 Company 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 Company assesses the value of real estate owned on a periodic basis. The allowance for possible loan losses at September 30, 1996 was $15.5 million, compared to $16.6 million at September 30, 1995. The activity in the allowance for possible loan losses for the nine months ended September 30, 1996 and 1995 was as follows: Nine Months ended September 30, ----------------------------- 1996 1995 ------------ ------------ Balance at beginning of period $ 14,986 $ 15,844 Provision for possible loan losses 2,200 3,357 Charge-offs: Residential real estate loans (755) (414) Commercial real estate loans (2,255) (2,048) Commercial loans (355) (489) Home equity loans (190) (25) Consumer loans (61) (182) ------------ ------------ Total charge-offs (3,616) (3,158) ------------ ------------ Recoveries: Residential real estate loans 594 51 Commercial real estate loans 1036 242 Commercial loans 163 141 Home equity loans 98 68 Consumer loans 27 71 ------------ ------------ Total recoveries 1,918 573 ------------ ------------ Net charge-offs (1,698) (2,585) ------------ ------------ Balance, end of period $ 15,488 $ 16,616 ============ ============ Ratio of allowance for possible loan losses to total loans at the end of the period 2.55% 2.99% Ratio of allowance for possible loan losses to non-performing loans at the end of the period 249.65% 123.94% 20 At September 30, 1996, the recorded investment in loans that are considered impaired under SFAS 114 was $9.0 million. Included in this amount is $0.4 million of impaired loans for which the related SFAS 114 allowance is $0.1 million and $8.6 million of impaired loans for which the SFAS 114 allowance is zero. The average recorded investment in impaired loans during the three and nine months ended September 30, 1996 was approximately $7.2 million and $9.0 million, respectively. For the three and nine month periods ended September 30, 1996, the Company recognized interest income on these impaired loans of $0.1 million and $0.3 million, respectively. 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.
September 30, 1996 December 31, 1995 ------------------------------- ------------------------------- % of Total % of Total Allowance Allowance for for Amount Loan Losses Amount Loan Losses ----------- ---------------- ------------ ---------------- Residential real estate loans $1,561 10.08% $1,881 12.55% Commercial real estate loans 6,872 44.37% 6,784 45.27% Commercial loans 5,814 37.54% 5,480 36.57% Home equity loans 964 6.22% 672 4.48% Consumer loans 277 1.79% 169 1.13% ----------- ---------------- ------------ ---------------- Total allowance for possible loan losses $15,488 100.00% $14,986 100.00% =========== ================ ============ ================
21 Deposit Distribution The principal source of funds for the Company are deposits from local consumers and businesses. There were no brokered deposits at September 30, 1996. The Company's deposits consist of demand and NOW accounts, passbook and statement savings accounts, Money Market accounts and Time deposit accounts. Total deposits were $954.1 million at September 30, 1996 compared to $885.4 million at December 31, 1995, an increase of $68.7 million. This growth occurred primarily in Demand deposits, Savings accounts and Time deposits. Demand deposits and Savings accounts increased $28.8 million and $9.6 million, respectively, as customers continue to take advantage of free savings and checking accounts offered as a result of the Company's consumer deposit strategy to attract and retain core deposits, which provide the Company with a lower cost source of funds. Also contributing to the growth of Demand deposit balances is an increase in business checking accounts of $16.1 million resulting from the Company's focus on small business banking. The growth in Time deposits is primarily attributable to the introduction of a new nine month CD in June 1996. As of September 30, 1996, total balances for this new product were $15.2 million. The following table presents the composition of deposits for the periods indicated:
September 30, 1996 December 31, 1995 ------------------------------ ----------------------------- Percent Percent of of Amount Total Amount Total -------------- ------------ -------------- ------------ Demand deposits $ 100,334 10.52% $ 71,539 8.08% NOW accounts 56,542 5.93% 57,271 6.47% Savings accounts 195,150 20.45% 185,555 20.96% Money market accounts 210,887 22.10% 203,313 22.96% Time deposits 391,219 41.00% 367,708 41.53% -------------- ------------ -------------- ------------ Total deposits $ 954,132 100.00% 885,386 100.00% ============== ============ ============== ============
22 Regulatory Capital Under current Federal Reserve Board (the "FRB") capital regulations, bank holding companies, such as the Company, 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 Company'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 Company as of September 30, 1996 and December 31, 1995 as well as the September 30, 1996 minimum FRB capital requirements. September 30, December 31, FRB 1996 1995 Requirement ------------- ------------ ------------ Tier 1 leverage capital ratio 7.31% 7.57% 3.00% (1) Tier 1 risk-based capital ratio 12.13% 12.52% 4.00% Total risk-based capital ratio 13.39% 13.77% 8.00% (1) The FRB expects most bank holding companies, including those organizations experiencing or anticipating significant growth, to operate with an additional cushion of Tier 1 leverage capital of at least 100 to 200 basis points. 23 Interest Rate Risk Management The operations of the Company are subject to the risk of interest rate fluctuations to the extent that there is a substantial difference in the amount of the Company'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 Company'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 Company estimates that its cumulative one-year gap position was a positive $40.1 million or 3.13% of total assets at September 30, 1996. The Company 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 September 30, 1996, which are anticipated by the Company 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 Company'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. 24
GAP Position at September 30, 1996 --------------------------------------------------------------------------------- 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 $ 17,545 $ - $ - $ - $ 17,545 Investment securities 330,844 109,229 105,354 34,755 580,182 Residential real estate loans 73,957 68,579 85,441 15,248 243,225 Commercial real estate loans 49,151 10,645 59,201 - 118,997 Commercial loans 62,985 11,478 66,691 2,638 143,792 Home equity loans 71,789 1,022 11,632 7,399 91,842 Consumer loans 3,835 192 380 215 4,622 Other assets - - - 84,361 84,361 -------------- -------------- -------------- --------------- -------------- Total assets $ 610,106 $ 201,145 $ 328,699 $ 144,616 $ 1,284,566 ============== ============== ============== =============== ============== Liabilities & stockholders' equity: Savings accounts $ 29,272 $ 29,272 $ 136,606 $ - $ 195,150 NOW accounts 8,482 8,482 39,578 - 56,542 Money market accounts 63,266 63,266 84,355 - 210,887 Time deposits 219,250 110,528 61,441 - 391,219 Borrowed funds 174,223 25,053 497 2,586 202,359 Other liabilities & stockholders' equity 20,006 20,006 60,021 128,376 228,409 -------------- -------------- -------------- --------------- -------------- Total liabilities & stockholders' equity $ 514,499 $ 256,607 $ 382,498 $ 130,962 $ 1,284,566 ============== ============== ============== =============== ============== Period GAP position $ 95,607 $ (55,462) $ (53,799) $ 13,654 Net period GAP as a percentage of total assets 7.44% -4.32% -4.19% 1.06% Cumulative GAP $ 95,607 $ 40,145 $ (13,654) - Cumulative GAP as a percentage of total assets 7.44% 3.13% -1.06% - For purposes of the above interest sensitivity analysis: Residential loans held for sale at September 30, 1996 totaling $4.5 million are 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 $5.1 million. Loans do not include the allowance for loan loss of $15.5 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 Company'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 accounts of $100.3 million 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. 25 Liquidity Liquidity measures the ability of the Company 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 Company'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 Company utilizes particular sources of funds based on comparative costs and availability. The Company 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 Company 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 Company 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 Company has a stable retail deposit base, Management believes that significant borrowings will not be necessary to maintain its current liquidity position. The Company'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. 26 PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company 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 Company. Item 2. Changes in Securities Not applicable Item 3. Defaults upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit Number Description 11. Computation of Earnings per Share and Pro Forma Earnings per Share (b) Reports on Form 8-K On September 26, 1996, the Company filed a current report on Form 8-K regarding an announcement of the Company's intended treatment of certain tax benefits. 27 SIGNATURES Under the requirements of the Securities Exchange Act of 1934, as amended, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SIS BANCORP, INC. (Registrant) November 14, 1996 /s/ F. William Marshall, Jr. - ------------------- ----------------------------------- Date F. William Marshall, Jr. President and Chief Executive Officer November 14, 1996 /s/ John F. Treanor - ------------------- ----------------------------------- Date John F. Treanor Executive Vice President and Chief Financial Officer 28 EX-11 2 Exhibit 11. Earnings per Share and Pro Forma Earnings per Share
Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- --------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Primary: Net income $10,201 $1,812 $15,650 $3,882 Weighted average and pro forma weighted average shares outstanding during the period 5,596 5,562 5,577 5,562 Unearned ESOP shares (363) (418) (363) (436) Stock options considered outstanding during the period 152 68 119 7 Restricted stock shares considered outstanding during the period 127 33 142 7 ------------ ------------ ------------ ------------ Total shares 5,512 5,245 5,475 5,140 ============ ============ ============ ============ Net income per share $1.85 $0.35 $2.86 $0.76 ============ ============ ============ ============ Three Months Ended Nine Months Ended September 30, September 30, -------------------------- ----------------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Fully Diluted: Net income $10,201 $1,812 $15,650 $3,882 Weighted average and pro forma weighted average shares outstanding during the period 5,596 5,562 5,577 5,562 Unearned ESOP shares (363) (418) (363) (436) Stock options considered outstanding during the period 197 82 188 37 Restricted stock shares considered outstanding during the period 127 38 142 17 ------------ ------------ ------------ ------------ Total shares 5,557 5,264 5,544 5,180 ============ ============ ============ ============ Net income per share $1.84 $0.34 $2.82 $0.75 ============ ============ ============ ============
Net income per share for the three and nine months ended September 30, 1996 and the three months ended September 30, 1995 is computed on weighted shares outstanding for the period. Net income per share for the nine months ended September 30, 1995 is computed on a pro forma basis as if the stock issued in the conversion from mutual to stock form 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. EX-27 3
9 This schedule contains summary financial information extracted from the unaudited financial statements of SIS Bancorp, Inc. for the period ended September 30, 1996 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 34,709 45 17,500 0 386,050 194,132 193,819 592,051 15,488 1,284,566 954,132 199,333 31,015 3,026 0 0 57 97,003 1,284,566 35,946 24,724 380 61,050 24,338 29,777 31,273 2,200 64 10,617 9,719 9,719 0 0 15,650 2.86 2.82 7.51 5,061 1,143 887 15,600 14,986 3,616 1,918 15,488 15,488 0 0
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