-----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, MLh0IP2iDRsZWjml5JqQERpE6fAIOGMD3f5Gju1G311eXjLMhKtv7Ctk95U9Rr4A 96LG5lFW4e8Vuia4p1evMg== 0000927016-97-000746.txt : 19970311 0000927016-97-000746.hdr.sgml : 19970311 ACCESSION NUMBER: 0000927016-97-000746 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970310 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-20809 FILM NUMBER: 97553761 BUSINESS ADDRESS: STREET 1: P O BOX 3034 STREET 2: 1441 MAIN STREET CITY: SPRINGFIELD STATE: MA ZIP: 01102-3034 BUSINESS PHONE: 4137488000 10-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [XAnnual]report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1996 or [_Transition]report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 FORM 10-K COMMISSION FILE NUMBER: 000-20809 ---------------- SIS BANCORP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- MASSACHUSETTS 04-3303264 (I.R.S. EMPLOYER IDENTIFICATION NO.) (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 1441 MAIN STREET 01102 SPRINGFIELD, MASSACHUSETTS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (413) 748-8000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $0.01 PER SHARE TITLE OF EACH CLASS 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing sale price of February 28, 1997, as reported by NASDAQ, was $151,240,800. Indicate the number of shares outstanding of the registrant's common stock, as of the latest practicable date: 5,707,200 shares as of February 28, 1997. DOCUMENTS INCORPORATED BY REFERENCE Portions of the SIS Bancorp, Inc. Proxy Statement for the Annual Meeting of Stockholders to be held on April 30, 1997 are incorporated by reference into Part III of this Form 10-K. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Report contains certain "forward-looking statements" including statements concerning plans, objectives, future events or performance and assumptions and other statements which are other than statements of historical fact. SIS Bancorp, Inc. and its subsidiaries (the "Company") wishes to caution readers that the following important factors, among others, may have affected and could in the future affect the Company's actual results and could cause the Company's actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf 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 changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the local, regional or national economies. 2 PART I ITEM 1: BUSINESS OVERVIEW The Company, 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 sole wholly-owned subsidiary of the Company and the Bank's former stockholders became stockholders of the Company. Established in 1827, the Bank is a state chartered, stock savings bank headquartered in Springfield, Massachusetts. The Company provides a wide variety of financial services which include retail and commercial banking, residential mortgage origination and servicing, commercial real estate lending and consumer lending. Substantially all operations of the Company are conducted through the Bank. The Company serves its primary market of Hampden and Hampshire Counties through a network of 23 retail branches. The Company opened three retail branch offices in 1996 and will continue to assess the need to open additional branch locations to better serve its customers. The Company's revenues are derived principally from interest payments on its loan portfolios and mortgage-backed and other investment securities. The Company's primary sources of funds are deposits, borrowings and principal and interest payments on loans and mortgage-backed securities. BACKGROUND Historically, the Bank's principal business was attracting deposits from the general public and investing those funds in residential mortgage loans. During the 1980's, the Bank significantly increased its portfolio of commercial real estate and real estate-related commercial loans both directly and through certain of its wholly-owned direct and indirect real estate investment subsidiaries, including Colebrook Corporation ("Colebrook"). As a result of the national and regional economic recession, the Bank's levels of non- performing assets increased from 1989 through 1992. The increase in non- performing assets and regulatory concerns over the preservation of the Bank's capital, together with other factors concerning the operations of the Bank, resulted in the Bank entering into a Stipulation and Consent to the issuance of an Order to Cease and Desist (the "Order") with the Federal Deposit Insurance Corporation ("FDIC") and the Office of the Massachusetts Commissioner of Banks (the "Commissioner of Banks") on May 12, 1992. In accordance with the Order, in March of 1994 the Bank submitted a capital restoration plan to the FDIC and Commissioner of Banks, strengthened its senior management team and developed and implemented new strategies to accelerate the disposition of non-performing assets, to improve the Bank's financial condition, and to enhance profitability. The Bank's capital restoration plan called for the Bank to raise additional capital through the issuance of common stock in a conversion from a mutual bank to a stockholder- owned bank (the "Conversion"). Effective with the Conversion, which was closed on February 7, 1995, there was a net increase to capital of $35.9 million. As a result of the accelerated disposition of non-performing assets, the Bank has significantly reduced its loan loss provision and foreclosed real estate expenses which contributed to net income of $11.5 million in 1995 and $18.2 million in 1996. In light of improvements to capital and non-performing asset levels, the Bank's return to profitability, and the Bank's satisfactory resolution of all other regulatory concerns addressed by the Order, on April 24, 1995, the Bank was notified that the FDIC and Commissioner of Banks had unconditionally terminated the Order. As of December 31, 1996, the Company has total equity of $101.9 million or 7.56% of total assets, and the Bank is considered "well capitalized" under the applicable regulatory definition. 3 Since 1993, the Bank has been in the process of divesting its real estate investment business that was largely conducted through Colebrook and the Bank's other wholly-owned real estate investment subsidiaries (collectively the "Real Estate Subsidiaries"). This divestment is required by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). In accordance with the requirements of FDICIA, the Bank submitted a divestiture plan for the Real Estate Subsidiaries to the FDIC, which approved the plan in December, 1995. The Bank's divestment of all such real estate investment activities is scheduled to be completed by December, 1997. On January 23, 1997, the Company announced the declaration of its first quarterly cash dividend in the amount of $0.12 per share payable on February 20, 1997 to shareholders of record as of the close of business on February 3, 1997. In addition, on that same date, the Company announced its Board of Directors had authorized a share repurchase program and adopted a shareholder rights plan. Under the share repurchase program, the Board of Directors has authorized the Company to purchase up to 286,180 of its own shares, or up to 5% of the common stock issued and outstanding as of December 31, 1996. The repurchased shares will be held in treasury and will be available for issuance in connection with various employee and director benefit programs. Under the shareholder rights plan each shareholder of record as of the close of business on February 3, 1997 received one right for each share of common stock held by such shareholder to purchase, upon the occurrence of certain triggering events, one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company at a purchase price of $100.00. Until and unless the rights are triggered, the rights will be evidenced by the common stock certificates directly, and will transfer automatically with the transfer of any common stock. The initial issuance of the rights has no dilutive effect on the outstanding shares of the Company or the Company's earnings, is not taxable to the Company or to the shareholders, and does not otherwise affect the trading of the Company's shares. If the rights are not triggered or otherwise redeemed by the Board of Directors, the rights will expire on January 22, 2007. INVESTMENT ACTIVITIES 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 Federal Home Loan Mortgage Corporation (FHLMC) in addition to publicly traded and rated mortgage-backed securities issued by private financial intermediaries which are rated "AA" or higher by rating agencies of national prominence. Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and now holds both "available for sale" and "held to maturity" portfolios. Securities which the Company has the intent and ability to hold until maturity are classified as held to maturity and are carried at amortized cost, while those securities which have been identified as assets that may be sold prior to maturity or assets for which there is not a positive intent to hold to maturity are classified as available for sale and are carried at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. 4 The following table sets forth certain information regarding the amortized cost and fair value of the Company's investment portfolio at the dates indicated.
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 ======== ======== ======== ======== DECEMBER 31, 1995 ----------------------------------------- AVAILABLE FOR SALE HELD TO MATURITY -------------------- -------------------- (DOLLARS IN THOUSANDS) AMORTIZED AMORTIZED COST FAIR VALUE COST FAIR VALUE --------- ---------- --------- ---------- U.S. government and agency obligations........................ $ 7,700 $ 7,699 $ -- $ -- Mortgage-backed securities.......... 222,673 224,101 161,168 161,481 Other bonds and short term obligations........................ 9,300 9,300 11,625 11,449 Other securities.................... 5,884 5,884 -- -- -------- -------- -------- -------- Total............................. $245,557 $246,984 $172,793 $172,930 ======== ======== ======== ======== DECEMBER 31, 1994 ----------------------------------------- AVAILABLE FOR SALE HELD TO MATURITY -------------------- -------------------- (DOLLARS IN THOUSANDS) AMORTIZED AMORTIZED COST FAIR VALUE COST FAIR VALUE --------- ---------- --------- ---------- U.S. government and agency obligations........................ $ 23,953 $ 23,882 $ 17,350 $ 16,173 Mortgage-backed securities.......... 112,452 109,455 136,901 125,096 Other bonds and short term obligations........................ 23,229 23,169 3,992 3,992 Other securities.................... 4,808 4,815 -- -- -------- -------- -------- -------- Total............................. $164,442 $161,321 $158,243 $145,261 ======== ======== ======== ========
The Company's investment portfolio increased $221.7 million from $419.8 million at December 31, 1995 to $641.5 million at December 31, 1996. This increase in investments was funded through an increase in deposits and borrowings. In 1995, the Financial Accounting Standards Board ("FASB") issued a special report, "Implementation of Statement 115," that provided additional guidance related to the application of SFAS 115. In connection with the issuance of this special report, the FASB allowed all organizations to review their portfolio classifications and make a one-time reclassification of securities between categories during the period from November 15, 1995 to December 15, 1995. On December 15, 1995, the Company transferred securities with an amortized cost of $84.3 million and an unrealized loss of $1.2 million from the held to maturity portfolio to the available for sale portfolio. In addition, the Company transferred securities with an estimated fair value of $47.3 million and an unrealized gain of $0.3 million from the available for sale portfolio to the held to maturity portfolio. The remaining unrealized gain of $0.2 million is included in a separate component of stockholders' equity. Subsequent to the transfer of these securities, the Company sold $82.9 million of available for sale securities in December 1995 at a net loss of $0.9 million. 5 The following table sets forth the contractual maturity distribution of the carrying value and the weighted average yields to contractual maturity of the investment portfolio at December 31, 1996. Changes in interest rates will affect actual maturities.
WITHIN ONE YEAR 1-5 YEARS 5-10 YEARS OVER 10 YEARS ------------------ ------------------ ------------------ ------------------ WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AVERAGE COST YIELD COST YIELD COST YIELD COST YIELD TOTAL YIELD --------- -------- --------- -------- --------- -------- --------- -------- -------- -------- AVAILABLE FOR SALE - ------------------ U.S. government and agency obligations..... $ -- 0.00% $28,601 7.11% $1,300 6.92% $ -- 0.00% $ 29,901 7.11% Collateral mortgage obligations............ -- 0.00% 28,965 6.58% -- 0.00% -- 0.00% 28,965 6.58% Mortgage-backed securities............. 6,503 7.92% 1,143 8.11% -- 0.00% 364,275 7.27% 371,921 7.28% Asset-backed securitites............ -- 0.00% -- 0.00% -- 0.00% -- 0.00% -- 0.00% Other bonds and short term obligations....... 1,681 5.39% -- 0.00% -- 0.00% -- 0.00% 1,681 5.39% ------ ------- ------ -------- -------- Total debt securities.. $8,184 7.40% $58,709 6.87% $1,300 6.92% $364,275 7.27% $432,468 7.22% Market Value........... $8,193 $58,824 $1,294 $366,538 $434,849 HELD TO MATURITY - ---------------- U.S. government and agency obligations..... $ -- 0.00% $ -- 0.00% $ -- 0.00% $ -- 0.00% $ -- 0.00% Collateral mortgage obligations............ -- 0.00% -- 0.00% -- 0.00% -- 0.00% -- 0.00% Mortgage-backed securities............. 6,304 6.78% 5,221 6.79% 3,396 7.69% 134,935 7.27% 149,856 7.24% Asset-backed securitites............ -- 0.00% -- 0.00% -- 0.00% 42,118 6.96% 42,118 6.96% Other bonds and short term obligations....... 100 5.15% -- 0.00% 100 8.40% -- 0.00% 200 6.78% ------ ------- ------ -------- -------- Total debt securities.. $6,404 6.75% $ 5,221 6.79% $3,496 7.71% $177,053 7.20% $192,174 7.18% Market Value........... $6,392 $ 5,205 $3,543 $176,477 $191,617
As of December 31, 1996, approximately 97.3% of mortgage-backed securities available for sale and 62.5% of mortgage-backed securities held to maturity were adjustable rate. 6 LENDING ACTIVITIES Gross loans comprised $625.0 million or 46.3% of total assets at December 31, 1996, compared to $573.1 million or 53.5% of total assets at December 31, 1995. The following table sets forth information concerning the Company's loan portfolio in dollar amounts and percentages, by type of loan at December 31, 1996, 1995, 1994, 1993, and 1992, respectively.
DECEMBER 31, ------------------------------------------------------------- 1996 1995 1994 -------------------- -------------------- ------------------- PERCENT OF PERCENT OF PERCENT OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL -------- ---------- -------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) Residential real estate loans.................. $242,410 38.79% $263,551 45.99% $257,623 50.17% Commercial real estate loans.................. 118,442 18.95% 118,005 20.59% 122,091 23.78% Commercial loans........ 155,808 24.93% 117,674 20.53% 80,296 15.64% Home equity loans....... 104,206 16.67% 67,657 11.81% 46,593 9.07% Consumer loans.......... 4,132 0.66% 6,196 1.08% 6,883 1.34% -------- ------ -------- ------ -------- ------ Total loans receivable, gross.. 624,998 100.00% 573,083 100.00% 513,486 100.00% -------- ------ -------- ------ -------- ------ Less: Unearned income and fees................. (1,196) (566) 60 Allowance for loan losses............... 15,597 14,986 15,844 -------- -------- -------- Total loans receivable, net.... $610,597 $558,663 $497,582 ======== ======== ========
DECEMBER 31, --------------------------------------- 1993 1992 ------------------- ------------------- PERCENT OF PERCENT OF AMOUNT TOTAL AMOUNT TOTAL -------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) Residential real estate loans........... $264,011 41.21% $299,705 41.78% Commercial real estate loans............ 227,313 35.49% 241,540 33.67% Commercial loans........................ 110,630 17.27% 125,923 17.56% Home equity loans....................... 26,819 4.19% 26,469 3.69% Consumer loans.......................... 11,801 1.84% 23,664 3.30% -------- ------ -------- ------ Total loans receivable, gross....... 640,574 100.00% 717,301 100.00% -------- ------ -------- ------ Less: Unearned income and fees.............. 940 2,069 Allowance for loan losses............. 18,367 12,176 -------- -------- Total loans receivable, net......... $621,267 $703,056 ======== ========
7 MATURITY OF LOAN PORTFOLIO The following table sets forth the Company's loan portfolio, before allowance for loan losses and unearned discounts, based on contractual maturities. The table does not consider prepayment assumptions. Principal amortization is included based on scheduled payments. Demand loans, and loans having no stated schedule of repayment and no stated maturity are reported as due within one year. Actual maturities may be significantly shorter due to changes in interest rates and economic conditions.
DECEMBER 31, 1996 ----------------------------------------- LESS THAN 1 YEAR MORE THAN 1 YEAR TO 5 YEARS 5 YEARS TOTAL --------- ---------- --------- -------- (DOLLARS IN THOUSANDS) Fixed rate loans (1): Residential real estate............. $6,820 (2) $ 5,749 $ 26,231 $ 38,800 Commercial real estate.............. 7,881 16,235 12,991 37,107 Commercial.......................... 4,792 24,945 13,636 43,373 Home equity......................... 948 4,843 10,549 16,340 Consumer............................ 3,580 286 266 4,132 ------- -------- -------- -------- Total fixed rate loans............ 24,021 52,058 63,673 139,752 ------- -------- -------- -------- Adjustable rate loans (1): Residential real estate............. 3,657 13,427 186,526 203,610 Commercial real estate.............. 16,191 30,833 34,311 81,335 Commercial.......................... 26,844 40,470 45,121 112,435 Home equity......................... 247 1,591 86,028 87,866 Consumer............................ -- -- -- -- ------- -------- -------- -------- Total adjustable rate loans....... 46,939 86,321 351,986 485,246 ------- -------- -------- -------- Total amounts due................. $70,960 $138,379 $415,659 $624,998 ======= ======== ======== ========
- -------- (1) Includes non-accrual loans. (2) Loans held for sale of $5.2 million are included as maturing in less than one year. DELINQUENCY The following table sets forth a summary of the Company's delinquent loans at December 31, 1996, 1995, 1994, 1993, and 1992:
DECEMBER 31, 1996 --------------------------------- 60-89 DAYS 90 DAYS OR MORE ---------------- ---------------- NUMBER PRINCIPAL NUMBER PRINCIPAL OF BALANCE OF BALANCE LOANS OF LOANS LOANS OF LOANS ------ --------- ------ --------- Residential real estate loans............. 38 $1,627 44 $2,773 Commercial real estate loans.............. 1 139 4 731 Commercial loans.......................... 4 11 7 451 Home equity loans......................... 4 46 6 129 Consumer loans............................ 93 80 65 34 --- ------ --- ------ Total delinquent loans................ 140 $1,903 126 $4,118 === ====== === ====== Delinquent loans to total gross loans..... 0.30% 0.66%
8
DECEMBER 31, 1995 --------------------------------- 60-89 DAYS 90 DAYS OR MORE ---------------- ---------------- NUMBER PRINCIPAL NUMBER PRINCIPAL OF BALANCE OF BALANCE LOANS OF LOANS LOANS OF LOANS ------ --------- ------ --------- Residential real estate loans............. 39 $ 2,472 75 $ 3,080 Commercial real estate loans.............. 2 171 19 2,067 Commercial loans.......................... 8 493 3 36 Home equity loans......................... 5 147 7 71 Consumer loans............................ 24 13 12 14 ---- ------- ---- ------- Total delinquent loans................ 78 $ 3,296 116 $ 5,268 ==== ======= ==== ======= Delinquent loans to total gross loans..... 0.58% 0.92% DECEMBER 31, 1994 --------------------------------- 60-89 DAYS 90 DAYS OR MORE ---------------- ---------------- NUMBER PRINCIPAL NUMBER PRINCIPAL OF BALANCE OF BALANCE LOANS OF LOANS LOANS OF LOANS ------ --------- ------ --------- Residential real estate loans............. 24 $ 690 63 $ 2,686 Commercial real estate loans.............. 1 129 6 2,150 Commercial loans.......................... 3 203 3 165 Home equity loans......................... 10 195 16 339 Consumer loans............................ 43 59 30 41 ---- ------- ---- ------- Total delinquent loans................ 81 $ 1,276 118 $ 5,381 ==== ======= ==== ======= Delinquent loans to total gross loans..... 0.25% 1.05% DECEMBER 31, 1993 --------------------------------- 60-89 DAYS 90 DAYS OR MORE ---------------- ---------------- NUMBER PRINCIPAL NUMBER PRINCIPAL OF BALANCE OF BALANCE LOANS OF LOANS LOANS OF LOANS ------ --------- ------ --------- Residential real estate loans............. 40 $ 1,406 103 $ 8,296 Commercial real estate loans.............. 5 5,066 8 5,976 Commercial loans.......................... 21 575 34 5,143 Home equity loans......................... 8 159 20 571 Consumer loans............................ 75 88 151 140 ---- ------- ---- ------- Total delinquent loans................ 149 $ 7,294 316 $20,126 ==== ======= ==== ======= Delinquent loans to total gross loans..... 1.14% 3.14% DECEMBER 31, 1992 --------------------------------- 60-89 DAYS 90 DAYS OR MORE ---------------- ---------------- NUMBER PRINCIPAL NUMBER PRINCIPAL OF BALANCE OF BALANCE LOANS OF LOANS LOANS OF LOANS ------ --------- ------ --------- Residential real estate loans............. 59 $ 2,945 103 $ 9,104 Commercial real estate loans.............. 13 5,299 15 19,442 Commercial loans.......................... 37 5,950 64 12,004 Home equity loans......................... 5 119 11 352 Consumer loans............................ 225 731 242 519 ---- ------- ---- ------- Total delinquent loans................ 339 $15,044 435 $41,421 ==== ======= ==== ======= Delinquent loans to total gross loans..... 2.10% 5.77%
9 ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses reflects an amount that in Management's judgment is adequate to provide for potential losses in the loan portfolio. In addition, examinations of the adequacy of the loan loss reserve are conducted periodically by various regulatory agencies. The Company's loan loss reserve methodology emphasizes an evaluation of non- performing loans and those loans that have been identified as having a higher risk of becoming non-performing loans. The overall analysis is a continuing process that gives consideration to such factors as size and risk characteristics of the loan portfolio, the risk rating of individual credits, general economic conditions, historical delinquency and charge-off experience, the borrowers' financial capabilities and the underlying collateral, including, when appropriate, independent appraisals of real estate properties. In addition, Management periodically reviews the methodology of allocating reserves to the various loan categories based on similar factors. The Company's allowance for possible loan losses is decreased by loan charge-offs and increased by provisions for possible loan losses and recoveries on loans previously charged-off. When commercial and residential real estate loans are foreclosed, the loan balance is compared with the fair value of the property. If the net carrying value of the loan at the time of foreclosure exceeds the fair value of the property less estimated selling costs, the difference is charged to the allowance for possible loan losses and the fair value of the property becomes the new cost basis of the real estate owned. The Company has or obtains current appraisals on real estate owned at the time it obtains possession of the property. Real estate owned is subsequently carried at the lower of cost or fair value less estimated selling costs with any further adjustments reflected as a charge against operations. The Company assesses the value of real estate owned on a periodic basis. The allowance for possible loan losses at December 31, 1996 was $15.6 million, compared to $15.0 million at December 31, 1995. The activity in the allowance for possible loan losses for the fiscal years ended December 31, 1996, 1995, 1994, 1993, and 1992 is set forth in the following table:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- -------- -------- -------- (DOLLARS IN THOUSANDS) Balance, beginning of period................... $14,986 $15,844 $ 18,367 $ 12,176 $ 11,873 Provision for loan losses................... 2,950 4,359 25,742 15,740 13,219 Charge-offs: Residential real estate loans.................. (880) (472) (4,588) (2,558) (1,745) Commercial real estate loans.................. (2,834) (4,632) (20,430) (3,693) (8,888) Commercial loans........ (521) (705) (5,729) (4,161) (2,328) Home equity loans....... (205) (51) (124) (215) (145) Consumer loans.......... (115) (208) (233) (373) (339) ------- ------- -------- -------- -------- Total charge-offs..... (4,555) (6,068) (31,104) (11,000) (13,445) Recoveries: Residential real estate loans.................. 741 -- 460 242 222 Commercial real estate loans.................. 1,103 379 1,199 558 27 Commercial loans........ 231 301 1,058 566 206 Home equity loans....... 106 82 79 46 57 Consumer loans.......... 35 89 43 39 17 ------- ------- -------- -------- -------- Total recoveries...... 2,216 851 2,839 1,451 529 ------- ------- -------- -------- -------- Net charge-offs........... (2,339) (5,217) (28,265) (9,549) (12,916) Balance, end of period.... $15,597 $14,986 $ 15,844 $ 18,367 $ 12,176 ======= ======= ======== ======== ======== Ratio of net loan charge- offs during the period to average loans outstanding during the period........ (0.40)% (0.96)% (4.94)% (1.36)% (1.72)% Ratio of allowance for possible loan losses to total loans at the end of the period............... 2.50% 2.61% 3.09% 2.87% 1.70% Ratio of allowance for possible loan losses to non-performing loans at the end of the period.... 223.61% 155.71% 106.71% 33.09% 17.51%
10 Effective January 1, 1995, the Company adopted No. SFAS 114, "Accounting by Creditors for Impairment of a Loan." At December 31, 1996, the recorded investment in loans that are considered impaired under SFAS No. 114 was $6.6 million. Included in this amount is $1.4 million of impaired loans for which the related SFAS 114 allowance is $33 thousand and $5.2 million of impaired loans for which the SFAS 114 allowance is zero. The average recorded investment in impaired loans during the year ended December 31, 1996 was approximately $8.2 million. For the year ended December 31, 1996, the Company recognized interest income on these impaired loans of $0.3 million. The following table shows the allocation of the allowance for loan losses to various types of loans.
DECEMBER 31, ----------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ----------------- ----------------- ----------------- ----------------- ----------------- % OF % OF % OF % OF % OF TOTAL TOTAL TOTAL TOTAL TOTAL ALLOWANCE ALLOWANCE ALLOWANCE ALLOWANCE ALLOWANCE FOR FOR FOR FOR FOR LOAN LOAN LOAN LOAN LOAN AMOUNT LOSSES AMOUNT LOSSES AMOUNT LOSSES AMOUNT LOSSES AMOUNT LOSSES ------- --------- ------- --------- ------- --------- ------- --------- ------- --------- (DOLLARS IN THOUSANDS) Residential real estate loans.................. $ 1,540 9.87% $ 1,881 12.55% $ 4,377 27.63% $ 1,949 10.61% $ 1,506 12.37% Commercial real estate loans.................. 5,808 37.24% 6,784 45.27% 7,240 45.69% 10,568 57.54% 6,978 57.31% Commercial loans........ 6,711 43.03% 5,480 36.57% 3,101 19.57% 5,605 30.52% 3,376 27.73% Home equity loans....... 1,207 7.74% 672 4.48% 906 5.72% 120 0.65% 134 1.10% Consumer loans.......... 331 2.12% 169 1.13% 220 1.39% 125 0.68% 182 1.49% ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- Total allowance for loan losses........... $15,597 100.00% $14,986 100.00% $15,844 100.00% $18,367 100.00% $12,176 100.00% ======= ======= ======= ======= ======= ======= ======= ======= ======= =======
DEPOSIT DISTRIBUTION The principal source of funds for the Company are deposits from local consumers and businesses. There were no brokered deposits at December 31, 1996. The Company's deposits consist of demand and NOW accounts, passbook and statement savings accounts, money market accounts and time deposit accounts. Total deposits were $969.5 million at December 31, 1996 compared to $885.4 million at December 31, 1995, an increase of $84.1 million. This growth occurred primarily in demand deposits, savings accounts, and time deposits. From December 31, 1995 to December 31, 1996, the Company's demand and savings account balances increased by approximately $38.9 million, with the greatest proportion of growth in demand deposit accounts. This increase is attributed to customers continuing to take advantage of free savings and checking accounts offered by the Company in connection with its consumer deposit strategy to attract and retain core deposits, which should provide the Company with a lower cost source of funds. Also contributing to the growth of demand deposit balances is an increase in business checking accounts of $13.1 million resulting from the Company's focus on small business banking. From December 31, 1995 to December 31, 1996, the Company's time deposit balances have increased $38.4 million, largely attributable to the introduction of new CD products. The following table sets forth the distribution of the Company's deposit accounts for each of the three years ended December 31, 1996, 1995 and 1994.
DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 ----------------- ----------------- ----------------- PERCENT PERCENT PERCENT AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL -------- -------- -------- -------- -------- -------- Demand deposits.......... $100,527 10.37% $ 71,539 8.08% $ 51,932 6.08% NOW accounts............. 57,980 5.98% 57,271 6.47% 56,297 6.59% Savings accounts......... 195,418 20.16% 185,555 20.96% 184,513 21.62% Money market accounts.... 209,523 21.61% 203,313 22.96% 235,168 27.55% Time deposits............ 406,069 41.88% 367,708 41.53% 325,723 38.16% -------- ------- -------- ------- -------- ------- Total deposits....... $969,517 100.00% $885,386 100.00% $853,633 100.00% ======== ======= ======== ======= ======== =======
11 The Company does not actively solicit time deposit accounts in excess of $100,000. The following table sets forth the remaining contractual maturities of the Company's time deposit portfolio in amounts greater than $100,000 at December 31, 1996.
DECEMBER 31, 1996 ----------------- (DOLLARS IN THOUSANDS) Three months or less................................... $26,788 Over three through six months.......................... 10,547 Over six through 12 months............................. 9,668 Over 12 months......................................... 5,560 ------- Total.............................................. $52,563 =======
BORROWINGS Deposits are the primary source of funds for the Company. However, the Company is able to borrow from the Federal Home Loan Bank ("FHLB") of Boston and can enter into repurchase agreements. At December 31, 1996, the Company's total outstanding FHLB advances and repurchase agreements were $68.5 million and $176.6 million, respectively. COMPETITION Vigorous competition exists in all areas in which the Company engages in business. The Company faces intense competition in its market areas from major banking and financial institutions, including many which have substantially greater resources or market presence than the Company. Competitors of the Company include commercial banks, savings banks, mutual funds, insurance companies, finance companies, credit unions and mortgage companies. SUPERVISION AND REGULATION The Company is a Massachusetts corporation and is a bank holding company subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") pursuant to the Bank Holding Company Act of 1956, as amended, and files with the Federal Reserve Board an annual report and such additional reports as the Federal Reserve Board may require. The Company is also subject to the jurisdiction of the Massachusetts Commissioner of Banks. As a bank holding company, the Company's activities are limited to the business of banking and activities closely related or incidental to banking. The Company may not directly or indirectly acquire the ownership or control of more than 5 percent of any class of voting shares or substantially all of the assets of any company, including a bank, without the prior approval of the Federal Reserve Board. The Bank is a Massachusetts chartered savings bank subject to regulation and supervision by the FDIC and Massachusetts Commissioner of Banks. Further, as a member of Federal Home Loan Bank of Boston, the Bank must maintain certain levels of liquidity and have collateral available to support borrowings, if required. The Company is also subject to requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and the interest that may be charged thereon, and limitations on the types of investments that may be made and the types of services that may be offered. Various federal and state consumer laws and regulations also affect the operations of the Company. The federal and state regulatory authorities have broad enforcement powers over depository institutions, including the power to impose substantial fines and other civil and criminal penalties, to terminate deposit insurance, and to appoint a conservator or receiver under a variety of circumstances. The Federal Reserve Board 12 also has broad enforcement powers over bank holding companies including the power to impose substantial fines and other civil and criminal penalties. REGULATORY RESTRICTIONS ON DIVIDENDS The Company is a legal entity separate and distinct from the Bank and its other subsidiaries. The Company's principal source of revenue consists of dividends from the Bank. The payment of dividends by the Bank is subject to various regulatory requirements. Massachusetts law generally provides that institutions such as the Bank may pay cash dividends to stockholders from their undistributed earnings. The Bank cannot declare or pay any dividend, however, which would reduce its capital below (i) the amount required to be maintained by federal and state laws and regulations, or (ii) the amount in the Bank's liquidation account established in connection with the Conversion. The payment of dividends on common and preferred stock by a bank holding company and its bank subsidiaries may also be limited by other factors, including applicable regulatory capital requirements and broad enforcement powers of the federal bank regulatory agencies. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. CAPITAL REQUIREMENTS The Company and Bank are required to maintain regulatory capital as follows: (i) Tier 1 capital of at least 4 percent of risk-weighted assets (including off-balance sheet items); (ii) Total capital of at least 8 percent of risk- weighted assets and (iii) Tier 1 capital of at least 4 percent of adjusted quarterly average total assets. The capital ratios for the Company and Bank are set forth in footnote 22 "Regulatory Capital" in the Notes to the Financial Statements. Failure to meet applicable capital requirements could subject a bank holding company or its subsidiary depository institutions to various enforcement actions, including substantial restrictions on its operations and activities, dividend limitations, issuance of a directive to increase capital and, for a depository institution, termination of deposit insurance and the appointment of a conservator or receiver. PROMPT CORRECTIVE ACTION FDICIA requires the federal banking regulators to take prompt supervisory and regulatory actions against undercapitalized depository institutions. FDICIA establishes five capital categories: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized", and "critically undercap-italized". Under regulations a "well capitalized" institution has a total capital to total risk-weighted assets ratio of at least ten percent, a Tier 1 capital to total risk-weighted assets ratio of a least six percent, a leverage ratio of at least five percent and is not subject to any written order, agreement or directive; an "adequately capitalized" institution has a total capital to total risk-weighted assets ratio of at least eight percent, a Tier 1 capital to total risk-weighted assets ratio of at least four percent, and a leverage ratio of at least four percent (three percent if given the highest regulatory rating and not experiencing significant growth), but does not qualify as "well capitalized". An "undercapitalized" institution fails to meet one of the three minimum capital requirements. A "significantly undercapitalized" institution has a total capital to total risk-weighted assets ratio of less than six percent, a Tier 1 capital to total risk-weighted assets ratio of less than three percent, and a Tier 1 leverage ratio of less than three percent. A "critically undercapitalized" institution has a ratio of tangible equity to assets of two percent or less. Under certain circumstances, a "well capitalized", "adequately capitalized" or "undercapitalized" institution may be required to comply with supervisory actions as if the institution was in the next lowest category. 13 A bank generally must file a written capital restoration plan which meets specified requirements, as well as a performance guaranty by each company that controls the bank, with an appropriate federal banking regulator within 45 days of the date that the bank receives notice or is deemed to have notice that it may become an "undercapitalized" institution. Immediately upon becoming undercapitalized, a bank would become subject to statutory provisions which, among other things, set forth various mandatory and discretionary restrictions on the operations of such bank. The Company and Bank had capital levels which qualified the Bank as a "well-capitalized" institution under the applicable FDIC prompt corrective action regulations at December 31, 1996. For more detail as to the capital requirements for the Company, please see footnote 22 "Regulatory Capital" in the Notes to the Financial Statements. EMPLOYEES As of December 31, 1996, the Company employed 460 persons (full-time equivalent). ITEM 2: PROPERTIES The Company conducts its business from its main office and other properties listed below, all of which are considered to be in good condition and adequate for the purposes for which they are used. The Company also serves customers through three (3) off-site SISTEM24 Automated Teller Machines ("ATM") which are on leased parcels and through its affiliation with the "NYCE"(C) and CIRRUS ATM(C) networks. The following table sets forth certain information relating to bank premises owned or used by the Company in conducting its business:
OWN/LEASE LOCATION EXPIRATION DATE -------- --------------- BANKING OFFICES 40 Springfield Street, Agawam.............................. Own 11 Amity Street, Amherst................................... Lease/2006 693 Memorial Drive, Chicopee............................... Own 153 Meadow Street, Chicopee................................ Own 465 North Main Street, East Longmeadow..................... Lease/2010 1360 Carew Street, East Springfield........................ Lease/2004 50 Holyoke Street, Holyoke................................. Lease/2001 724 Bliss Road, Longmeadow................................. Lease/2002 52 East Street, Ludlow..................................... Lease/2002 175 Main Street, Northampton............................... Own 501 Newton Street, South Hadley............................ Lease/2003 412 Boston Road, Springfield............................... Own 1800 Boston Road, Springfield.............................. Own 619 Chestnut Street, Springfield........................... Own 300 Cooley Street, Springfield............................. Lease/2001 441 Cooley Street, Springfield............................. Own 561 Sumner Avenue, Springfield............................. Own 1441 Main Street, Springfield.............................. Own 807 Wilbraham Road, Springfield............................ Lease/1998 958 State Street, Springfield.............................. No Lease 968 Riverdale Road, West Springfield....................... Lease/2006 1425 Westfield Street, West Springfield.................... Lease/2002 60 Main Street, Westfield.................................. Own
14 ITEM 3: LEGAL PROCEEDINGS The Company is not involved in any pending litigation other than routine legal proceedings occurring in the ordinary course of business. While the legal responsibility and financial impact with respect to such litigation cannot presently be ascertained, the Company does not anticipate that any of these matters will result in the payment by the Company of damages, that, in the aggregate, would be material in relation to the consolidated financial position or operations of the Company. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5: MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS (a) The Company's Common Stock is traded on the NASDAQ National Market system ("NASDAQ") under the symbol "SISB". The following table sets forth the high and low last sale prices of the Common Stock or, prior to the Reorganization, the common stock of the Bank as reported by NASDAQ.
HIGH LOW -------- ------- 1995 First Quarter (1)....................................... $11 1/16 $ 9 5/8 Second Quarter.......................................... $13 1/16 $10 7/8 Third Quarter........................................... $16 $12 7/8 Fourth Quarter.......................................... $17 1/8 $14 5/8 1996 First Quarter........................................... $18 3/4 $16 1/4 Second Quarter (2)...................................... $18 5/8 $16 3/4 Third Quarter........................................... $23 5/8 $17 1/2 Fourth Quarter.......................................... $24 1/2 $22 1/8
- -------- (1) The Springfield Institution for Savings ("Bank") was a mutual bank in 1994 and converted to a stockholder owned savings bank on February 7, 1995, when trading commenced on NASDAQ. (2) On June 21, 1996, 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. Upon the effectiveness of such share-for-share exchange on June 21, 1996, the Bank became a wholly-owned subsidiary of the Company and the Bank's former stockholders became stockholders of the Company. (b) As of February 28, 1997, the most recent practicable date, the closing sale price of the Company's Common Stock, as reported by NASDAQ, was $26 1/2 per share. As of February 28, 1997, the most recent practicable date, the Company had 1,136 holders of record of the Company's Common Stock. The figure does not reflect beneficial ownership of shares held in nominee names. (c) The Company announced its first quarterly cash dividend on January 23, 1997 of $0.12 per share to holders as of February 3, 1997 and payable on February 20, 1997. 15 ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA SELECTED BALANCE SHEET DATA:
DECEMBER 31, -------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- -------- -------- ---------- (DOLLARS IN THOUSANDS) Total assets............... $1,348,612 $1,070,978 $920,689 $969,904 $1,002,513 Investment securities...... 641,497 419,777 319,564 231,565 156,279 Loans receivable, gross.... 624,998 573,083 513,486 640,574 717,301 Allowance for possible loan losses.................... 15,597 14,986 15,844 18,367 12,176 Investments in real estate and real estate partnerships.............. 2,757 6,092 6,699 9,939 13,219 Deposits................... 969,517 885,386 853,633 874,906 898,050 Borrowings................. 247,896 78,071 2,392 6,063 6,240 Total stockholders' equity.................... 101,917 81,469 28,503 58,531 72,762 Asset Quality: Non-accruing loans....... 6,547 9,037 14,472 52,308 63,865 Loans past due 90 days and still accruing...... 428 587 376 3,205 5,679 ---------- ---------- -------- -------- ---------- Total non-performing loans................. 6,975 9,624 14,848 55,513 69,544 Foreclosed real estate, net..................... 381 1,529 4,951 25,085 52,757 Restructured loans on accrual status (1)...... 198 2,732 6,114 15,845 1,544 ---------- ---------- -------- -------- ---------- Total non-performing assets................ $ 7,554 $ 13,885 $ 25,913 $ 96,443 $ 123,845 ========== ========== ======== ======== ==========
- -------- (1) Restructured loans are loans for which concessions, including reduction of interest rates or deferral of interest or principal payments, have been granted to acknowledge changes in the borrower's financial condition or changes in the underlying cash flows of the loan's collateral. Restructured loans on non-accrual status are reported in the non-accrual loan category. Restructured loans on accrual status are those that have complied with the terms of a restructuring agreement for a satisfactory period (generally six months). 16 SELECTED OPERATING DATA:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------- 1996 1995 1994 1993 1992 ------- ------- -------- -------- -------- (DOLLARS IN THOUSANDS) Interest and dividend income.. $84,277 $69,916 $ 57,913 $ 63,174 $ 72,187 Interest expense.............. 41,173 32,556 23,792 27,175 36,537 ------- ------- -------- -------- -------- Net interest and dividend income....................... 43,104 37,360 34,121 35,999 35,650 Less: provision for possible loan losses.................. 2,950 4,359 25,742 15,740 13,219 ------- ------- -------- -------- -------- Net interest and dividend income after provision for possible loan losses......... 40,154 33,001 8,379 20,259 22,431 Noninterest income: Net gain (loss) on sale of loans and securities....... 860 (643) (553) 2,351 1,612 Loan fees................... 3,259 3,221 3,213 3,776 3,822 Deposit fees................ 6,236 5,191 4,122 4,337 4,038 Other fees.................. 1,115 355 1,547 1,207 954 ------- ------- -------- -------- -------- Total noninterest income................. 11,470 8,124 8,329 11,671 10,426 Noninterest expense: Operating expenses: Salaries and employee benefits................. 17,839 15,961 16,808 16,583 13,927 Occupancy expense of bank premises, net............ 3,291 3,459 3,410 3,502 3,575 Furniture and equipment expense.................. 2,240 1,943 1,830 1,696 1,929 Other operating expenses.. 14,199 13,768 15,109 13,442 11,274 ------- ------- -------- -------- -------- Total operating expenses............... 37,569 35,131 37,157 35,223 30,705 Foreclosed real estate expenses................... 440 521 5,470 11,734 13,272 Net (income) expense of real estate operations.......... (272) (227) 988 2,632 1,077 ------- ------- -------- -------- -------- Total noninterest expense................ 37,737 35,425 43,615 49,589 45,054 ------- ------- -------- -------- -------- Income (loss) before income taxes and cumulative effect of change in accounting principle.................... 13,887 5,700 (26,907) (17,659) (12,197) Income tax benefit............ (4,273) (5,759) -- (3,384) (3,228) ------- ------- -------- -------- -------- Income (loss) before cumulative effect of change in accounting principle...... 18,160 11,459 (26,907) (14,275) (8,969) Cumulative effect of change in accounting principle (1)..... -- -- -- -- 1,295 ------- ------- -------- -------- -------- Net income (loss)....... $18,160 $11,459 $(26,907) $(14,275) $(10,264) ======= ======= ======== ======== ========
- -------- (1) Results from the January 1, 1992 adoption of SFAS No. 109, "Accounting for Income Taxes." 17 SELECTED FINANCIAL RATIOS AND OTHER DATA:
AT OR FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- PERFORMANCE RATIOS: (1) Return on average assets................. 1.52% 1.16% (2.88)% (1.46)% (1.01)% Return on average equity................. 20.91% 17.25% (63.55)% (20.85)% (13.24)% Net interest income/spread (2)...... 3.37% 3.59% 3.72% 4.06% 3.92% Net interest margin (3).................... 3.85% 4.00% 3.90% 4.13% 3.97% Efficiency ratio (4).... 69.94% 76.16% 86.41% 77.72% 69.06% Operating expenses to average assets......... 3.15% 3.55% 3.98% 3.60% 3.02% Ratio of net loan charge-offs to average loans outstanding...... (0.40)% (0.96)% (4.94)% (1.36)% (1.72)% ASSET QUALITY RATIOS: Non-performing loans to total gross loans...... 1.12% 1.68% 2.89% 8.67% 9.70% Non-performing assets to total assets........... 0.56% 1.30% 2.81% 9.94% 12.35% Allowance for possible loan losses to non- performing loans....... 223.61% 155.71% 106.71% 33.09% 17.51% Allowance for possible loan losses to total gross loans............ 2.50% 2.61% 3.09% 2.87% 1.70% CAPITAL RATIOS: Equity to total assets.. 7.56% 7.61% 3.10% 6.03% 7.26% Tier 1 leverage capital ratio.................. 7.41% 7.57% 3.43% 6.02% 7.28% Tier 1 risk-based capital ratio.......... 12.79% 12.52% 6.07% 8.47% 10.13% Total risk-based capital ratio.................. 14.05% 13.77% 7.32% 9.72% 11.38% OTHER DATA: Number of deposit accounts............... 230,508 193,795 156,524 147,835 144,118 Residential loan originations ($000s)... $ 95,445 $107,045 $176,355 $380,202 $392,045 Loans serviced for others ($000s)......... $792,376 $880,558 $935,066 $911,028 $792,243 Number of full time equivalent employees... 460 410 463 533 530 FACILITIES: Full-service customer service facilities..... 23 20 19 19 20 Mortgage origination offices................ -- -- 2 2 2
- -------- (1) With the exception of end of period ratios, all ratios are based on average daily balances during the indicated periods and are annualized where appropriate. (2) Interest spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities (which do include noninterest bearing demand accounts). (3) Net interest margin represents the net interest income as a percent of average interest-earning assets, including the average daily balance amount of non-performing loans. (4) The efficiency ratio represents operating expenses as a percentage of net interest income and noninterest income, excluding gains/(losses) on sales of loans and securities. 18 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the Company's Consolidated Financial Statements and Notes thereto, which are included in Item 8 of this report. FINANCIAL CONDITION BALANCE SHEET CHANGES Total assets of $1.35 billion at December 31, 1996 increased $277.6 million or 25.9% from $1.07 billion at December 31, 1995. This growth in total assets occurred primarily in commercial and home equity loans and the investment portfolio and was funded by an increase in deposits and borrowings. Commercial loans totaled $155.8 million as of December 31, 1996 compared to $117.7 million as of December 31, 1995, an increase of $38.1 million or 32.4%. This increase reflects the Company's continued focus on lending activities in the local business market. Home equity loan balances grew from $67.7 million as of December 31, 1995 to $104.2 million as of December 31, 1996, an increase of $36.5 million or 54.0%. This increase is the result of the Company's consumer strategy and the active promotion of this product. Investments increased $221.7 million to a total of $641.5 million as of December 31, 1996 from the $419.8 million reported one year earlier. Total deposits were $969.5 million as of December 31, 1996 compared to $885.4 million as of December 31, 1995, an increase of $84.1 million or 9.5%. During this period, the Company continued to focus on increasing its share of primary deposit relationships. Demand deposits and savings accounts increased $29.0 million and $9.9 million, respectively, as customers continued to take advantage of the Company's consumer deposit strategy to attract and retain core deposits. Time deposit balances increased $38.4 million or 10.4% primarily due to the introduction of new CD products. ASSET QUALITY/NON-PERFORMING ASSETS Non-performing assets declined $6.3 million from $13.9 million at December 31, 1995 to $7.6 million at December 31, 1996. Non-performing asset balances have declined significantly since December 31, 1992 as a result of the accelerated disposition program initiated by the Company in 1994, as well as an improvement in economic conditions. The following table sets forth information regarding the components of non-performing assets for the periods presented.
DECEMBER 31, ------------------------------------------- 1996 1995 1994 1993 1992 ------ ------- ------- ------- -------- (DOLLARS IN THOUSANDS) Non-accrual loans (1): Residential real estate loans..................... $1,287 $ 2,553 $ 2,651 $ 6,112 $ 7,259 Commercial real estate loans..................... 4,428 5,745 10,003 32,569 37,625 Commercial loans........... 674 638 1,492 13,489 18,699 Home equity loans.......... 157 90 289 -- -- Consumer loans............. 1 11 37 138 282 ------ ------- ------- ------- -------- Total non-accrual loans.. 6,547 9,037 14,472 52,308 63,865 ------ ------- ------- ------- -------- Loans past due 90 days still accruing (2)................ 428 587 376 3,205 5,679 ------ ------- ------- ------- -------- Total non-performing loans................... 6,975 9,624 14,848 55,513 69,544 Foreclosed real estate (3)... 381 1,529 4,951 25,085 52,757 Restructured loans on accrual status (4).................. 198 2,732 6,114 15,845 1,544 ------ ------- ------- ------- -------- Total non-performing assets.................. $7,554 $13,885 $25,913 $96,443 $123,845 ====== ======= ======= ======= ======== Total non-performing loans to total gross loans........... 1.12% 1.68% 2.89% 8.67% 9.70% Total non-performing assets to total assets............. 0.56% 1.30% 2.81% 9.94% 12.35% Allowance for possible losses to non-performing loans..... 223.61% 155.71% 106.71% 33.09% 17.51%
19 - -------- (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 Company has stopped the accrual of interest based on management's assessment of the circumstances surrounding these loans. (2) Accruing loans past due 90 days or more are loans which have not been placed on non-accrual status as, in management's opinion, the collection of the loan and contractual interest, in full, is not in doubt. (3) Foreclosed real estate includes OREO, defined as real estate acquired through foreclosure or acceptance of a deed in lieu of foreclosure. The Company carries foreclosed real estate at net realizable value, which approximates fair value less estimated selling costs. (4) Restructured loans are loans for which concessions, including reduction of interest rates or deferral of interest or principal payments have been granted due to the borrower's financial condition. Restructured loans on non-accrual status are reported in the non-accrual loan category. Restructured loans on accrual status are those loans that have complied with terms of a restructuring agreement for a satisfactory period (generally six months). LIQUIDITY Liquidity measures the ability of the Company to meet its maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund its operations and to provide for customer credit needs. The Company's principal sources of funds are deposits, advances from the FHLB of Boston, repurchase agreements, repayments and maturities on loans and securities, proceeds from the sale of securities in the available-for-sale portfolio, and funds provided by operations. While scheduled loan and security amortization and maturities are relatively predictable sources of funds, deposit flows and loan and security prepayments are greatly influenced by economic conditions and the general level of interest rates and competition. The Company utilizes particular sources of funds based on comparative costs and availability. The Company generally manages the pricing of its deposits to maintain a steady deposit balance, but has from time to time decided not to pay rates on deposits as high as its competition, and when necessary, will supplement deposits with longer term and/or less expensive alternative sources of funds such as advances from the FHLB and repurchase agreements. Liquidity management is both a daily and long-term responsibility of Management. The Company adjusts its investments in cash and cash equivalents based upon Management's assessment of expected loan demand, projected security maturities, expected deposit flows, yields available on interest-bearing deposits, and the objectives of its asset/liability management program. If the Company requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and collateral eligible for repurchase agreements. Because the Company has a stable retail deposit base, Management believes that significant borrowings will not be necessary to maintain its current liquidity position. The Company's ongoing principal use of capital resources remains the origination of single-family residential mortgage loans, commercial real estate loans, commercial loans, and home equity loans secured by residential real estate as well as the purchase of investment securities. 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. CAPITAL RESOURCES/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 effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Bank'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 20 components, risk weightings, and other factors. As of December 31, 1996, the Bank is considered well capitalized under the quantitative measures established by its regulators. The Company's current capital position and its regulatory requirements are discussed in greater detail in footnote 22 "Regulatory Capital" in the Notes to the Financial Statements. INTEREST RATE RISK MANAGEMENT The operations of the Company are subject to the risk of interest rate fluctuations to the extent that there is a substantial difference in the amount of the Company's assets and liabilities that reprice or mature within specific time periods. An asset-sensitive position indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specific time horizons, which would generally imply a favorable impact on net interest income in periods of rising interest rates and an unfavorable impact in periods of falling interest rates. A liability- sensitive position would generally imply an unfavorable impact on net interest income in periods of rising interest rates and a favorable impact in periods of falling interest rates. The objective of the Company's interest rate risk management process is to identify, manage, and control its interest rate risk within established limits in order to produce consistent earnings that are not contingent upon favorable trends in interest rates. This is attained by monitoring the levels of interest rates, the relationships between the rates earned on assets and the rates paid on liabilities, the absolute amount of assets and liabilities which reprice or mature over similar periods, and the effect of all of these factors on the estimated level of net interest income. There are a number of industry standards used to measure a financial institution's interest rate risk position. Most common among these is the one- year gap which is the difference between assets and liabilities that will mature or reprice within one year expressed as a percentage of total assets. Using Management's estimates of asset prepayments and core deposit decay in its computation, the Company estimates that its cumulative one-year gap position was liability sensitive by $7.5 million or 0.56% of total assets at December 31, 1996. The Company also utilizes income simulation modeling in measuring its interest rate risk and managing its interest rate sensitivity. Income simulation not only considers the impact of changing market interest rates on forecasted net interest income, but also takes into consideration other factors such as yield curve relationships, the volume and mix of assets and liabilities, customer preferences, and general market conditions. 21 The following table sets forth the amounts of assets and liabilities outstanding at December 31, 1996, which are anticipated by the Company to mature or reprice in each of the future time periods shown using certain assumptions based on its historical experience, the current interest rate environment, and other data available to Management. Management believes that these assumptions approximate actual experience and considers such assumptions reasonable; however, the interest rate sensitivity of the Company's assets and liabilities could vary substantially if different assumptions were used or actual experience differs from the assumptions used. Management periodically reviews and, when appropriate, changes assumptions used in evaluating the Company's interest rate sensitivity.
GAP POSITION AT DECEMBER 31, 1996 ---------------------------------------------------------- MORE THAN SIX LESS THAN MONTHS LESS 1- SIX MONTHS THAN ONE YEAR 5 YEARS OVER 5 YRS TOTAL ---------- ------------- -------- ---------- ---------- (DOLLARS IN THOUSANDS) Assets: Federal funds sold and interest bearing deposits............. $ 10,045 $ -- $ -- $ -- $ 10,045 Investment securities........... 307,972 154,634 147,533 31,358 641,497 Residential real estate loans......... 77,668 53,187 98,181 12,416 241,452 Commercial real estate loans................ 37,841 12,573 56,603 7,007 114,024 Commercial loans...... 63,914 11,698 72,571 7,228 155,411 Home equity loans..... 82,978 1,148 13,055 7,495 104,676 Consumer loans........ 3,466 74 283 261 4,084 Other assets.......... -- -- -- 77,423 77,423 -------- -------- -------- -------- ---------- Total assets........ $583,884 $233,314 $388,226 $143,188 $1,348,612 ======== ======== ======== ======== ========== Liabilities & stockholders' equity: Savings accounts...... $ 29,312 $ 29,312 $136,794 $ -- $ 195,418 NOW accounts.......... 8,698 8,698 40,584 -- 57,980 Money market accounts............. 62,856 62,856 83,811 -- 209,523 Time deposits......... 240,118 103,083 62,868 -- 406,069 Borrowed funds........ 223,061 16,641 1,312 6,882 247,896 Other liabilities & stockholders' equity............... 20,050 20,050 60,152 131,474 231,726 ======== ======== ======== ======== ========== Total liabilities & stockholders' equity............. $584,095 $240,640 $385,521 $138,356 $1,348,612 ======== ======== ======== ======== ========== Period GAP position..... $ (211) $ (7,326) $ 2,705 $ 4,832 Net period GAP as a per- centage of total as- sets................... (0.02)% (0.54)% 0.20% 0.36% Cumulative GAP.......... $ (211) $ (7,537) $ (4,832) -- Cumulative GAP as a per- centage of total as- sets................... (0.02)% (0.56)% (0.36)% --
For purposes of the above interest sensitivity analysis: Residential loans held for sale at December 31, 1996 totaling $5.2 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 $6.5 million. Loans do not include the allowance for loan loss of $15.6 million. In certain deposit categories where there is no contractual maturity, Management assumed the sensitivity characteristics listed below based on the current interest rate environment and the Company's 22 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%. --Noninterest bearing accounts of $100.5 million are included in other liabilities and are assumed to decay at an annual rate of 40%. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, while certain assets and liabilities may have similar contractual maturities or periods to repricing, they may react in different ways to changes in market interest rates. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Finally, the ability of borrowers to service their adjustable rate mortgages may decrease in the event of an interest rate increase. 23 RESULTS OF OPERATIONS COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995 GENERAL For the year ended December 31, 1996 the Company reported net income of $18.2 million, or $3.26 per share fully diluted, as compared to net income of $11.5 million, or $2.19 per share fully diluted, for the year ended December 31, 1995. The financial results for 1996 and 1995 were favorably affected by nonrecurring tax events totaling $8.0 million and $6.0 million, respectively. The Company also experienced improved results in core earnings primarily attributed to increased net interest income and noninterest income as well as lower provisions for possible loan losses, partially offset by higher operating expenses. NET INTEREST INCOME Net interest income represents the difference between income earned 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. 24 The following table sets forth, for the periods indicated, average balances, interest income and expense, and yields earned or rates paid on the major categories of assets and liabilities. Non-accrual loans have been included in the appropriate average balance loan category, but unpaid interest on non- accrual loans has not been included for purposes of determining interest income. In addition, investment securities available for sale are reflected at amortized cost.
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 1996 1995 ------------------------------- ----------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST ---------- -------- ---------- -------- -------- ---------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Fed funds sold and in- terest-bearing depos- its.................... $ 10,573 $ 569 5.29% $ 22,294 $ 1,316 5.82% Investment securities held to maturity....... 188,224 12,833 6.82% 183,139 10,849 5.92% Investment securities available for sale..... 337,085 22,218 6.59% 184,551 12,214 6.62% Residential real estate loans.................. 245,680 19,397 7.90% 266,276 20,970 7.88% Commercial real estate loans.................. 119,152 10,132 8.50% 116,957 9,671 8.27% Commercial loans........ 131,256 11,595 8.69% 96,246 9,050 9.27% Home equity loans....... 82,960 6,927 8.35% 57,943 5,306 9.16% Consumer loans.......... 5,656 606 10.71% 6,482 540 8.33% ---------- ------- ----- -------- ------- ---- Total interest-earn- ing assets......... 1,120,586 84,277 7.52% 933,888 69,916 7.49% Allowance for loan loss- es..................... (15,391) (16,346) Noninterest-earning as- sets................... 85,679 71,341 ---------- -------- Total assets........ $1,190,874 $84,277 $988,883 $69,916 ========== ======= ======== ======= INTEREST-BEARING LIABIL- ITIES: Deposits Savings accounts...... $ 194,593 $ 4,830 2.48% $185,176 $ 4,616 2.49% NOW accounts.......... 56,623 640 1.13% 53,955 727 1.35% Money market ac- counts............... 208,180 6,912 3.32% 212,272 6,945 3.27% Time deposit ac- counts............... 381,642 20,256 5.31% 349,950 18,136 5.18% ---------- ------- ----- -------- ------- ---- Total deposits.......... 841,038 32,638 3.88% 801,353 30,424 3.80% Borrowed funds.......... 150,919 8,535 5.56% 34,457 2,132 6.10% ---------- ------- ----- -------- ------- ---- Total interest-bearing liabilities............ 991,957 41,173 4.15% 835,810 32,556 3.90% Noninterest-bearing lia- bilities............... 112,057 86,632 ---------- -------- Total liabilities... 1,104,014 922,442 Total stockholders' eq- uity................... 86,860 66,441 ---------- -------- Total liabilities and stockholders' equity............. $1,190,874 $41,173 $988,883 $32,556 ========== ======= ======== ======= Net interest income/spread.......... $43,104 3.37% $37,360 3.59% ======= ===== ======= ==== Net interest margin as a % of interest-earning assets................. 3.85% 4.00% ===== ====
Net interest income increased $5.7 million or 15.4% for the year ended December 31, 1996 versus the same period last year. This increase was the result of a $186.7 million increase in interest-earning assets partially offset by a 15 basis point decrease in net interest margin. Total interest income was $84.3 million for the year ended December 31, 1996, an increase of $14.4 million or 21.0%. This increase is primarily attributable to higher levels of interest-earning assets. Average interest- earning assets totaled $1.12 billion for the year ended December 31, 1996 compared to $933.9 million for the 25 year ended December 31, 1995, an increase of $186.7 million or 20.0%. Average investments increased $157.6 million and were funded by higher deposit levels and borrowed funds. Average loans increased $40.8 million as the Company continued to focus on the commercial and home equity market segments, which grew by $35.0 million or 36.4% and $25.0 million or 43.2%, respectively. Residential real estate loan balances declined $20.6 million or 7.7%, reflecting significant refinancing activity to fixed rate products during the first quarter of 1996, as well as a decline in production for adjustable rate mortgage products. The Company originates long-term fixed rate mortgages for sale in the secondary market and generally holds adjustable rate mortgages in the Company's loan portfolio. Total interest expense was $41.2 million for the year ended December 31, 1996 compared to $32.6 million for the same period in 1995, an increase of $8.6 million or 26.5%. This increase is primarily attributable to increases in interest-bearing deposits and the use of borrowed funds. Interest-bearing deposits totaled $841.0 million for the year ended December 31, 1996 compared to $801.4 million for the same period in 1995, an increase of $39.6 million or 5.0%. This growth occurred primarily in time deposits, which increased $31.7 million largely attributable to the introduction of new CD products. Borrowed funds averaged $150.9 million during 1996 reflecting the use of FHLB advances and repurchase agreements to leverage a portion of the Company's capital. RATE/VOLUME ANALYSIS The following table presents the changes in net interest income resulting from changes in interest rates or changes in the volume of interest-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.
FOR THE YEARS ENDED DECEMBER 31, 1996 VERSUS 1995 ------------------------------------ INCREASE (DECREASE) DUE TO ------------------------------------ VOLUME RATE NET ------------ ---------- ----------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Federal funds sold and interest bearing deposits............................... $ (661) $ (86) $ (747) Investment securities held to maturity.. 324 1,660 1,984 Investment securities available for sale................................... 10,075 (71) 10,004 Residential real estate loans........... (1,624) 51 (1,573) Commercial real estate loans............ 184 277 461 Commercial loans........................ 3,192 (647) 2,545 Home equity loans....................... 2,190 (569) 1,621 Consumer loans.......................... (79) 145 66 ----------- ---------- ----------- Total interest-earning assets....... 13,601 760 14,361 ----------- ---------- ----------- INTEREST-BEARING LIABILITIES: Deposits: Savings accounts...................... 234 (20) 214 NOW accounts.......................... 33 (120) (87) Money market accounts................. (135) 102 (33) Time deposit accounts................. 1,663 457 2,120 ----------- ---------- ----------- Total deposits...................... 1,795 419 2,214 Borrowed funds.......................... 6,896 (493) 6,403 ----------- ---------- ----------- Total interest-bearing liabilities.. 8,691 (74) 8,617 ----------- ---------- ----------- Change in net interest income....... $ 4,910 $ 834 $ 5,744 =========== ========== ===========
26 PROVISION FOR LOAN LOSSES The Company recorded a $3.0 million provision for possible loan losses in 1996 compared to $4.4 million in 1995. The provision for possible loan losses is based upon Management's judgment of the amount necessary to maintain the allowance for possible loan losses at a level which is considered adequate. For further discussion of this topic please refer to the section titled "Allowance for Possible Loan Losses" in Item 1 of this document. NONINTEREST INCOME Noninterest income is composed of fee income for bank services and gains or losses from the sale of assets. The components of noninterest income for the periods represented are as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 1996 1995 ----------- ----------- (DOLLARS IN THOUSANDS) Net gain (loss) on sale of loans................... $ 604 $ 243 Net gain (loss) on sale of securities.............. 256 (886) Loan charges and fees.............................. 3,259 3,221 Deposit related fees............................... 6,236 5,191 Other charges and fees............................. 1,115 355 ----------- ---------- $ 11,470 $ 8,124 =========== ==========
Net gain on sale of loans increased $0.4 million due to an increase in the amount of loans sold on a servicing released basis. Net gain on sale of securities increased $1.1 million in the year ended December 31, 1996 compared to the same period in 1995. The $0.3 million gain on sale of securities in 1996 is associated with the sale of preferred stocks and mortgage-backed securities. The $0.9 million loss recorded in 1995 is related to the sale of securities in connection with the restructuring of the investment portfolio. Deposit related fees increased $1.0 million due primarily to fees associated with the Company's larger noninterest bearing account base. Other charges and fees increased $0.8 million in the year ended December 31, 1996 compared to the same period in 1995 primarily as the result of an increase in brokerage fee income as well as losses incurred in 1995 from the disposition of fixed assets. NONINTEREST EXPENSE Salaries and Benefits Expense Salaries and benefits expense totaled $17.8 million for the year ended December 31, 1996 compared to $16.0 million for the same period in 1995, an increase of $1.8 million or 11.8% reflecting increased headcount, standard wage increases, and higher employee stock ownership plan ("ESOP") restricted stock and 401K plan expenses. 27 Other Operating Expense The components of other operating expenses for the periods presented are as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------- 1996 1995 --------- --------- (DOLLARS IN THOUSANDS) Marketing........................................ $ 1,976 $ 1,107 Insurance........................................ 379 2,440 Professional services............................ 2,944 2,902 Outside processing............................... 4,118 2,893 Other............................................ 4,782 4,426 --------- --------- $ 14,199 $ 13,768 ========= =========
Marketing expense increased $0.9 million reflecting the expanded use of television, billboards, radio and print advertising directed towards the Company's consumer strategy and new branch openings. Insurance expense decreased $1.9 million due to a significant reduction in FDIC premiums. Outside processing expenses increased $1.2 million due to higher transaction and account volume associated with increased account activity resulting from the Company's consumer banking strategy, as well as costs associated with the outsourcing of the Company's item processing operations in 1996. Other operating expenses increased $0.4 million reflecting increased supplies and postage costs associated with the growth in consumer deposit accounts as a result of the Company's consumer strategy. Foreclosed Real Estate Expense Foreclosed real estate expense reflects losses on sales, writedowns and net operating results of foreclosed properties. These expenses were $0.4 million in 1996 compared to $0.5 million in 1995. This $0.1 million decrease reflects lower levels of foreclosed properties. Net Expenses of Real Estate Operations The Company has certain subsidiaries that are engaged in various real estate investments directly or in joint ventures with unaffiliated partners. The Company has terminated its real estate development activities and is in the process of selling its remaining real estate investments. Net expense of real estate operations reflects the net operating results of these activities, writedowns on real estate properties and gains/losses on sales of these properties. Net income of real estate operations was $0.3 million and $0.2 million in 1996 and 1995, respectively. INCOME TAXES In accordance with SFAS 109, "Accounting for Income Taxes", Management evaluated the income tax benefits associated with temporary differences, based on the weight of available evidence, as to whether it is more likely than not that the income tax benefits would be realized. As a result, a 100% valuation allowance against the Company's net deferred tax asset was established at December 31, 1994. Management reviews the valuation allowance on a periodic basis, and, based upon all available facts and circumstances at that time, may adjust the level of the allowance. During both the fourth quarter of 1995, and the third quarter of 1996, Management's evaluation of the weight of currently available evidence resulted in the conclusion that it was more likely than not that the Company would realize a portion of its net deferred tax asset which was reserved for at those times. At December 31, 1995, Management reduced the Company's 100% valuation allowance from $15.9 million to $7.9 million, while at September 30, 1996, Management reduced the remaining valuation allowance at that date of 28 $5.2 million to zero. In both instances, Management's judgment was influenced by factors including changes in the levels of actual and expected future taxable income and anticipated reversals of net deductible temporary differences. Also in the third quarter of 1996, pursuant to the enactment of the Small Business Jobs Protection Act during 1996, the Company was required, for tax purposes, to change its method of accounting for bad debts. The change required the Company to change from the reserve method to the specific charge- off method. The Company recognized a one-time tax benefit of $2.8 million during the third quarter, representing the tax effects of pre-1988 loan loss reserves not subject to recapture provisions. As a result of this third quarter activity, the Company became fully taxable for financial reporting purposes beginning in the fourth quarter of 1996. Certain future distributions in excess of the Bank's current earnings and profits would require the recapture of the taxes related to the pre-1988 loan loss reserves that were not subject to recapture under the Small Business Job Protection Act. The total tax liability that would be subject to recapture for which no deferred tax liability has been recorded is $3.0 million. IMPACT OF INFLATION Monetary assets and liabilities are claims to receive or pay a sum of money, the amount of which is fixed. Most assets and liabilities of a bank are monetary in nature. In times of inflation, monetary assets lose purchasing power and monetary liabilities gain purchasing power because the obligations will be repaid with dollars that have less purchasing power than at the time the assets and liabilities were recorded. Since the Company's primary source of earnings is net interest income, interest rates have a more significant impact on the Company's financial performance than the general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. IMPACT OF ACCOUNTING CHANGES In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS 121 is effective prospectively for fiscal years beginning after December 15, 1995, and was adopted by the Company effective January 1, 1996. The adoption of this statement did not have a material impact on the Company's results of operations. In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage Service Rights." SFAS 122 amends certain provisions of SFAS 65, "Accounting for Certain Mortgage Banking Activities," to eliminate the accounting distinction between rights to service mortgage loans for others that are acquired through loan origination activities and those acquired through purchase transactions. SFAS 122 is effective prospectively for fiscal years beginning after December 15, 1995, and was adopted by the Company effective January 1, 1996. The adoption of this statement did not have a material impact on the Company's results of operations or financial position. In November 1995, the FASB issued SFAS 123, "Accounting for Stock Based Compensation" which gives companies the option of employing intrinsic value accounting under the guidelines of Accounting Principles Board (APB) No. 25 or fair value accounting for stock based compensation. While SFAS 123 does not require the adoption of fair value accounting, it does require certain disclosures in the financial statements as if fair value accounting had been adopted, including pro forma net income and earnings per share. The Company adopted this accounting standard effective January 1, 1996 for disclosure purposes only and will continue to apply APB 25 in accounting for stock based compensation. In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", that provides accounting and reporting standards which require that after a 29 transfer of financial assets, an entity recognizes the financial and servicing asset 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 Company does not believe its adoption of this Statement will have a material impact on its results of operations or financial position. COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994 GENERAL For the year ended December 31, 1995 the Company reported net income of $11.5 million as compared to a net loss of $26.9 million for the year ended December 31, 1994. This increase in earnings reflects growth in earning assets as well as lower levels of loan loss provision and foreclosed real estate expenses in 1995 versus 1994. During the year ended December 31, 1995 the Company recorded a number of nonrecurring items. The Company released $6.0 million of the valuation allowance on that portion of its net deferred tax asset associated with temporary differences (principally loan loss reserves). In addition, the Company recorded a $0.9 million loss on the sale of securities in connection with the restructuring of its investment portfolio and a $0.5 million severance accrual related to organizational changes. These items were offset in part by a $0.4 million gain on the sale of a real estate investment and a $0.6 million insurance rebate from the Federal Deposit Insurance Corporation. The Company's core operating earnings, net of nonrecurring items, were approximately $6.0 million for the year ended December 31, 1995. NET INTEREST INCOME Net interest income represents the difference between income earned on interest-earning assets and expense paid on interest-bearing liabilities. Net interest income is affected by the mix and volume of assets and liabilities, and the movement and level of interest rates. 30 The following table sets forth, for the periods indicated, average balances, interest income and expense, and yields earned or rates paid on the major categories of assets and liabilities. Non-accrual loans have been included in the appropriate average balance loan category, but unpaid interest on non- accrual loans has not been included for purposes of determining interest income. For purposes of this table, investment securities available for sale are reflected at amortized cost.
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------------- 1995 1994 ----------------------------- ----------------------------- AVERAGE AVERAGE AVERAGE AVERAGE BALANCE INTEREST YIELD/COST BALANCE INTEREST YIELD/COST -------- -------- ---------- -------- -------- ---------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Fed funds sold and in- terest-bearing depos- its.................... $ 22,294 $ 1,316 5.82% $ 11,682 $ 527 4.45% Investment securities held to maturity....... 183,139 10,849 5.92% 147,943 8,173 5.52% Investment securities available for sale..... 184,551 12,214 6.62% 143,801 6,576 4.57% Residential real estate loans.................. 266,276 20,970 7.88% 249,294 18,575 7.45% Commercial real estate loans.................. 116,957 9,671 8.27% 182,626 13,236 7.25% Commercial loans........ 96,246 9,050 9.27% 95,093 7,210 7.48% Home equity loans....... 57,943 5,306 9.16% 32,890 2,651 8.06% Consumer loans.......... 6,482 540 8.33% 12,088 965 7.98% -------- ------- ---- -------- ------- ---- Total interest-earn- ing assets......... 933,888 69,916 7.49% 875,417 57,913 6.62% Allowance for loan loss- es..................... (16,346) (22,015) Noninterest-earning as- sets................... 71,341 80,574 -------- -------- Total assets........ $988,883 $69,916 $933,976 $57,913 ======== ======= ======== ======= INTEREST-BEARING LIABIL- ITIES: Deposits Savings accounts...... $185,176 $ 4,616 2.49% $188,125 $ 3,846 2.04% NOW accounts.......... 53,955 727 1.35% 56,699 801 1.41% Money market ac- counts............... 212,272 6,945 3.27% 249,674 6,452 2.58% Time deposit ac- counts............... 349,950 18,136 5.18% 326,616 12,693 3.89% -------- ------- ---- -------- ------- ---- Total Deposits.......... 801,353 30,424 3.80% 821,114 23,792 2.90% Borrowed funds.......... 34,457 2,132 6.10% -- -- -- -------- ------- ---- -------- ------- ---- Total interest-bearing liabilities............ 835,810 32,556 3.90% 821,114 23,792 2.90% Noninterest-bearing lia- bilities............... 86,632 70,236 -------- -------- Total liabilities... 922,442 891,350 Total stockholders' eq- uity................... 66,441 42,626 -------- -------- Total liabilities and stockholders' equity............. $988,883 32,556 $933,976 $23,792 ======== ======= ======== ======= Net interest income/spread.......... 37,360 3.59% $34,121 3.72% ======= ==== ======= ==== Net interest margin as a % of interest-earning assets................. 4.00% 3.90% ==== ====
Net interest income increased $3.2 million or 9.5% for the year ended December 31, 1995 versus the same period last year. This increase was the result of an increase in interest-earning assets combined with an increase of 10 basis points in the net interest margin to 4.00% for the year ended December 31, 1995 from 3.90% for the same period last year. Total interest income was $69.9 million for the year ended December 31, 1995, an increase of $12.0 million or 20.7%. This increase is attributable to higher levels of interest-earning assets and weighted average yields as 31 well as lower levels of non-performing assets. Interest-earning assets averaged $933.9 million for the year ended December 31, 1995 compared to $875.4 million for the year ended December 31, 1994, an increase of $58.5 million or 6.7%. Average investments increased $75.9 million or 26.0% reflecting the reinvestment of proceeds from the Conversion and leveraging a portion of the Company's capital position. Average loans decreased $28.1 million reflecting bulk sales of loans, which occurred in 1994, partially offset by increases in residential real estate loans as well as home equity loans. The average yield on interest-earning assets was 7.49% for the year ended December 31, 1995 compared to 6.62% for the same period in 1994, an increase of 87 basis points or 13.1% reflecting the repricing of adjustable rate loans and investment securities to market rates and lower levels of non- accruing loans. These positive effects on interest income were partially offset by a change in asset mix from higher yielding loans to lower yielding investment securities. Total interest expense was $32.6 million for the year ended December 31, 1995 compared to $23.8 million for the same period in 1994, an increase of $8.8 million or 36.8%. This increase is attributable to higher deposit rates and the use of borrowings in 1995. The average rate paid on deposits was 3.80% for the year ended December 31, 1995 compared to 2.90% for the same period in 1994, an increase of 90 basis points or 31.0% reflecting a higher interest rate environment, continued competitive pricing pressures on consumer deposits, and the introduction of the "Can't Lose CD" product, which paid a rate equal to the prime rate less 350 basis points. Borrowings averaged $34.5 million during 1995 reflecting the Company's leveraged ESOP as well as the use of FHLB Advances and repurchase agreements to leverage a portion of the Company's capital position. RATE/VOLUME ANALYSIS The following table presents the changes in net interest income resulting from changes in interest rates or changes in the volume of interest-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.
FOR THE YEARS ENDED DECEMBER 31, 1995 VERSUS 1994 ---------------------------------- INCREASE (DECREASE) DUE TO ---------------------------------- VOLUME RATE NET ---------------------- ---------- (DOLLARS IN THOUSANDS) INTEREST-EARNING ASSETS: Federal funds sold and interest bearing deposits................................. $ 553 $ 236 $ 789 Investment securities held to maturity.... 2,015 661 2,676 Investment securities available for sale.. 2,280 3,358 5,638 Residential real estate loans............. 1,301 1,094 2,395 Commercial real estate loans.............. (5,095) 1,530 (3,565) Commercial loans.......................... 98 1,742 1,840 Home equity loans......................... 2,156 499 2,655 Consumer loans............................ (457) 32 (425) ---------- ---------- ---------- Total interest-earning assets......... 2,851 9,152 12,003 ---------- ---------- ---------- INTEREST-BEARING LIABILITIES: Deposits: Savings accounts.......................... (67) 837 770 NOW accounts.............................. (38) (36) (74) Money market accounts..................... (1,095) 1,588 493 Time deposit accounts..................... 1,058 4,385 5,443 ---------- ---------- ---------- Total deposits........................ (142) 6,774 6,632 Borrowed funds............................ 1,066 1,066 2,132 ---------- ---------- ---------- Total interest-bearing liabilities.... 924 7,840 8,764 ---------- ---------- ---------- Change in net interest income......... $ 1,927 $ 1,312 $ 3,239 ========== ========== ==========
32 PROVISION FOR LOAN LOSSES The Company recorded a $4.4 million provision for possible loan losses in the year ended December 31, 1995 compared to $25.7 million in the year ended December 31, 1994. The loan loss provision in 1994 reflects the implementation of an accelerated disposition program. The provision for possible loan losses is based upon Management's judgment of the amount necessary to maintain the allowance for possible loan losses at a level which is considered adequate. For further discussion of this topic please refer to the section titled "Allowance for Possible Loan Losses" in Item 1 of this document. NONINTEREST INCOME Noninterest income is composed of fee income for bank services and gains or losses from the sale of assets. The components of noninterest income for the periods represented are as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 1995 1994 ----------- ----------- (DOLLARS IN THOUSANDS) Net gain (loss) on sale of loans................. $ 243 ($505) Net loss on sale of securities................... (886) (48) Loan charges and fees............................ 3,221 3,213 Deposit related fees............................. 5,191 4,122 Other charges and fees........................... 355 1,547 ----------- ----------- $ 8,124 $ 8,329 =========== ===========
Net loss on sale of loans declined $0.7 million reflecting mark to market losses of $0.5 million on residential loans held for sale recorded in 1994. Net loss on sale of securities increased $0.9 million reflecting losses on the sale of securities in connection with the restructuring of the investment portfolio. Deposit related fees increased $1.1 million due primarily to fees associated with the Company's larger non-interest bearing account base. Other charges and fees declined $1.1 million in the year ended December 31, 1995 compared to the same period in 1994 primarily as the result of losses incurred in 1995 from the disposition of fixed assets and non-recurring income recorded in 1994, specifically gains on sales of lease financing receivables and tax abatements. NONINTEREST EXPENSE Salaries and Benefits Expense Salaries and benefits expense totaled $15.9 million for the year ended December 31, 1995 compared to $16.8 million for the same period in 1994, a decrease of $0.8 million or 5.0% reflecting a reduction in headcount partially offset by standard wage increases as well as new employee benefit programs instituted in 1995. Other Operating Expense
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 1995 1994 ----------- ----------- (DOLLARS IN THOUSANDS) Marketing.......................................... $ 1,107 $ 1,405 Insurance.......................................... 2,440 3,270 Professional services.............................. 2,902 4,076 Outside processing................................. 2,893 2,683 Other.............................................. 4,426 3,675 ----------- ----------- $ 13,768 $ 15,109 =========== ===========
33 Marketing expense decreased $0.3 million reflecting a lower level of advertising expenses incurred in 1995. Insurance expense includes FDIC Insurance expense, which totaled $1.9 million in 1995 compared to $2.6 million in 1994, a decrease of $0.7 million. This decrease reflects an insurance premium reduction of $0.6 million from the FDIC in 1995. Professional services expense decreased $1.2 million for the year ended December 31, 1995 compared to the same period last year primarily due to costs incurred in 1994 related to the management and disposition of non-performing assets. Outside processing expenses increased $0.2 million due to higher transaction and account volume associated with increased account activity resulting from the consumer banking strategy, partially offset by savings which resulted from a renegotiated data processing contract. Other operating expenses increased $0.8 million primarily due to costs associated with shareholder relation activities and costs associated with significant growth in retail deposit accounts as a result of the consumer strategy. Foreclosed Real Estate Expense Foreclosed real estate expense reflects losses on sales, writedowns and net operating results of foreclosed properties. These expenses were $5.5 million in 1994 compared to $0.5 million in 1995. The expenses in 1994 reflect the Company's aggressive program of selling foreclosed properties as part of its efforts to reduce the level of non-performing assets. Net Expenses of Real Estate Operations The Company has certain subsidiaries that are engaged in various real estate investments directly or in joint ventures with unaffiliated partners. The Company has terminated its real estate development activities and plans to sell its remaining real estate investments by December 31, 1997 as part of a divestiture plan submitted to the FDIC. The FDIC approved the plan in December of 1995. The net expense of real estate operations reflects the net operating results of these activities, writedowns on real estate properties and gains/losses on sales of these properties. Net (income) expense of real estate operations was ($0.2) million and $1.0 million in 1995 and 1994, respectively. INCOME TAXES In accordance with SFAS 109, "Accounting for Income Taxes," Management evaluated the income tax benefits associated with temporary differences, based on the weight of available evidence, as to whether it is more likely than not that the income tax benefits would be realized. As a result, a 100% valuation allowance was established at December 31, 1994. Management reviews the valuation allowance on a periodic basis and, based upon all available facts and circumstances at that time, may adjust the level of the allowance. At December 31, 1995, Management evaluated the weight of available evidence and concluded that it was more likely than not that the Company will realize a significant portion of the net deferred tax asset and has reduced the valuation allowance from $15.9 million at December 31, 1994 to $7.9 million at December 31, 1995. As part of that reduction, the Company released $6.0 million of its valuation allowance resulting in a tax benefit. Factors influencing Management's judgment include among other things changes in the level of actual and expected future taxable income and anticipated reversals of net temporary differences. In addition, the Company recorded $0.2 million of state and federal alternative minimum tax provision in 1995. 34 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following Consolidated Financial Statements and Notes are included herein.
PAGE ---- Consolidated Balance Sheet as of December 31, 1996 and 1995.............. 36 Consolidated Statement of Operations for the three years ended December 31, 1996, 1995, and 1994................................................ 37 Consolidated Statement of Changes in Stockholders' Equity for the three years ended December 31, 1996, 1995, and 1994........................... 38 Consolidated Statement of Cash Flows for the three years ended December 31, 1996, 1995, and 1994................................................ 39 Notes to Consolidated Financial Statements............................... 40 Report of Independent Accountants........................................ 67
All schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. 35 SIS BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (DOLLARS IN THOUSANDS)
DECEMBER 31, ------------------------ 1996 1995 ----------- ----------- ASSETS Cash and due from banks.............................. $ 31,902 $ 30,377 Federal funds sold and interest-bearing deposits..... 10,045 8,045 Investment securities available for sale............. 449,323 246,984 Investment securities held to maturity (fair value: $191,617 at December 31, 1996 and $172,930 at December 31, 1995).................................. 192,174 172,793 Loans receivable, net of allowance for possible losses ($15,597 at December 31, 1996 and $14,986 at December 31, 1995).................................. 610,597 558,663 Accrued interest and dividends receivable............ 8,982 7,109 Investments in real estate and real estate partnerships........................................ 2,757 6,092 Foreclosed real estate, net.......................... 381 1,529 Bank premises, furniture and fixtures, net........... 27,106 25,706 Other assets......................................... 15,345 13,680 ----------- ----------- Total assets..................................... $ 1,348,612 $ 1,070,978 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits............................................. $ 969,517 $ 885,386 Federal Home Loan Bank advances...................... 68,471 41,500 Securities sold under agreements to repurchase....... 176,577 31,101 Loans payable........................................ 2,848 5,470 Mortgage escrow deposits............................. 4,396 4,193 Accrued expenses and other liabilities............... 24,886 21,859 ----------- ----------- Total liabilities................................ 1,246,695 989,509 ----------- ----------- 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 and outstanding: 5,723,600 at December 31, 1996 and 5,710,700 at December 31, 1995)................................ 57 57 Unearned compensation.............................. (3,693) (4,937) Additional paid-in capital......................... 42,665 41,790 Retained earnings.................................. 60,993 42,833 Net unrealized gain on investment securities available for sale................................ 1,895 1,726 ----------- ----------- Total stockholders' equity....................... 101,917 81,469 ----------- ----------- Total liabilities and stockholders' equity........... $ 1,348,612 $ 1,070,978 =========== ===========
See accompanying Notes to the Consolidated Financial Statements 36 SIS BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------- 1996 1995 1994 ---------- ---------- ---------- Interest and dividend income Loans................................... $ 48,657 $ 45,536 $ 42,637 Investment securities available for sale................................... 22,218 12,215 6,576 Investment securities held to maturity.. 12,833 10,849 8,173 Federal funds sold and interest-bearing deposits............................... 569 1,316 527 ---------- ---------- ---------- Total interest and dividend income.... 84,277 69,916 57,913 ---------- ---------- ---------- Interest expense Deposits................................ 32,638 30,424 23,792 Borrowings.............................. 8,535 2,132 -- ---------- ---------- ---------- Total interest expense................ 41,173 32,556 23,792 ---------- ---------- ---------- Net interest and dividend income.......... 43,104 37,360 34,121 Less: Provision for possible loan losses.. 2,950 4,359 25,742 ---------- ---------- ---------- Net interest and dividend income after provision for possible loan losses....... 40,154 33,001 8,379 Noninterest income: Net gain (loss) on sale of loans........ 604 243 (505) Net gain (loss) on sale of securities... 256 (886) (48) Fees and other income................... 10,610 8,767 8,882 ---------- ---------- ---------- Total noninterest income.............. 11,470 8,124 8,329 ---------- ---------- ---------- Noninterest expense: Operating expenses: Salaries and employee benefits........ 17,839 15,961 16,808 Occupancy expense of bank premises, net.................................. 3,291 3,459 3,410 Furniture and equipment expense....... 2,240 1,943 1,830 Other operating expenses.............. 14,199 13,768 15,109 ---------- ---------- ---------- Total operating expenses............ 37,569 35,131 37,157 ---------- ---------- ---------- Foreclosed real estate expense.......... 440 521 5,470 Net (income) expense of real estate op- erations............................... (272) (227) 988 ---------- ---------- ---------- Total noninterest expense........... 37,737 35,425 43,615 Income (loss) before income tax benefit... 13,887 5,700 (26,907) Income tax benefit........................ (4,273) (5,759) -- ---------- ---------- ---------- Net income (loss)................... $ 18,160 $ 11,459 $ (26,907) ========== ========== ========== Earnings per share and pro forma earnings per share: (1) Primary................................. $ 3.29 $ 2.21 $ (5.21) Fully diluted (2)....................... $ 3.26 $ 2.19 $ (5.21) Weighted average and pro forma weighted average shares outstanding: (1) Primary................................. 5,522,594 5,174,037 5,174,037 Fully diluted........................... 5,573,390 5,220,778 5,220,778
- -------- (1) Net income per share for the year ended December 31, 1996 is computed on weighted average shares outstanding for the period. Net income (loss) per share for the years ended December 31, 1995 and 1994 is computed on a pro forma basis as if the conversion of the Bank from mutual to stock form had been completed as of the beginning of the periods presented. (2) For the year ended December 31, 1994 the fully diluted earnings per share calculation is anti-dilutive. See accompanying Notes to the Consolidated Financial Statements 37 SIS BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (DOLLARS IN THOUSANDS)
NET UNREALIZED GAIN (LOSS) ADDITIONAL ON INVESTMENT COMMON UNEARNED PAID-IN RETAINED SECURITIES AVAILABLE STOCK COMPENSATION CAPITAL EARNINGS FOR SALE TOTAL ------ ------------ ---------- -------- -------------------- -------- Balance at December 31, 1993................... $ -- $ -- $ -- $ 58,531 $ -- $ 58,531 Net loss................ -- -- -- (26,907) -- (26,907) Change in unrealized gain (loss) on investment securities available for sale..... -- -- -- -- (3,121) (3,121) ----- -------- ------- -------- ------- -------- Balance at December 31, 1994................... $ -- $ -- $ -- $ 31,624 $(3,121) $ 28,503 ===== ======== ======= ======== ======= ======== Balance at December 31, 1994................... $ -- $ -- $ -- $ 31,624 $(3,121) $ 28,503 Net income.............. -- -- -- 11,459 -- 11,459 Issuance of common stock.................. 56 -- 39,665 (250) -- 39,471 Unearned compensation... 1 (5,375) 1,814 -- -- (3,560) Decrease in unearned compensation........... -- 438 311 -- -- 749 Change in unrealized gain (loss) on investment securities available for sale..... -- -- -- -- 4,847 4,847 ----- -------- ------- -------- ------- -------- Balance at December 31, 1995................... $ 57 $ (4,937) $41,790 $ 42,833 $ 1,726 $ 81,469 ===== ======== ======= ======== ======= ======== Balance at December 31, 1995................... $ 57 $ (4,937) $41,790 $ 42,833 $ 1,726 $ 81,469 Net income.............. -- -- -- 18,160 -- 18,160 Unearned compensation... -- (315) 297 -- -- (18) Decrease in unearned compensation........... -- 1,559 578 -- -- 2,137 Change in unrealized gain (loss) on investment securities available for sale..... -- -- -- -- 169 169 ----- -------- ------- -------- ------- -------- Balance at December 31, 1996................... $ 57 $ (3,693) $42,665 $ 60,993 $ 1,895 $101,917 ===== ======== ======= ======== ======= ========
See accompanying Notes to the Consolidated Financial Statements 38 SIS BANCORP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)............................. $ 18,160 $ 11,459 $ (26,907) Adjustments to reconcile net income (loss) to net cash provided by/ (used for) operating activities Provision for possible loan losses........... 2,950 4,359 25,742 Provision for foreclosed real estate......... -- 836 6,034 Depreciation................................. 3,003 3,026 3,605 Amortization of premium on investment securities, net............................. 2,071 972 1,812 ESOP and restricted stock expenses........... 1,890 749 -- Investment security (gains) losses........... (256) 886 48 (Income) loss from equity investment in partnerships................................ (48) 133 987 (Gain) loss on sale of loans................. (604) (243) 505 Disbursements for mortgage loans held for sale........................................ (79,442) (65,747) (126,727) Receipts from mortgage loans held for sale... 80,046 65,989 126,161 Loss (gain) on sale of fixed assets and real estate...................................... 11 609 (4,306) Changes in assets and liabilities: (Increase) decrease in other assets, net... (4,426) (8,029) 1,382 Decrease (increase) in accrued expenses and other liabilities......................... 3,257 (8,996) 5,677 --------- --------- --------- Net cash provided by operating activities.............................. 26,612 6,003 14,013 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of investment securities available for sale.......................... 41,736 213,252 59,609 Proceeds from maturities and principal payments received on investment securities available for sale.......................... 115,764 135,076 406,369 Purchase of investment securities available for sale.................................... (360,031) (345,959) (497,675) Proceeds from maturities and principal payments received on investment securities held to maturity............................ 46,892 33,287 13,783 Purchase of investment securities held to maturity.................................... (66,840) (132,878) (75,067) Net decrease in investments in real estate... 475 -- 6,005 Cash distributions from partnerships......... -- -- 63 Capital contributions to partnerships........ -- -- (401) Net (increase) decrease in loans receivable.................................. (59,932) (66,864) 20,685 Net decrease in foreclosed real estate....... 2,132 2,928 16,437 Principal payments received under leases..... -- -- 177 Proceeds from sale of loans.................. 4,064 1,081 74,925 Proceeds from sale of fixed assets and leases...................................... 2,328 -- 27 Purchase of fixed assets..................... (3,834) (5,454) (1,967) --------- --------- --------- Net cash (used for)/provided by investing activities................................ (277,246) (165,531) 22,970 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from stock conversion........... -- 35,911 -- Net increase (decrease) in deposits.......... 84,131 31,753 (21,273) Net increase (decrease) in borrowings........ 169,825 75,679 (3,671) Net increase (decrease) in mortgagors' escrow deposits............................. 203 (1,113) 79 --------- --------- --------- Net cash provided by/(used for) financing activities................................ 254,159 142,230 (24,865) --------- --------- --------- Increase (decrease) in cash and cash equivalents.................................. 3,525 (17,298) 12,118 Cash and cash equivalents, beginning of year.. 38,422 55,720 43,602 --------- --------- --------- Cash and cash equivalents, end of year........ $ 41,947 $ 38,422 $ 55,720 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for interest to depositors and interest on debt............. $ 40,813 $ 32,456 $ 23,751 Non-cash investing activities: Transfers to foreclosed real estate, net..... $ 984 $ 342 $ 2,337
See accompanying Notes to the Consolidated Financial Statements 39 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS) GENERAL SIS Bancorp, Inc., (the "Company") 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 sole 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, 1994. The Company provides a variety of financial services which include retail and commercial banking, residential mortgage origination and servicing, commercial real estate lending and consumer lending. The Company, which is headquartered in Springfield, Massachusetts serves its primary market of Hampden and Hampshire Counties of Massachusetts through a network of 23 retail branches. The Company's revenues are derived principally from interest payments on its loan portfolios and mortgage-backed and other investment securities. The Company's primary sources of funds are deposits, borrowings and principal and interest payments on loans and mortgage-backed securities. 1. ACCOUNTING POLICIES The accounting and reporting policies of the Company conform with generally accepted accounting principles. The significant policies are summarized below. The consolidated financial statements of the Company are dependent on the use of estimates, particularly with regard to the allowance for possible loan losses and the value of other real estate. Estimates of loan collectability and real estate values involve a high degree of judgment and the use of appraisals and other information. Subsequent changes in general economic conditions and the financial condition of borrowers may require changes in such estimates. CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany items have been eliminated. Certain amounts in prior periods have been reclassified to conform to the current year presentation. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and interest bearing deposits. Generally, federal funds are sold on an overnight basis. INVESTMENT SECURITIES Investment securities which management has the positive intent and ability to hold until maturity are classified as held-to-maturity and carried at amortized cost, adjusted for amortization of premiums and accretion of discounts into interest income using the level yield method over the remaining contractual life of the securities, adjusted for actual prepayments. Premiums are amortized to the earlier of the call or maturity date and discounts 40 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) are accreted to the maturity date. Investment securities which have been identified as assets which may be sold prior to maturity or for which there is not a positive intent to hold until maturity, based on foreseeable conditions, including all marketable equity securities, are classified as available-for- sale. FAS 115, "Accounting for Certain Investments in Debt and Equity Securities," requires that available-for-sale securities be reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity, net of tax. The Company adopted FAS 115 effective January 1, 1994. Gains and losses on sales of investment securities are computed under the specific identification method. Investment securities which have experienced an other than temporary decline in value are written down to fair value as a new cost basis with the amount of the writedown included in earnings as a realized loss. The new cost basis is not increased for subsequent recoveries in fair value. INVESTMENTS IN REAL ESTATE AND REAL ESTATE PARTNERSHIPS Investments in real estate reflect the Company's interest in wholly owned real estate properties. Investments in real estate properties are carried at the lower of cost, including cost of improvements incurred subsequent to acquisition, or fair value less costs to sell. Investments in partnerships reflect the Company's interest in joint venture real estate developments. Investments in partnerships which are greater than 50% owned by the Company are accounted for using the equity method and are carried at the Company's equity in the underlying assets. LOANS Loans are stated at the principal amount outstanding, net of unearned income. Interest income on loans is accrued based on rates applied to amounts outstanding. Unearned income on loans made or purchased on a discounted basis are recognized in interest income over the lives of the loans using a method that approximates a level yield. Loans held for sale are carried at the lower of cost or market value. Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount is amortized as a yield adjustment over the average life of the loans using a method that approximates a level yield method. Loans on which the accrual of interest has been discontinued are classified as nonaccrual loans. Interest accruals on loans are normally discontinued whenever the payment of interest or principal is more than 90 days past due or when, in the opinion of management, such action is prudent. When a loan is placed on nonaccrual status, all interest previously accrued in the current year but not collected is reversed against current year interest income. Loans are removed from nonaccrual status when they become current as to principal and interest and when, in the opinion of management, the loans are estimated to be fully collectible as to principal and interest. The Company may continue to accrue interest on loans past due 90 days or more that are well secured and in the process of collection. Restructured loans are loans for which concessions, including reduction of interest rates or deferral of interest or principal payments, have been granted to acknowledge changes in the borrower's financial condition or changes in underlying cash flows of the loan's collateral. Interest income on restructured loans is accrued at the modified rates after a satisfactory period of performance (generally six months). Effective January 1, 1995 the Company adopted FAS 114, "Accounting by Creditors for Impairment of a Loan". FAS 114 modifies the accounting for impaired loans, defined as those loans, where, based on current information and events, it is probable that a creditor will be unable to collect all amounts due, both interest and principal, according to the contractual terms of the loan agreement. Specifically, FAS 114 requires that the 41 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) allowance for possible loan losses related to impaired loans be determined based on the present value of expected cash flows discounted at the loan's effective interest rate or, as a practical expedient, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The adoption of this statement did not have a material impact on the Company's results of operations or financial position. Effective January 1, 1995, the Company also adopted FAS 118, "Accounting by Creditors for an Impairment of a Loan--Income Recognition and Disclosure," which amends FAS 114 to permit a creditor to use existing methods for recognizing interest income on impaired loans. Generally, interest income received on impaired loans either continues to be applied by the Company against principal or is realized as interest income, according to Management's judgment as to the collectability of the principal. ALLOWANCE FOR POSSIBLE LOAN LOSSES The allowance for possible loan losses is established through charges against income. Loans deemed uncollectable are charged against the allowance, while recoveries of amounts previously charged-off are credited to the allowance. The allowance represents an amount which, in Management's judgment, will be adequate to absorb probable losses on existing loans that may become uncollectable. Management's judgment in determining the adequacy of the allowance is based on various factors influencing the collectability of the loan. These factors include, but are not limited to, an analysis of the borrower's ability to meet the repayment terms, the borrower's overall financial condition, the estimated value of collateral supporting the credit, the concentration of credit risk in the portfolio and judgments as to the effect of current and anticipated economic conditions. Management's determination of the allowance is, by necessity, dependent upon estimates, appraisals and judgments, which may change because of changing economic conditions and the Company's perception as to how these factors may affect the financial condition of the borrowers. FORECLOSED REAL ESTATE Real estate acquired through foreclosure is transferred to foreclosed real estate at the lower of the estimated fair value of the asset acquired or book value. The excess if any, of the loan over the fair value of the property at the time of transfer is charged to the Allowance for Possible Loan Losses. Subsequent declines in the value of the property are reflected as a valuation allowance and charged to operations. Subsequent to transfer, foreclosed real estate is carried at the lower of cost or the estimated fair value less expenses to dispose of the asset. PREMISES, FURNITURE AND FIXTURES Premises, furniture and fixtures are stated at cost less accumulated depreciation and amortization. Depreciation is computed by use of the straight-line method over the estimated useful lives of the related assets, ranging from 3 to 30 years. Leasehold improvements are amortized over the shorter of the lease terms or the useful life of the improvement. FAIR VALUES OF FINANCIAL INSTRUMENTS The Company follows FAS 107, "Disclosures about Fair Value of Financial Instruments," which requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial position, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The calculation of fair value estimates is dependent upon certain subjective assumptions and involves significant uncertainties, resulting in variability in estimates with changes in assumptions. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in the fair value amounts disclosed. FAS 107 excludes certain financial 42 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. In addition, the fair value estimates are not intended to reflect the liquidation value of the financial instruments. The following methods and assumptions were used by the Company to estimate the fair value for each class of financial instruments for which it is practicable to estimate that value. Cash and short-term investments--The carrying amounts for cash and short- term investments are reasonable estimates of those assets' fair values. Investment securities--Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities. Loans receivable, net--For adjustable rate residential loans that reprice frequently and with no significant change in credit risk, fair values are based on the market prices for securities collateralized by similar loans. For certain homogeneous categories of loans, such as some residential fixed rate mortgages, fair value is estimated using the quoted market price for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Accrued interest and dividends receivable--The carrying amount of interest and dividends receivable approximates its fair value. Deposit liabilities--The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date, that is, the carrying value. The fair value of fixed maturity certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently offered for deposits of similar remaining maturities on the future cash flows expected to be paid on the deposits. In estimating the fair value of deposit liabilities, FAS 107 prohibits financial entities from taking into account the value of its long- term relationships with depositors, commonly known as core deposit intangibles. Federal Home Loan Bank advances--The fair value of advances from the Federal Home Loan Bank of Boston is based on discounted values of contractual cash flows using rates currently offered for instruments with similar terms and maturities or, when available, quoted market prices. Securities sold under agreements to repurchase--The fair value of securities sold under agreements to repurchase are based on the discounted value of contractual cash flows using dealer quoted rates for agreements of similar terms and maturities. Loans payable--The fair values of the Company's loans payable are estimated using discounted cash flow analyses, based on rates currently available to the Company for debt with similar terms and remaining maturities. Standby letters of credit--The estimated fair value of financial guarantees, such as standby letters of credit, are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the creditworthiness of the counterparties or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. Commitments to extend credit--The fair value of commitments to extend credit, which includes unused lines of credit and commitments to fund loans, is estimated using the fees currently charged to enter into similar 43 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The commitments to extend credit have terms that are consistent with current market terms. LONG-LIVED ASSETS In March 1995, the Financial Accounting Standards Board ("FASB") issued FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. FAS 121 is effective prospectively for fiscal years beginning after December 15, 1995, and was adopted by the Company effective January 1, 1996. The adoption of this statement did not have a material impact on the Company's results of operations. PENSION PLAN AND OTHER EMPLOYEE BENEFIT PLANS All eligible employees are covered by a non-contributory defined benefit pension plan which is administered by the Savings Bank Employees' Retirement Association. The pension plan is funded in an amount consistent with the funding requirements of federal laws and regulations. The Company sponsors postretirement health care and life insurance benefit plans that provide health care and life insurance benefits for retired employees that have met certain age and service requirements. Postretirement health care and life insurance benefits expense is based upon an actuarial computation of current and future benefits to earnings for employees and retirees. The Company accounts for its postretirement health care and life insurance benefits in accordance with FAS 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions." The FASB has issued FAS 112, "Employers' Accounting for Postemployment Benefits," which requires accrual of a liability for all types of benefits paid to former or inactive employees after employment but before retirement. Benefits subject to this accounting pronouncement include salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits (including workers' compensation), job training and counseling and continuation of such benefits as health care and life insurance coverage. The Company adopted this accounting standard beginning January 1, 1994. The adoption of FAS 112 did not have a material impact on the Company's results of operations or financial position. The Company sponsors a leveraged employee stock ownership plan ("ESOP") that covers all full-time and part-time employees with more than one year of service at the Company. The ESOP was formed with the completion of the Bank's conversion from mutual to stock form (the "Conversion") on February 7, 1995. The Company makes annual contributions to the ESOP equal to the ESOP's debt service. The ESOP's shares initially were pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid during the year in excess of dividends on ESOP stock and other earnings applied to repayment of the ESOP's debt. The Company accounts for its ESOP in accordance with Statement of Position (SOP) 93-6. Accordingly, the debt of the ESOP is recorded as long-term debt and the shares pledged as collateral are reported as unearned compensation in the Company's Consolidated Balance Sheet. As shares are released from collateral, the Company records compensation expense equal to the current market price of the shares, and the shares are treated as outstanding for purposes of calculating earnings per share. The FASB has issued FAS 123, "Accounting for Stock Based Compensation" which gives companies the option of employing intrinsic value accounting under the guidelines of Accounting Principles Board (APB) No. 25 or fair value accounting for stock based compensation. While FAS 123 does not require the adoption of fair 44 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) value accounting, it does require certain disclosures in the financial statements as if fair value accounting had been adopted, including pro forma net income and earnings per share. The Company adopted this accounting standard effective January 1, 1996 for disclosure purposes only and will continue to apply APB 25 in accounting for stock based compensation. The Company's Stock Option Plan (the "Stock Option Plan") was approved by the Bank's stockholders at its annual meeting on May 31, 1995 and was assumed by the Company upon the completion of the Reorganization. The Stock Option Plan provides for the granting of incentive and nonqualified stock options to certain employees and non-employee directors of the Company and its wholly- owned subsidiaries for the purchase of the Company's common stock at 100 percent of the fair market value at the date of grant. The maximum option term is 10 years. Options granted to non-employee Directors of the Company or Bank under the Stock Option Plan are exercisable in installments of 20% per year commencing on the first anniversary of the date of grant. Options granted to employees of the Company and its subsidiaries under the Stock Option Plan will vest in accordance with the terms set by the Company's Compensation Committee with the ratification of the Company's Board of Directors. Under the terms of the Stock Option Plan, 806,250 shares of authorized but unissued common stock were reserved for issuance under the Stock Option Plan. At December 31, 1996 and 1995, 594,300 and 415,600 stock options have been granted under the Stock Option Plan, respectively. The Company's Restricted Stock Plan (the "Restricted Stock Plan") was approved by the Bank's stockholders at its annual meeting on May 31, 1995 and was assumed by the Company upon completion of the Reorganization. The Restricted Stock Plan provides for the awarding of restricted stock to certain employees and non-employee directors of the Company and its wholly-owned subsidiaries. The restricted stock vests over a period of time provided that the awardee continues to be employed by or serves as a director of the Company. Under the terms of the Restricted Stock Plan, 222,500 shares of restricted stock were reserved for awarding under the Restricted Stock Plan. Each award of restricted stock to non-employee Directors of the Company or Bank under the Restricted Stock Plan vest in installments of 20% per year commencing on the first anniversary of the date of grant. Each award of restricted stock to employees of the Company and its subsidiaries under the Restricted Stock Plan will vest in accordance with the terms set by the Company's Compensation Committee with ratification of the Company's Board of Directors. At December 31, 1996 and 1995, 161,100 and 148,200 shares of restricted stock have been awarded under the Restricted Stock Plan. The Company sponsors a defined contribution profit sharing plan (the "Plan"), with cash or deferral arrangements permitted by Internal Revenue Code subsection 401(k). The Plan was formed by the Company in 1995. Substantially all employees are eligible to participate after satisfaction of the one year service requirement under the Plan. Under the savings aspect of the Plan, employees may contribute 1% to 12% of base compensation with up to 6% being eligible for matching contributions, at 25%, from the Company. Contributions to the Plan by the Company were $120 for the year ended December 31, 1996 as compared to $52 for the year ended December 31, 1995. MORTGAGE BANKING ACTIVITIES Fees paid for the right to service mortgage loans are capitalized and amortized in proportion to, and over the period of, estimated net servicing income. Amortization is adjusted prospectively to reflect increases or decreases in prepayment experience. Purchased mortgage servicing rights of $412 and $405 at December 31, 1996 and 1995, respectively, are included in other assets. Servicing income represents fees earned for servicing real estate mortgage loans owned by outside investors. The fees are calculated on the outstanding principal balances of the loans serviced and are recorded as income when earned. The mortgage loans being serviced for outside investors are not included in the consolidated 45 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) financial statements because they are not assets of the Company. The Company maintained a servicing portfolio for other investors of $792,376 and $880,558 at December 31, 1996 and 1995, respectively. In May 1995, the FASB issued FAS 122, "Accounting for Mortgage Service Rights." FAS 122 amends certain provisions of FAS 65, "Accounting for Certain Mortgage Banking Activities," to eliminate the accounting distinction between rights to service mortgage loans for others that are acquired through loan origination activities and those acquired through purchase transactions. FAS 122 is effective prospectively for fiscal years beginning after December 15, 1995, and was adopted by the Company effective January 1, 1996. The adoption of this statement did not have a material impact on the Company's results of operations or financial position. TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES In June 1996, the FASB issued SFAS 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 asset 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 Company does not believe its adoption of this Statement will have a material impact on its results of operations or financial position. INCOME TAXES The Company accounts for income taxes in accordance with FAS 109, "Accounting for Income Taxes." FAS 109 requires an asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Under the deferred method, deferred taxes were recognized using the tax rate applicable to the year of the calculation and were not adjusted for subsequent changes in tax rates. PRO FORMA EARNINGS PER SHARE Net income (loss) per share for the years ended December 31, 1995 and 1994 is computed on a pro forma basis as if the stock issued in the Conversion had been issued as of the beginning of each year presented and is adjusted for common stock equivalents as appropriate. 2. CONVERSION AND REGULATORY MATTERS On May 12, 1992, the Bank entered into a Stipulation and Consent to the issuance of an Order to Cease and Desist (the "Order") with the FDIC and the Massachusetts Commissioner of Banks ("Commissioner of Banks"). The Bank had previously entered into an informal agreement with the Commissioner of Banks. The terms of this informal agreement, which was entered into in April 1991, were similar to those of the Order. The Order placed certain restrictions on the Bank's operations, made other actions subject to the approval of the FDIC 46 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) and the Commissioner of Banks, and contained certain affirmative obligations. In addition, the Order required the Bank to maintain a Tier 1 leverage capital ratio of at least 2%, and further provided that in the event that the Bank's Tier 1 leverage capital ratio fell below 6%, the Bank would submit a written plan to the FDIC to increase such ratio to at least 6%, and, within 180 days thereafter, achieve and thereafter maintain a Tier 1 leverage capital ratio of at least 6%. As a consequence of the net losses incurred by the Bank during 1994, the Bank's Tier 1 leverage capital ratio fell below the 6% minimum required by the Order, and its total risk-based capital ratio fell below the 8% minimum regulatory requirement. These net losses resulted primarily from the Bank's efforts to reduce the level of its non-performing assets through accelerated dispositions, which included bulk sales, and the adoption of new loan loss reserve methodologies and charge-off requirements. In accordance with the Order, the Bank submitted a capital restoration plan (the "Capital Restoration Plan") to the FDIC in May 1994, which plan, as subsequently modified following discussions with the FDIC, satisfied the FDIC's directive to raise capital. The Capital Restoration Plan, which was accepted by the Regional Office of the FDIC in August 1994, called for the Bank to raise the additional capital necessary to comply with the required capital ratios through the issuance of common stock in a conversion from a mutal bank to a stock bank (the "Conversion"). The Conversion was successfully completed on February 7, 1995. The Bank issued 5,562,500 shares of common stock at a price of $8.00 per share. After deducting net expenses of approximately $5,029 relating to underwriting fees and other costs of the conversion process, and amounts relating to the ESOP of $3,560, the Bank received net proceeds of $35,911. With the infusion of the net proceeds from the Conversion, the Bank immediately satisfied the capital requirements of the Order and all minimum regulatory requirements. The Bank presently maintains the requisite capital levels to qualify for treatment as a "well capitalized" institution under the FDIC Improvement Act ("FDICIA"). Effective April 24, 1995, the Bank received notification from both the FDIC and the Commissioner of Banks that the Order had been terminated, which unconditionally released the Bank from its obligations under the Order. 3. CASH AND DUE FROM BANKS Under provisions of the Federal Reserve Act, depository institutions are required to maintain certain average balances in the form of cash or noninterest-bearing balances with a Federal Reserve Bank. Reserve balances of $5,645 and $4,794 at December 31, 1996 and 1995, respectively, were maintained in accordance with these requirements. 4. INVESTMENT SECURITIES The amortized cost, unrealized gains and losses and approximate fair values of investment securities were as follows: Securities Available for Sale
DECEMBER 31, 1996 ---------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- -------- U.S. Government and agency obligations..................... $ 29,901 $ 58 $ (16) $ 29,943 Collateralized mortgage obligations..................... 28,965 104 (62) 29,007 Mortgage-backed securities....... 371,921 2,684 (387) 374,218 Other bonds and short-term obligations..................... 1,681 -- -- 1,681 Other securities................. 14,276 199 (1) 14,474 -------- ------ ----- -------- Total........................ $446,744 $3,045 $(466) $449,323 ======== ====== ===== ========
47 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Securities Held to Maturity
DECEMBER 31, 1996 ---------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- -------- Mortgage-backed securities........ $149,856 $ 563 $(1,167) $149,252 Asset-backed securities........... 42,118 118 (71) 42,165 Other bonds and short-term obligations...................... 200 -- -- 200 -------- ------ ------- -------- Total......................... $192,174 $ 681 $(1,238) $191,617 ======== ====== ======= ======== Securities Available for Sale DECEMBER 31, 1995 ---------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- -------- U.S. Government and agency obligations...................... $ 7,700 $ 5 $ (6) $ 7,699 Mortgage-backed securities........ 222,673 1,562 (134) 224,101 Other bonds and short-term obligations...................... 9,300 -- -- 9,300 Other securities.................. 5,884 -- -- 5,884 -------- ------ ------- -------- Total......................... $245,557 $1,567 $ (140) $246,984 ======== ====== ======= ======== Securities Held to Maturity DECEMBER 31, 1995 ---------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- -------- Mortgage-backed securities........ $161,168 $ 779 $ (466) $161,481 Other bonds and short-term obligations...................... 11,625 43 (219) 11,449 -------- ------ ------- -------- Total......................... $172,793 $ 822 $ (685) $172,930 ======== ====== ======= ========
At December 31, 1996, the net unrealized gain, net of tax effect, on available for sale securities that was included as a separate component of stockholders' equity was $1,895. At December 31, 1995, the net unrealized gain, net of tax effect, on available for sale securities was $1,427. Proceeds from the sale of available for sale investment securities were $41,736 and $213,252 during 1996 and 1995, respectively. Gross realized gains on sales of investment securities were $271 in 1996 and $13 in 1995, while gross realized losses were $15 in 1996 and $899 in 1995. In 1995, the FASB issued a special report, "Implementation of Statement 115," that provided additional guidance related to the application of FAS 115. In connection with the issuance of this special report, the FASB allowed all organizations to review their portfolio classifications and make a one-time reclassification of securities between categories during the period from November 15, 1995 to December 15, 1995. On December 15, 1995, the Company transferred securities with an amortized cost of $84,299 and an unrealized loss of $1,177 from the held to maturity portfolio to the available for sale portfolio. In addition, the Company also transferred securities with an estimated fair value of $47,280 and an unrealized gain of $299 from the available for sale portfolio to the held to maturity portfolio. The remaining unrealized gain of $204 is included in a separate component of stockholder's equity. Subsequent to the transfer of these securities, the Company sold $82,900 of available for sale securities in December 1995 at a net loss of $899. 48 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At December 31, 1996, investment securities having a carrying value of $202,140 and an estimated fair value of $203,247 were pledged to collateralize securities sold under agreements to repurchase and other items. The amortized cost and estimated fair value of debt securities are shown below by contractual maturity. Actual maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties.
DECEMBER 31, 1996 ----------------------------------------- SECURITIES AVAILABLE SECURITIES HELD FOR SALE TO MATURITY ---------------------- ------------------ AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ---------------------- --------- -------- Within 1 year.................... $ 8,184 $ 8,193 $ 6,404 $ 6,392 1-5 years........................ 58,709 58,824 5,221 5,205 5-10 years....................... 1,300 1,294 3,496 3,543 over ten years................... 364,275 366,538 177,053 176,477 ---------- ---------- -------- -------- Total........................ $ 432,468 $ 434,849 $192,174 $191,617 ========== ========== ======== ======== DECEMBER 31, 1995 ----------------------------------------- SECURITIES AVAILABLE SECURITIES HELD FOR SALE TO MATURITY ---------------------- ------------------ AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ---------------------- --------- -------- Within 1 year.................... $ 9,300 $ 9,300 $ -- $ -- 1-5 years........................ 13,187 13,251 10,593 10,625 5-10 years....................... 3,000 2,997 10,063 10,131 over ten years................... 214,186 215,552 152,137 152,174 ---------- ---------- -------- -------- Total........................ $ 239,673 $ 241,100 $172,793 $172,930 ========== ========== ======== ========
As of December 31, 1996, approximately 97.3% of mortgage-backed securities available for sale and 62.5% of mortgage-backed securities held to maturity were adjustable rate. 5. INVESTMENTS IN REAL ESTATE AND REAL ESTATE PARTNERSHIPS The Company has certain subsidiaries that are engaged in various real estate activities individually or in joint ventures with unaffiliated partners. Investments in real estate and real estate partnerships are composed of the following:
DECEMBER 31, ------------- 1996 1995 ------ ------ Operating properties Land...................................................... $ 688 $1,320 Buildings and improvements, net of accumulated depreciation of $2,832 and $4,133, respectively.......... 2,042 4,318 ------ ------ Total investments in real estate............................ 2,730 5,638 Investments in real estate partnerships..................... 27 454 ------ ------ Investments in real estate and real estate partnerships........................................... $2,757 $6,092 ====== ======
49 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Net (income) expense of real estate operations is summarized as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 ---------- ---------- ------------ Net (income) expenses of operating real estate....................... $ (26) $ (3) $ 303 Writedowns on real estate.......... 447 6 5,011 Net (gain)/loss on sale of real estate............................ (693) (230) (4,326) ---------- ---------- ------------ Net (income) expenses of real estate operations............. $ (272) $ (227) $ 988 ========== ========== ============
Depreciation expense of $299 in 1996, $381 in 1995, and $912 in 1994 is included in net (income) expenses of real estate operations. Losses recorded from the real estate partnerships under the equity method were $110, $69 and $987 for the same three year period and are also included in net (income) expenses of real estate operations. Loans to these partnerships at December 31, 1996 and 1995 amounted to $150 and $339, respectively. 6. LOANS RECEIVABLE, NET Loans receivable, net, is composed of the following:
DECEMBER 31, ------------------ 1996 1995 -------- -------- Residential real estate loans.......................... $242,410 $263,551 Commercial real estate loans........................... 118,442 118,005 Commercial loans....................................... 155,808 117,674 Home equity loans...................................... 104,206 67,657 Consumer loans......................................... 4,132 6,196 -------- -------- Total loans receivable................................. 624,998 573,083 Less: Unearned discounts..................................... (1,196) (566) Allowance for possible loan losses..................... 15,597 14,986 -------- -------- Loans receivable, net.............................. $610,597 $558,663 ======== ========
At December 31, 1996 and December 31, 1995, residential real estate loans included loans held for sale of $5,171 and $6,724, respectively. RISK ELEMENTS The Company grants commercial and residential loans to customers primarily in New England. Although the Company has a diversified portfolio, its debtors' ability to honor their contracts is substantially dependent upon the general economic conditions of the region. The Company manages its loan portfolio to avoid concentration by industry or loan size to minimize its credit exposure. Commercial loans may be collateralized by the assets underlying the borrowers' business such as accounts receivable, equipment, inventory and real property. Residential mortgage and home equity loans are generally secured by the real property financed. Commercial real estate loans are generally secured by the underlying real property and lease agreements. 50 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table shows the components of non-performing assets:
DECEMBER 31, -------------- 1996 1995 ------ ------- Non-accruing loans......................................... $6,547 $ 9,037 Loans past due 90 days and still accruing.................. 428 587 ------ ------- Total non-performing loans................................. 6,975 9,624 Foreclosed real estate, net................................ 381 1,529 Restructured loans on accrual status....................... 198 2,732 ------ ------- Total non-performing assets............................ $7,554 $13,885 ====== =======
The principal amount of non-performing loans, excluding non-performing restructured loans, aggregated approximately $6,975 and $9,422 at December 31, 1996 and 1995, respectively. Interest income that would have been recorded if the loans had been performing in accordance with their original terms aggregated $963, $1,196 and $1,683 for the years ended December 31, 1996, 1995 and 1994, respectively. Interest income recorded on these loans during the three years ended December 31, 1996, 1995 and 1994 was $774, $983 and $1,203, respectively. The principal amount of restructured loans aggregated $198 at December 31, 1996, and $2,934 at December 31, 1995. Interest income that would have been recorded if the loans had been performing in accordance with their original terms aggregated $20, $378 and $704 for the years ended December 31, 1996, 1995 and 1994, respectively. Interest income recorded on these loans amounted to $2, $180 and $570 for the years ended December 31, 1996, 1995 and 1994, respectively. LOANS TO RELATED PARTIES At December 31, 1996, and 1995, the amount of loans outstanding to directors, officers and other related parties (including real estate partnerships) was approximately $7,328 and $9,854, respectively. There were no non-accrual loans included in the loans to related parties at December 31, 1996 and 1995. During 1996 and 1995, new loans aggregating $1,080 and $791, respectively, were made or added and deductions and repayments totaled $3,606 and $6,304, respectively. There were no charge-offs made against these loans in 1996 and 1995. Changes in the composition of the related parties resulted in additions to or deductions from loans outstanding to related parties. 7. ALLOWANCE FOR POSSIBLE LOAN LOSSES Changes in the allowance for possible loan losses are summarized as follows:
FOR THE YEARS ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 ---------- ---------- ----------- Balance, beginning of year.......... $ 14,986 $ 15,844 $ 18,367 Provision charged to operating expense............................ 2,950 4,359 25,742 Loan charge-offs.................... (4,555) (6,068) (31,104) Loan recoveries..................... 2,216 851 2,839 ---------- ---------- ----------- Balance, end of year............ $ 15,597 $ 14,986 $ 15,844 ========== ========== ===========
As discussed in Note 1, the Company adopted FAS 114 effective January 1, 1995. The FAS 114 analysis is applied only to the commercial and commercial real estate loan portfolios. Because of their homogeneous nature, 51 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) the Company's residential mortgage, home equity and consumer portfolios are evaluated collectively for impairment and a reserve requirement is developed under the historical loss method. Impaired loans are those loans for which, based on current information, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. All commercial and commercial real estate non-accrual loans are considered impaired loans, however the impaired classification may also include other loans which in Management's judgment meet the criteria described above. At December 31, 1996, the recorded investment in loans that are considered impaired under FAS 114 was $6,600 as compared to $8,036 at December 31, 1995. Included in this amount as of December 31, 1996 is $1,449 of impaired loans for which the related FAS 114 allowance is $33 and $5,151 of impaired loans for which the FAS 114 allowance is zero. At December 31, 1995 there were $857 of impaired loans for which the related FAS 114 allowance was $305 and $7,180 of impaired loans for which the FAS 114 allowance was zero. The average recorded investment in impaired loans during the year ended December 31, 1996 was approximately $8,157 as compared to $9,789 during the year ended December 31, 1995. For the years ended December 31, 1996 and 1995, the Company recognized interest income on these impaired loans of $313 and $254, respectively. 8. FORECLOSED REAL ESTATE, NET Foreclosed real estate, net consists of the following:
DECEMBER 31, ------------- 1996 1995 ------------- Residential................................................. $ 438 $ 231 Commercial.................................................. -- 2,073 ----- ------- 438 2,304 Less valuation allowance.................................... 57 775 ----- ------- Foreclosed real estate, net................................. $ 381 $ 1,529 ===== =======
Changes in the allowance for foreclosed real estate are summarized as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 ---------- ---------- ------------ Balance, beginning of year......... $ 775 $ 542 $ 3,420 Provision charged to expense....... -- 836 6,034 Dispositions, net.................. (718) (603) (8,912) ---------- ---------- ------------ Balance, end of year........... $ 57 $ 775 $ 542 ========== ========== ============ Foreclosed real estate expense is summarized as follows: FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 ---------- ---------- ------------ Net expense (income) of operating foreclosed real estate............ $ 149 $ (225) $ 547 Writedowns and net loss on foreclosed real estate, net....... 291 746 4,923 ---------- ---------- ------------ Foreclosed real estate expense....................... $ 440 $ 521 $ 5,470 ========== ========== ============
52 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. BANK PREMISES, FURNITURE AND FIXTURES, NET Major categories of fixed assets are as follows:
DECEMBER 31, --------------- 1996 1995 ------- ------- Buildings and improvements................................ $29,746 $27,529 Leasehold improvements.................................... 7,189 6,114 Furniture and fixtures.................................... 15,350 14,828 ------- ------- 52,285 48,471 Less accumulated depreciation............................. 25,179 22,765 ------- ------- Bank premises, furniture and fixtures, net................ $27,106 $25,706 ======= =======
Depreciation expense aggregated $2,698, $2,646 and $2,693 for the years ended December 31, 1996, 1995 and 1994, respectively, and is included in occupancy expense and furniture and equipment expense. Rental income of $1,503, $1,393 and $1,368 for the years ended December 31, 1996, 1995, and 1994, respectively, is included in occupancy expense. 10. DEPOSITS Deposits consist of the following:
DECEMBER 31, ----------------- 1996 1995 -------- -------- Demand deposits........................................... $100,527 $ 71,539 NOW accounts.............................................. 57,980 57,271 Savings accounts.......................................... 195,418 185,555 Money market accounts..................................... 209,523 203,313 Time deposits Time deposits under $100................................ 353,506 337,099 Time deposits of $100 or more........................... 52,563 30,609 -------- -------- Total deposits........................................ $969,517 $885,386 ======== ========
53 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. FEDERAL HOME LOAN BANK ADVANCES Pursuant to a blanket pledge agreement with the Federal Home Loan Bank ("FHLB") of Boston, advances are secured by the Company's stock in the FHLB, certain qualifying first mortgage loans, mortgage-backed and mortgage-related securities, and other securities not otherwise pledged. Advances from the FHLB at December 31, 1996 and 1995 are summarized as follows:
DECEMBER 31, --------------------------------- 1996 1995 ---------------- ---------------- WEIGHTED WEIGHTED AVERAGE AVERAGE YEAR OF MATURITY AMOUNT RATE AMOUNT RATE ---------------- ------- -------- ------- -------- 1996....................................... $ -- -- $40,000 5.75% 1997....................................... 60,000 5.55% -- -- 2001....................................... 1,100 6.23% -- -- 2006....................................... 1,200 6.39% -- -- 2011....................................... 1,690 6.97% -- -- 2015....................................... 1,484 6.23% 1,500 6.23% 2021....................................... 2,997 7.18% -- -- ------- ---- ------- ---- $68,471 5.70% $41,500 5.76% ======= ==== ======= ====
The FHLB advances above which mature in the year 2001 and beyond are amortizing borrowings. The outstanding balances for each amortizing advance at December 31, 1996 and 1995 are listed above by their contractual maturities. At December 31, 1996 there was a commitment for a Community Investment Program Plus advance from the FHLB for $1,880 at 6.38% for settlement on January 15, 1997. There were no commitments for additional advances from the FHLB as of December 31, 1995. 12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE At December 31, 1996 and December 31, 1995, securities sold under agreements to repurchase totaled $176,577 and $31,101 respectively. These agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the Consolidated Balance Sheet. An analysis of securities sold under agreements to repurchase identical securities for the years ended December 31, 1996, 1995 and 1994 is summarized as follows:
DECEMBER 31, ------------------------ 1996 1995 1994 -------- ------- ----- Maximum month-end balance during the period........ $176,577 $39,552 $ -- Average balance during the period.................. $101,073 $19,297 $ -- Weighted average interest rate during the period... 5.47% 5.87% -- Weighted average interest rate at end of period.... 5.49% 5.49% --
At December 31, 1996, securities sold under agreements to repurchase had maturity ranges from January 1997 to November 1999 with a weighted average maturity at December 31, 1996 of 218 days. 54 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At December 31, 1996, mortgage-backed securities with carrying values totaling $182,787 and estimated fair values totaling $183,831 were pledged as collateral for securities sold under agreements to repurchase. It is the Company's policy to enter into repurchase agreements only with major brokerage firms that are primary dealers in government securities. 13. LOANS PAYABLE Loans payable consist of the following:
DECEMBER 31, ------------- 1996 1995 ------ ------ Mortgage note payable, principal and interest are payable in equal monthly installments of $18. This fully amortizing mortgage note bears an interest rate of 7.5% and matures on October 25, 2015. Mortgage-backed securities with carrying values of $2,151 and estimated fair values of $2,201 were pledged as collateral for this mortgage note as of December 31, 1995. This note was satisfied in full in January of 1996.......................................................... -- $2,266 Note issued by the Company's Employee Stock Ownership Plan ("ESOP"), and guaranteed by the Company. This note is subject to mandatory redemption through the operation of a sinking fund commencing on the last business day of June 1995 and continuing on the last business day of each June and December thereafter. The note bears interest at a variable rate per annum equal to the Prime Rate as published from time to time in the Wall Street Journal. The interest rate at December 31, 1996 was 8.25%. The proceeds for the issuance of the note were used by the Company's ESOP solely for the purpose of purchasing 445,000 shares of the Company's common stock....... 2,848 3,204 ------ ------ $2,848 $5,470 ====== ======
Aggregate required principal payments on the loans payable at December 31, 1996 for the next five years and thereafter are as follows: 1997.............................. $ 356 1998.............................. 356 1999.............................. 356 2000.............................. 356 2001.............................. 356 2002 and thereafter............... 1,068 ------ $2,848 ======
At December 31, 1996, investment securities having a carrying value of $3,400 and an estimated fair value of $3,423 were pledged to collateralize a letter of credit supporting the ESOP note, which honors demands for payment by the Note Trustee presented in accordance with the terms of the letter of credit. At December 31, 1996, the Company had an available, but unused, line of credit in the amount of $22,000 with the FHLB of Boston and an available, but unused, line of credit in the amount of $10,000 with another financial institution. 55 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 14. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS The following table presents the Company's assets, liabilities, and unrecognized financial instruments at both their respective carrying or notional amounts and fair values.
DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Financial Assets: Cash and due from banks.............. $ 31,902 $ 31,902 $ 30,377 $ 30,377 Federal funds sold and interest- bearing deposits.................... 10,045 10,045 8,045 8,045 Investment securities................ 641,497 640,940 419,777 419,914 Loans receivable net................. 610,597 626,546 558,663 577,772 Accrued interest and dividends receivable.......................... 8,982 8,982 7,109 7,109 Financial Liabilities: Deposits............................. $969,517 $969,933 $885,386 $886,529 Federal Home Loan Bank advances...... 68,471 68,599 41,500 41,543 Securities sold under agreements to repurchase.......................... 176,577 176,544 31,101 31,189 Loans payable........................ 2,848 2,848 5,470 5,746 NOTIONAL FAIR NOTIONAL FAIR AMOUNT VALUE AMOUNT VALUE -------- -------- -------- -------- Unrecognized Financial Instruments: Standby letters of credit............ $ 4,233 $ 42 $ 252 $ 3 Commitments to extend credit......... 184,238 -- 133,084 --
Certain assets, which are not financial instruments and, accordingly, are not included in the above fair values, contribute substantial value to the Company in excess of the related amounts recognized in the balance sheet. These include the core deposit intangibles and the related retail banking network, and mortgage servicing rights. A discussion of the methodologies and assumptions used by the Company in determining these fair values is included in Note 1 under the subheading "Fair Values of Financial Instruments." 15. PENSION PLAN AND OTHER EMPLOYEE BENEFIT PLANS The Company's pension plan covers all employees who meet certain age and service requirements. Vested benefits, paid at retirement, are computed based upon a formula considering length of service and average compensation. Plan assets consist of marketable equity securities and United States Government and agency obligations. Net periodic pension cost for 1996, 1995 and 1994 included the following components:
FOR THE YEARS ENDED DECEMBER 31, ----------------------- 1996 1995 1994 ------- ------- ----- Service cost--current period..................... $ 786 $ 631 $ 847 Interest cost on projected benefit obligation.... 712 725 680 Actual return on assets.......................... (1,330) (1,549) (474) Net amortization and deferral.................... 532 799 (213) ------- ------- ----- Net periodic pension cost........................ $ 700 $ 606 $ 840 ======= ======= =====
56 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Assumptions used in the accounting for pension cost in 1996, 1995, and 1994 were as follows:
FOR THE YEARS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 -------- -------- -------- Discount rate................................... 7.5% 7.0% 8.0% Average remaining service....................... 28 years 28 years 28 years Expected long-term rate of return on plan assets......................................... 8.0% 8.0% 8.0%
The discount rate is the estimated rate at which the obligation for pension benefits could effectively be settled. The average wage increase assumption of 5% reflects the Company's best estimate of the future compensation levels of the individual employees covered by the plan. The expected long-term rate of return on plan assets reflects the average rate of earnings that the Company estimates will be generated on the assets of the plan. The funded status of the plan for its most recent fiscal years is as follows:
OCTOBER 31, ----------------- 1996 1995 ------- -------- Accumulated benefit obligation Vested benefits....................................... $ 5,027 $ 6,292 Nonvested benefits.................................... 336 278 ------- -------- Accumulated benefit obligation.......................... $ 5,363 $ 6,570 ======= ======== Projected benefit obligation............................ $(8,464) $(10,170) Plan assets at fair value............................... 8,357 8,808 ------- -------- Projected benefit obligation in excess of plan assets... (107) (1,362) Unrecognized net (gain)/loss............................ (4,076) (2,103) Unrecognized net transition asset being recognized over 25 years............................................... (297) (316) ------- -------- Accrued pension cost.................................... $(4,480) $ (3,781) ======= ========
As discussed in Note 1, the Company formed an ESOP with the completion of the Conversion in February, 1995. ESOP compensation expense for the year ended December 31, 1996 was $1,065 as compared to expense of $749 for the year ended December 31, 1995. The ESOP shares as of December 31, 1996 and 1995 were as follows (dollars in thousands except share amounts):
FOR THE YEARS ENDED DECEMBER 31, ----------------- 1996 1995 -------- -------- Allocated shares, net..................................... 53,549 -- Shares released for allocation............................ 53,829 54,812 Unreleased shares......................................... 336,359 390,188 -------- -------- Total ESOP shares....................................... 443,737 445,000 ======== ======== Fair value of unreleased shares......................... $ 7,694 $ 6,389 ======== ========
16. STOCK PLANS As discussed in Note 1, the Company has two stock-based compensation plans, which are described below. The Company applies APB Opinion 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plan. Had compensation cost for the Company's 57 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Stock Option Plan been determined based on the fair value at the grant dates for awards under that plan consistent with the method of FASB Statement 123, the Company's net income and earnings per share would have changed to the pro forma amounts indicated below:
1996 1995 ------- ------- Net income...................................... As reported $18,160 $11,459 Pro forma $17,567 $11,311 Primary earnings per share...................... As reported $ 3.29 $ 2.21 Pro forma $ 3.22 $ 2.22 Fully diluted earnings per share................ As reported $ 3.26 $ 2.19 Pro forma $ 3.18 $ 2.19
STOCK OPTION PLAN Under the Company's Stock Option Plan, the Company may grant stock options to certain employees and non-employee directors of the Company for the purchase of the Company's common stock. Under this plan, the exercise price of each option equals the market price of the Company's stock on the date of grant and the maximum term of the option is 10 years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995, respectively: dividend yield of 2.5% for both years; expected volatility of 24% and 25%; risk-free interest rates of 6.42% and 5.57%; and expected lives of 5 years for both periods. A summary of the status of the Company's Stock Option Plan as of December 31, 1996 and 1995 and changes during the years ending on those dates is presented below:
FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------- 1996 1995 ----------------------- ---------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ------- -------------- ------- -------------- Options outstanding, beginning of year.......... 415,600 $12 -- $-- Granted................... 194,700 18 415,600 12 Exercised................. -- -- -- -- Cancelled................. (16,000) 12 -- -- ------- ------- Options outstanding, end of year................ 594,300 $14 415,600 $ 12 ======= ======= Options exercisable at year- end........................ 187,280 -- Weighted-average fair value of options granted during the year................... $4.50 $3.06
The following table summarizes information regarding stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------- --------------------- WEIGHTED- WEIGHTED- NUMBER WEIGHTED-AVERAGE AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING AT REMAINING EXERCISE EXERCISABLE EXERCISE EXERCISE PRICES 12/31/96 CONTRACTUAL LIFE PRICE AT 12/31/96 PRICE --------------- -------------- ---------------- --------- ----------- --------- $10 to $15.............. 399,600 8.1 years $12 156,280 $12 $16 to $23.............. 194,700 9.2 years $18 31,000 $18 ------- ------- $10 to $23.............. 594,300 8.5 years $14 187,280 $13 ======= =======
58 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) RESTRICTED STOCK PLAN The Company's Restricted Stock Plan provides for the granting of restricted stock to certain employee and non-employee directors of the Company. The fair market value of the stock allocations, based on the market price at date of grant, is recorded as unearned compensation. Unearned compensation is amortized over the periods to be benefited. The Company recorded compensation cost related to the Restricted Stock Plan of $848 and $230 for 1996 and 1995, respectively. A summary of the Company's Restricted Stock Plan as of December 31, 1996 and 1995 and changes during the years ending on those dates is presented below:
FOR THE YEARS ENDED DECEMBER 31, -------------------- 1996 1995 --------- --------- Balance, beginning of year............................ 148,200 -- Granted............................................. 18,900 148,200 Cancelled........................................... (6,000) -- --------- --------- Balance, end of year.................................. 161,100 148,200 ========= ========= Weighted-average fair value of restricted shares granted during the year.............................. $18 $12
17. FEES AND OTHER INCOME Fees and other income are composed of the following:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 ----------- ---------- ---------- Loan charges and fees..................... $ 3,259 $3,221 $3,213 Deposit related fees...................... 6,236 5,191 4,122 Other charges and fees.................... 1,115 355 1,547 ----------- ---------- ---------- $10,610 $8,767 $8,882 =========== ========== ==========
18. OTHER OPERATING EXPENSES Other operating expenses are composed of the following:
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 ---------- ---------- ---------- Marketing................................... $ 1,976 $ 1,107 $ 1,405 Insurance................................... 379 2,440 3,270 Professional services....................... 2,944 2,902 4,076 Outside processing.......................... 4,118 2,893 2,683 Other....................................... 4,782 4,426 3,675 ---------- ---------- ---------- $ 14,199 $13,768 $15,109 ========== ========== ==========
59 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 19. INCOME TAXES The components of the income tax benefit for the years ended December 31 are as follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 1996 1995 1994 ----------- ----------- ---------- Current Federal................................ $ 334 $ 136 $ -- State.................................. 896 99 -- Deferred Federal................................ (6,323) (6,363) -- State.................................. 820 369 -- ----------- ----------- --------- $ (4,273) $ (5,759) $ -- =========== =========== =========
A reconciliation of the statutory income tax rate to the consolidated effective income tax rate as well as a reconciliation of expected income tax benefit, computed at the applicable statutory rate, to the actual income tax benefit for the three years ended December 31, 1996, 1995, and 1994 follows:
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------------ 1996 1995 1994 ------------------- ------------------- ------------------- PERCENTAGE PERCENTAGE PERCENTAGE OF PRETAX OF PRETAX OF PRETAX AMOUNT INCOME AMOUNT INCOME AMOUNT LOSS ------- ---------- ------- ---------- ------- ---------- Federal income tax at statutory rate......... $ 4,722 34.00 % $ 1,938 34.00 % $(9,148) (34.00)% Change in valuation allowance.............. (7,867) (56.65)% (8,002) (140.38)% 9,952 36.99 % State income taxes...... 1,133 8.16 % 309 5.42 % -- -- Tax bad debt recapture.. (2,790) (20.09)% -- -- -- -- Employee stock ownership plan................... 207 1.49 % -- -- -- -- Other................... 322 2.31 % (4) (0.07)% (804) (2.99)% ------- ------ ------- ------- ------- ------ $(4,273) (30.78)% $(5,759) (101.03)% $ -- (0.00)% ======= ====== ======= ======= ======= ======
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are as follows:
DECEMBER 31, ----------------- 1996 1995 -------- ------- Deferred tax assets: Allowance for loan losses............................... $ 3,783 $ 5,622 Accrued pension......................................... 2,023 1,720 Employee stock awards................................... 190 132 Net operating loss carryforwards........................ 5,448 4,261 Alternative minimum tax credit carryforwards............ 430 298 Investment tax credit carryforwards..................... 1,721 1,721 Other................................................... 956 1,549 -------- ------- Total gross deferred tax assets....................... 14,551 15,303 -------- ------- Deferred tax liabilities: Investment in real estate and bank premises............. (2,754) (1,442) Other................................................... (888) -- -------- ------- Total gross deferred tax liabilities.................. (3,642) (1,442) -------- ------- Net deferred tax asset prior to valuation allowance....... 10,909 13,861 Valuation allowance....................................... -- (7,867) -------- ------- Net deferred tax asset after valuation allowance.......... $ 10,909 $ 5,994 ======== =======
60 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In accordance with SFAS 109, "Accounting for Income Taxes", Management evaluated the income tax benefits associated with deductible temporary differences, based on the weight of available evidence, as to whether it is more likely than not that the income tax benefits would be realized. As a result, a 100% valuation allowance against the Company's net deferred tax asset was established at December 31, 1994. Management reviews the valuation allowance on a periodic basis, and, based upon all available facts and circumstances at that time, may adjust the level of the allowance. During both the fourth quarter of 1995, and the third quarter of 1996, Management's evaluation of the weight of currently available evidence resulted in the conclusion that it was more likely than not that the Company would realize a portion of its net deferred tax asset which was reserved for at those times. At December 31, 1995, Management reduced the Company's 100% valuation allowance from $15,869 to $7,867, while at September 30, 1996, Management reduced the remaining valuation allowance at that date of $5,229 to zero. In both instances, Management's judgment was influenced by factors including changes in the levels of actual and expected future taxable income and anticipated reversals of net deductible temporary differences. As a result of these adjustments the net change in the total valuation allowance for the years ended December 31, 1996 and 1995 was a net decrease of $7,867 and $8,002, respectively. Also in the third quarter of 1996, pursuant to the enactment of the Small Business Jobs Protection Act during 1996, the Company was required, for tax purposes, to change its method of accounting for bad debts. The change required the Company to change from the reserve method to the specific charge- off method. The Company recognized a one-time tax benefit of $2,790 during the third quarter, representing the tax effects of pre-1988 loan loss reserves not subject to recapture provisions. As a result of this third quarter activity, the Company became fully taxable for financial reporting purposes beginning in the fourth quarter of 1996. Certain future distribution in excess of the Company's current earnings and profits would require the recapture of the taxes related to the pre-1988 loan loss reserves that were not subject to recapture under the Small Business Jobs Protection Act. The total tax liability that would be subject to recapture for which no deferred tax liability has been recorded is $2,790. At December 31, 1996, the Company had investment tax credit carryforwards of approximately $1,721 which expire in years from 1998 through 2008. In addition, the Company had alternative minimum tax credit carryforwards of approximately $430 which have an indefinite utilization period. At December 31, 1996, the Company had federal net tax operating loss carryforwards of approximately $5,223 which will expire in the years 2009 through 2010. The Company has $225 of state net operating loss carryforwards as of December 31, 1996, which will expire in 1999. If certain substantial direct or indirect changes in the Company's ownership should occur, there would be an annual limitation on the amount of carryforwards (including certain net unrealized built-in losses) which can be utilized for regular and alternative minimum tax purposes. 20. COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK OFF-BALANCE SHEET INSTRUMENTS The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk which are not reflected in the Balance Sheet. The contract or notional amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. 61 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The Company uses the same credit policies in making commitments and standby letters of credit as it does for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on Management's credit evaluation of the counterparty. The Company's commitments to extend credit, which includes unused lines of credit and commitments to fund loans, were approximately $184,238 and $133,084 at December 31, 1996 and 1995, respectively. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company's commitments under standby letters of credit were $4,233 and $252 at December 31, 1996 and 1995, respectively. Commitments to sell loans are contracts for delayed delivery of loans in which the Company agrees to make delivery at a specific future date of a specified instrument, at a specific price or yield. Risks arise from the possible inability to meet the terms of the contracts and from movements in interest rates. The Company had commitments to sell $11,603 and $16,054 of loans at December 31, 1996 and 1995, respectively. LEASES The Company leases certain of its branch office facilities and equipment under nonfinancing leases having various maturities to 2010. Certain of the leases require payment of real estate taxes, insurance and maintenance. The future minimum rental payments required under these leases are approximately as follows:
YEAR ENDED DECEMBER 31, ----------------------- 1997.............................. $ 576 1998.............................. 571 1999.............................. 576 2000.............................. 585 2001.............................. 510 2002--2010........................ 1,805 ------ $4,623 ======
Total rental expense for 1996, 1995, and 1994 amounted to approximately $475, $431, and $461, respectively. LITIGATION 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. 62 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 21. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) Following is the quarterly financial information of the Company for 1996 and 1995:
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ------------- -------------- --------------- -------------- 1996 1995 1996 1995 1996 1995 1996 1995 ------ ------ ------- ------ ------- ------ ------- ------ Net interest and divi- dend income............ $9,571 $9,260 $10,457 $9,251 $11,245 $9,439 $11,831 $9,410 Provision for possible loan losses............ 700 1,153 750 1,202 750 1,002 750 1,002 Net gain (loss) on sale of loans............... 270 (6) 162 (4) 105 72 67 180 Net gain (loss) on sale of securities.......... 2 4 -- 10 62 -- 192 (899) Fees and other income... 2,309 2,048 2,575 2,188 2,761 2,099 2,965 2,432 Noninterest expense..... 8,836 9,325 9,122 8,888 9,643 8,746 10,137 8,466 Income tax expense (ben- efit).................. 212 39 278 74 (6,421) 50 1,658 (5,922) ------ ------ ------- ------ ------- ------ ------- ------ Net income.............. $2,404 $ 789 $ 3,044 $1,281 $10,201 $1,812 $ 2,510 $7,577 ====== ====== ======= ====== ======= ====== ======= ====== Earnings per share and pro forma earnings per share Primary................. $ 0.45 $ 0.15 $ 0.56 $ 0.25 $ 1.85 $ 0.35 $ 0.45 $ 1.43 Fully diluted........... $ 0.45 $ 0.15 $ 0.56 $ 0.25 $ 1.84 $ 0.34 $ 0.45 $ 1.43
22. 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 effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Bank'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. As of December 31, 1996, the Bank is considered well capitalized under the FDIC's applicable prompt corrective action regulations. Quantitative measures established by regulation to ensure capital adequacy require the Company 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. Management believes, as of December 31, 1996, that the Company meets all capital adequacy requirements to which it is subject. As of December 31, 1996 the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the institution's category. 63 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 TO BE WELL FOR CAPITAL CAPITALIZED UNDER ADEQUACY PROMPT CORRECTIVE ACTUAL PURPOSES ACTION PROVISIONS -------------- ------------- ------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO -------- ----- ------- ----- ---------- -------- 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% N/A 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% N/A Bank....................... $105,300 14.0% $60,220 8.0% $75,275 10.0% AS OF DECEMBER 31, 1995: Tier I Capital (to Average Assets) Bank....................... $ 79,197 7.6% $41,682 4.0% $52,103 5.0% Tier I Capital (to Risk Weighted Assets) Bank....................... $ 79,197 12.5% $25,343 4.0% $38,015 6.0% Total Capital (to Risk Weighted Assets) Bank....................... $ 87,101 13.8% $50,493 8.0% $63,116 10.0%
23. PARENT COMPANY FINANCIAL INFORMATION The following condensed balance sheet at December 31, 1996 and condensed statements of operations and of cash flows for the period June 21, 1996 (date of parent company formation) to December 31, 1996 for SIS Bancorp, Inc. (parent company only) reflect the Company's investment in its wholly owned subsidiary using the equity method of accounting. The company had no results prior to June 21, 1996.
DECEMBER 31, CONDENSED BALANCE SHEET 1996 ----------------------- ---------------------- (DOLLARS IN THOUSANDS) ASSETS Cash and due from banks............................. $ -- Investment securities available for sale............ 206 Due from subsidiaries............................... 398 Investment in subsidiaries.......................... 101,416 -------- Total assets...................................... $102,020 ======== LIABILITIES AND STOCKHOLDERS' EQUITY Borrowings from subsidiaries........................ $ -- Other liabilities................................... 103 -------- Total liabilities................................. 103 Stockholders' equity................................ 101,917 -------- Total liabilities and stockholders' equity........ $102,020 ========
64 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE PERIOD FROM JUNE 21, 1996 TO CONDENSED STATEMENT OF INCOME DECEMBER 31, 1996 ----------------------------- ---------------------- (DOLLARS IN THOUSANDS) Revenues Interest income on investments available for sale.... $ 7 Other income......................................... -- ------- Total income....................................... 7 Expenses Interest expense..................................... -- Other expenses....................................... 155 ------- Total expenses..................................... 155 Income before income taxes and equity in undistributed income of subsidiaries................................ (148) Income taxes......................................... -- ------- Income before equity in undistributed income of subsidiaries.......................................... (148) Equity in undistributed income of subsidiaries......... 18,308 ------- Net income............................................. $18,160 =======
FOR THE PERIOD FROM JUNE 21, 1996 TO CONDENSED STATEMENT OF CASH FLOWS DECEMBER 31, 1996 --------------------------------- ---------------------- (DOLLARS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income........................................... $ 18,160 Equity in undistributed earnings of subsidiaries..... (18,308) Other, net........................................... -- -------- Net cash used in operating activities.............. (148) -------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in subsidiaries........................... (86,297) Purchases of investment securities................... (257) Sale of investment securities........................ 51 Other, net........................................... -- -------- Net cash used in investing activities.............. (86,503) -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock............... 86,547 Advances from subsidiaries........................... 155 Repayments of advances from subsidiaries............. (51) Dividends paid....................................... -- Other, net........................................... -- -------- Net cash provided by financing activities.......... 86,651 -------- Net Increase in cash and due from banks................ -- Beginning balance: cash and due from banks............. -- -------- Ending balance: cash and due from banks................ $ -- ========
65 SIS BANCORP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 24. SUBSEQUENT EVENTS On January 23, 1997, the Company announced the declaration of its first quarterly cash dividend in the amount of $0.12 per share payable on February 20, 1997 to shareholders of record as of the close of business on February 3, 1997. In addition, on that same date, the Company announced its Board of Directors had authorized a share repurchase program and adopted a shareholder rights plan. Under the share repurchase program, the Board of Directors has authorized the Company to purchase up to 286,180 of its own shares, or up to 5% of the common stock issued and outstanding as of December 31, 1996. The repurchased shares will be held in treasury and will be available for issuance in connection with various employee and director benefit programs. Under the shareholder rights plan each shareholder of record as of the close of business on February 3, 1997 received one right for each share of common stock held by such shareholder to purchase, upon the occurrence of certain triggering events, one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company at a purchase price of $100.00. Until and unless the rights are triggered, the rights will be evidenced by the common stock certificates directly, and will transfer automatically with the transfer of any common stock. The initial issuance of the rights has no dilutive effect on the outstanding shares of the Company or the Company's earnings, is not taxable to the Company or to the shareholders, and does not otherwise affect the trading of the Company's shares. If the rights are not triggered or otherwise redeemed by the Board of Directors, the rights will expire on January 22, 2007. 66 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of SIS Bancorp, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, changes in stockholders' equity, and of cash flows present fairly, in all material respects, the financial position of SIS Bancorp, Inc. and its subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts January 23, 1997 67 PART III ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (a) INFORMATION REGARDING DIRECTORS: The Directors of the Registrant are listed below. The other information required by the response to this Item is contained in the discussion under the caption "Information Regarding Directors and Nominees" contained on pages 3 through 6 of the Proxy Statement filed as Schedule 14A with the SEC, which is incorporated by reference herein.
NAME & PRINCIPAL OCCUPATION POSITION HELD WITH COMPANY --------------------------- -------------------------- Sr. Mary Caritas (Geary), S.P. Director Retired, former President & CEO of Mercy Hospital John M. Naughton Chairman of the Board of Directors Retired, former Executive VicePresident, Massachusetts Mutual Life Insurance Co. Charles L. Johnson Director Consultant--Associated Energy Managers, investment management firm F. William Marshall, Jr. Director, President and Chief President & CEO, SIS Bancorp, Inc. Executive Officer and SIS Bank Thomas O'Brien Director Dean, School of Management University of Massachusetts William B. Hart, Jr. Director President, the Dunfey Group, an investment corporation Stephen A. Shatz Director Attorney, partner in Shatz, Schwartz & Fentin, P.C.
(b) PRINCIPAL OFFICERS OF THE COMPANY: The following table sets forth certain information regarding the executive officers and other principal officers of the Company and its subsidiaries. The other information required by the response to this Item regarding those persons who are executive officers of the Company is contained in the discussion under the caption "Executive Officers of the Company and its Subsidiaries" contained on page 7 of the Proxy Statement filed as Schedule 14A with the SEC, which is incorporated by reference herein.
NAME POSITION AND OFFICE WITH THE COMPANY ---- ------------------------------------ F. William Marshall, Jr. President & Chief Executive Officer, Director--SIS Bancorp, Inc. and SIS Bank Frank W. Barrett Executive Vice President/Credit & Commercial Lending Group-- SIS Bank B. John Dill Executive Vice President--SIS Bank; President of Colebrook Corporation
68
NAME POSITION AND OFFICE WITH THE COMPANY ---- ------------------------------------ John F. Treanor Executive Vice President, Treasurer & Chief Financial Officer--SIS Bancorp, Inc. and SIS Bank Gilbert F. Ehmke Senior Vice President & Chief Investment Officer--SIS Bancorp, Inc. and SIS Bank Henry J. McWhinnie Senior Vice President/Human Resources Group--SIS Bank Jeanne Rinaldo Senior Vice President/Residential Mortgage Group-SIS Bank Christopher A. Sinton Senior Vice President/Retail Banking Group--SIS Bank Michael E. Tucker Senior Vice President, General Counsel & Clerk--SIS Bancorp, Inc. and SIS Bank Ting Chang Vice President, Investor Relations & Corporate Planning-- SIS Bancorp, Inc. and SIS Bank Laura Sotir Katz Vice President & Controller--SIS Bancorp, Inc. and SIS Bank Brian Schwartz Vice President & Director of Internal Auditing--SIS Bank
(c) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT: The information required by the response to this Item is contained in the discussion under the caption "Section 16(a) Compliance" contained on page 22 of the Proxy Statement filed as Schedule 14A with the SEC, which is incorporated by reference herein. ITEM 11. EXECUTIVE COMPENSATION The response to this Item is contained in the discussion under the captions "Executive Compensation", "Employment Agreements", "Benefits Under Plans", contained on Pages 8 through 20 of the Proxy Statement, which is incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this Item is incorporated by reference from the discussion under the headings "Stock owned by Directors and Management" on Page 4 of the Proxy Statement, which is incorporated by reference herein. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: The response to this Item is contained in the discussion under the captions "Transactions with Certain Related Persons" and "Certain Business Relationships" contained on Page 20 of the Proxy Statement, which is incorporated by reference herein. PART IV ITEM 14: EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K (a) CONTENTS: (1) FINANCIAL STATEMENTS: All Financial Statements are included as Part II, Item 8 of this Report. The index is on page 35 of this Report. (2) FINANCIAL STATEMENT SCHEDULES: None (b) REPORTS ON FORM 8-K: None were filed during the fourth quarter of 1996. 69 (c) EXHIBITS:
EXHIBIT NO. EXHIBIT LOCATION ----------- ------- -------- (3)(a). Articles of Organization of SIS Bancorp, Inc. (1) (3)(b). By-laws of SIS Bancorp, Inc. (1) 4(a). Specimen Common Stock Certificate 10. Material Contracts (a) Employment agreements for Messrs. F. William Marshall, Jr., Frank W. Barrett, B. John Dill, John F. Treanor, Henry J. McWhinnie, Ms. Jeanne Rinaldo, Mr. Michael E. Tucker (1) (b) Employment agreements for Messrs. Gilbert F. Ehmke and Christopher A. Sinton. (2) (c) Director and Management Stock Option Plan, as amended. (2) (d) Director and Management Restricted Stock Plan, as amended. (2) (e) Rights Agreement dated January 22, 1997 by and between the Company and Chase Mellon Shareholder Services, as Rights Agent (3) 11. Statement Regarding Computation of Per Share Earnings 21. Subsidiaries of the Registrant 23. Consent of Price Waterhouse, LLP.
- -------- Locations of Exhibits if not attached hereto: (1) Exhibit is incorporated by reference to the Form 8-A Registration Statement filed by the Company with the Securities and Exchange Commission ("SEC") on June 21, 1996. (2) Exhibit is incorporated by reference to the Form 10-Q for the quarter ending June 30, 1996. (3) Exhibit is incorporated by reference to the Form 8-A Registration Statement filed by the Company with the SEC on January 23, 1997. 70 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934, THE BANK HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. February 26, 1997 Springfield Institution for Savings By: /s/ F. William Marshall, Jr. -------------------------------- F. William Marshall, Jr., President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY AND IN THE CAPACITIES ON THE DATES INDICATED. SIGNATURE TITLE DATE - --------- ----- ---- By: /s/ F. William Marshall, Jr. President, Chief February 26, ----------------------------- Executive Officer and 1997 F. William Marshall, Jr. Director By: /s/ John F. Treanor Executive Vice February 26, ----------------------------- President, Chief 1997 John F. Treanor Financial Officer and Treasurer By: /s/ Laura Sotir Katz Vice President, February 26, ----------------------------- Controller (Chief 1997 Laura Sotir Katz Accounting Officer) By: /s/ John M. Naughton Director, Chairman of February 26, ----------------------------- the Board 1997 John M. Naughton By: /s/ Sr. Mary Caritas Geary Director February 26, ----------------------------- 1997 Sister Mary Caritas Geary, S.P. By: /s/ Charles L. Johnson Director February 26, ----------------------------- 1997 Charles L. Johnson By: /s/ Stephen A. Shatz Director February 26, ----------------------------- 1997 Stephen A. Shatz By: /s/ Thomas O'Brien Director February 26, ----------------------------- 1997 Thomas O'Brien By: /s/ William B. Hart, Jr. Director February 26, ----------------------------- 1997 William B. Hart, Jr. 71 EX-4.(A) 2 SPECIMEN COMMON STOCK CERTIFICATE EXHIBIT 4(A) [Facsimile copy of Stock certificate-front] Number Shares [SIS Bancorp logo] SIS Bancorp, Inc. Organized under the Laws of the Commonwealth of Massachusetts Common Stock See Reverse for Certain Restrictions, Preferences and Definitions This Certifies That CUSIP 78427E 10 0 Is the owner of Fully Paid and Non-Assessable Shares of Common Stock of the Par Value of $0.01 each of SIS Bancorp, Inc. a business corporation chartered by the Commonwealth of Massachusetts (hereinafter, the "Corporation"), transferable on the books of the Corporation in person or by duly authorized attorney upon surrender of this certificate properly endorsed. The stock represented by this certificate is nonwithdrawable capital, is not of an insurable type and is not insured by the Federal Deposit Insurance Corporation, the Depositors Insurance Funds, Inc. or any other insurer. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. IN WITNESS WHEREOF, the Corporation has caused this certificate to be executed by facsimile signatures of its duly authorized officers and sealed with the facsimile seal of the Corporation. Dated: [facsimile of corporate seal] [facsimile signature of [facsimile signature of John F. Treanor] F. William Marshall, Jr.] Treasurer President and Chief Executive Officer [Reverse of Certificate] SIS Bancorp Inc. This certificate and the shares of common stock represented hereby are issued and shall be held subject to the laws of the Commonwealth of Massachusetts and the Articles of Organization and Bylaws of the Corporation, as amended, to all of which the holder by acceptance hereof assents. The Corporation will furnish to any stockholder, upon written request and without charge, a copy of the Articles of Organization and Bylaws of the Corporation. Such request may be made to the Secretary of the Corporation. The Articles of Organization authorize the issuance of shares of preferred stock in one or more series with such voting, dividend, dissolution and other rights and preferences as specified by the Board of Directors of the Corporation or a committee thereof, at the time of issuance of the shares. A statement of the preferences, powers, qualifications, and the rights of the series of such stock, will be furnished to the holder of this certificate upon written request and without charge. The Articles of Organization prohibit any Person (as defined in said Articles) from directly or indirectly offering to acquire or acquiring the beneficial ownership of more than 4.9% of the outstanding shares of any class of equity securities of the Corporation entitled to vote generally in the election of Directors during the period up to and through February 8, 1998, and after such period, directly or indirectly offering to acquire or acquiring the beneficial ownership of more than 10% of the outstanding shares of any class of such equity securities of the Corporation. This limitation shall not apply (A) to any acquisition of shares of capital stock of the Corporation which has been expressly approved in advance by an affirmative vote of not less than two-thirds of the Board of Directors then in office (or, if there shall be an Interested Stockholder at the time of such vote, then also by an affirmative vote of not less than two-thirds of the Continuing Directors then in office (as such terms are defined in the Articles of Organization)), and (B) to any offer to the Corporation made by the underwriters selected by the Corporation in connection with a public offering by the Corporation of the Corporation's capital stock. In the event that equity securities are acquired in excess of the 4.9% or 10% limitation, as the case may be, the excess securities will no longer be entitled to vote on any matter or take other stockholder action or be counted in stockholder action, and the Board of Directors of the Corporation may cause such excess securities to be transferred to an independent trustee for sale to the Corporation or in the open market at a price which shall be the lesser of the purchase or the market price, with the expenses of such trustee to be paid out of the proceeds from such sale. Detailed information concerning this limitation is set forth in the Articles of Organization. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to the applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT- Custodian TEN ENT - as tenants by the entireties --------------------- JT TEN - as joint tenants with rights of under Uniform Gifts to survivorship and not as tenants in Minors Act common -------------- (state) Additional abbreviations may also be used though not in the above list. For value received hereby sell, assign and transfer unto Please insert social security or other identifying number of assignee [ ] --------------- - -------------------------------------------------------------------------------- please print or typewrite name and address including postal zip code of assignee - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint - -------------------------------------------------------------------------------- Attorney to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated: -------------------- ---------------------------------------- [the following additional legend appears in the left hand margin on reverse of certificate] This certificate also evidences and entitles the holder hereof to certain Rights as set forth in the Rights Agreement between SIS Bancorp, Inc. (the "Company") and ChaseMellon Shareholder Services, L.L.C. (the "Rights Agent") dated as of January 22, 1997 (the "Rights Agreement"), the terms of which are hereby incorporated by reference and a copy of which is on file at the principal offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Company will mail to the holder of this certificate a copy of the Rights Agreement, as in effect on the date of the mailing, without charge promptly after receipt of written request therefor. Under certain circumstances set forth in the Rights Agreement, Rights beneficially owned (as such term is defined in the Rights Agreement) by any Person who is, was or becomes an Acquiring Person, or any Affiliate or Associate thereof) as such terms are defined in the Rights Agreement) whether currently held by or on behalf of such Persons or by any subsequent holder, may become null and void. The Rights shall not be exercisable, and shall be void so long as held, by a holder in any jurisdiction where the requisite qualification to the issuance to such holder, or the issuance by such holder, of the Rights in such jurisdiction shall not have been obtained or be obtainable. [the following additional legend appears in bottom right margin on reverse of certificate] Notice: the signature to this assignment must correspond with the name as written upon the face of the Certificate, in every particular, without alteration or enlargement, or any change whatever. EX-11 3 STATEMENT OF COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 SIS BANCORP, INC AND SUBSIDIARIES COMPUTATION OF PRO FORMA PRIMARY AND FULLY DILUTED EARNINGS PER SHARE (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
TWELVE MONTHS ENDED DECEMBER 31, -------------------------- 1996 1995 1994 ------- ------- -------- PRIMARY: Net income (loss)................................. $18,160 $11,459 $(26,907) Pro forma income on net proceeds.................. -- -- 1,189 Pro forma ESOP adjustment......................... -- -- (1,028) Pro forma RSP adjustment.......................... -- -- (230) ------- ------- -------- Net income and pro forma net income (loss)........ $18,160 $11,459 $(26,976) ======= ======= ======== Weighted average and pro forma weighted shares outstanding during the period.................... 5,583 5,562 5,562 Unearned ESOP shares.............................. (336) (431) (431) Stock options considered outstanding during the period........................................... 139 25 25 Restricted stock shares considered outstanding during the period................................ 137 18 18 ------- ------- -------- Total shares...................................... 5,523 5,174 5,174 ======= ======= ======== Earnings per share and pro forma earnings (loss) per share........................................ $ 3.29 $ 2.21 $ (5.21) ======= ======= ======== FULLY DILUTED: Net income (loss)................................. $18,160 $11,459 $(26,907) Pro forma income on net proceeds.................. -- -- 1,189 Pro forma ESOP adjustment......................... -- -- (1,028) Pro forma RSP adjustment.......................... -- -- (230) ------- ------- -------- Net income and pro forma net income (loss)........ $18,160 $11,459 $(26,976) ======= ======= ======== Weighted average and pro forma weighted shares outstanding during the period.................... 5,583 5,562 5,562 Unearned ESOP shares.............................. (336) (431) (431) Stock options considered outstanding during the period........................................... 189 60 60 Restricted stock shares considered outstanding during the period................................ 137 30 30 ------- ------- -------- Total shares...................................... 5,573 5,221 5,221 ======= ======= ======== Net income and pro forma net income (loss) per share............................................ $ 3.26 $ 2.19 $ (5.17) ======= ======= ========
Net income per share for the year ended December 31, 1996 is computed on weighted average shares outstanding for the period. Pro forma net income (loss) per share for the years ended December 31, 1995 and 1994 assume that the stock issued in the conversion of the Bank from mutual to stock form had been issued as of the beginning of the year. This computation includes the impact of the Restricted Stock Plan ("RSP") and the Stock Option Plan which were approved by the stockholders at the Annual Meeting of the Stockholders held on May 31, 1995. For the year ended December 31, 1994 the fully diluted earnings per share calculation is anti-dilutive and therefore, the primary earnings per share is shown on Consolidated Statement of Operations in accordance with APB 15. EX-21 4 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES OF THE COMPANY The Company owns 100% of the capital stock of the Springfield Institution for Savings, a Massachusetts chartered stock savings bank ("Bank"). The Company, through the Bank, owns 100% of the capital stock of each of the following subsidiaries, all of which are Massachusetts corporations (unless otherwise indicated) and all of which are included in the Company's consolidated financial statements: (1) Commerce Properties, Inc. (2) Properties Two, Inc. (Connecticut corporation) (4) Village Park Properties, Inc. (Georgia corporation) (5) SIS Investment Corporation (6) SIS Investment Corporation II (7) Sherman Street Corporation (8) SIS Center, Inc. (9) Newgate Corporation (10) Colebrook Corporation (11) Colebrook-Leominster, Inc. The Company also owns 100% of the capital stock of each of the following subsidiaries through the Bank and Colebrook Corporation, all of which are Massachusetts corporations (unless otherwise indicated) and all of which are included in the Company's consolidated financial statements: (1) Colebrook Realty Services, Inc. (2) Colebrook-Diamond, Inc. (3) Colebrook-Riverdale Corporation (4) New Marlboro Corp. (5) Colebrook-Woodcrest, Inc. (6) Colebrook/Westor, Inc. (7) 140 Glastonbury Boulevard, Inc. (Connecticut Corporation) (8) Overlook, Inc. In addition, the Company owns, either directly or through the wholly owned subsidiaries of the Bank and Colebrook Corporation specified below, the percentage interest in the partnership or corporation set forth opposite each such wholly owned subsidiary.
SUBSIDIARY PARTNERSHIP OR CORPORATION OWNED PERCENTAGE INTEREST - ---------- -------------------------------- ------------------- (1) Colebrook-Woodcrest, Hillman Associates 50% general partnership Inc................. Partnership #4 Waltham Medical Associates 12.5% limited partnership Limited Partnership Wiljon Partnership 50% general partnership (2) New Marlboro........ Francoline Colebrook 50% general partnership Partnership #7 (3) Colebrook/Westor Westor Corporation 50% stockholder Corporation......... Westor Partnership 1% general partnership (98% limited partnership owned by Westor Corporation). (4) Overlook, Inc. ..... Chester Commons 99% limited partnership (5) Sherman Street Van Der Hayden 1% general partnership Corporation.........
EX-23 5 CONSENT OF PRICE WATERHOUSE, LLP [LETTERHEAD OF PRICE WATERHOUSE APPEARS HERE] EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-11443) of SIS Bancorp, Inc. of our report dated January 23, 1997 appearing on page 67 of this Form 10-K. /s/ Price Waterhouse LLP Boston, Massachusetts March 10, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
9 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 31,902 45 10,000 0 449,323 192,174 0 610,597 15,597 1,348,612 969,517 245,048 29,282 2,848 0 0 57 101,860 1,348,612 48,657 35,051 569 84,277 32,638 41,173 43,104 2,950 256 14,199 13,887 13,877 0 0 18,160 3.29 3.26 7.52 6,547 428 198 0 14,986 4,555 2,216 15,597 15,597 0 0
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