-----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, Gmmk+GgUft3DHY+2Ri0CMgMOrPuAO9aX44hjiQ0xIQ8uEVu7YPqtuHOYGweQyxvD XZUs2aSRvb4VjbuecrMKQg== 0000908737-97-000411.txt : 19971023 0000908737-97-000411.hdr.sgml : 19971023 ACCESSION NUMBER: 0000908737-97-000411 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971022 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIS BANCORP INC CENTRAL INDEX KEY: 0001013049 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 043303264 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-20809 FILM NUMBER: 97698941 BUSINESS ADDRESS: STREET 1: P O BOX 3034 STREET 2: 1441 MAIN STREET CITY: SPRINGFIELD STATE: MA ZIP: 01102-3034 BUSINESS PHONE: 4137488000 MAIL ADDRESS: STREET 1: 1441 MAIN STREET CITY: SPRINGFIELD STATE: MA ZIP: 01102 10-Q/A 1 FORM 10-Q/A (Amendment 1) 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 06/30/97 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 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: 5,576,842 shares as of August 4, 1997. 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") wish 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 of 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 Statement of Operations for the three and six months ended June 30, 1997 and 1996........................ 1 Condensed Consolidated Statement of Financial Condition at June 30, 1997 and December 31, 199.................................... 2 Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 1997 and 1996.................................. 3 Condensed Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 1997 and 1996.......................... 5 Notes to the Unaudited Financial Statements.............................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 8 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................................. 28 SIGNATURES............................................................... 29
SIS BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Dollars In Thousands Except Per Share Amounts) (Unaudited) (Unaudited) Three Months Ended Six Months Ended ---------------------- --------------------- June 30, June 30, June 30, June 30, 1997 1996 1997 1996 --------- --------- --------- --------- Interest and dividend income: Loans $ 13,343 $ 11,922 $ 26,327 $ 23,474 Investment securities available for sale 8,298 5,170 16,086 9,296 Investment securities held to maturity 3,317 3,269 6,680 6,215 Federal funds sold and short term investments 130 45 359 259 -------- -------- -------- -------- Total interest and dividend income 25,088 20,406 49,452 39,244 -------- -------- -------- -------- Interest expense: Deposits 8,542 7,992 16,879 16,068 Borrowings 3,990 1,957 7,524 3,148 -------- -------- -------- -------- Total interest expense 12,532 9,949 24,403 19,216 -------- -------- -------- -------- Net interest and dividend income 12,556 10,457 25,049 20,028 Less: Provision for possible loan losses 400 750 801 1,450 -------- -------- -------- -------- Net interest and dividend income after provision for possible loan losses 12,156 9,707 24,248 18,578 Noninterest income: Net gain on sale of loans 86 162 192 432 Net gain on sale of securities 11 -- 11 2 Fees and other income 2,764 2,575 5,376 4,884 -------- -------- -------- -------- Total noninterest income 2,861 2,737 5,579 5,318 -------- -------- -------- -------- Noninterest expense: Operating expenses: Salaries and employee benefits 4,941 4,242 9,660 8,492 Occupancy expense of bank premises, net 927 795 1,903 1,577 Furniture and equipment expense 523 514 1,031 1,056 Other operating expenses 3,568 3,656 7,241 6,771 -------- -------- -------- -------- Total operating expenses 9,959 9,207 19,835 17,896 -------- -------- -------- -------- Foreclosed real estate (income) expense (4) 63 (32) 223 Net expense (income) of real estate operations 58 (148) 479 (162) -------- -------- -------- -------- Total noninterest expense 10,013 9,122 20,282 17,957 Income before income tax expense 5,004 3,322 9,545 5,939 Income tax expense 2,014 278 3,785 490 -------- -------- -------- -------- Net income $ 2,990 $ 3,044 $ 5,660 $ 5,449 ======== ======== ======== ======== Earnings per share: Primary $ 0.53 $ 0.56 $ 1.03 $ 1.00 Fully diluted $ 0.53 $ 0.56 $ 1.02 $ 1.00 Weighted average shares outstanding: Primary 5,634,786 5,434,834 5,608,141 5,432,265 Fully diluted 5,657,177 5,450,529 5,640,349 5,445,968
See accompanying Notes to the Unaudited Financial Statements 1
SIS BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (Dollars In Thousands Except Share Amounts) (Unaudited) June 30, December 31, 1997 1996 ----------- ----------- ASSETS Cash and due from banks $ 42,807 31,902 Federal funds sold and short-term investments 10,585 10,045 Investment securities available for sale 493,862 449,323 Investment securities held to maturity (fair value: $184,424 at June 30, 1997 and $191,617 at December 31, 1996) 184,993 192,174 Loans receivable, net of allowance for possible losses ($16,392 at June 30, 1997 and $15,597 at December 31, 1996) 645,877 610,597 Accrued interest and dividends receivable 9,846 8,982 Investments in real estate and real estate partnerships 2,703 2,757 Foreclosed real estate, net 214 381 Bank premises, furniture and fixtures, net 27,783 27,106 Other assets 15,875 15,345 ----------- ----------- Total assets $ 1,434,545 $ 1,348,612 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 1,015,404 $ 969,517 Federal Home Loan Bank advances 118,878 68,471 Securities sold under agreements to repurchase 158,809 176,577 Loans payable 2,670 2,848 Mortgage escrow deposits 4,707 4,396 Accrued expenses and other liabilities 30,804 24,886 ----------- ----------- Total liabilities 1,331,272 1,246,695 ----------- ----------- Commitments and contingent liabilities -- -- 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: 5,727,242 at June 30, 1997 and 5,723,600 at December 31, 1996; outstanding: 5,576,842 at June 30, 1997 and 5,723,600 at December 31, 1996) 57 57 Unearned compensation (3,306) (3,693) Additional paid-in capital 43,039 42,665 Retained earnings 65,472 60,993 Net unrealized gain on investment securities available for sale 1,976 1,895 Treasury stock, at cost (150,400 shares at June 30, 1997) (3,965) -- ----------- ----------- Total stockholders' equity 103,273 101,917 ----------- ----------- Total liabilities and stockholders' equity $ 1,434,545 $ 1,348,612 =========== ===========
See accompanying Notes to the Unaudited Financial Statements 2
SIS BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars In Thousands) (Unaudited) Six Months Ended June 30, ----------------------- 1997 1996 ---------- ---------- Cash Flows From Operating Activities Net income $ 5,760 $ 5,449 Adjustments to reconcile net income to net cash provided by/ (used for) operating activities Provision for possible loan losses 801 1,450 Depreciation 1,479 1,510 Amortization of premium on investment securities, net 1,112 1,193 ESOP and restricted stock expenses 868 722 Investment security gains -- (2) Income from equity investment in partnerships (2) (145) Gain on sale of loans (192) (432) Disbursements for mortgage loans held for sale (26,746) (54,864) Receipts from mortgage loans held for sale 26,938 55,296 Loss on sale of fixed assets and real estate -- 342 Changes in other assets and other liabilities: Increase in other assets, net (1,803) (1,644) Increase in accrued expenses and other liabilities 5,918 680 --------- --------- Net cash provided by operating activities 14,133 9,555 --------- --------- Cash Flows From Investing Activities Proceeds from sales of investment securities available for sale 3,634 12,200 Proceeds from maturities and principal payments received on investment securities available for sale 62,425 71,652 Purchase of investment securities available for sale (110,994) (176,695) Proceeds from maturities and principal payments received on investment securities held to maturity 21,333 25,862 Purchase of investment securities held to maturity (14,378) (46,583) Net decrease in investments in real estate -- 475 Net increase in loans receivable (36,201) (22,549) Net decrease in foreclosed real estate 195 1,767 Proceeds from sale of loans 92 462 Purchase of fixed assets (2,100) (1,480) --------- --------- Net cash used for investing activities (75,994) (134,889) --------- ---------
See accompanying Notes to the Unaudited Financial Statements 3
SIS BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (continued) (Dollars In Thousands) (Unaudited) Six Months Ended June 30, --------------------- 1997 1996 -------- --------- Cash Flows from Financing Activities Net increase in deposits 45,887 41,912 Net increase in borrowings 32,461 90,848 Net increase in mortgagors' escrow deposits 311 128 Net proceeds from exercise of stock options 121 -- Repurchase of common stock (4,193) -- Cash dividends paid (1,281) -- -------- -------- Net cash provided by financing activities 73,306 132,888 -------- -------- Increase in cash and cash equivalents 11,445 7,554 Cash and cash equivalents, beginning of period 41,947 38,422 -------- -------- Cash and cash equivalents, end of period $ 53,392 $ 45,976 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for interest to depositors and interest on debt $ 23,734 $ 19,217 Non-cash investing activities: Transfers to foreclosed real estate, net $ 28 $ 665
See accompanying Notes to the Unaudited Financial Statements 4
SIS BANCORP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY For The Six Months Ended June 30, 1997 and 1996 (Dollars In Thousands) Net unrealized gain (loss) on investment Unearned Additional securities Treasury Common Compen- Paid-In Retained available Stock Stock sation Capital Earnings for sale at Cost Total ------- -------- --------- -------- ------------ ---------- --------- Balance at December 31, 1996 $ 57 $(3,693) $42,665 $60,993 $ 1,895 $ -- $ 101,917 Net income -- -- -- 5,760 -- -- 5,760 Cash dividends declared ($0.24 per share) -- -- -- (1,281) -- -- (1,281) Issuance of common stock in connection with employee and non-employee directors benefit programs -- (98) (9) -- -- 228 121 Decrease in unearned compensation -- 485 383 -- -- -- 868 Change in unrealized gain (loss) on investment securities available for sale -- -- -- -- 81 -- 81 Treasury stock purchased -- -- -- -- -- (4,193) (4,193) ------ ------- ------- ------- --------- ------- --------- Balance at June 30, 1997 $ 57 $(3,306) $43,039 $65,472 $ 1,976 $(3,965) $ 103,273 ====== ======= ======= ======= ========= ======= ========= Balance at December 31, 1995 $ 57 $(4,937) $41,790 $42,833 $ 1,726 $ -- $ 81,469 Net income -- -- -- 5,449 -- -- 5,449 Issuance of common stock in connection with employee and non-employee directors benefit programs -- (315) 297 -- -- -- (18) Decrease in unearned compensation -- 749 221 -- -- -- 970 Change in unrealized gain (loss) on investment securities available for sale -- -- -- -- (874) -- (874) ------ ------- ------- ------- --------- ------- --------- Balance at June 30, 1996 $ 57 $(4,503) $42,308 $48,282 $ 852 $ -- $ 86,996 ====== ======= ======= ======= ========= ======= =========
See accompanying Notes to the Unaudited Financial Statements 5 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO THE UNAUDITED FINANCIAL STATEMENTS (Dollars in thousands except per share amounts) 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 in a manner similar to 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 Reorganization had been effected on January 1, 1996. 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 Securities and Exchange Commission ("SEC") Form 10-K and accompanying Notes to the Financial Statements (the "Form 10-K") filed by the Company for the year ended December 31, 1996. Management believes that the disclosures contained herein are adequate to make a fair presentation. These unaudited condensed consolidated financial statements should be read in conjunction with the Form 10-K. The results for the three and six month interim periods covered hereby are not necessarily indicative of the operating results for a full year. 3. New Accounting Pronouncements Effective January 1, 1997, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", that provides accounting and reporting standards which require that after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. In addition to setting requirements regarding the initial recording and subsequent accounting for assets, liabilities and derivatives acquired in transfers of financial assets, this Statement requires that debtors reclassify financial assets pledged as collateral and that secured parties recognize those assets and their obligation to return them in certain circumstances in which the secured party has taken control of those assets. SFAS 125 is effective prospectively for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and for collateral related matters on January 1, 1998. The adoption of this statement did not have a material affect on the Company's financial position as of June 30, 1997 or on the results of its operations for the three and six month periods then ended. In February of 1997 the Financial Accounting Standards Board issued SFAS 128, "Earnings Per Share". SFAS 128 establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock. This statement simplifies the standards for computing EPS previously found in APB Opinion No. 15, "Earnings Per Share," and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS 128 will be effective for financial statements issued after December 15, 1997, and will be adopted by the Company in its December 31, 1997 financial statements. If SFAS 128 had been effective during the first six months of 1997, pro forma basic EPS for the three and six months ended June 30, 1997 would have been $0.57 and $1.10, respectively. Pro forma diluted EPS for the three and six months ended June 30, 1997 would have been $0.53 and $1.03, respectively. 6 4. Dividend Policy The Company paid a cash dividend in the amount of $0.12 per share on May 23, 1997. On July 23, 1997 the Company declared a dividend of $0.14 per share payable on August 21, 1997 to shareholders of record as of the close of business on August 4, 1997. 5. Divestment Related Charges The Company has certain subsidiaries that are engaged in various real estate investments, directly or in joint ventures with unaffiliated partners. In accordance with the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the Company has terminated its real estate development activities and is in the process of selling its remaining real estate investments. In the first quarter of 1997, the Company established a reserve of $1.0 million relating to the divestment of its real estate investment and brokerage subsidiaries, Colebrook Inc. and subsidiaries (" Colebrook"). This amount is included in net expense of real estate operations in the June 30, 1997 Condensed Consolidated Statement of Operations. The $1.0 million reserve consists of $0.7 million in severance and benefit accruals and $0.3 million for other expenses. As of June 30, 1997, no amounts have been paid relating to the divestiture. This divestment is scheduled to be completed by March 31, 1998. 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (DOLLARS IN THOUSANDS) Overview 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. Substantially all of the Company's operations are conducted through the Bank. The Bank provides a wide variety of financial services which include retail and commercial banking, residential mortgage origination and servicing, and commercial and consumer lending. 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 June 30, 1997 and June 30, 1996 The Company reported net income of $3.0 million, or $0.53 per share fully diluted for the second quarter of 1997 as compared to net income of $3.0 million, or $0.56 per share fully diluted for the same period last year. These results reflect an increase in net interest income as well as lower provisions for possible loan losses, offset by increases in noninterest expense and income tax expense. 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 Company invests in certain assets that have preferential tax treatment. In order to present yields on a comparable basis, net interest income is presented on a fully taxable equivalent basis for purposes of yield and margin analysis. 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. 8
Three Months Ended June 30, ------------------------------------------------------------------------------------ 1997 1996 ---------------------------------------- ----------------------------------------- Average Average Average Average Balance Interest(1) Yield/Cost(1) Balance Interest(1) Yield/Cost)(1) ---------- ------------ ------------- ---------- ------------- --------------- (Dollars In Thousands) Interest-earning assets: Fed funds sold and short-term investments $ 9,764 $ 131 5.31% $ 3,396 $ 45 5.24% Investment securities held to maturity 190,435 3,318 6.97% 193,672 3,269 6.75% Investment securities available for sale 493,752 8,365 6.78% 319,709 5,170 6.47% Residential real estate loans 235,695 4,744 8.05% 243,998 4,758 7.80% Commercial real estate loans 113,098 2,464 8.71% 119,523 2,573 8.61% Commercial loans 174,434 3,810 8.64% 128,974 2,841 8.71% Home equity loans 114,075 2,241 7.88% 76,590 1,592 8.36% Consumer loans 4,408 135 12.25% 7,096 158 8.91% ---------- ---------- ----- ---------- --------- ----- Total interest-earning assets 1,335,661 25,208 7.55% 1,092,958 20,406 7.47% Allowance for loan losses (16,447) (14,737) Non-interest-earning assets 92,818 84,258 --------- ---------- Total assets $1,412,032 $ 25,208 $1,162,479 $ 20,406 ========== ========== ========== ========= Interest-bearing liabilities: Deposits Savings accounts $ 206,839 $ 1,161 2.25% $ 195,987 $ 1,218 2.50% NOW accounts 59,222 148 1.00% 57,412 161 1.13% Money market accounts 205,782 1,703 3.32% 206,801 1,701 3.31% Time deposit accounts 422,393 5,530 5.25% 371,828 4,912 5.31% ---------- ---------- ----- ---------- --------- ----- Total interest-bearing deposits 894,236 8,542 3.83% 832,028 7,992 3.86% Borrowed funds 274,991 3,990 5.74% 141,217 1,957 5.48% ---------- ---------- ----- ---------- --------- ----- Total interest-bearing liabilities 1,169,227 12,532 4.30% 973,245 9,949 4.11% Non-interest-bearing liabilities 142,110 106,530 --------- ---------- Total liabilities 1,311,337 1,079,775 Total stockholders' equity 100,695 82,704 ---------- ---------- Total liabilities and stockholders' equity $1,412,032 $ 12,532 $1,162,479 $ 9,949 ========== ========== ========== ========= Net interest income/spread $ 12,676 3.25% $ 10,457 3.36% ========== ===== ========= ===== Net interest margin as a % of interest- earning assets 3.80% 3.83% ===== ===== Tax equivalent adjustment $ 120 $ - --------- --------- Net interest income/spread per Condensed Consolidated Statement of Operations $ 12,556 $ 10,457 ========= ========= (1) On a fully taxable equivalent basis. Calculated using a Federal income tax rate of 34% for 1997 and 1996.
Net interest income on a fully taxable equivalent basis for the three months ended June 30, 1997 was $12.7 million compared to $10.5 million for the three months ended June 30, 1996, an increase of $2.2 million or 21.2%. Total interest income was $25.2 million on a fully taxable equivalent basis for the three months ended June 30, 1997, an increase of $4.8 million or 23.5% from the same period last year. These increases are primarily due to an increase in average interest-earning assets. Average interest-earning assets totaled $1.3 billion in the second quarter of 1997 compared to $1.1 billion in the second quarter of 1996, an increase of $242.7 million or 22.2%. Total investments increased $170.8 million and were funded by higher deposit levels and borrowed funds. Total loans increased $65.5 million as the Company continued to focus on the commercial and home equity market segments, which grew by $45.5 million or 35.3% and $37.5 million or 48.9%, respectively. Residential real estate loan balances declined $8.3 million or 3.4% for the three months ended June 30, 1997, reflecting amortization and prepayments of the existing loan portfolio partially offset by adjustable rate mortgage production. 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. Total interest expense was $12.5 million for the three months ended June 30, 1997 compared to $9.9 million during the same period in 1996, an increase of $2.6 million or 26.0%. This increase is attributable to increases in interest-bearing deposits and borrowed funds. Average interest-bearing deposits totaled $894.2 million for the quarter ended June 30, 1997 compared to $832.0 million for the same period in 1996, an increase of $62.2 million or 7.5%. This growth 9 occurred primarily in time deposits which increased $50.6 million largely attributable to the introduction of new CD products. Borrowed funds averaged $275.0 million for the three months ended June 30, 1997 compared to $141.2 million for the same period in 1996 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 (on a fully taxable equivalent basis) 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 June 30, 1997 versus 1996 ------------------------------ Increase (Decrease) Due to ------------------------------ Volume Rate Net --------- -------- -------- Interest-earning assets: Federal funds sold and interest bearing deposits $ 85 $ 1 $ 86 Investment securities held to maturity (56) 104 48 Investment securities available for sale 2,882 314 3,196 Residential real estate loans (165) 151 (14) Commercial real estate loans (139) 30 (109) Commercial loans 997 (28) 969 Home equity loans 758 (109) 649 Consumer loans (71) 48 (23) ------- ------- ------- Total interest-earning assets 4,291 511 4,802 ------- ------- ------- Interest-bearing liabilities: Deposits: Savings accounts 64 (121) (57) NOW accounts 5 (18) (13) Money market accounts (8) 10 2 Time deposit accounts 665 (47) 618 ------- ------- ------- Total deposits 726 (176) 550 Borrowed funds 1,897 136 2,033 ------- ------- ------- Total interest-bearing liabilities 2,623 (40) 2,583 ------- ------- ------- Change in net interest income $ 1,668 $ 551 $ 2,219 ======= ======= ======= Provision for Possible Loan Losses The Company's provision for possible loan losses was $0.4 million for the second quarter of 1997 compared to $0.8 million in the second quarter of 1996. 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. 10 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 June 30, --------------------------- 1997 1996 ------- ------- Net gain on sale of loans $ 86 $ 162 Net gain on sale of securities 11 -- Loan charges and fees 696 754 Deposit related fees 1,690 1,544 Other charges and fees 378 277 ------ ------ $2,861 $2,737 ====== ====== Net gain on sale of loans decreased $0.1 million. Management attributes the decrease to reduced production and sale of fixed rate single family residential mortgage loans due to a higher interest rate environment. Loan charges and fees decreased $0.1 million as a result of lower mortgage servicing fees. Deposit service charges increased $0.1 million due primarily to fees associated with the Company's larger noninterest bearing account base. Non-interest Expense Salaries and Benefits Expense Salaries and benefits expense totaled $4.9 million for the second quarter of 1997 compared to $4.2 million for the same period in 1996, an increase of $0.7 million reflecting standard wage increases as well as an increase in staffing related to new branch openings and branch related support. Occupancy Expense of Bank Premises Occupancy expense of bank premises totaled $0.9 million for the second quarter 1997 compared to $0.8 million for the same period in 1996, an increase of $0.1 million. This increase is primarily due to costs associated with the expansion of the retail branch network and the addition of stand alone ATMs. 11 Other Operating Expense The components of other operating expense for the periods presented are as follows: Three months ended June 30, ------------------------ 1997 1996 ------- ------- Marketing $ 406 $ 422 Insurance 131 93 Professional services 609 851 Outside processing 1,160 1,098 Other 1,262 1,192 ------ ------ $3,568 $3,656 ====== ====== Professional services expense decreased $0.2 million, primarily due to lower levels of legal, consulting, and audit and accounting expenses. Outside processing expense increased $0.1 million, reflecting higher transaction and account volume resulting from 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 remained relatively flat for the three months ended June 30, 1997 compared to the same period last year. Net Expense of Real Estate Operations The Company's real estate investment and brokerage subsidiary, Colebrook Inc. and subsidiaries ("Colebrook") engages in various real estate investments, directly or in joint ventures with unaffiliated partners. In accordance with the Federal Deposit Insurance Corporation Improvement Act of 1991 (" FDICIA"), 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 of $0.1 million and $(0.1) million for the three months ended June 30, 1997 and June 30, 1996, respectively reflects normal operating results. Income Taxes For the three months ended June 30, 1997 the Company recorded income tax expense of $2.0 million compared with income tax expense of $0.3 million for the three months ended June 30, 1996. The increase in income tax expense is attributable to the Company becoming fully taxable for financial reporting purposes beginning in the fourth quarter of 1996 and a 50.6% increase in pre-tax earnings. 12 Results of Operations for the Six Months Ended June 30, 1997 and June 30, 1996 The Company reported net income of $5.8 million, or $1.03 per share fully diluted for the six months ended June 30, 1997 as compared to net income of $5.4 million, or $1.00 per share fully diluted for the same period last year. The improved results are primarily attributable to increased net interest income as well as lower provisions for possible loan losses partially offset by higher noninterest expenses and income tax expense. 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 Company invests in certain assets that have preferential tax treatment. In order to present yields on a comparable basis, net interest income is presented on a fully taxable equivalent basis for purposes of yield and margin analysis. 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.
Six Months Ended June 30, ------------------------------------------------------------------------------------ 1997 1996 ---------------------------------------- ----------------------------------------- Average Average Average Average Balance Interest(1) Yield/Cost(1) Balance Interest(1) Yield/Cost)(1) ---------- ------------ ------------- ---------- ------------- --------------- (Dollars In Thousands) Interest-earning assets: Fed funds sold and short-term investments $ 13,645 $ 359 5.23% $ 9,594 $ 259 5.34% Investment securities held to maturity 191,748 6,680 6.97% 182,841 6,215 6.80% Investment securities available for sale 475,878 16,240 6.83% 291,192 9,296 6.38% Residential real estate loans 236,501 9,475 8.01% 249,899 9,792 7.84% Commercial real estate loans 114,180 5,022 8.80% 119,102 5,018 8.43% Commercial loans 169,996 7,337 8.58% 120,248 5,333 8.77% Home equity loans 110,091 4,316 7.91% 72,971 3,077 8.48% Consumer loans 4,409 263 11.93% 6,977 254 7.32% ---------- ---------- ----- ---------- ---------- ---- Total interest-earning assets 1,316,448 49,692 7.55% 1,052,824 39,244 7.45% Allowance for loan losses (16,167) (15,286) Non-interest-earning assets 91,521 82,267 ---------- ---------- Total assets $1,391,802 $ 49,692 $1,119,805 $ 39,244 ========== ========== ========== ========== Interest-bearing liabilities: Deposits Savings accounts $ 202,625 $ 2,260 2.25% $ 192,419 $ 2,395 2.50% NOW accounts 58,632 292 1.00% 55,829 328 1.18% Money market accounts 205,511 3,381 3.32% 205,305 3,397 3.33% Time deposit accounts 422,101 10,946 5.23% 371,205 9,948 5.39% ---------- ---------- ----- ---------- ---------- ---- Total interest-bearing deposits 888,869 16,879 3.83% 824,758 16,068 3.92% Borrowed funds 265,985 7,524 5.63% 112,469 3,148 5.54% ---------- ---------- ----- ---------- ---------- ---- Total interest-bearing liabilities 1,154,854 24,403 4.26% 937,227 19,216 4.12% Non-interest-bearing liabilities 136,375 101,415 ---------- ---------- Total liabilities 1,291,229 1,038,642 Total stockholders' equity 100,573 81,163 ---------- ---------- Total liabilities and stockholders' equity $1,391,802 $ 24,403 $1,119,805 $ 19,216 ========== ========== ========== ========== Net interest income/spread $ 25,289 3.29% $ 20,028 3.33% ========== ===== ========== ===== Net interest margin as a % of interest- earning assets 3.84% 3.80% ===== ===== Tax equivalent adjustment $ 240 $ - ---------- ---------- Net interest income/spread per Condensed Consolidated Statement of Operations $ 25,049 $ 20,028 ========== ========== (1) On a fully taxable equivalent basis. Calculated using a Federal income tax rate of 34% for 1997 and 1996.
13 Net interest income on a fully taxable equivalent basis for the six months ended June 30, 1997 was $25.3 million compared to $20.0 million for the six months ended June 30, 1997, an increase of $5.3 million or 26.3%. Total interest income was $49.7 million on a fully taxable equivalent basis for the six months ended June 30, 1997, an increase of $10.4 million or 26.7% from the same period last year. These increases are primarily due to an increase in average interest-earning assets. Average interest-earning assets totaled $1.3 billion for the six months ended June 30, 1997 compared to $1.1 billion for the same period in 1996, an increase of $263.6 million or 25.0%. Total investments increased $193.6 million and were funded by higher deposit levels and borrowed funds. Total loans increased $66.0 million as the Company continued to focus on the commercial and home equity market segments, which grew by $49.7 million or 41.4% and $37.1 million or 50.9%, respectively. Residential real estate loan balances declined $13.4 million or 5.4% for the six months ended June 30, 1997, reflecting amortization and prepayments of the existing loan portfolio partially offset by adjustable rate mortgage production. 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. Total interest expense was $24.4 million for the six months ended June 30, 1997 compared to $19.2 million during the same period in 1996, an increase of $5.2 million or 27.0%. This increase is attributable to increases in interest-bearing deposits and borrowed funds. Average interest-bearing deposits totaled $888.9 million for the six months ended June 30, 1997 compared to $824.8 million for the same period in 1996, an increase of $64.1 million or 7.8%. This growth occurred primarily in time deposits which increased $50.9 million largely attributable to the introduction of new CD products. Borrowed funds averaged $266.0 million for the six months ended June 30, 1997 compared to $112.5 million for the same period in 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 (on a fully taxable equivalent basis) 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. Six Months Ended June 30, 1997 versus 1996 ------------------------------------- Increase (Decrease) Due to ------------------------------------- Volume Rate Net ------------ --------- ----------- (Dollars In Thousands) Interest-earning assets: Federal funds sold and short term investments $ 108 $ (8) $ 100 Investment securities held to maturity 307 158 465 Investment securities available for sale 6,099 845 6,944 Residential real estate loans (531) 214 (317) Commercial real estate loans (212) 216 4 Commercial loans 2,177 (173) 2,004 Home equity loans 1,510 (271) 1,239 Consumer loans (123) 132 9 -------- -------- -------- Total interest-earning assets 9,335 1,113 10,448 -------- -------- -------- Interest-bearing liabilities: Deposits: Savings accounts 120 (255) (135) NOW accounts 15 (51) (36) Money market accounts 3 (19) (16) Time deposit accounts 1,342 (344) 998 -------- -------- -------- Total deposits 1,480 (669) 811 Borrowed funds 4,320 56 4,376 -------- -------- -------- Total interest-bearing liabilities 5,800 (613) 5,187 -------- -------- -------- Change in net interest income $ 3,535 $ 1,726 $ 5,261 ======== ======== ======== 14 Provision for Possible Loan Losses The Company's provision for possible loan losses was $0.8 million for the six months ended June 30, 1997 compared to $1.5 million for the same period in 1996. 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. 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: Six months ended June 30, ----------------------- 1997 1996 ------- -------- Net gain on sale of loans $ 192 $ 432 Net gain on sale of securities 11 2 Loan charges and fees 1,381 1,461 Deposit related fees 3,294 2,947 Other charges and fees 701 476 ------ ------ $5,579 $5,318 ====== ====== Net gain on sale of loans decreased $0.2 million. Management attributes the decrease to reduced production and sale of fixed rate single family residential mortgage loans due to a higher interest rate environment. 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 $0.2 million due primarily to an increase in brokerage fees and the introduction of a new commercial product in 1997 which involves the funding and management of accounts receivable for small-to-medium sized business customers. Non-interest Expense Salaries and Benefits Expense Salaries and benefits expense totaled $9.7 million for the six months ended June 30, 1997 compared to $8.5 million for the same period in 1996, an increase of $1.2 million reflecting standard wage increases, higher ESOP and restricted stock expenses as a result of an increase in the Company's stock price, as well as an increase in staffing related to new branch openings and branch related support. Occupancy Expense of Bank Premises Occupancy expense of bank premises totaled $1.9 million for the six months ended June 30, 1997 compared to $1.6 million for the same period in 1996, an increase of $0.3 million. This increase is primarily due to costs associated with the expansion of the retail branch network and the addition of stand alone ATMs. 15 Other Operating Expense The components of other operating expense for the periods presented are as follows: Six months ended June 30, ----------------------- 1997 1996 ------- -------- Marketing $ 997 $ 752 Insurance 270 194 Professional services 1,356 1,490 Outside processing 2,277 2,055 Other 2,341 2,280 ------ ------ $7,241 $6,771 ====== ====== Marketing expense increased $0.2 million related to advertising and marketing expenses associated with the promotion of home equity lines and loans. Insurance expense increased $0.1 million as a result of higher FDIC insurance premiums. Outside processing increased $0.2 million, reflecting higher transaction and account volume resulting from 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 zero for the six months ended June 30, 1997 compared to $0.2 million for the same period in 1996. This $0.2 million decrease reflects increased gains on the sale of foreclosed properties during the six months ended June 30, 1997 as compared to the same period last year. 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. In accordance with FDICIA, 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 was $0.5 million for the six months ended June 30, 1997 or $0.6 million higher compared to the same period in 1996. In the first quarter of 1997, the Company established a reserve of $1.0 million relating to the divestment of Colebrook which was partially offset by a $0.6 million gain on the sale of a real estate property. The $1.0 million reserve consists of $0.7 million in severance and benefit accruals and $0.3 million for other expenses. As of June 30, 1997, no amounts have been paid relating to the divestiture. This divestment is scheduled to be completed by March 31, 1998. Income Taxes For the six months ended June 30, 1997 the Company recorded income tax expense of $3.8 million compared with income tax expense of $0.5 million for the six months ended June 30, 1996. The increase in income tax expense is attributable to the Company becoming fully taxable for financial reporting purposes beginning in the fourth quarter of 1996 and a 60.7% increase in pre-tax earnings. 16 Balance Sheet Analysis - Comparison Of June 30, 1997 To December 31, 1996 Total assets increased from $1.3 billion at December 31, 1996 to $1.4 billion at June 30, 1997. This increase primarily reflects growth in loans and investments funded through an increase in deposits and wholesale borrowings. Investments The Company's investment portfolio increased $37.4 million from $641.5 million at December 31, 1996 to $678.9 million at June 30, 1997. 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 net of tax 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.
June 30, 1997 ----------------------------------------------------------------------- Available for Sale Held to Maturity -------------------------------- -------------------------------- (Dollars In Thousands) Amortized Amortized Cost Fair Value Cost Fair Value ------------- ------------ ------------ ------------ U.S. Government and Agency obligations $ 29,087 $ 29,039 $ -- $ -- Collateralized mortgage obligations 28,128 28,042 -- -- Mortgage-backed securities 409,642 412,637 139,383 138,953 Asset-backed securities -- -- 45,410 45,271 Other bonds and short term obligations -- -- 200 200 Other securities 23,878 24,144 -- -- -------- -------- -------- -------- Total $490,735 $493,862 $184,993 $184,424 ======== ======== ======== ======== December 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 $ 29,901 $ 29,943 $ -- $ -- Collateralized mortgage obligations 28,965 29,007 -- -- Mortgage-backed securities 371,921 374,218 149,856 149,252 Asset-backed securities -- -- 42,118 42,165 Other bonds and short term obligations 1,681 1,681 200 200 Other securities 14,276 14,474 -- -- -------- -------- -------- -------- Total $446,744 $449,323 $192,174 $191,617 ======== ======== ======== ========
17 Loan Portfolio Composition Gross loans comprised $660.4 million or 46.0% of total assets as of June 30, 1997. The following table sets forth information concerning the Company's loan portfolio in dollar amounts and percentages, by type of loan at June 30, 1997 and at December 31, 1996. June 30, 1997 December 31, 1996 ------------------------ ---------------------- Percent of Percent of Amount Total Amount Total ----------- ---------- --------- ---------- (Dollars In Thousands) Residential real estate loans $238,470 36.11% $242,410 38.79% Commercial real estate loans 120,160 18.19% 118,442 18.95% Commercial loans 173,587 26.28% 155,808 24.93% Home equity loans 121,953 18.47% 104,206 16.67% Consumer loans 6,260 0.95% 4,132 0.66% -------- ------ -------- ------ Total loans receivable, gross 660,430 100.00% 624,998 100.00% -------- ------ -------- ------ Less: Unearned income and fees (1,839) (1,196) Allowance for loan losses 16,392 15,597 -------- -------- Total loans receivable, net $645,877 $610,597 ======== ======== 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 six months ended June 30, 1997, the Company experienced an increase in prepayments in its adjustable rate mortgage portfolio. These prepayments offset new originations and resulted in a $3.9 million decrease in residential real estate balances between December 31, 1996 and June 30, 1997. During the six months ended June 30, 1997, commercial loan balances increased $17.8 million, reflecting the Company's continued focus on lending activities in the local business market. During this same period commercial real estate loan balances increased $1.7 million primarily due to new originations, partially offset by prepayments. Home equity loans outstanding have increased $17.7 million since December 31, 1996. Management attributes this increase to the active promotion of these products. Non-performing Assets Non-performing assets totaled $6.7 million as of June 30, 1997 compared to $7.6 million as of December 31, 1996, a decrease of $0.8 million or 11.1%. The following table sets forth information regarding the components of non-performing assets for the periods presented: 18 June 30, December 31, 1997 1996 --------------- --------------- (Dollars In Thousands) Non-accrual loans (1): Residential real estate loans $1,537 $1,287 Commercial real estate loans 3,048 4,428 Commercial loans 759 674 Home equity loans 135 157 Consumer loans -- 1 ------ ------ Total non-accrual loans 5,479 6,547 ------ ------ Loans past due 90 days still accruing (2) 540 428 ------ ------ Total non-performing loans 6,019 6,975 Foreclosed real estate (3) 214 381 Restructured loans on accrual status (4) 477 198 ------ ------ Total non-performing assets $6,710 $7,554 ====== ====== Total non-performing loans to total gross loans 0.91% 1.12% Total non-performing assets to total assets 0.47% 0.56% Allowance for possible losses to non-performing loans 272.34% 223.61% (1) Non-accrual loans are loans that are contractually past due in excess of 90 days, for which the Company 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 Company carries foreclosed real estate at the lower of cost or 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). 19 The principal amount of non-performing loans aggregated approximately $6.0 million at June 30, 1997 compared to $7.0 million at December 31, 1996. Interest income that would have been recorded if the loans had been performing in accordance with their original terms aggregated $0.4 million and $0.5 million for the six months ended June 30, 1997 and 1996, respectively. Interest income recorded on these loans for the six months ended June 30, 1997 and 1996 was $0.4 million and $0.4 million, respectively. The principal amount of restructured loans aggregated $0.5 million at June 30, 1997 compared to $0.2 million at December 31, 1996. Interest income that would have been recorded if the loans had been performing within their original terms aggregated $22 thousand and $10 thousand for the period ended June 30, 1997 and 1996, respectively. Interest income recorded on these loans amounted to $20 thousand and $1 thousand for the six months ended June 30, 1997 and 1996, respectively. Watch List Loans The Company maintains a "watch list" of loans, which represents 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 terms in the obligor's operations or balance sheet weaknesses. Watch list loans totaled $11.7 million and $18.1 million at June 30, 1997 and December 31, 1996, respectively. Classified Loans The Company's Credit Grade Policy (the "Policy") provides for the classification of loans considered to be lesser quality as "substandard", "doubtful", or "loss" loans. A loan is considered substandard under the Company's Policy if it is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those characterized by the "distinct possibility" that the Company will sustain "some loss" if the deficiencies are not corrected. Loans classified as doubtful under the Company's Policy have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses present make "collection or liquidation in full" on the basis of currently existing facts, conditions and value, "improbable." Assets characterized as loss are those considered "uncollectible" and of such little value that their continuance as bankable assets is not warranted. Classified loans, all of which are considered substandard, totaled $11.4 million and $7.6 million at June 30, 1997 and December 31, 1996, respectively. Included in these amounts are $5.5 million and $6.5 million of loans which have been reported as non-performing assets at June 30, 1997 and December 31 1996, respectively. 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 allowance for possible loan losses at June 30, 1997 was $16.4 million, compared to $14.9 million at June 30, 1996. The activity in the allowance for possible loan losses for the six months ended June 30, 1997 and 1996 was as follows: 20
Six Months Ended June 30, ------------------------------- 1997 1996 ---------- ---------- (Dollars In Thousands) Balance, beginning of period $ 15,597 $ 14,986 Provision for loan losses 801 1,450 Charge-offs: Residential real estate loans (126) (563) Commercial real estate loans (300) (2,102) Commercial loans (128) (180) Home equity loans (38) (138) Consumer loans (123) (38) -------- -------- Total charge-offs (715) (3,021) Recoveries: Residential real estate loans 1 577 Commercial real estate loans 542 762 Commercial loans 74 100 Home equity loans 73 39 Consumer loans 19 20 -------- -------- Total recoveries 709 1,498 -------- -------- Net recoveries/(charge-offs) (6) (1,523) Balance, end of period $ 16,392 $ 14,913 ======== ======== Ratio of net loan recoveries/(charge-offs) during the period to average loans outstanding during the period - (0.27%) Ratio of allowance for possible loan losses to total loans at the end of the period 2.48% 2.51% Ratio of allowance for possible loan losses to non-performing loans at the end of the period 272.34% 162.66%
21 At June 30, 1997, the recorded investment in loans that are considered impaired under SFAS 114 "Accounting by Creditors for Impairment of a Loan" was $9.6 million. Included in this amount is $0.2 million of impaired loans for which the related SFAS 114 allowance is $0.1 million and $9.3 million of impaired loans for which the SFAS 114 allowance is zero. The average recorded investment in impaired loans during the three and six months ended June 30, 1997 was approximately $9.5 million and $9.0 million, respectively. For the three and six month periods ended June 30, 1997, the Company recognized interest income on these impaired loans of $0.2 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 allowance for possible loan losses in each category to total allowance for possible loan losses.
June 30, 1997 December 31, 1996 -------------------------- ------------------------- % of % of Total Total Allowance for Allowance for Amount Loan Losses Amount Loan Losses -------- ------------ ---------- ---------------- Residential real estate loans $ 2,295 14.00% $ 1,540 9.87% Commercial real estate loans 4,945 30.17% 5,808 37.24% Commercial loans 6,744 41.14% 6,711 43.03% Home equity loans 1,776 10.83% 1,207 7.74% Consumer loans 632 3.86% 331 2.12% ------- ------ ------- ------ Total allowance for possible loan losses $16,392 100.00% $15,597 100.00% ======= ====== ======= ======
Deposit Distribution The principal source of funds for the Company are deposits from local consumers and businesses. There were no brokered deposits at June 30, 1997. The Company's deposits consist of demand and NOW accounts, passbook and statement savings accounts, money market accounts and time deposits. Total deposits were $1.0 billion at June 30, 1997 compared to $969.5 million at December 31, 1996, an increase of $45.9 million. This growth occurred primarily in demand deposits, savings accounts and time deposits. Demand deposits and savings accounts increased $20.1 million and $11.1 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. The $17.0 million growth in time deposits is primarily attributable to the introduction of new CD products. The following table presents the composition of deposits at the dates indicated: June 30, 1997 December 31, 1996 ------------------------- ------------------------ Percent Percent of of Amount Total Amount Total ---------- -------- ---------- --------- (Dollars In Thousands) Demand deposits $ 120,604 11.88% $ 100,527 10.37% NOW accounts 60,318 5.94% 57,980 5.98% Savings accounts 206,521 20.34% 195,418 20.16% Money market accounts 204,913 20.18% 209,523 21.61% Time deposits 423,048 41.66% 406,069 41.88% ---------- ------ ---------- ------ Total deposits $1,015,404 100.00% $ 969,517 100.00% ========== ====== ========== ====== 22 Borrowings Borrowings consist of FHLB advances, securities sold under agreements to repurchase, and loans payable related to the Company's employee stock ownership plan. The Company generally uses borrowings to fund loan growth and to leverage a portion of its capital position. Borrowings increased $32.5 million from $247.9 million at December 31, 1996 to $280.4 million at June 30, 1997 reflecting a portion of the funding for the growth in loans and investments. Regulatory Capital The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material adverse effect on the Company's financial statements. Under applicable capital adequacy requirements the Company must meet specific minimum capital requirements that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require both the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. As of June 30, 1997 both the Company and the Bank exceed all capital adequacy requirements to which they are subject and qualify as "well capitalized" under applicable regulations of the Board of Governors of the Federal Reserve System and the FDIC. The Company's and Bank's actual capital amounts and ratios are presented in the table. No deductions were made from capital for interest-rate risk.
Minimum Minimum Requirements Requirements For Capital To Qualify As Actual Adequacy Purposes Well Capitalized ----------------------- ---------------------- --------------------- Amount Ratio Amount Ratio Amount Ratio --------- ---------- ---------- --------- ----------- -------- As of June 30, 1997: Tier I Capital (to Average Assets) Company $ 98,451 7.0% $ 56,368 4.0% N/A Bank $ 95,797 6.8% $ 56,292 4.0% $ 70,365 5.0% Tier I Capital (to Risk Weighted Assets) Company $ 98,451 11.9% $ 33,157 4.0% $ 49,736 6.0% Bank $ 95,797 11.6% $ 33,076 4.0% $ 49,614 6.0% Total Capital (to Risk Weighted Assets) Company $108,862 13.1% $ 66,314 8.0% $ 82,893 10.0% Bank $106,208 12.8% $ 66,152 8.0% $ 82,690 10.0% As of December 31, 1996: Tier I Capital (to Average Assets) Company $ 96,317 7.4% $ 52,007 4.0% N/A Bank $ 95,816 7.4% $ 51,999 4.0% $ 64,999 5.0% Tier I Capital (to Risk Weighted Assets) Company $ 96,317 12.8% $ 30,118 4.0% $ 45,177 6.0% Bank $ 95,816 12.7% $ 30,110 4.0% $ 45,165 6.0% Total Capital (to Risk Weighted Assets) Company $105,804 14.1% $ 60,236 8.0% $ 75,296 10.0% Bank $105,300 14.0% $ 60,220 8.0% $ 75,275 10.0%
23 Interest Rate Risk Management 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 $22.8 million or 1.59% of total assets at June 30, 1997. The following table sets forth the amounts of assets and liabilities outstanding at June 30, 1997, 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 June 30, 1997 ------------------------------------------------------------------------------ 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 $ 10,585 $ -- $ -- $ -- $ 10,585 Investment securities 330,091 141,589 183,474 23,701 678,855 Residential real estate loans 63,885 50,683 109,638 13,092 237,298 Commercial real estate loans 31,921 9,666 69,046 6,516 117,149 Commercial loans 80,780 10,359 74,064 8,013 173,216 Home equity loans 75,867 21,173 15,742 10,118 122,900 Consumer loans 5,797 58 151 221 6,227 Other assets -- -- -- 88,315 88,315 ---------- ---------- ---------- ---------- ---------- Total assets $ 598,926 $ 233,528 $ 452,115 $ 149,976 $1,434,545 ========== ========== ========== ========== ========== Liabilities & stockholders' equity: Savings accounts $ 30,978 $ 30,978 $ 144,565 $ -- $ 206,521 NOW accounts 9,048 9,048 42,222 -- 60,318 Money market accounts 61,474 61,474 81,965 -- 204,913 Time deposits 236,702 115,000 71,346 -- 423,048 Borrowed funds 166,741 40,272 64,031 9,313 280,357 Other liabilities & stockholders' equity 23,966 23,966 71,899 139,557 259,388 ---------- ---------- ---------- ---------- ---------- Total liabilities & stockholders' equity $ 528,909 $ 280,738 $ 476,028 $ 148,870 $1,434,545 ========== ========== ========== ========== ========== Period GAP position $ 70,017 $ (47,210) $ (23,913) $ 1,106 Net period GAP as a percentage of total assets 4.88% (3.29%) (1.67%) 0.08% Cumulative GAP $ 70,017 $ 22,807 $ (1,106) -- Cumulative GAP as a percentage of total assets 4.88% 1.59% (0.08%) -- For purposes of the above interest sensitivity analysis: Residential loans held for sale at June 30, 1997 totaling $4.3 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 Company's estimate of prepayments. Loans do not include non-accrual loans of $5.5 million. Loans do not include the allowance for loan loss of $16.4 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 $120.6 million are included in other liabilities and are assumed to decay at an annual rate of 40%.
25 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. 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. 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. 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. Management intends to continue seeking opportunities for expansion and believes that the Company's liquidity, capital resources and borrowing capabilities are adequate for its current and intended operations. 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. Default upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders (a) On April 30, 1997, the Annual Meeting of the Stockholders of SIS Bancorp, Inc. was held at the Springfield Marriott Hotel, Springfield, Massachusetts. (b) Directors elected at the Annual Meeting (Term to Expire in 2000) Sister Mary Caritas, S.P. Retired; former President and Chief Executive Officer of Mercy Hospital John M. Naughton Retired, former Executive Vice President, Massachusetts Mutual Life Insurance Co. Continuing Directors (Term to Expire in 1998) Charles L. Johnson Consultant- Associated Energy Managers, Investment Management Firm F. William Marshall,Jr. President and Chief Executive Officer, SIS Bancorp, Inc. and SIS Bank Continuing Directors (Term to Expire in 1999) William B. Hart, Jr. President, The Dunfey Group an investment corporation Thomas O'Brien Dean, University of Massachusetts School of Management Stephen A. Shatz Attorney, Partner in Shatz, Schwartz & Fentin, P.C. (c) The matters voted on at the meeting and the results included the following proposals: 1. To elect two Directors for a three-year term ending in the Year 2000 (Proposal 1); Votes For (shares) Votes Withheld (shares) ------------------ ----------------------- Sr. Mary Caritas (Geary) 4,956,015 17,053 John Naughton 4,958,288 14,780 Item 5. Other Information Not applicable 27 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit No. Exhibit Location 10. Material Contracts 10.1 Form of "Second Addendum to Form of Employment and Severance Agreement for Senior Vice President and Executive Vice Presidents" of SIS Bank executed by Messrs. Barrett, Dill, Treanor, Ehmke, McWhinnie, Sinton, Tucker, and Ms. Rinaldo. 10.2 Amended and Restated Employment Agreement between SIS Bank and F. William Marshall, Jr. dated June 30, 1997 (b) Reports on Form 8-K None 28 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) October 22, 1997 /s/ F. William Marshall, Jr. Date F. William Marshall, Jr. President and Chief Executive Officer October 22, 1997 /s/ John F. Treanor Date John F. Treanor Executive Vice President and Chief Financial Officer 29 EX-10.1 2 Exhibit 10.1 Second Addendum to Form of Employment and Severance Agreement For Senior Vice Presidents and Executive Vice Presidents of Springfield Institution for Savings This Addendum is made effective as of the _____ day of April, 1997 is by and between ___________________ (the "Executive") and the SPRINGFIELD INSTITUTION FOR SAVINGS, a Massachusetts savings bank (the "Bank") Recitals: A. The Executive and the Bank have previously entered into an "Employment and Severance Agreement" dated ____________and a first "Addendum to the Form of Employment and Severance Agreement" dated March 31, 1996 (collectively the "Agreement"); and B. On June 21, 1996, the Bank reorganized into a bank holding company form of organization (the "Reorganization"), where the Bank has become the wholly-owned subsidiary of SIS Bancorp, Inc., as the parent company of the Bank, and the Board of Directors of the Bank have determined that it is in the best interests of the Bank to amend the Agreement to modify the definition of "Change in Control"; and C. The Executive is willing to agree to such a modification on the terms and conditions outlined herein, NOW, THEREFORE, in return for the mutual covenants herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties hereto, it is agreed as follows: 1. Modification of Agreement: (I) Section 2(c) of the Agreement is hereby amended and restated by deleting it in its entirety and replacing it with the following language: (c) "Change in Control" means: (i) a change in control of the Bank, or of any parent holding company of the Bank (the "Parent Company") which has its common stock registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of a nature that would be required to be reported in response to Item 1 of a current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Exchange Act ; (ii) a change in control of the Bank within the meaning of 12 U.S.C. ss.1817(j), the Change in Bank Control Act or any acquisition of control of the Parent Company by any company or person within the meaning of 12 U.S.C. ss.1841(a)(2), the Bank Holding Company Act of 1956, as amended, or 12 U.S.C. ss.1817(j), the Change in Bank Control Act, as applicable; (iii) individuals who constitute the Board of Directors of the Parent Company as of the date of this Addendum (the "Incumbent Board") cease for any reason, to constitute at least a majority thereof, provided that any person becoming a director subsequent to the effective date of this Addendum 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 Parent Company's shareholders was approved by the Parent Company's Nominating Committee then serving under the Incumbent Board, shall be, for purposes of 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; (iv) approval by the shareholders of the Parent Company of a reorganization, merger or consolidation, or the consummation of any such reorganization, merger or consolidation, other than, in any case 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 Parent Company 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 Parent Company; (v) approval by the shareholders of the Parent Company of (1) a complete liquidation or dissolution of the Parent Company, or (2) the sale or other disposition of all or substantially all of the assets of the Parent Company, 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 Parent Company, or any affiliate; and/or (vi) the solicitation of proxies from shareholders of the Parent Company, by someone other than the current management of the Parent Company and without the approval of the Board of Directors of the Parent Company, seeking shareholder approval of a plan or reorganization, merger or consolidation of the Parent Company with one or more corporations as a result of which the shareholders' interests in the Parent Company are actually exchanged for or converted into securities not issued by the Parent Company. (vii) 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 to any subsequent events or circumstances constituting a Change in Control. (II) Section 2(g) is hereby amended by deleting the word "Bank" in the first and second lines and replacing it with the words "Parent Company". 2. Confirmation of Remaining Terms: Except as expressly modified herein, all of the terms and conditions of the Agreement, including the first Addendum, shall remain in full force and effect and are hereby ratified by the parties. Executed under seal as of the date first written above. Attest: Springfield Institution for Savings - ----------------------- By: -------------------------------- F. William Marshall, Jr. President & Chief Executive Officer Executive - ----------------------- ------------------------------- (Name) EX-10.2 3 Exhibit 10.2 Amended and Restated EMPLOYMENT AGREEMENT This Amended and Restated Employment Agreement (this "Agreement"), dated as of June 30, 1997, is made by and among Springfield Institution for Savings, a state chartered stock savings bank organized under the laws of the Commonwealth of Massachusetts, having its principal; offices at 1441 Main Street, P.O. Box 3034, Springfield, Massachusetts 01102-3034 (the "Bank"), and F. William Marshall, Jr., residing at 87 Ely Road, Longmeadow, MA 01106 (the "Executive") and shall be effective as of the above date (the "Effective Date"). Recitals: A. The Executive is employed as President & Chief Executive Officer by the Bank, having previously entered into an "Employment Agreement" with the Bank dated August 23, 1994 (the "Original Employment Agreement") which provided the terms and conditions of such an employment relationship. B. On June 21, 1996, the Bank reorganized into a bank holding company form of organization (the "Reorganization"), where the Bank has become the wholly-owned subsidiary of SIS Bancorp, Inc. (the "Holding Company"), as the parent company of the Bank. In order to retain the services of the Executive as President & CEO of the Bank and Holding Company, the Board of Directors of the Bank have determined that it is in the best interests of the Bank to restate and amend the Original Employment Agreement to update the terms of the Executive's employment and to modify the definition of "Change in Control". C. The Executive is willing to agree to continue such employment on the terms and conditions outlined herein, NOW, THEREFORE, in return for the mutual covenants herein, and other good and valuable consideration, the Bank and the Executive hereby agree that the Original Employment Agreement is deleted in its entirety and replaced with this Amended and Restated Employment Agreement as follows. 1. Definitions. 1.1 "Affiliate" means any person or entity of any kind effectively controlling, effectively controlled by or effectively under common control with the Bank. 1.2 "Board" means the board of directors of the Bank. 1.3 "Cause" means termination due to the Executive's (a) personal dishonesty, (b) incompetence, (c) willful misconduct, (d) breach of fiduciary duty involving personal profit, (e) intentional failure to perform stated duties, (f) willful violation of any law, rule or regulation (other than traffic violations or similar offenses), or final cease-and-desist order, or (g) material breach of any provision of this Agreement. 1.4 "Change in Control" means, after the date of this Agreement: (i) a change in control of the Bank, or of any parent holding company of the Bank (the "Parent Company") which has its common stock registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of a nature that would be required to be reported in response to Item 1 of a current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Exchange Act ; (ii) a change in control of the Bank within the meaning of 12 U.S.C. ss.1817(j), the Change in Bank Control Act or any acquisition of control of the Parent Company by any company or person within the meaning of 12 U.S.C. ss.1841(a)(2), the Bank Holding Company Act of 1956, as amended, or 12 U.S.C. ss.1817(j), the Change in Bank Control Act, as applicable; (iii) individuals who constitute the Board of Directors of the Parent Company as of the date of this Addendum (the "Incumbent Board") cease for any reason, to constitute at least a majority thereof, provided that any person becoming a director subsequent to the effective date of this Addendum 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 Parent Company's shareholders was approved by the Parent Company's Nominating Committee then serving under the Incumbent Board, shall be, for purposes of 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; (iv) approval by the shareholders of the Parent Company of a reorganization, merger or consolidation, or the consummation of any such reorganization, merger or consolidation, other than, in any case 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 Parent Company 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 Parent Company; (v) approval by the shareholders of the Parent Company of (1) a complete liquidation or dissolution of the Parent Company, or (2) the sale or other disposition of all or substantially all of the assets of the Parent Company, 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 Parent Company, or any affiliate; and/or (vi) the solicitation of proxies from shareholders of the Parent Company, by someone other than the current management of the Parent Company and without the approval of the Board of Directors of the Parent Company, seeking shareholder approval of a plan or reorganization, merger or consolidation of the Parent Company with one or more corporations as a result of which the shareholders' interests in the Parent Company are actually exchanged for or converted into securities not issued by the Parent Company. (vii) 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 to any subsequent events or circumstances constituting a Change in Control. 1.5 "Code" means the Internal Revenue Code of 1966, as amended, and as in effect from time to time, and/or any successor code thereto. 1.6 "Date of Termination" means the date specified in the Notice of Termination (as defined in Section 6.8 of this Agreement); provided, however, that if within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction, including all appeals, unless the time for appeal therefrom has expired and no appeal has been perfected; provided, further, however, that the Date of Termination shall (a) in no case be later than the date on which the Term of Employment expires, and (b) be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. 1.7 "Excise Tax" means any excise tax imposed under Section 4999 of the Code and/or any successor section thereto. 1.8 "Good Reason" means, and shall be deemed to exist if, without the written consent of the Executive, (a) the Bank (or any Parent for the balance of this Section 1.8) fails to appoint or reappoint the Executive as President and Chief Executive Officer of the Bank, (b) there occurs any reduction of Base Salary or material reduction in other benefits of any material change by the Bank to the Executive's function, duties, or responsibilities in effect on the date hereof and/or as set forth in Section 4.1 of this Agreement, 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 and/or as set forth in Section 4.1 of this Agreement (and any such material change shall be deemed a continuing breach of this Agreement), (c) there occurs any material breach of this Agreement by the Bank, (d) a Change in Control occurs, or (e) the Bank, if and after a Suspension for Disability (as defined in Section 6.2(a) occurs and after a Change in Control occurs, fills the Executive's position (in the manner set forth in Section 6.2(b) of this Agreement). 1.9 "Parent" means any corporation which has a direct or indirect legal or beneficial ownership interest in the Bank, but only if any such corporation owns or controls, directly or indirectly, securities possessing at least 50% of the total combined voting power of all classes of securities of the Bank. -2- 1.10 "Subsidiary" means any corporation (other than the Bank) in which the Bank or any Parent has a direct or indirect legal or beneficial ownership interest, but only if the Bank or the Parent, as the case may be, 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. 1.11 "Retirement" means the termination of the Executive's employment with the Bank for any reason by the Executive at any time after the Executive attains age 65. 1.12 "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. 2. Employment. 2.1 General. Subject to the terms and provisions set forth in this Agreement, the Bank, during the Term of Employment, agrees to continue to employ the Executive as President and Chief Executive Officer of the Bank and the Executive hereby accepts such continued employment. 2.2 FDIC Suspension. If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818(e)(3) and (g)(1)), the Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank shall (i) pay the Executive all or part of the compensation withheld while its contract obligations were suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. 3. Term of Employment. 3.1 Term. The term of employment under this Agreement shall commence as of the Effective Date and, unless extended as provided below or earlier terminated by the Bank or the Executive under Section 6 of this Agreement, shall continue until the third anniversary of the Effective Date (the "Term of Employment"). As of each anniversary of the date of this Agreement, a one year extension of the then Term of Employment shall automatically be effected, unless either the Bank or the Executive shall give written notice to the other party, not less than four months prior to the anniversary of the date of this Agreement of the intent of such party to terminate the expiration of the Term of Employment. 3.2 FDIC Removal. Notwithstanding anything to the contrary in this Agreement, if the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818(e)(4) or (g)(1)) all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the Bank and/or the Executive, if any, shall not be affected. 4. Positions, Responsibilities and Duties. 4.1 Positions and Duties. During the Term of Employment, the Executive shall be employed and shall serve as President and Chief Executive Officer of the Bank. In such position(s), the Executive shall have the duties, responsibilities and authorities and authority as determined and designated from time to time by the Board, including, without limitation, complete management authority with respect to, and total responsibility for, the overall operations and day-to-day business and affairs of the Bank. the Executive shall serve under the direction and supervision of, and report only to, the Board. Notwithstanding the above, the Executive shall not be required to perform any duties and responsibilities (a) which would result in a noncompliance with or violation of any applicable law, regulation, regulatory bulletin, and/or any other regulatory requirement or (b) on a regular basis in any locations outside the counties of Berkshire, Franklin and Hampden or Hampshire, unless agreed upon by the Executive. 4.2 Attention to Duties and Responsibilities. During the Term of Employment, the Executive shall, except for periods of absence occasioned by illness, vacation in accordance with Section 5.6, and reasonable leaves of absence in accordance with the practices of the Bank as of the date of this Agreement, devote substantially all of his business time to the business and affairs of the Bank and the Executive shall use his best efforts, business skills, ability and fidelity to perform faithfully and efficiently the duties and responsibilities contemplated by this -3- Agreement; provided, however, that the Executive shall be allowed, to the extent such activities do no present a conflict of his duties and responsibilities hereunder, (a) to manage the Executive's personal affairs, and (b) (i) to serve on boards or committees of civic or charitable organizations or trade associations, and (ii) after obtaining the consent of the Board, as evidenced by a written resolution of the Board and under the terms and conditions specified in any such resolution, to serve on the boards of directors and trustees of companies or other organizations and associations; provided, further, however, that all offices or positions which the Executive currently holds or has held prior to the date to this Agreement and those set forth on Exhibit "A", annexed hereto are designated as currently consented to positions. 5. Compensation and Other Benefits. 5.1 Base Salary. During the Term of Employment, the Executive shall receive a base salary of $360,000.00 per annum ("Base Salary") payable in accordance with the Bank's normal payroll practices. Such Base Salary shall be reviewed at least annually by the Board for increase in the Board's sole discretion. Such Base Salary as so increased shall then constitute the Executive's Base Salary as so increased shall then constitute the Executive's "Base Salary" for purposes of this Agreement. Notwithstanding the foregoing, after a Change in Control occurring during the Term of Employment, the Base Salary or the Executive shall be increased not less often than once every twelve calendar months increased not less than often than once every twelve calendar months during the Term of Employment in an amount not less than the average increase the Executive had received in the prior three (3) years or for the length of the Executive's employment. 5.2 Annual Bonus. During the Term of Employment, the Executive shall be entitled to participate in an equitable manner with other executive officers of the Bank in such discretionary bonus payment or awards as may be authorized, declared, and paid by the Board to the Bank's executive employees. No other compensation or additional benefits provided for in this Agreement shall be deemed a substitute for the Executive's right, if any, to receive such bonuses if, when and as declared by the Board. 5.3 Incentive, Retirement, and Savings Plans. During the Term of Employment, the Executive shall participate in all incentive, pension, retirement, supplemental retirement, savings, stock option and other stock grant plans, as well as other employee benefit plans and programs, if any, maintained from time to time by the Bank for the benefit of senior executives and/or other employees of the Bank. 5.4 Welfare Benefit Plans. During the Term of Employment, the Executive, the Executive's spouse, if any, and their eligible dependent, if any, shall participate in and be covered by all the welfare benefit plans and programs, if any, and/or other employees of the Bank. 5.5 Expense Reimbursement. During the Term of Employment, the Executive shall be entitled to receive prompt reimbursement for all reasonable expenses, including reasonable business travel expenses, incurred by the Executive in performing his duties and responsibilities hereunder in accordance with the policies and procedures of the Bank as in effect at the time the expense was incurred, as the same may be from time to time. 5.6 Vacation and Fringe Benefits. During the Term of Employment, the Executive shall be entitled to five (5) weeks paid vacation each calendar year at such times which do not materially interfere with the performance of the Executive's duties hereunder. In addition, during the Term of Employment, the Executive shall be eligible to benefit from such fringe benefits and prerequisites, if any, in accordance with the policies of the Bank and as in effect and provided from time to time to senior executives of the Bank. Notwithstanding the above, the Executive, during the Term of Employment, shall retain, pursuant to current policy and practice of the Bank, all privileges, if any, including club memberships and automobile usage of a bank-owned vehicle, to which he is entitled on the date of this Agreement. 6. Termination. 6.1 Termination Due to Death. In the event of the Executive's death during the Term of Employment, the Term of Employment shall thereupon end and his estate or other legal representative, as the case may be, shall, subject to Sections 2.2, 3.2, 6.9, 6.11 and 6.12 of this Agreement, only be entitled to: (a)(i)(A) Base Salary Continuation at the rate in effect (as provided in Section 5.1 of the Agreement) on the Date of Termination for a six month period commencing on such Date of Termination, or (B), if Board so determines in its sole discretion and in lieu of such six month salary continuation described above in (A), a lump sum payment equal in amount to the present value of such Base Salary continuation (reasonably determined using a discount rate equal to the most recent quote available for the one year United States Treasury Bill rate on the Date of Termination) payable within thirty business days after the Date of Termination, and (ii) a pro-rata annual bonus for -4- the fiscal year in which such termination occurs, such pro-rata bonus amount to be (I) pro-rated based on a minimum of six months service during the fiscal year of the Bank (prior to the Date of Termination), (II) determined in good faith by the Board (but in its sole discretion), and (III) if any such bonus is payable, paid on or about the same date that the annual bonus amounts payable in respect of such fiscal year, in any, to the senior executives of the Bank are actually paid to them; (b) any Base Salary accrued, but not less than for a period of six months to the Date of Termination or any bonus actually awarded, but not yet paid as of the Date of Termination; (c) reimbursement for all expenses (under Section 5.5) incurred as the Date of Termination, but not yet paid as of the Date of Termination; (d) payment of the per diem value of any unused vacation days accruing during the Term of Employment and the unused, unaccrued portion of any vacation days available through the end (but not beyond) of the calendar year of the Bank in which such termination occurs; (e) 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 or any Subsidiary; and (f) continuation of the welfare benefits of the Executive and Executive's dependents, or any of the same, at the level in effect (as provided for by Section 5.4 of this Agreement) on, and at the same out-of pocket cost to the Executive as of, the Date of Termination for a six (6) month period commencing on the Date of Termination (or, if such continuation is not permitted by applicable law or if the Board so determines in its sole discretion, the Bank shall provide the economic equivalent in lieu thereof); (g) any rights to indemnification in accordance with Section 11 of this Agreement. 6.2 Suspension for Disability. (a) If, during the Term of Employment, the Executive shall have been absent from his duties with the Bank on a full-time basis due to physical or mental illness for six (6) consecutive months, the Bank may give thirty (30) days written notice of potential suspension. If the Executive shall not have returned to the full-time performance of his duties within such 30-day period, the Bank may suspend the Executive's employment for "Disability" (a "Suspension for Disability"). (b) If a Suspension for Disability occurs during the Term of Employment, the Bank will pay the Executive a bi-weekly payment equal to two-thirds (2/3) of the Executive's bi-weekly rate of Base Salary on the effective date of the Suspension for Disability. These payments shall commence on the effective date of the Executive's Suspension for Disability and will end on the earlier of (i) Date the Executive returns to full-time employment of the Bank; (ii) the Executive's equivalent full-time employment by another employer; (iii) the Executive's retirement; (iv) the Executive's death; or (v) the Term of Employment. After a Suspension for Disability occurs, the Bank shall be free to fill the Executive's position, but such action by the Bank, shall constitute Good Reason if it occurs after a Change in Control. Upon the Executive being able to return to full-time employment before the expiration of the Term of Employment, the Executive shall be offered an equivalent available position and otherwise be subject to the provisions of this Agreement. The disability payments hereunder will be in addition to any benefit payable from any qualified or non-qualified retirement plans or programs maintained by the Bank but will be reduced by payments received by the Executive on account of such disability under any long-term disability plan maintained for the Bank's employees or maintained by the Executive. The Executive shall maintain any such disability insurance during the Term of Employment. (c) During the Term of Employment, the Bank will cause to be continued life and health coverage and such other benefits substantially identical to the coverage and benefits maintained by the Bank for the Executive prior to the occurrence of any Suspension for Disability. (d) Notwithstanding the foregoing, there will be no reduction in the compensation (except as otherwise provided in Section 6.2(b) above), accrued benefits or pension granted or accruing to the Executive during the Term of Suspension. Nothing in this Section 6.2 shall abrogate or limit other provisions of this Agreement granting rights to the Executive or the Executive's spouse or the Executive's estate following death, retirement or termination, if applicable. -5- (e) continuation of the welfare benefits of the Executive and the Executive's dependents, or any of the same, at the level in effect (as provided for by Section 5.4 of this Agreement) on, and at the same out-of pocket cost to the Executive as of, the Date of Termination (or if such continuation is not permitted by applicable law or if the Board so determines in its discretion, the Bank shall provide the economic equivalent in lieu thereof). 6.3 Termination by the Board for Cause. The Board may terminate the Executive's employment hereunder for Cause, as provided below. If the Board terminates the Executive's employment hereunder for Cause, the Term of Employment (if not already expired) shall thereupon end as set forth below and the Executive shall, subject to Sections 2.2, 3.2, 6.9, 6.11 and 6.12 of this Agreement, only be entitled to: (a) Base Salary up to and including the Date of Termination; (b) any bonuses actually awarded, but not yet paid as of the Date of Termination; (c) reimbursement for all expenses (under Section 5.5) incurred as of the Date of Termination, but not yet paid as of the Date of Termination; (d) payment of the per diem value of any unused vacation days accruing during the Term of Employment and, to the extent not prohibited by applicable law, regulation, regulatory bulletin, and/or any other regulatory requirement, as the same exists or may hereafter be promulgated or amended the unused, unaccrued portion of any vacation days available through the end and (but not beyond) of the calendar year of the Bank in which such termination occurs; (e) to the extent not prohibited by applicable law, regulation, regulatory bulletin, and/or any other regulatory requirement, as the same exists or may hereafter be promulgated or amended, any other compensation and benefits as may be provided in accordance with the term sand provisions of any applicable plans and programs, if any, of the Bank or any Subsidiary; and (f) any rights to indemnification in accordance with Section 11 of this Agreement. In each case, in determining Cause the alleged acts or omissions of the Executive shall be measured against standards generally prevailing in the banking industry generally and the ultimate existence of Cause must be confirmed by no less than 51% of the Incumbent Board (as constituted in accordance with Section 1.4(c) of this Agreement) at a meeting prior to any termination therefor; provided, however, that it shall be the Bank's burden to prove the alleged facts an omissions and the prevailing nature of the standards the Bank shall have alleged are violated by such acts and/or omissions of the Executive. In the event of such a confirmation by 51% or more of the Board, the Bank shall notify the Executive that the Bank intends to terminate the Executive's employment for Cause under this Section 6.3 (the Executive's "Confirmation Notice"). The Confirmation Notice shall specify the act, or acts, upon the basis of which the Board has confirmed the existence of Cause and must be delivered to the Executive within ninety (90) days after a majority of the Board (excluding, if applicable, the Executive) has actual knowledge of the events giving rise to such purported termination. If the Executive notifies the Bank in writing (the "Opportunity Notice") within thirty (30) days after the Executive has received the Confirmation Notice, the Executive (together with counsel) shall be provided one opportunity to meet with the Board (or a sufficient quorum thereof) to discuss such act or acts. Such opportunity to meet with the Board shall be fixed and shall occur on a date selected by the Board (such date being not less than ten (10) nor more than forty-five (45) days after the Bank receives the Opportunity Notice from the Executive). Such meeting shall take place at the principal offices of the Bank or such other location as agreed to by the Executive and the Bank. During the period commencing on the date the Bank receives the Opportunity Notice and ending on the date next succeeding the date on which such meeting between the Board (or sufficient quorum thereof) and the Executive is scheduled to occur and not withstanding anything to the contrary in this Agreement, the Executive shall be suspended from employment with the Bank (with pay to the extent not prohibited by applicable law, regulation, regulatory bulletin, and/or any other regulatory requirement, as the same exists or may hereafter be promulgated or amended) and the same exists or may hereafter be promulgated or amended) and the Board may, during such suspension period, reasonably limit the Executive's access to the principal offices of the Bank or any of its assets. If the Board properly sets the date of such meeting and if the Board (or a sufficient quorum thereof) attends such meeting and in good faith does not rescind its confirmation of Cause at such meeting or if the Executive fails to attend such meeting for any reason, the Executive's employment by the Bank shall, immediately upon the closing for such meeting and the delivery to the Executive of the Notice of Termination, be terminated for Cause under this Section 6.3. If the Executive does not respond in writing to the Confirmation Notice in the manner and within the time period specified in this Section 6.3, the Executive's employment with the Bank shall, on the thirty-first day after the receipt by the Executive of the Confirmation Notice, be terminated for Cause under this Section 6.3. In the event of any dispute hereunder, -6- Executive shall be entitled, to the extent not prohibited by applicable law, regulation, regulatory bulletin, and/or any other regulatory, as the same exists or may hereafter be promulgated or amended, until the earlier to occur of (i) the Date of Termination, (ii) the expiration of the current state Term of Employment, or (iii) the resolution of such dispute to (A) be paid bi-weekly his then Base Salary, and (b) continue to receive all other benefits; and there shall be no reduction whatsoever of any amounts subsequently paid to the Executive upon resolution of such dispute as a result of, or in respect to, such interim payments or coverage. The procedure set forth in this Section 6.3 to determine the existence of Cause shall at all times be subject to the requirements of applicable law, regulation, regulatory bulletin or other regulatory requirements. 6.4 Termination Without Cause or for Good Reason. The Bank may terminate the Executive's employment hereunder at any time without Cause. The Executive may terminate his employment hereunder for Good Reason at any time by delivery or written notice to the Bank within the six-month period commencing after the occurrence of the Good Reason effective forty-five (45) days after such written notice is delivered. If the Bank terminates the Executive's employment hereunder without Cause (other than due to Retirement, death, Disability or the normal expiration of the full Term of Employment), or if the Executive terminates his employment hereunder for Good Reason, the Term of Employment shall thereupon end (if not already expired) and the Executive shall, subject to Sections 2.2, 3.2, 6.9, 6.11, and 6.12 of this Agreement, only be entitled to: (a) as liquidated damages, a cash lump sum equal to two (2) times the Executive's "Highest Annual Compensation" (as herein defined), provided that if the Executive terminates for Good Reason following a Change in Control, the cash lump sum shall be equal to three (3) times the Executive's "Highest Annual Compensation". For purposes of this Agreement, "Highest Annual Compensation" shall mean the sum of (i) the highest per annum rate of Base Salary, and (ii) the aggregate bonus amounts paid to the Executive or which would have been paid but for an election to defer payment to a later period), in respect to any fiscal year of the Bank at any time during the Term of Employment; (b) any Base Salary accrued to the Date of Termination or any bonus actually awarded, but not yet paid as of the Date of Termination; (c) reimbursement for all expenses (under Section 5.5) incurred as of the Date of Termination, but not yet paid as of the Date of Termination; (d) payment of the per diem value of any unused vacation days accruing during the Term of Employment and the unused, unaccrued portion of any vacation days available through the end (but not beyond) of the calendar year of the Bank in which such termination occurs; (e) continuation of the welfare benefits of the Executive and dependents, or any of the same, at the level in effect (as provided for by Section 5.4 of this Agreement) on, and at the same out-of-pocket costs to the Executive as of, the Date of Termination for the three-year period commencing on the Date of Termination (or, if such continuation is not permitted by applicable law or if the Board so determines in its sole discretion, the Bank shall provide the economic equivalent in lieu thereof); (f) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans or programs, if any, of the Bank or any Subsidiary; and (g) any rights to indemnification in accordance with Section 11 of this Agreement. In the event of any dispute hereunder, the Executive shall be entitled until the earlier to occur of (i) the Date of Termination, (ii) the expiration of the current stated Term of Employment, or (iii) the resolution of such dispute to (A) be paid bi-weekly his then Base Salary, and (B) continue to receive all other benefits; and there shall be no reduction whatsoever of any amounts subsequently paid to the Executive upon resolution of such dispute as a result of, or in respect to, such interim payments or coverage. 6.5 Voluntary Termination. During the Term of Employment, the Executive may effect, upon sixty (60) days prior written notice to the Bank, a Voluntary Termination of his employment hereunder and thereupon the Term of Employment (if not already expired) shall end. A "Voluntary Termination" shall mean a termination of employment by the Executive on his own initiative other than (a) a termination due to death or Disability, (b) a termination for Good Reason, (c) a termination due to Retirement, or (d) a termination as a result of the normal expiration of the full Term of Employment. A Voluntary Termination shall, subject to Section 2.2, 3.2, 6.9, 6.11 and 6.12 of this Agreement, entitle the Executive only to all of the payments and benefits which the Executive would be entitled to in the event of a termination of his employment by the Bank for Cause. -7- 6.6 Termination Due to Retirement. The Executive may terminate the Executive's employment hereunder due to Retirement upon thirty (30) days prior written notice to the Bank. If, during the Term of Employment, the Executive's employment is so terminated due to Retirement, the Term of Employment shall thereupon and the Executive shall, subject to Sections 2.2, 3.2, 6.9, 6.11 and 6.12 of this Agreement, only be entitled to; (a) Base Salary up to and including the Date of Termination; (b) any bonus actually awarded, but not yet paid as of the Date of Termination; (c) reimbursement for all expenses (under Section 5.5) incurred as of the Date of Termination, but not yet paid as of the Date of Termination. (d)(i) continuation of the Executive's welfare benefits (as described in Section 5.4 of this Agreement) at the level in effect on the Date of Termination for the one-year period following the termination of the Executive's employment due to Retirement (or, if such continuation is not permitted by applicable law or if the Board so determines in its sole discretion, the Bank shall provide the economic equivalent in lieu thereof), and (ii) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs, if any, or the Bank or any Subsidiary; (e) payment of the per diem value of any unused vacation days accruing during the Term of Employment and the unused, unaccrued portion of any vacation days available through the end (but not beyond) of the calendar year of the Bank in which such termination occurs; and (f) any rights to indemnification in accordance with Section 11 of this Agreement. 6.7 No Mitigation; No Offset. In the event of any termination of employment under this Section 6, the Executive shall be under no obligation to seek other employment or to mitigate damages and there shall be no offset against any amounts due to Executive under this Agreement for any reason, including, without limitation, on account of any remuneration attributable to any subsequent employment that the Executive may obtain. Any amounts due under this Section 6 are in the nature of severance payments, or liquidated damages, or both, and are not in the nature of a penalty. 6.8 Notice of Termination. Any termination of the Executive's employment under this Section 6 requiring advance written notice shall be communicated by a notice of termination to the other party hereto given in accordance with Section 12.3 of this Agreement (the "Notice of Termination"). The Notice of Termination, in the case of a termination by the Bank for Cause, or a termination by the Executive for Good Reason, shall (a) indicate the specific termination provision in this Agreement relied upon, and (b) set forth in reasonable detail the dates, facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. 6.9 Code Section 280G Coverage. Notwithstanding any other provisions of this Agreement or of any other agreement, contract, understanding, plan or program entered into or maintained by the Bank, if any payment or benefit received or to be received by the Executive in connection with the termination of the Executive's employment pursuant to a Change in Control, any amount payable under this Agreement or any other payments to which Executive is entitled under any benefit plan, option or stock grant plan, incentive plan or other agreement with the Bank constitute "excess parachute payments" (as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code")), the Bank shall pay to the Executive an additional sum equal to: (i) the excise tax imposed by Section 4999 of the Code on the excess parachute payments (including any payments made pursuant to this sentence), and (ii) the Executive's federal, state and local income and payroll taxes imposed upon the payments made pursuant to this sentence. 6.10 Payment. Except as otherwise provided in this Agreement, any payments to which the Executive shall be entitled to under this Section 6, including, without limitation, any economic equivalent of any benefit, shall be made, to the extent practicable, within five (5) business days following the Date of Termination. 6.11 Bank Regulatory Limitations. -8- 6.11.1 Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. 6.11.2 To the extent required by applicable law, regulation, regulatory bulletin, and/or any other regulatory requirement, the aggregate amount and/or value of the Compensation paid as a result of any termination of the Executive's employment with the Bank, regardless of the reason for any such termination of employment, shall not exceed the limit prescribed by applicable law, rule or regulation. 6.12 Other Required Provisions. 6.12.1 If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under this Agreement shall terminate as of the date of default, but this Section 6.12.1 shall not affect the vested rights of the Bank and/or Executive, if any. 6.12.2 All obligations under this Agreement shall be terminated, except to the extent determined that continuation of this Agreement is necessary for the continued operation of the Bank, (i) by the director, or his or her designee, at the time the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the director, or his designee, at the time director, or his or her designee, approves a supervisory merger to resolve problems related to operation of the Bank or when the Bank is determined by such director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by any such actions. 6.13 Post Termination Obligations. During the Term of Employment and for one (1) full year after the expiration or termination thereof, or subject to ordinary court process, the Executive shall, upon reasonable notice, use his reasonable best efforts to cooperate with the Bank by providing such information and assistance to the Bank as may be reasonably be required by the Bank and the Bank's expense in connection with any litigation not commenced by or involving the Executive in which the Bank or any of its Subsidiaries or Affiliates is, or may become, a party. 7. Non-exclusivity of Rights; Non-extension Severance. 7.1 Other Benefits. Except as is otherwise specifically provided in this Agreement, the Executive's continuing or future participation in any benefit, bonus, incentive or other plan or program provided or maintained by the Bank, an for which the Executive may be eligible an qualify, shall not be prevented or limited, and the Executive's rights under any future agreements with the Bank and/or any Affiliate, including, without limitation, any stock option agreement shall no be limited or prejudiced. Subject to Section 7.2 below, this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. Except as otherwise specifically provided in this Agreement, no provision of this Agreement shall be interpreted to mean or result in the Executive receiving fewer benefits than those available to him without reference to this Agreement. 7.2 Non-extension Severance. If (a)(i) the Executive's employment hereunder is not terminated or suspended under Sections 6.1, 6.2, 6.3, 6.4, 6.5 or 6.6 of this Agreement prior to the expiration of the Term of Employment, (ii) any such termination or suspension of the Executive's employment is not initiated prior to the expiration of the Term of Employment, or (b) the Term of Employment is not extended by the Bank, and (c) the Executive's employment with the Bank terminates after the expiration of the Term of Employment (other than for Cause), the Executive shall be entitled to receive, in lieu of any severance payments or severance benefits under any other plan or program maintained by the Bank or any Affiliate, (1) Base Salary continuation at the rate in effect (as provided in Section 5.1 of and (2) welfare benefit continuation, at the level in effect (as provided for by Section 5.4 of this Agreement) on, and at the same out-of-pocket cost to the Executive as of, the expiration of the Term of Employment, in each case (1) and (2), for the greater of (A) the period ending six (6) months after the Executive's employment terminates, or (B) the period commencing on the date the Executive's employment terminates and ending as of the Term of Employment. Notwithstanding the above, if the Board determines in its sole discretion and in lieu only of such Base Salary continuation in (1), a lump sum payment, equal to the present value of such Base Salary continuation (reasonably determined using the discount rate specified in Section 6.1(a)(1)), shall be paid to the Executive within thirty (30) days after the date the Executive's employment terminates. Notwithstanding anything to the contrary in this Section 7.2, if (x) there occurs a Change in Control during the Term of Employment, (y) the Term of Employment is not extended by the Bank up to and/or through the Term of Employment, and (z) the Executive's employment with the Bank is subsequently terminated (other than for Cause), the Executive, in lieu of -9- the Base Salary and welfare benefits continuation under this Section 7.2 shall be entitled to receive the payments and benefits set forth in Section 6.4 of this Agreement. 8. Resolution of Disputes. With the exception of proceedings for equitable relief brought pursuant to this Section or Section 9.2 of this Agreement, any dispute or controversy arising under or in connection with this Agreement may, at either the Bank's or the Executive's option, be settled exclusively by arbitration in Springfield, Massachusetts in accordance with the rules of the American Arbitration Association then in effect and at the Bank's expense. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that the Executive shall be entitled to seek specific performance in court 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. If a claim for any payments or benefits under this Agreement or any other provision of this Agreement is disputed by the Bank and the Executive, the Executive shall, to the extent and at such time or times as is not prohibited by applicable law, regulation, regulatory bulletin, and/or any other regulatory requirement, as the same exists or may be hereafter promulgated or amended, if the Executive is successful in his claim, be reimbursed for all reasonable attorney's fees and expenses incurred by the Executive in pursuing such claim. 9. Confidential Information. 9.1 Confidentiality. The Executive will not, during or after the Term of Employment, disclose any confidential information relating to the business activities of the Bank or any Affiliate thereof which has not been previously disclosed by any person to any person, firm, corporation, bank or other entity for any reason or purpose whatsoever. Notwithstanding the foregoing, the Executive may disclose any knowledge or other information relating to banking, financing and/or economic principles, concepts or ideas which are based on experience and which are not derived from the business plans and activities of the Bank, and may disclose such confidential information in connection with legal and/or regulatory proceedings. 9.2 Injunctive Relief. The Executive acknowledges and agrees that the Bank will have no adequate remedy at law, and would be irreparably harmed, if the Executive breaches or threatens to breach any of the provisions of this Section 9 of this Agreement. The Executive agrees that the Bank shall be entitled to equitable and/or injunctive relief to prevent any breach or threatened breach of this Section 9, and to specific performance of each of the terms of such Section in addition to any other legal or equitable remedies that the Bank may have. The Executive further agrees that he shall not, in any equity proceeding relating to the enforcement of the terms of this Section 9, raise the defense that the Bank has an adequate remedy at law. 9.3 Special Severability. The terms and provisions of this Section 9 are intended to be separate and divisible provisions and if, for any reason, any one or more of them is held to be invalid or unenforceable, neither the validity nor the enforceability of any other provision of this Agreement shall thereby be affected. 10. Successors. 10.1 The Executive. This Agreement is personal to the Executive and, without the prior express written consent of the Bank, shall not be assignable by the Executive, except that the Executive's rights to receive any compensation or benefits under this Agreement may be transferred or disposed of pursuant to testamentary disposition, intestate succession or pursuant to a qualified domestic relations order. This Agreement shall inure to the benefit of and be enforceable by the Executive's heirs, beneficiaries and/or legal representatives. 10.2 The Bank. This Agreement shall inure to the benefit of and be binding upon the Bank and its successors and assigns; provided, however, that no assignment of this Agreement may be made without the written consent of the Executive. 11. Indemnification. The Executive (and his heirs, executors and administrators) shall be indemnified and held harmless by the Bank to the fullest extent permitted by applicable law, regulation, regulatory bulletin, and/or any other regulatory requirement, as the same exists or may hereafter be promulgated or amended, against all expense, liability and loss including, without limitation, attorney's fees, judgments, fines, excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Executive as a consequence of the Executive being or having been made a party to, or being or having been involved, in any threatened, pending or completed actin, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that the Executive is or was a trustee, director or officer of the Bank or is or was serving at the request of the Bank as a trustee, director or officer of another corporation (including, but not limited to, a subsidiary or an Affiliate of the bank), and such indemnification shall continue after the Executive shall cease to be an officer, director or -10- trustee. The right to indemnification conferred hereby shall be a contract right and shall also include, to the extent permitted by applicable regulation, the right to be paid by the Bank the expenses incurred in defending any such proceeding in advance of the final disposition upon receipt by the Bank of an undertaking by or on behalf of the Executive to repay such amount or a portion hereof, if it shall ultimately be determined that the Executive is not entitled to be indemnified by the Bank pursuant hereto or as otherwise authorized by law but such repayment by the Executive shall only be in an amount ultimately determined to exceed the amount to which the Executive was entitled to be indemnified. 12. Miscellaneous. 12.1 Applicable Law. This Agreement shall, to the extent not superseded by federal law, be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts, without regard to principles of conflict of laws. 12.2 Amendments/Waiver. This Agreement may not be amended, waived, or modified otherwise than by a written agreement executed by the parties to this Agreement or their respective successors and legal representatives. No waiver by any party to this Agreement of any breach of any term, provision or condition of this Agreement of any breach of any term, provision or condition of this Agreement by the other party shall be deemed a waiver of a similar or dissimilar condition or provision at the same time, or any prior or subsequent time. 12.3 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given when received by hand-delivery to the other party, by facsimile transmission, by overnight courier, or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: F. William Marshall, Jr. 87 Ely Road, Longmeadow, MA 01106 with a copy to: If to the Bank: Springfield Institution for Savings 1441 Main Street, Springfield, MA 01103 Attention: Chairman- Board of Directors with a copy to: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications shall be effective when actually received by the addressee. 12.4 Withholdings. The Bank may withhold from any amounts payable under this Agreement such taxes as shall be required to be withheld pursuant to any applicable law or regulation. 12.5 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. 12.6 Captions. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. 12.7 Entire Agreement. This Agreement contains the entire agreement between the parties to this Agreement concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the parties with respect thereto. 12.8 Representation. The Executive represents and warrants that the performance of the Executive's duties and obligations under this Agreement will not violate any agreement between the Executive and any other person, firm, partnership, corporation, or organization. 12.9 Survivorship. The respective rights and obligations of the parties to this Agreement, including, without limitation, any rights of the Executive and the Bank under Section 11 of this Agreement, shall survive any termination of this Agreement or the Executive's employment hereunder for any reason to the extent necessary to the intended preservation of such rights and obligations. -11- IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and the Bank has caused this Amended and Restated Employment Agreement to be executed in its name on its behalf, and its corporate seal to be hereunto affixed and attested by its Secretary, all as of the Effective Date. Attested: SPRINGFIELD INSTITUTION FOR SAVINGS /Michael E. Tucker/ By: /Henry. J. McWhinnie/ Clerk/Secretary Name: Henry J. McWhinnie (seal) Title: Senior Vice President-Human Resources /F. William Marshall, Jr./ -12- -----END PRIVACY-ENHANCED MESSAGE-----