-----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, E81cPgd9ierbtFvmHMx17vrZ7AT3xRb0JW+bSdWBKgvSi0uDqfS1KufJS19CDdjt dasS/PkGd2OwDxhLsPMWoQ== 0000950109-97-006519.txt : 19971029 0000950109-97-006519.hdr.sgml : 19971029 ACCESSION NUMBER: 0000950109-97-006519 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19971028 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: S-4 SEC ACT: SEC FILE NUMBER: 333-38889 FILM NUMBER: 97701949 BUSINESS ADDRESS: STREET 1: P O BOX 3034 STREET 2: 1441 MAIN STREET CITY: SPRINGFIELD STATE: MA ZIP: 01102-3034 BUSINESS PHONE: 4137488000 MAIL ADDRESS: STREET 1: 1441 MAIN STREET CITY: SPRINGFIELD STATE: MA ZIP: 01102 S-4 1 REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- SIS BANCORP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- MASSACHUSETTS 6036 04-3303264 (STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 1441 MAIN STREET, SPRINGFIELD, MASSACHUSETTS 01102 (413) 748-8000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- F. WILLIAM MARSHALL, JR. SIS BANCORP, INC. 1441 MAIN STREET SPRINGFIELD, MASSACHUSETTS 01102 (413) 748-8000 TELECOPY: (413) 748-8464 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------------- COPIES TO: STEPHEN J. COUKOS, ESQ. J. GILBERT SOUCIE WILLIAM W. BOUTON III, ESQ. SULLIVAN & WORCESTER LLP GLASTONBURY BANK & TYLER COOPER & ALCORN, LLP ONE POST OFFICE SQUARE TRUST COMPANY CITYPLACE--35TH FLOOR BOSTON, MASSACHUSETTS 2461 MAIN STREET HARTFORD, CONNECTICUT 06103 02109 GLASTONBURY, CONNECTICUT (860) 725-6200 (617) 338-2800 06033 TELECOPY: (860) 278-3802 TELECOPY: (617) 338-2880 (860) 633-4695 TELECOPY: (860) 657-4187 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective and all other conditions to the merger of SIS Interim Bank with and into Glastonbury Bank & Trust Company pursuant to the Agreement and Plan of Reorganization described in the accompanying Joint Proxy Statement--Prospectus have been satisfied or waived. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------ PROPOSED PROPOSED TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE REGISTRATION REGISTERED REGISTERED PER SHARE OFFERING PRICE FEE - ------------------------------------------------------------------------------------ Common Stock, Par Value $0.01 per share....... 1,354,141 shares -- (1) $45,748,000(1) $13,863.03 - ------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------
(1) Pursuant to Rule 457(f), the maximum aggregate offering price has been determined as the value of the shares of Glastonbury Bank & Trust Company acquired by SIS Bancorp, Inc. in the merger. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT WILL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT WILL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT WILL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- [COMPANY LOGOS TO BE INSERTED] JOINT PROXY STATEMENT--PROSPECTUS 1,354,141 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE The SIS and GBT Boards of Directors have agreed that SIS will acquire GBT in a merger transaction. GBT will become a subsidiary of SIS, but will remain a separate corporation and will stay headquartered in Glastonbury, Connecticut. The merger will enable GBT to offer more products and services to customers and will enable SIS to extend its operations into the Connecticut market, and we believe it will benefit both companies and our shareholders. If you are a GBT shareholder, you will receive 0.74 of a share of SIS common stock for each share of GBT stock you own on the date of the merger. To calculate the exact dollar value of what you receive, we will multiply 0.74 by the average closing bid price of SIS common stock for the 20 trading days that end five days before the date of the merger. If that price is too low to guarantee that you will receive at least $18.50 worth of SIS stock per GBT share, GBT can terminate the merger agreement. At that point, SIS can agree to issue more SIS common stock so that you will receive the $18.50 minimum value, but it is not obliged to do so. YOUR VOTE IS VERY IMPORTANT. The merger cannot be completed unless the shareholders of both companies approve it. We have scheduled special meetings for our shareholders to vote on the merger. The special shareholders meetings to vote on the merger will take place as follows: FOR GBT SHAREHOLDERS FOR SIS SHAREHOLDERS Thursday, December 4, 1997 Thursday, December 4, 1997 4:30 p.m. 10.00 a.m. Glastonbury Bank & Trust Company SIS Bancorp, Inc. 2461 Main Street 1441 Main Street, 12th floor Glastonbury, Connecticut Springfield, Massachusetts Whether or not you plan to attend your meeting, please take the time to vote by completing and mailing the enclosed proxy card to us. If you complete and return your card but don't indicate how you want to vote, your proxy will be counted as a vote in favor of the merger. If you don't return your card or abstain from voting, the effect in most cases will be a vote against the merger. If you decide to attend your meeting, you may vote in person even though you have already submitted a proxy. This Proxy Statement--Prospectus provides you with detailed information about the merger, and we urge you to read it carefully. In addition, you may obtain information about our companies from documents we have filed with the Securities and Exchange Commission or the Federal Deposit Insurance Corporation. If you have questions, you may call us on business days between 9:00 a.m. and 4:00 p.m. for further information. Please ask for Wayne Patenaude, GBT's Senior Vice President, at 860-652-6589, or Ting Chang, SIS's Vice President- Investor Relations, at 413-748-8271. [signature of Mr. Naughton here] [signature of Mr. Soucie here] - ------------------------------------- ------------------------------------- John M. Naughton J. Gilbert Soucie Chairman of the Board President and Chief Executive SIS Bancorp, Inc. Officer Glastonbury Bank & Trust Company SHARES OF SIS COMMON STOCK ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. NEITHER THE SEC NOR ANY STATE SECURITIES REGULATORS HAVE APPROVED OR DISAPPROVED THE SIS COMMON STOCK TO BE ISSUED IN THE MERGER OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF YOUR ENTIRE INVESTMENT. Joint Proxy Statement--Prospectus dated October 28, 1997 and first mailed to shareholders on or about October 31, 1997. NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON DECEMBER 4, 1997 TO THE SHAREHOLDERS OF GLASTONBURY BANK & TRUST COMPANY: NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of Glastonbury Bank & Trust Company will be held on December 4, 1997 at 4:30 p.m., local time, at GBT's main office at 2461 Main Street, Glastonbury, Connecticut, for the purpose of considering and voting upon the following matter: . A proposal to approve and adopt the Agreement and Plan of Reorganization, dated as of August 18, 1997 (the "Merger Agreement"), by and between GBT and SIS Bancorp, Inc. and the related Agreement and Plan of Merger, dated as of September 12, 1997 (the "Plan of Merger"), by and among GBT, SIS and SIS Interim Bank, an "interim" bank that has been organized as a wholly owned subsidiary of SIS, and each of the transactions contemplated thereby, including the merger of SIS Interim Bank with and into GBT, upon the terms and subject to the conditions set forth in the Merger Agreement and the Plan of Merger, as more fully described in the accompanying Joint Proxy Statement--Prospectus. A copy of the Merger Agreement is attached as Appendix A to the accompanying Joint Proxy Statement--Prospectus and certain related documents are attached as exhibits thereto. A copy of the Plan of Merger is attached as Appendix B to the accompanying Joint Proxy Statement--Prospectus. The GBT Board of Directors has fixed the close of business on October 10, 1997 as the record date for the determination of shareholders entitled to notice of and to vote at the Special Meeting and any adjournments or postponements thereof. Only shareholders of record at the close of business on such date are entitled to notice of and to vote at the Special Meeting. Your vote is important regardless of the number of shares you own. Approval of the merger requires the affirmative vote of the holders of not less than two-thirds of all issued and outstanding shares of GBT Common Stock, whether or not such shares are present at the Special Meeting. Each shareholder, even though he or she now plans to attend the Special Meeting, is requested to sign, date and return the enclosed Proxy without delay in the enclosed postage-paid return envelope. You may revoke your Proxy at any time prior to its exercise. Any shareholder present at the Special Meeting or at any adjournments or postponements thereof may revoke his or her Proxy and vote personally on each matter brought before the Special Meeting. Because of the required two-thirds vote, it is particularly important that all shareholders vote at the Special Meeting. An abstention or non-vote will have the effect of a vote against the Merger Agreement and Plan of Merger. By Order of the Board of Directors, Camille S. Bushnell, Secretary October 28, 1997 Glastonbury, Connecticut THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT AND PLAN OF MERGER AND EACH OF THE TRANSACTIONS COMPLETED THEREBY. PLEASE DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE. IF THE MERGER IS APPROVED BY THE SHAREHOLDERS AT THE SPECIAL MEETING AND EFFECTED BY GBT, SHAREHOLDERS OF GBT WHO FOLLOW THE PROCEDURES SET FORTH IN SECTIONS 33-855 THROUGH 33-872, INCLUSIVE, OF THE CONNECTICUT BUSINESS CORPORATIONS ACT WILL HAVE DISSENTERS' RIGHTS OF APPRAISAL AS THEREIN PROVIDED. A COPY OF THOSE SECTIONS IS ATTACHED AS APPENDIX E TO THE JOINT PROXY STATEMENT-PROSPECTUS ACCOMPANYING THIS NOTICE. NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON DECEMBER 4, 1997 TO THE SHAREHOLDERS OF SIS BANCORP, INC.: NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of SIS Bancorp, Inc. will be held on December 4, 1997 at 10:00 a.m., local time, at SIS's corporate headquarters, 1441 Main Street, 12th floor, Springfield, Massachusetts, for the purpose of considering and voting upon the following matter: . A proposal to approve and adopt the Agreement and Plan of Reorganization, dated as of August 18, 1997, by and between SIS and Glastonbury Bank and Trust Company, and each of the transactions contemplated thereby, including the issuance by SIS of shares of its common stock to the shareholders of GBT, upon the terms and subject to the conditions set forth in the Agreement, as more fully described in the accompanying Joint Proxy Statement--Prospectus. A copy of the Agreement is attached as Appendix A to the accompanying Joint Proxy Statement--Prospectus and certain related documents are attached as exhibits thereto. The SIS Board of Directors has fixed the close of business on October 10, 1997 as the record date for the determination of shareholders entitled to notice of and to vote at the Special Meeting and any adjournments or postponements thereof. Only shareholders of record at the close of business on such date are entitled to notice of and to vote at the Special Meeting. Your vote is important regardless of the number of shares you own. Approval of the issuance of shares of SIS common stock to the shareholders of GBT requires the affirmative vote of the holders of not less than a majority of the shares of SIS Common Stock present and voting at the Special Meeting. Each shareholder, even though he or she now plans to attend the Special Meeting, is requested to sign, date and return the enclosed Proxy without delay in the enclosed postage-paid return envelope. You may revoke your Proxy at any time prior to its exercise. Any shareholder present at the Special Meeting or at any adjournments or postponements thereof may revoke his or her Proxy and vote personally on each matter brought before the Special Meeting. By Order of the Board of Directors, Michael E. Tucker, Clerk October 28, 1997 Springfield, Massachusetts THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE AGREEMENT AND EACH OF THE TRANSACTIONS COMPLETED THEREBY. PLEASE DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED POSTAGE-PAID RETURN ENVELOPE. TABLE OF CONTENTS
PAGE ---- SUMMARY.................................................................... 1 The Companies............................................................ 1 What GBT Shareholders Will Receive....................................... 1 Our Reasons for the Merger............................................... 2 Our Recommendations to Shareholders...................................... 2 Required Vote; Stockholders Agreements .................................. 3 Ownership of SIS Following the Merger.................................... 3 Management and Operations after the Merger............................... 3 Opinions of Financial Advisers........................................... 3 Conditions to the Merger................................................. 3 Termination of the Merger Agreement...................................... 4 Amendment, Waiver and Extension of the Merger Agreement.................. 4 Regulatory Approvals..................................................... 4 Certain Federal Income Tax Consequences.................................. 4 Stock Option Agreement................................................... 4 Appraisal Rights and Dissenting Shareholders............................. 5 Certain Differences in the Rights of Shareholders........................ 5 Market Prices and Dividend Data.......................................... 5 Future SIS Acquisition Activity.......................................... 6 Cautionary Statement Concerning Forward-Looking Statements............... 6 Summary Pro Forma Financial Data......................................... 7 Comparative Per Share Financial Information.............................. 8 SELECTED FINANCIAL DATA.................................................... 10 THE MEETINGS............................................................... 14 Matters to Be Discussed at the Meetings.................................. 14 Record Dates; Stock Entitled to Vote; Quorum............................. 14 Solicitation of Proxies.................................................. 15 Required Votes........................................................... 16 Solicitation Expenses.................................................... 17 Beneficial Ownership of GBT Common Stock................................. 17 Appraisal Rights and Dissenting Shareholders............................. 18 THE MERGER................................................................. 20 General.................................................................. 20 Background of the Merger................................................. 20 Recommendation of the GBT Board and Reasons for the Merger............... 23 Recommendation of the SIS Board and Reasons for the Merger............... 24 Opinions of Financial Advisers........................................... 24 Effective Time of the Merger; Closing Date............................... 32 Conversion of Shares of GBT Common Stock Pursuant to the Merger.......... 32 Certificate Exchange Procedures.......................................... 33 Conduct of Business Pending the Merger................................... 33 Conditions to Consummation of the Merger................................. 35 Termination.............................................................. 36 Amendment, Extension and Waiver.......................................... 37 Requisite Regulatory Approvals........................................... 37 Expenses................................................................. 38 Stock Option Agreement................................................... 38 Stockholders Agreements.................................................. 39 No Solicitation.......................................................... 40 Management and Operations after the Merger............................... 40
i
PAGE ---- Interests of Certain Persons in the Merger.............................. 40 Employment Obligations.................................................. 41 Resale of SIS Common Stock.............................................. 41 Certain Federal Income Tax Consequences................................. 41 Accounting Treatment.................................................... 43 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS............... 44 INFORMATION REGARDING GBT................................................. 52 INFORMATION REGARDING SIS................................................. 52 DESCRIPTION OF SIS CAPITAL STOCK.......................................... 52 Common Stock............................................................ 52 Preferred Stock......................................................... 54 MARKET FOR SIS COMMON STOCK............................................... 55 COMPARISON OF RIGHTS OF HOLDERS OF SIS COMMON STOCK AND GBT COMMON STOCK.. 56 Special Meetings of Shareholders........................................ 56 Inspection Rights....................................................... 57 Action by Consent of Shareholders....................................... 57 Preemptive Rights....................................................... 57 Dividends and Repurchases of Stock...................................... 57 Classification of the Board of Directors................................ 58 Removal of Directors.................................................... 58 Vacancies on the Board of Directors..................................... 58 Exculpation of Directors and Officers................................... 59 Indemnification of Directors, Officers and Others....................... 59 Transactions with Interested Persons.................................... 60 Mergers, Share Exchanges or Asset Sales; Anti-Takeover Provisions of State Law.............................................................. 60 Amendments to Charter................................................... 62 Amendments to Bylaws.................................................... 62 Dissenters' Appraisal Rights............................................ 63 Shareholders Rights Plan................................................ 63 LEGAL MATTERS............................................................. 63 EXPERTS................................................................... 63 WHERE YOU CAN FIND MORE INFORMATION....................................... 64 INFORMATION INCORPORATED BY REFERENCE..................................... 64 APPENDICES Appendix A Agreement and Plan of Reorganization dated as of August 18, 1997 Appendix B Agreement and Plan of Merger dated as of September 12, 1997 Appendix C Opinion of McConnell, Budd & Downes, Inc. Appendix D Opinion of Oppenheimer & Co., Inc. Appendix E Text of Sections 33-855 through 33-872 of the Connecticut Business Corporations Act (Appraisal Rights) INFORMATION NOT REQUIRED IN PROSPECTUS.................................... II-1
ii SUMMARY The following summary of the material aspects of the merger is not intended to be complete and is qualified by the more detailed discussion elsewhere in this Proxy Statement-Prospectus. The Agreement and Plan of Reorganization between SIS and GBT, which we refer to throughout this Proxy Statement- Prospectus as the "merger agreement," is attached as Appendix A, and the Agreement and Plan of Merger that is part of the merger agreement, which we refer to throughout this Proxy Statement-Prospectus as the "plan of merger," is attached as Appendix B. To understand the merger fully, you should read carefully this entire Proxy Statement-Prospectus, including the merger agreement, the plan of merger and the other documents we have referred you to. See "Where You Can Find More Information." (Page 64) THE COMPANIES SIS Bancorp, Inc. 1441 Main Street Springfield, Massachusetts 01102 (413) 748-8000 SIS is a bank holding company. It conducts business through its subsidiary bank, Springfield Institution for Savings, and offers a wide variety of financial services, including retail and commercial banking, residential mortgage origination and servicing, commercial and industrial lending, commercial real estate lending and consumer lending. The bank operates a network of 25 retail branches located in Hampden County and Hampshire County, Massachusetts. SIS and the bank are subject to regulation by the Federal Reserve Board, the FDIC and the Massachusetts Division of Banks. As of June 30, 1997, SIS had total assets of $1.4 billion, total deposits of $1.0 billion, net loans of $645.9 million, and shareholders' equity of $103.3 million. Glastonbury Bank & Trust Company 2461 Main Street Glastonbury, Connecticut 06033 (860) 633-4695 GBT is a Connecticut commercial bank that provides a variety of deposit, loan and investment products and services to small and medium-sized businesses and consumers. It conducts business from nine branches located in Glastonbury and neighboring towns and cities in central Connecticut. In addition to its banking activities, GBT offers insurance products through a subsidiary insurance agency, GBT Insurance Group, Inc. GBT is subject to regulation by the FDIC and the Commissioner of Banking of the State of Connecticut. As of June 30, 1997, GBT had total assets of $261.3 million, total deposits of $216.6 million, net loans of $152.9 million and shareholders' equity of $18.0 million. WHAT GBT SHAREHOLDERS WILL RECEIVE (SEE PAGE 32) If you are a GBT shareholder, you will receive 0.74 of a share of SIS common stock for each share of GBT common stock you own on the date of the merger. To calculate the exact dollar value of what you will receive, we will multiply 0.74 by the average closing bid price of SIS common stock for the 20 trading days that end five days before the date of the merger. For example, assume that the merger had occurred on October 10, 1997. The average closing bid price of SIS common stock for the 20 days ending on October 3, 1997, five trading days prior to October 10, was $33.638. In this example, you would have received $24.89 worth of SIS common stock for each share of GBT common stock that you owned on October 10 ($33.638 x 0.74 = $24.89). 1 In addition to SIS stock, you will also receive a check for a small amount of cash instead of any fractional shares you might otherwise receive. For instance, if you own 10 shares of GBT stock, they would be converted into 7.4 shares of SIS stock in the merger (0.74 X 10). If the average closing price was $33.638, instead of receiving four-tenths of a share of SIS stock, you would be paid $13.46 ($33.638 X 0.4). GBT can terminate the merger agreement if the actual average closing bid price of SIS common stock is too low to guarantee that you will receive at least $18.50 worth of SIS common stock per GBT share. At that point, SIS can agree to issue more SIS common stock so that you will receive the $18.50 minimum value per share. However, SIS is not required to issue more shares, and it is possible under these circumstances that the GBT Board could conclude that proceeding with the merger at the lower price would still be in your best interest and consistent with the Board's fiduciary duties. You should not send in your GBT stock certificates until we notify you to do so after the merger takes place. OUR REASONS FOR THE MERGER In July 1997, after considering various alternatives that would allow it to improve its overall performance and earnings potential, GBT approached SIS to discuss a combination of the two companies that could expand the resources of each and give both the opportunity to enhance shareholder value and to offer a greater variety of products and services. The ensuing negotiations resulted in our signing the merger agreement. Both SIS and GBT recognize that the banking industry, nationally and in New England, is undergoing substantial consolidation. Banking laws and regulations now permit banks to offer new types of financial services to businesses and consumers and have eliminated barriers to interstate operations. Both SIS and GBT offer various products and services not currently provided by the other. By combining, we expect to become more efficient and to be better positioned to expand beyond our current market areas. Combining the companies will enable us to increase revenues, reduce costs and improve services. We believe that our combined company will not only enable GBT to maximize long-term shareholder value while serving the interests of its customers, suppliers, employees and community, but will also further the interests of SIS and its shareholders. In deciding to approve and recommend the merger agreement, our Boards considered a number of factors, including the financial strength, enhanced prospects and opportunities for growth of the combined organization; the potential benefits to our shareholders; the effects on our customers, suppliers, employees and communities; the value of the stock SIS offered and how it compared with other preliminary, informal proposals made at the time; and the opinions of our financial advisers that the stock being offered by SIS was fair from a financial point of view. You can find a more detailed discussion of the background to the merger agreement and our reasons for the merger in this Proxy Statement-Prospectus under the heading entitled "THE MERGER," at pages 20 through 24. OUR RECOMMENDATIONS TO SHAREHOLDERS To GBT Shareholders: The GBT Board believes that the merger is in your best interest and unanimously recommends that you vote FOR the proposal to approve the merger agreement and the plan of merger. To SIS Shareholders: The SIS Board believes that the merger is in your best interest and unanimously recommends that you vote FOR the proposal to approve the merger agreement and the issuance of shares of SIS common stock to the shareholders of GBT. 2 REQUIRED VOTE; STOCKHOLDERS AGREEMENTS (SEE PAGES 16-17) The merger agreement must be approved by the holders of two-thirds of all outstanding shares of the stock of GBT, and must also be approved by the holders of a majority of the stock present and voting at the SIS shareholders' meeting. The directors and executive officers of GBT have agreed that they will vote a total of 419,622 shares of GBT stock owned by them in favor of the merger agreement. This represents about 22.93% of the outstanding shares of GBT. Similarly, SIS directors who own a total of 188,019 shares of SIS stock, including shares they could acquire by exercising stock options, have agreed to vote in favor of the merger agreement. This represents about 3.36% of the outstanding shares of SIS stock. OWNERSHIP OF SIS FOLLOWING THE MERGER SIS will issue approximately 1.35 million shares of its stock to GBT shareholders in connection with the merger, which will constitute slightly less than 20% of the outstanding stock of SIS after the merger. The shares will be listed for trading on the Nasdaq National Market. MANAGEMENT AND OPERATIONS AFTER THE MERGER After the merger takes place, the management and board of directors of SIS and GBT will remain unchanged, except that F. William Marshall, Jr., the President and Chief Executive Officer and a director of SIS, will join the GBT Board, and Ronald E. Bourbeau, a director of GBT, will join the SIS Board. OPINIONS OF FINANCIAL ADVISERS (SEE PAGES 24-32) We asked our financial advisers, McConnell, Budd & Downes, Inc. and Oppenheimer & Co., Inc., for advice on the fairness of the amount that SIS is offering to GBT shareholders in the merger. Our advisers performed a number of analyses in which they compared the companies' historical stock prices and other measures of financial performance, compared the financial terms of the merger to those of other publicly announced transactions, and estimated the relative values of SIS and GBT based on past and anticipated future performance and the benefits that could be expected from the merger. MB&D delivered an opinion to GBT and Oppenheimer delivered an opinion to SIS that the exchange ratio of SIS stock for GBT stock in the merger is fair to that company's shareholders from a financial point of view. These opinions are attached as Appendix C and Appendix D to this Joint Proxy Statement-Prospectus. CONDITIONS TO THE MERGER (SEE PAGES 35-36) To complete the merger, we must meet a number of conditions in addition to obtaining the votes of our shareholders, including the following: . no law or injunction may effectively prohibit the merger; . we must receive all necessary approvals of governmental authorities; . we must receive legal opinions that the merger will be treated as a tax- free reorganization under the Internal Revenue Code; and . SIS's independent accountants must concur in management's determination that SIS may account for the merger as a pooling of interests. Certain conditions to the merger may be waived by the company entitled to assert the condition. In some instances, if we wish to waive a condition, we may be required to resolicit the approval of the shareholders of GBT and/or SIS. 3 TERMINATION OF THE MERGER AGREEMENT (SEE PAGES 36-37) In addition to terminating the merger agreement if SIS's stock price falls below the agreed minimum, we can agree jointly to terminate the merger agreement without completing the merger, and either of us can terminate the merger agreement if any of the following occurs: . the merger is not completed by June 30, 1998; . the merger is not approved by either the SIS shareholders or the GBT shareholders; . a court or other governmental authority permanently prohibits the merger; or . the other party breaches or materially fails to comply with any of its representations or warranties or obligations under the merger agreement. In addition, SIS may terminate the merger agreement if the GBT Board does not recommend to its shareholders that the merger be approved, or subsequently withdraws or modifies in any adverse manner its recommendation. AMENDMENT, WAIVER AND EXTENSION OF THE MERGER AGREEMENT (SEE PAGE 37) We may amend the merger agreement at any time before the merger actually takes place, and may agree to extend the time within which any action required by the merger agreement is to take place. However, if an amendment would change the amount or form of what GBT's shareholders would receive in the merger, the amendment will have to be approved by our shareholders. REGULATORY APPROVALS (SEE PAGE 37) The Federal Reserve Board approved the merger on October 22, 1997. The merger must also be approved by the FDIC, the Connecticut Department of Banking and the Massachusetts Board of Bank Incorporation, and SIS has filed applications with those agencies seeking the necessary approvals, which are still pending. If the Federal Reserve Board and FDIC approve the merger, the United States Department of Justice has 15 days in which to challenge such approvals on antitrust grounds. It is possible that some of these governmental authorities may impose conditions for granting approval. We cannot predict whether we will obtain the required regulatory approvals within the time frame contemplated by the merger agreement or on conditions that would not be detrimental to either of us or the combined company. CERTAIN FEDERAL INCOME TAX CONSEQUENCES (SEE PAGES 41-43) We have structured the merger so that SIS, GBT and GBT's shareholders will not recognize any gain or loss for federal income tax purposes in the merger, except for taxes payable because of cash received by GBT shareholders instead of fractional SIS shares or pursuant to the exercise of dissenters' rights as described below. STOCK OPTION AGREEMENT (SEE PAGES 38-39) In connection with the merger agreement, GBT granted SIS an option to purchase up to 170,080 shares of GBT Common Stock at an exercise price of $18.00 per share. SIS may exercise this option only if certain events ordinarily associated with another party attempting to "break up" the merger and acquire GBT occur; as of this date, none of those events has occurred. Under the option agreement, if any such event did occur and SIS were entitled to exercise the option, it would also be entitled to receive a fee of $1.5 million from GBT. The option and the fee are an incentive to GBT to proceed with the merger, and may discourage other persons who might be interested in acquiring GBT. 4 APPRAISAL RIGHTS AND DISSENTING SHAREHOLDERS (SEE PAGES 18-19) Holders of GBT Common Stock who do not vote in favor of the merger and who follow certain procedures set forth in Connecticut law will be entitled to dissenters' rights under Connecticut law. The text of the pertinent statutory provisions is attached as Appendix E. Because the merger involves a subsidiary of SIS rather than SIS itself, holders of SIS Common Stock do not have dissenters' rights in connection with the merger. CERTAIN DIFFERENCES IN THE RIGHTS OF SHAREHOLDERS Once the merger occurs, GBT's shareholders will automatically become shareholders of SIS, and their rights will be governed by Massachusetts rather than Connecticut law and by SIS's corporate governing documents, including its articles of organization and bylaws. Perhaps the most significant difference between the rights of GBT shareholders and the rights of SIS shareholders is that GBT shareholders have a preemptive right to subscribe for additional shares of stock offered by GBT, a right that SIS shareholders do not have with respect to SIS stock. You can find a detailed discussion of the differences between the rights of GBT and SIS shareholders further on in this Proxy Statement--Prospectus under the heading entitled "COMPARISON OF RIGHTS OF HOLDERS OF GBT COMMON STOCK AND SIS COMMON STOCK" at pages 56 through 63. MARKET PRICES AND DIVIDEND DATA SIS common stock is listed for trading on the Nasdaq National Market, and GBT common stock is listed for trading on the Nasdaq Small Capitalization Market. The following table shows the range of high and low closing prices for SIS common stock and GBT common stock during each quarter since January 1, 1995. It also shows the quarterly cash dividends paid by SIS and GBT on their shares.
CASH DIVIDENDS SIS GBT PER SHARE OF COMMON STOCK COMMON STOCK COMMON STOCK ------------- ------------- --------------- QUARTER ENDED HIGH LOW HIGH LOW SIS GBT - ------------- ------ ------ ------ ------ ------- ------- 1995 March 31........................... $11.06 $ 9.63 $ 7.75 $ 7.70 -- -- June 30............................ 13.06 10.88 7.63 7.25 -- -- September 30....................... 16.00 12.88 10.50 7.25 -- -- December 31........................ 17.13 14.63 9.88 7.50 -- -- 1996 March 31........................... 18.75 16.25 9.25 8.50 -- -- June 30............................ 18.63 16.75 10.25 9.13 -- $ .07 September 30....................... 23.63 17.50 10.88 10.00 -- .07 December 31........................ 24.50 22.13 13.25 10.13 -- .14* 1997 March 31........................... 27.33 22.33 19.00 12.75 $ .12 .07 June 30............................ 29.63 23.33 18.75 14.25 .12 .09 September 30....................... 34.75 27.63 25.00 17.00 .14 .09 through October 22................. 37.00 34.50 26.38 24.50
- -------- * GBT paid an additional special dividend of $0.07 per share. On October 22, 1997, SIS announced a quarterly dividend of $0.14 per share payable on November 21, 1997 to holders of record as of the close of business on November 4, 1997. On October 8, 1997, GBT announced a quarterly dividend of $0.09 per share payable on November 15, 1997 to holders of record as of October 24, 1997. 5 On August 15, 1997, the last business day before the merger was announced, the closing price for a share of SIS stock was $30.00 and for a share of GBT stock was $20.00. If $30.00 had been the average of the closing bid prices under the merger agreement, a GBT shareholder receiving SIS stock in exchange for a share of GBT stock on that day under the terms of the merger agreement would have received stock with a value of $22.20 ($30.00 X 0.74). On October 22, 1997, the last day before this Proxy Statement-Prospectus was printed for which we had information, the closing price was $35.50. If that had been the average, a GBT shareholder would have received stock with a value of $26.24 ($35.50 X 0.74). FUTURE SIS ACQUISITION ACTIVITY Both nationally and in New England, the banking industry is undergoing a period of consolidation marked by numerous mergers and acquisitions. SIS has no formal program to acquire other banking or thrift institutions, but it may occasionally be presented with opportunities before or after the merger to acquire existing institutions that could expand and strengthen SIS's market position. If such an opportunity arises, SIS may engage in discussions or negotiations about the target company, and may also conduct a business investigation of the target. If the purchase price for any such acquisition were to include a premium over the target's book or market value, which is not unusual, SIS's book value might be diluted, at least in the short term. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS We have made forward-looking statements in this document that are subject to risks and uncertainties. Forward-looking statements include the information concerning possible or assumed future results of operations of our companies set forth under "--Recommendation of the GBT Board and Reasons for the Merger," "--Recommendation of the SIS Board and Reasons for the Merger" and "Opinions of Financial Advisers" and statements preceded by, followed by or including words such as "believes," "anticipates," "plans," "expects" and similar expressions. For those statements, we claim the protection of the safe harbor for forward- looking statements contained in the Private Securities Litigation Reform Act of 1995. You should understand that the following important factors, in addition to those discussed elsewhere in this document and the documents we incorporate by reference, could affect the future results of the companies and could cause those results to differ materially from those expressed in our forward-looking statements: we may not fully realize anticipated operating efficiencies; we may lose deposits, customers or revenue after the merger; competitive pressure in the banking industry, negative changes in general economic conditions or changes in banking regulation could affect our operations; and changes in interest rates could reduce our operating margins. 6 SUMMARY PRO FORMA FINANCIAL DATA The unaudited pro forma financial data set forth below have been prepared to reflect the Merger using the pooling of interests method of accounting, assuming the Merger had been consummated as of June 30, 1997 for the balance sheet data and as of January 1, 1994 for results of operations data. Under the pooling of interests method of accounting, the recorded assets and liabilities of the separate companies are added together at the amounts shown in their preceding separate financial statements and generally become the recorded assets and liabilities of the combined corporation. The assets of the constituent entities are recorded on the resulting corporation's books at their historical cost. The combined shareholders' equity accounts are adjusted to reflect the fact that SIS shares will be issued in exchange for GBT shares. The results of operations of the separate companies are added together for each period shown, and pro forma adjustments are made only to reflect SIS's income statement classifications. For a description of the effect of the pooling of interests method of accounting on the Merger and the historical financial statements of SIS, see "The Merger--Accounting Treatment." The unaudited pro forma financial data are presented for illustrative purposes only and, therefore, are not necessarily indicative of the operating results and financial position that might have been achieved had the Merger occurred as of an earlier date, nor are they necessarily indicative of operating results and financial position which may occur in the future. The pro forma amounts do not include any adjustments for estimated operating efficiencies or revenue enhancements resulting from the Merger. The unaudited pro forma financial data presented are based on and derived from, and should be read in conjunction with, the historical and pro forma consolidated financial statements and notes thereto for SIS and GBT either incorporated by reference or included herein. See "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
AT OR FOR THE YEAR ENDED AT OR FOR THE DECEMBER 31, SIX MONTHS ENDED ----------------------------------- JUNE 30, 1997 1996 1995 1994 ----------------------------- ---------- ---------- (DOLLAR IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA: Total assets............ $ 1,696,233 -- -- -- Loans receivable........ 798,819 -- -- -- Investment securities... 759,888 -- -- -- Foreclosed property..... 1,183 -- -- -- Deposits................ 1,231,998 -- -- -- Borrowed funds.......... 304,462 -- -- -- Shareholders' equity.... 120,251 -- -- -- RESULTS OF OPERATIONS: Interest and dividend income................. $ 58,588 $ 101,738 $ 86,434 $ 73,366 Interest expense........ 28,554 48,915 39,448 29,729 Net interest and dividend income........ 30,034 52,823 46,986 43,637 Provision for loan losses................. 921 3,625 6,191 27,531 Net interest and dividend income after provision for loan losses............ 29,113 49,198 40,795 16,106 Noninterest income...... 7,208 14,667 11,669 11,002 Noninterest expense..... 24,786 48,210 45,622 54,840 Income tax provision (benefit).............. 4,540 (5,030) (6,259) 35 Net income (loss)....... 6,995 20,685 13,101 (27,767) COMMON SHARE DATA: Primary net income (loss) per share....... $ 1.00 $ 3.01 $ 2.12 $ (4.53) Fully diluted net income (loss) per share....... $ 1.00 $ 2.99 $ 2.11 $ (4.50) CAPITAL RATIOS: Equity to total assets.. 7.09% -- -- -- Core (leverage) capital ratio at period end.... 6.96% -- -- -- Total risk-based capital ratio at period end.... 13.01% -- -- --
7 COMPARATIVE PER SHARE FINANCIAL INFORMATION The following table sets forth selected comparative per share data for each of SIS and GBT on a historical basis and selected unaudited pro forma comparative per share data assuming the Merger had been consummated as of the beginning of the earliest period presented for earnings per share and dividends per share and as of the end of the period presented for book value per share. The unaudited pro forma financial data have been prepared giving effect to the Merger as a pooling of interests. For a description of the effect of pooling of interests method of accounting on the Merger and the historical financial statements of SIS, see "THE MERGER--Accounting Treatment." The comparative per share data presented are based on and derived from, and should be read in conjunction with, the historical consolidated financial statements and notes thereto for SIS and GBT incorporated herein by reference. The selected historical unaudited financial data for SIS and GBT for the six months ended June 30, 1997 have been prepared in accordance with generally accepted accounting principles ("GAAP") applicable to interim financial information and, in the opinion of the respective managements of SIS and GBT, include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of financial information for such periods. The unaudited pro forma comparative data are presented for comparative purposes only and, therefore, are not necessarily indicative of the operating results and financial position that might have been achieved had the Merger occurred as of an earlier date, nor are they necessarily indicative of operating results and financial position that may occur in the future. The pro forma amounts do not include any adjustments for estimated operating efficiencies or revenue enhancements resulting from the Merger. The unaudited pro forma financial data presented are based on and derived from, and should be read in conjunction with, the historical and pro forma consolidated financial statements and notes thereto for SIS and GBT either incorporated by reference or included herein. See "UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS."
AT OR FOR THE YEAR ENDED AT OR FOR THE DECEMBER 31, SIX MONTHS ENDED ------------------------ JUNE 30, 1997 1996 1995 1994 ---------------- ------------------------ SIS Income (loss) per common and common equivalent share: Historical--Primary EPS.......... $1.03 $ 3.29 $ 2.21 $ (5.21) Historical--Fully Diluted EPS.... $1.02 $ 3.26 $ 2.19 $ (5.21) Pro forma combined--Primary EPS(1).......................... $1.00 $ 3.01 $ 2.12 $ (4.53) Pro forma combined--Fully Diluted EPS(1).......................... $1.00 $ 2.99 $ 2.11 $ (4.50) Dividends per common share: Historical....................... $0.24 -- -- -- GBT Income (loss) per common and common equivalent share: Historical--Primary EPS.......... $0.68 $ 1.38 $ 1.22 $ (0.67) Historical--Fully Diluted EPS.... $0.68 $ 1.38 $ 1.22 $ (0.67) Pro forma equivalent--Primary EPS(2).......................... $0.74 $ 2.23 $ 1.57 $ (3.35) Pro forma equivalent--Fully Diluted EPS(2).................. $0.74 $ 2.21 $ 1.56 $ (3.33) Dividends per common share: Historical....................... $0.16 $ 0.28 -- -- Pro forma equivalent(3).......... $0.18 -- -- --
8
JUNE 30, DECEMBER 31, 1997 1996 -------- ------------ SIS Book value per common share at period end: Historical.............................................. $18.52 $17.81 Pro forma combined(4)................................... $17.35 $16.59 GBT Book value per common share at period end: Historical.............................................. $ 9.82 $ 9.22 Pro forma equivalent(2)................................. $12.84 $12.28
- -------- (1) SIS pro forma combined income per common share is determined by dividing the pro forma combined net income by SIS's and GBT's combined historical weighted average shares, after adjustment of GBT's historical number of shares by the Exchange Ratio of 0.74. (2) GBT pro forma equivalent income per common share and book value per common share are calculated by multiplying the pro forma combined amounts by the ratio of 0.74 of a share of SIS Common Stock for each share of GBT Common Stock. (3) GBT pro forma equivalent dividends per common share are calculated by multiplying the SIS historical dividends per common share by the ratio of 0.74 of a share of SIS Common Stock for each share of GBT Common Stock. (4) SIS pro forma combined book value per common share is determined by dividing the pro forma combined shareholders' equity by SIS's and GBT's combined historical shares outstanding as of the period end, after adjustment of GBT's historical number of shares by the Exchange Ratio of 0.74. 9 SELECTED FINANCIAL DATA The following tables set forth consolidated historical summary financial data for the periods and as of the dates indicated for SIS and its consolidated subsidiaries and for GBT and its consolidated subsidiaries. The summary selected financial data are based on and derived from, and should be read in conjunction with, the historical consolidated financial statements and notes thereto for SIS and GBT incorporated herein by reference. The historical unaudited financial statements as of or for the six months ended June 30, 1997 and 1996 have been prepared in accordance with GAAP applicable to interim financial information and, in the opinion of the respective managements of SIS and GBT, include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of financial information for such periods. 10 SELECTED HISTORICAL FINANCIAL DATA OF SIS
AT OR FOR THE SIX MONTHS ENDED AT OR FOR THE JUNE 30, YEARS ENDED DECEMBER 31, ---------------------- ------------------------------------------------------------ 1997 1996 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) RESULTS OF OPERATIONS: Interest and dividend income................. $ 49,452 $ 39,244 $ 84,277 $ 69,916 $ 57,913 $ 63,174 $ 72,187 Interest expense........ 24,403 19,216 41,173 32,556 23,792 27,175 36,537 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest and dividend income....... 25,049 20,028 43,104 37,360 34,121 35,999 35,650 Provision for loan losses................. 801 1,450 2,950 4,359 25,742 15,740 13,219 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest and dividend income after provision for loan losses................ 24,248 18,578 40,154 33,001 8,379 20,259 22,431 Noninterest income...... 5,579 5,318 11,470 8,124 8,329 11,671 10,426 Noninterest expense..... 20,282 17,957 37,737 35,425 43,615 49,589 45,054 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes and cumulative effect of change in accounting principle............. 9,545 5,939 13,887 5,700 (26,907) (17,659) (12,197) Income tax expense (benefit).............. 3,785 490 (4,273) (5,759) -- (3,384) (3,228) Cumulative effect of change in accounting principle.............. -- -- -- -- -- -- 1,295 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income............ $ 5,760 $ 5,449 $ 18,160 $ 11,459 $ (26,907) $ (14,275) $ (10,264) ========== ========== ========== ========== ========== ========== ========== BALANCE SHEET DATA: Total assets............ $1,434,545 $1,209,843 $1,348,612 $1,070,978 $ 920,689 $ 969,904 $1,002,513 Loans receivable, gross.................. 660,430 592,720 624,998 573,083 513,486 640,574 717,301 Allowance for possible loan losses............ 16,392 14,913 15,597 14,986 15,844 18,367 12,176 Investment securities... 678,855 530,641 641,497 419,777 319,564 231,565 156,279 Investments in real estate and real estate partnerships........... 2,703 5,494 2,757 6,092 6,699 9,939 13,219 Deposits................ 1,015,404 927,298 969,517 885,386 853,633 874,906 898,050 Borrowings.............. 280,357 168,919 247,896 78,071 2,392 6,063 6,240 Total shareholders' equity................. 103,273 86,996 101,917 81,469 28,503 58,531 72,762 PER SHARE DATA: Net income(1): Primary................ $ 1.03 $ 1.00 $ 3.29 $ 2.21 $ (5.21) $ (2.77) $ (1.98) Fully diluted(2)....... $ 1.02 $ 1.00 $ 3.26 $ 2.19 $ (5.21) $ (2.77) $ (1.98) Total cash dividends paid................... $ 0.24 -- -- -- -- -- -- Book value per share(3)............... $ 18.52 $ 15.20 $ 17.81 $ 14.27 $ 4.99 $ 10.25 $ 12.74 Weighted average fully diluted shares outstanding(1)......... 5,640,349 5,445,968 5,573,390 5,220,778 5,220,778 5,220,778 5,220,778 SELECTED FINANCIAL RATIOS: Return on average assets(4).............. 0.83% 0.97% 1.52% 1.16% (2.88)% (1.46)% (1.01)% Return on average shareholders' equity(4).............. 11.45% 13.43% 20.91% 17.25% (63.55)% (20.85)% (13.24)% Net interest margin(4)(5)........... 3.84% 3.80% 3.85% 4.00% 3.90% 4.13% 3.97% Cash dividends per share as a percentage of earnings per share..... 23.53% -- -- -- -- -- -- Equity to total assets.. 7.20% 7.19% 7.56% 7.61% 3.10% 6.03% 7.26% Core (leverage) capital ratio at period end.... 6.99% 7.40% 7.41% 7.57% 3.43% 6.02% 7.28% Total risk-based capital ratio at period end.... 13.13% 13.51% 14.05% 13.77% 7.32% 9.72% 11.38% Allowance for loan losses to total gross loans.................. 2.48% 2.51% 2.50% 2.61% 3.09% 2.87% 1.70% Nonperforming assets to total assets........... 0.47% 0.87% 0.56% 1.30% 2.81% 9.94% 12.35%
Footnotes on following page 11 Footnotes to preceding page - -------- (1) Net income per share for the six months ended June 30, 1997 and 1996 and for the year ended December 31, 1996 is computed on weighted average shares outstanding for periods presented. Net income (loss) per share for the years ended December 31, 1995, 1994, 1993 and 1992 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 earliest period presented. (2) For the years ended December 31, 1994, 1993 and 1992 the fully diluted earnings per share calculation is anti-dilutive. (3) Calculated on the basis of 5,576,842, 5,722,600, 5,723,600 shares outstanding at June 30, 1997 and 1996, and December 31, 1996, respectively. At December 31, 1995, 1994, 1993 and 1992 the calculation is based on 5,710,700 shares outstanding on a fully diluted basis. (4) June 30, 1997 and 1996 figures are annualized. (5) On a fully taxable equivalent basis. 12 SELECTED HISTORICAL FINANCIAL DATA OF GBT
AT OR FOR THE SIX MONTHS ENDED AT OR FOR THE JUNE 30, YEARS ENDED DECEMBER 31, ---------------------- ------------------------------------------------------------ 1997 1996 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) RESULTS OF OPERATIONS: Interest income......... $ 9,136 $ 8,550 $ 17,461 $ 16,518 $ 15,453 $ 16,136 $ 17,580 Interest expense........ 4,151 3,702 7,742 6,892 5,937 6,392 7,488 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income.... 4,985 4,848 9,719 9,626 9,516 9,744 10,092 Provision (benefit) for loan losses............ 120 375 675 (213) 1,789 3,847 3,587 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net interest income after provision (benefit) for loan losses................ 4,865 4,473 9,044 9,839 7,727 5,897 6,505 Other operating income.. 1,629 1,546 3,197 3,135 4,043 4,045 3,670 Other operating expense................ 4,504 4,940 10,473 10,197 11,225 12,606 10,898 (Recovery) loss on National Premium CD Program................ -- -- -- (410) 1,370 -- -- Loss on bulk sale of loans.................. -- -- -- 2,045 -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Income (loss) before income tax expense (benefit) and cumulative effect of change in accounting principle............. 1,990 1,079 1,768 1,142 (825) (2,664) (723) Income tax expense (benefit).............. 755 -- (757) (500) 35 65 76 Cumulative effect of change in accounting principle.............. -- -- -- -- -- 52 -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net income (loss)..... $ 1,235 $ 1,079 $ 2,525 $ 1,642 $ (860) $ (2,677) $ (799) ========== ========== ========== ========== ========== ========== ========== BALANCE SHEET DATA: Total assets............ $ 261,298 $ 236,902 $ 248,598 $ 229,774 $ 218,292 $ 228,981 $ 238,499 Loans receivable(1)..... 156,390 145,080 148,733 141,965 130,790 147,736 164,742 Allowance for possible loan losses............ 3,448 3,407 3,352 3,029 4,517 4,742 4,601 Investment securities(2).......... 83,144 70,633 62,763 65,071 67,329 54,832 40,032 Deposits................ 216,594 194,542 208,420 190,315 194,384 202,392 218,382 Borrowings.............. 24,105 25,000 21,350 23,000 13,000 14,000 5,000 Total shareholders' equity................. 17,963 15,659 16,869 14,974 8,040 11,054 13,796 PER SHARE DATA: Net income (loss) per share.................. $ 0.68 $ 0.59 $ 1.38 $ 1.22 $ (0.67) $ (2.08) $ (0.62) Total cash dividends paid per share......... $ 0.16 $ 0.07 $ 0.28 -- -- $ 0.05 $ 0.20 Book value per share.... $ 9.82 $ 8.56 $ 9.22 $ 8.18 $ 6.23 $ 8.57 $ 10.70 Weighted average shares outstanding............ 1,829,920 1,829,920 1,829,920 1,352,057 1,289,920 1,289,920 1,289,920 SELECTED FINANCIAL RATIOS: Return (loss) on average assets(3).............. 0.99% 0.94% 1.08% 0.75% (0.39)% (1.15)% (0.35)% Return (loss) on average shareholders' equity(3).............. 14.59% 14.24% 16.29% 16.04% (8.05)% (18.68)% (5.10)% Net interest margin(3)(4)........... 4.33% 4.56% 4.46% 4.74% 4.69% 4.66% 5.00% Cash dividends per share as a percentage of earnings (loss) per share.................. 23.53% 11.86% 20.29% -- -- (2.40)% (32.26)% Equity to total assets.. 6.87% 6.61% 6.79% 6.52% 3.68% 4.83% 5.78% Core (leverage) capital ratio at period end.... 7.22% 7.01% 7.07% 6.77% 4.64% 4.76% 5.86% Total risk-based capital ratio at period end.... 13.05% 13.43% 13.42% 12.83% 9.08% 8.62% 9.28% Allowance for loan losses to loans receivable(1).......... 2.20% 2.35% 2.25% 2.13% 3.45% 3.21% 2.79% Nonperforming assets to total assets........... 1.04% 1.02% 1.06% 0.46% 2.61% 4.26% 4.14%
- -------- (1) Net of unearned income. (2) Includes investment securities available-for-sale, investment securities held-to-maturity and Federal Home Loan Bank stock. (3) June 30, 1997 and 1996 figures are annualized. (4) On a fully taxable equivalent basis. 13 THE MEETINGS MATTERS TO BE DISCUSSED AT THE MEETINGS General. This Proxy Statement--Prospectus is being furnished by SIS to holders of shares of SIS Common Stock and by GBT to holders of shares of GBT Common Stock in connection with the solicitation of proxies from such shareholders for use at the SIS Meeting and the GBT Meeting, respectively. SIS. At the SIS Meeting or any adjournments or postponements thereof, holders of shares of SIS Common Stock will be asked to approve and adopt the Merger Agreement and the consummation of the transactions contemplated thereby, including the Merger and the related issuance by SIS of shares of SIS Common Stock to the shareholders of GBT, and such other matters as may properly be brought before the meeting. THE BOARD OF DIRECTORS OF SIS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND RECOMMENDS A VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER AND THE RELATED ISSUANCE BY SIS OF SHARES OF SIS COMMON STOCK TO THE STOCKHOLDERS OF GBT. GBT. At the GBT Meeting or any adjournments or postponements thereof, holders of shares of GBT Common Stock will be asked to approve and adopt the Merger Agreement and Plan of Merger and the consummation of the transactions contemplated thereby, including the Merger. THE BOARD OF DIRECTORS OF GBT HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND PLAN OF MERGER AND RECOMMENDS THAT SHAREHOLDERS VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND PLAN OF MERGER AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER. RECORD DATES; STOCK ENTITLED TO VOTE; QUORUM SIS. The SIS Record Date for the determination of shares of those holders of SIS Common Stock entitled to notice of, and to vote at, the SIS Meeting is October 10, 1997. Only holders of record of shares of SIS Common Stock at the close of business on the SIS Record Date will be entitled to notice of and to vote at the SIS Meeting or any adjournments or postponements thereof. As of the SIS Record Date, there were 5,580,842 shares of SIS Common Stock outstanding and entitled to vote. The presence in person or by proxy of shares representing a majority of votes (2,790,422 votes) entitled to be cast by holders of SIS Common Stock issued and outstanding and entitled to vote as of the SIS Record Date is required to constitute a quorum for the transaction of business at any meeting of shareholders. Abstentions and broker non-votes are included in the determination of the number of shares of SIS Common Stock present and voting. "Broker non-votes" are proxies with respect to shares held in record name by brokers or nominees, as to which (i) instructions have not been received from the beneficial owners or persons entitled to vote, (ii) the broker or nominee does not have discretionary voting power under applicable national securities exchange rules or the instrument under which it serves in such capacity, and (iii) the record holder has indicated on the proxy card or otherwise notified the corporation that it does not have authority to vote such shares on that matter. GBT. The GBT Board has fixed the close of business on October 10, 1997 as the GBT Record Date. Only the holders of record of shares of GBT Common Stock at the close of business on the GBT Record Date will be entitled to notice of and to vote at the GBT Meeting and any adjournments or postponements thereof. At the GBT Record Date, 1,829,920 shares of GBT Common Stock were outstanding and entitled to vote. The presence in person or by proxy of the holders of a majority of the issued and outstanding shares of GBT Common Stock entitled to vote is required to constitute a quorum at the GBT Meeting. Shares of GBT Common Stock for 14 which proxies or ballots have been received but with respect to which holders of shares have abstained with respect to the approval and adoption of the Merger Agreement and Plan of Merger (whether as a broker non-vote or otherwise) will be counted as present for purposes of determining the presence or absence of a quorum for the transaction of business at the GBT Meeting. SOLICITATION OF PROXIES SIS. Shareholders of record on the SIS Record Date are entitled to cast their votes, in person or by properly executed proxy, at the SIS Meeting. Shareholders are requested to complete, date, sign and promptly return the accompanying proxy card in the enclosed envelope. All shares represented at the SIS Meeting by properly executed proxies received prior to or at the SIS Meeting and not properly revoked will be voted at the SIS Meeting in accordance with the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED, SUCH PROXIES WILL BE VOTED FOR APPROVAL OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. If a quorum is not present at the time the SIS Meeting is convened, or if for any other reason SIS believes that additional time should be allowed for the solicitation of proxies or for the satisfaction of conditions to the Merger or the transactions contemplated thereby, SIS may adjourn the SIS Meeting with a vote of the holders of a majority of the voting power represented by the SIS Common Stock present at such meeting. If SIS proposes to adjourn the SIS Meeting, the persons named in the enclosed proxy card will vote all shares for which they have voting authority in favor of such adjournment. A proxy that withholds discretionary authority or that is voted against the Merger Agreement will not be voted in favor of any adjournment or postponement of the SIS Meeting. Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by (i) filing with the Clerk of SIS, at or before the SIS Meeting, a written notice of revocation bearing a date later than the date of the proxy, (ii) duly executing a subsequent proxy relating to the same shares and delivering it to the Clerk of SIS at or before the SIS Meeting or (iii) attending the SIS Meeting and voting in person (although attendance at the SIS Meeting will not in and of itself constitute revocation of a proxy). Any written notice revoking a proxy should be sent to Michael E. Tucker, Clerk of SIS, 1441 Main Street, Springfield, Massachusetts 01102. Proxies are being solicited by and on behalf of the SIS Board. In addition to solicitation by use of the mails, SIS has retained Morrow & Co. to solicit proxies at an anticipated cost of $5,500 plus reimbursement for out-of-pocket expenses. Morrow & Co. may solicit proxies in person, by telephone, telegram or other means of communications. Further, proxies may be solicited by directors, officers and employees of SIS in person or by telephone, telegram or other means of communication. Such directors, officers and employees will not be additionally compensated, but may be reimbursed for out-of-pocket expenses in connection with such solicitation. Arrangements will be made with custodians, nominees and fiduciaries for forwarding of proxy solicitation materials to beneficial owners of SIS Common Stock held of record by such persons, and SIS may reimburse such custodians, nominees and fiduciaries for reasonable expenses incurred in connection therewith. GBT. Proxies in the form enclosed are being solicited by and on behalf of the GBT Board. Shareholders are requested to complete, date, sign and promptly return the accompanying proxy card in the enclosed envelope. Shares represented by a properly executed proxy received prior to the vote at the GBT Meeting and not revoked will be voted at the GBT Meeting as directed in the proxy. IF A PROXY IS SUBMITTED AND NO DIRECTIONS ARE GIVEN, THE PROXY WILL BE VOTED FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND PLAN OF MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY. In addition to solicitation by use of the mails, GBT has retained Morrow & Co. to solicit proxies at an anticipated cost of $6,000 plus reimbursement for out-of-pocket expenses. Morrow & Co. may solicit proxies in person, by telephone, telegram or other means of communications. Further, proxies may be solicited by directors, 15 officers and employees of GBT in person or by telephone, telegram or other means of communication. Such directors, officers and employees will not be additionally compensated, but may be reimbursed for out-of-pocket expenses in connection with such solicitation. Arrangements will be made with custodians, nominees and fiduciaries for forwarding of proxy solicitation materials to beneficial owners of GBT Common Stock held of record by such persons, and GBT may reimburse such custodians, nominees and fiduciaries for reasonable expenses incurred in connection therewith. The persons named as proxies by a GBT shareholder may propose and vote for one or more adjournments or postponements of the GBT Meeting to permit further solicitation of proxies in favor of the proposals to be considered at the GBT Meeting. A proxy voted against the Merger Agreement and Plan of Merger will not be voted in favor of any adjournment or postponement of the GBT Meeting. A holder of record of GBT Common Stock may revoke a proxy by filing an instrument of revocation with Camille S. Bushnell, Secretary of GBT, 2461 Main Street, Glastonbury, Connecticut 06033. Such shareholder may also revoke a proxy by filing a duly executed proxy bearing a later date, or by appearing at the GBT Meeting in person and notifying the Secretary at the GBT Meeting. Any shareholder of record attending the GBT Meeting may vote in person whether or not a proxy has been previously given, but the mere presence (without notifying the Secretary) of a shareholder at the GBT Meeting will not constitute revocation of a previously given proxy. REQUIRED VOTES SIS. The affirmative vote of a majority of the votes cast at the SIS Meeting is required for approval of the Merger Agreement and the transactions contemplated thereby, including the issuance of shares of SIS Common Stock to the shareholders of GBT. Abstentions and broker non-votes will have the same effect as votes against the Merger Agreement. Shareholders of SIS are entitled to one vote at the SIS Meeting for each share of SIS Common Stock held of record at the close of business on the SIS Record Date. Because SIS Interim Bank rather than SIS will be a party to the Merger, the vote of the shareholders of SIS is not required by either Massachusetts law or the SIS articles of organization (the "SIS Articles") to approve the Merger Agreement or the Merger. However, SIS has agreed with GBT that SIS will seek approval of the Merger Agreement by the SIS shareholders, and the Bylaws of the National Association of Securities Dealers require shareholder approval of the issuance of shares of SIS Common Stock in connection with the Merger. At the close of business on the SIS Record Date, 5,580,842 shares of SIS Common Stock were outstanding and entitled to vote, of which approximately 341,000 shares (including approximately 166,000 shares subject to vested stock options), or approximately 6.11%, were held by directors and executive officers of SIS. The directors of SIS, who beneficially own a total of 188,019 shares of SIS Common Stock (including 76,560 shares subject to vested stock options), representing approximately 3.36% of the shares of SIS Common Stock issued and outstanding on the SIS Record Date, have entered into an agreement (the "SIS Stockholders Agreement"), pursuant to which they have agreed to vote all of their shares of SIS Common Stock in favor of the Merger. GBT. The affirmative vote of two-thirds of the votes (1,219,947 votes) of holders of the outstanding shares of GBT Common Stock is required for approval of the Merger Agreement and Plan of Merger and the transactions contemplated thereby. Abstentions and broker non-votes will have the same effect as votes against the Merger Agreement and Plan of Merger. Shareholders of GBT are entitled to one vote at the GBT Meeting for each share of GBT Common Stock held of record at the close of business on the GBT Record Date. At the close of business on the GBT Record Date, 1,829,920 shares of GBT Common Stock were outstanding and entitled to vote. GBT directors and executive officers who beneficially own a total of 419,622 shares of GBT Common Stock, representing approximately 22.93% of the shares of GBT Common Stock issued and outstanding on the GBT Record Date, have entered into an agreement (the "GBT Stockholders Agreement"), pursuant to which such shareholders have agreed to certain restrictions on their respective shares of GBT Common Stock. Specifically, such shareholders have agreed, with respect to all presently owned or after-acquired stock, (a) to vote such stock in favor of the Merger and against any other acquisition transaction with a 16 party other than SIS or its affiliates, and (b) generally not to sell, assign, transfer, encumber or otherwise dispose of such stock. The GBT Stockholders Agreement will remain in effect until the earlier of the consummation of the Merger or the termination of the Merger Agreement in accordance with its terms. Assuming that all of the shares subject to the GBT Stockholders Agreement are in fact voted in favor of the Merger Agreement and Plan of Merger, the vote of holders of approximately 800,325 additional shares of GBT Common Stock, representing approximately 43.74% of the shares of GBT Common Stock issued and outstanding on the GBT Record Date, will be required to approve and adopt the Merger Agreement and Plan of Merger and the transactions contemplated thereby. SOLICITATION EXPENSES SIS and GBT will pay their respective expenses in connection with the solicitation of proxies. BENEFICIAL OWNERSHIP OF GBT COMMON STOCK The following table sets forth certain information regarding beneficial ownership of GBT Common Stock as of October 10, 1997 by (i) each person known by GBT to own beneficially more than 5% of GBT Common Stock, (ii) each director of GBT, and (iii) all directors and executive officers of GBT as a group. The number of shares beneficially owned by such persons is determined according to rules of the Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power, and also any shares that the individual or entity has the right to acquire within 60 days of October 10, 1997 through the exercise of an option, conversion feature or similar right. Except as noted below, each holder has sole voting and investment power with respect to shares of GBT Common Stock listed as beneficially owned by such person or entity.
PERCENTAGE OF NUMBER OF SHARES OUTSTANDING OF GBT GBT COMMON NAME COMMON STOCK STOCK ---- ---------------- ------------- DIRECTORS AND EXECUTIVE OFFICERS Loren J. Andreo............................. 78,591 4.29% Ronald E. Bourbeau.......................... 179,823 9.83% Camille S. Bushnell......................... 1,190 * John J. Carson.............................. 185 * Alden A. Ives............................... 11,944(1) * Harvey A. Katz.............................. 80,084(2) 4.38% Grace C. Nome............................... 691 * Mark A. Sheptoff............................ 5,456(3) * J. Gilbert Soucie........................... 54,310(4) 2.98% James Uccello............................... 2,059 * All Directors and Executive Officers as a group (13 persons)......................... 419,622 22.93% 5% BENEFICIAL OWNERS Ronald E. Bourbeau(5)....................... 179,823 9.83% Thomas J. Carroll(6)........................ 96,000 5.25%
- -------- * Less than 1% (1) Includes 5,192 shares owned by spouse and 1,588 shares owned jointly with spouse. (2) Includes 1,991 shares owned by spouse and 16,697 shares as trustee for Harvey A. Katz, Profit Sharing Plan. (3) Includes 5,000 shares as Trustee for Mark A. Sheptoff, Voluntary Retirement Plan. (4) Includes 15,500 shares owned jointly with spouse, 12,272 shares owned by spouse and 5,500 shares owned by son. Mr. Soucie disclaims beneficial ownership of the 5,500 shares owned by his son. (5) Mr. Bourbeau's address is Reb Realty, 54 Riverview Street, Portland, Connecticut 06480. (6) Mr. Carroll's address is P.O. Box 488, Middleburg, Virginia 22117. 17 APPRAISAL RIGHTS AND DISSENTING SHAREHOLDERS Shareholders of GBT who do not vote to approve and adopt the Merger Agreement and Plan of Merger and who comply with the requirements of Sections 33-855 through 33-872 (the "Dissenters' Rights Statute") of the Connecticut Business Corporations Act (the "CBCA"), a copy of which is attached to this Proxy Statement--Prospectus as Appendix E, will be entitled to dissenters' rights. Because the Merger involves the merger of a subsidiary of SIS, SIS Interim Bank ("Interim Bank"), into GBT rather than a merger between SIS itself and GBT, shareholders of SIS have no dissenters' rights in connection with the Merger. If the Merger is consummated, a shareholder of GBT who does not vote in favor of the approval and adoption of the Merger Agreement and Plan of Merger, and who follows the statutory provisions of the Dissenters' Rights Statute summarized herein may require GBT to pay the fair value of his or her shares of GBT Common Stock, determined as provided in the Dissenters' Rights Statute. A shareholder of GBT who desires to pursue his or her dissenters' rights must deliver to GBT, before the taking of the vote on the Merger Agreement and Plan of Merger, a written notice of intent to demand payment for his or her shares if the proposed action is effectuated. Notice of an intention to demand payment should be addressed to Camille S. Bushnell, Secretary, Glastonbury Bank & Trust Company, 2461 Main Street, Glastonbury, Connecticut 06033. The shareholder must then not vote any shares in favor of the approval and adoption of the Merger Agreement and Plan of Merger. A vote against the approval and adoption of the Merger Agreement and Plan of Merger, whether by proxy or in person at the GBT Meeting, is not required to perfect a shareholder's dissenters rights, nor will a negative vote be considered a demand for payment in and of itself without the prior delivery of the demand. If the Merger Agreement and Plan of Merger are approved and adopted by the required vote at the GBT Meeting, and all conditions to consummation of the Merger are satisfied or waived, GBT will, within 10 days after the date on which the Merger has become effective pursuant to the laws of the State of Connecticut, deliver a written dissenters' notice to all shareholders who complied with the statutory requirements, which notice shall (i) state where the payment demand shall be sent and when certificates for certificated shares must be deposited; (ii) inform holders of uncertificated shares to what extent transfer of the shares will be restricted after the payment demand is received; (iii) supply a form for demanding payment that includes the date of the first announcement to news media or to shareholders of the terms of the Merger Agreement and Plan of Merger and requires that the person asserting dissenters' rights certify whether or not beneficial ownership of such shares was acquired before that date; (iv) set a date by which GBT must receive the payment demand, which date shall not be fewer than 30 nor more than 60 days after the date the notice is delivered; and (v) be accompanied by a copy of the appropriate statutory provisions. Within the time period set forth in the written dissenters' notice, the dissenting shareholder must demand payment, certify whether beneficial ownership of the shares was acquired before the date set forth pursuant to clause (iii) above, and deposit his or her certificates in accordance with the terms of the notice. The right of dissent must be exercised with respect to all shares owned by the same person. With respect to the shares acquired by the shareholder prior to the date set forth pursuant to clause (iii) above, GBT will then pay each dissenter who has complied with the provisions set forth above the amount GBT estimates to be the fair value of the shares, plus accrued interest. This payment will be accompanied by certain required financial information relating to GBT, a statement of its estimate of the fair value of the shares, an explanation of how the interest was calculated, a statement of the dissenter's right to demand payment in a different amount if the shareholder is dissatisfied with the payment tendered by GBT and a copy of the relevant statutory provisions. With respect to shares acquired on or after the date set forth pursuant to clause (iii) above, GBT may withhold payment and merely send to the dissenter its offer of payment, together with a statement of its estimate of fair value, an explanation of how the interest was calculated and a statement of the dissenter's right to demand payment in a different amount. If the shareholder is dissatisfied with the payment or offer tendered by GBT or if GBT fails to make payment within 60 days after the date set for demanding payment, he or she may notify GBT in writing of his or her own estimate of the fair value of the shares, and the amount of interest due, and demand payment in that 18 amount less any payment received through the procedure set forth above. This notice must be delivered within 30 days after GBT makes or offers payment for the shareholder's shares as provided above. If the parties have not agreed to a payment which is acceptable to both of them, GBT will commence a proceeding within 60 days after receiving the dissatisfied shareholder's payment demand, by a petition in Superior Court for the judicial district of Hartford-New Britain, Connecticut to determine the fair value of the shares and accrued interest, making all dissenters whose demands remain unsettled at the time parties to the proceeding, whereupon the court will determine the appropriate amount of payment. The cost and expenses of any court proceeding to determine the fair value of the shares of GBT Common Stock will be determined by the court and will be assessed against GBT, provided that the Court may assess costs against some or all of the shareholders to the extent it finds the dissenters acted arbitrarily, vexatiously or not in good faith. The Court may include in any such assessment the fees and expenses of counsel and experts to the extent the Court finds such assessment equitable. A GBT shareholder who exercises dissenters' rights and receives cash will recognize gain for federal income tax purposes, the tax rate on which will depend upon the holding period for his or her GBT Common Stock. The exchange of shares for cash upon the exercise of dissenters' rights could be treated as substantially equivalent to a dividend and, therefore, taxed as ordinary income if the recipient of cash owns or constructively owns other shares of SIS Common Stock. See "THE MERGER--Certain Federal Income Tax Consequences." 19 THE MERGER GENERAL This section of the Proxy Statement-Prospectus describes the material terms and provisions of the proposed Merger, including the principal provisions of the Merger Agreement and Plan of Merger, and related transactions. Copies of the Merger Agreement and Plan of Merger are attached to this Proxy Statement-- Prospectus as Appendix A and Appendix B, respectively. All shareholders are urged to read the Merger Agreement (including the Plan of Merger) in its entirety. The Merger Agreement provides that, subject to the satisfaction or waiver (where permissible) of certain conditions, which are described more fully herein and therein, Interim Bank will be merged with and into GBT. In connection with the Merger, each outstanding share of GBT Common Stock will be converted into and become exchangeable for 0.74 (the "Exchange Ratio") of one share of SIS Common Stock plus cash in lieu of any fractional share of SIS Common Stock. BACKGROUND OF THE MERGER Like many Connecticut financial institutions, GBT experienced financial difficulties as a result of the national and regional recession which began in 1989. These difficulties resulted in GBT's stipulation to a Cease and Desist Order issued by the FDIC and agreed to by the Connecticut Department of Banking in 1993 (the "Order"). GBT responded by focusing on improving its financial condition and earnings potential. As a result of its efforts, the Order was lifted in 1996. Following issuance of the Order, GBT received several acquisition proposals and considered seriously two of them. However, after much deliberation, GBT announced in October 1994 that it had decided not to pursue any proposals that would involve its acquisition by another company, and would instead concentrate on a financial recovery as an independent institution. GBT furthered its independence strategy and improved its financial condition by completing a $3.5 million rights offering of its common stock and a bulk sale of approximately $7.7 million of non-performing assets and certain loans in the fourth quarter of 1995. During 1996 and the first half of 1997, GBT continued to focus on improving shareholder value as an independent institution. However, in considering long- term objectives, the GBT Board noted that increasing industry consolidation and changes in government regulation of interstate banking had significantly increased competition within GBT's market area. In order to compete effectively in this environment, the GBT Board determined that it would be beneficial to expand the range of products and services offered to GBT's customers and to obtain the capital resources that would enable it to do so. During this period, GBT engaged in preliminary dicussions concerning a possible affiliation with an out-of-state organization, but the discussions terminated because the parties were unable to agree on pricing. GBT engaged MB&D in April 1997 for professional advice on the relative merits of attempting to expand its business either by internal growth or by a strategic alliance with another organization. GBT and MB&D analyzed these alternatives and determined that an affiliation with a larger institution without a Connecticut presence could further GBT's business objectives. On July 3, 1997, MB&D approached SIS on behalf of GBT and inquired whether SIS would be interested in discussing an affiliation between the two companies. The GBT Board believed that such an affiliation, if properly structured, would not only enhance long-term shareholder value by increasing the resources available to GBT for expansion of its franchise, but would also allow GBT to continue a form of independent operation that would benefit its customers, suppliers, employees and community. As part of SIS's ongoing review and consideration of strategic alternatives, the SIS Board regularly reviews the operational and structural options available to SIS to expand and strengthen its community banking franchise and enhance long-term shareholder value, including opportunities that may arise from time to time to acquire other banking and thrift institutions. In response to MB&D's preliminary inquiry on July 3, 1997, SIS indicated that it would be interested in discussing further with GBT the prospects for a business combination involving the 20 two companies. Later that same day, J. Gilbert Soucie, President and Chief Executive Officer of GBT, contacted F. William Marshall, Jr., President and Chief Executive Officer of SIS, and indicated that the GBT Board had made the decision to explore strategic merger possibilities and was seeking an acceptable partner. During this discussion, Mr. Soucie indicated that the GBT Board sought to affiliate with a company that would enable GBT to continue its present success in the local market through retaining its corporate identity and enable its shareholders to participate in the growth of a continuing company. From the discussion, Mr. Soucie and Mr. Marshall established a future meeting. On July 14, 1997, Mr. Marshall and Mr. Soucie held a meeting in Springfield, Massachusetts, during which each described his respective company's organization and its prospects for the future. The majority of the meeting focused on aspects of a potential merger, specifically the compatibility of the two organizations, how the combined company would operate, and the roles of the SIS Board, the GBT Board and key management. On July 22, 1997, Mr. Marshall and John F. Treanor, Executive Vice President and Chief Financial Officer of SIS, met with the Executive Committee of the GBT Board. At the meeting, Messrs. Marshall and Treanor provided information as to SIS's background, operating environment and future growth opportunities, and addressed the GBT Board's concerns in regards to SIS's qualifications as a merger partner. In turn, the GBT executive committee approved the execution of a confidentiality agreement between SIS and GBT in order to facilitate further discussions. The parties signed a confidentiality agreement on July 24, 1997, pursuant to which SIS undertook a preliminary due diligence investigation of the business, operations and personnel of GBT. On July 30, following the completion of such initial due diligence and further discussion between the parties and their financial advisers, SIS's senior management, together with Oppenheimer, presented to the SIS Board a proposal to submit a formal indication of interest to GBT, in which SIS would outline the general terms and conditions on which it would be willing to discuss further the prospects for acquiring GBT in a strategic merger. The SIS Board authorized management to submit such an indication of interest, and it was delivered to the GBT Board and MB&D following the close of business on July 30. On August 4, the GBT Board met in a special meeting and authorized management and GBT's advisers to proceed to develop further SIS's proposal and make appropriate investigations and analyses. The parties, together with their counsel and financial advisers, subsequently met on August 6, 1997, to discuss various aspects of the proposed transaction, including the structure and accounting treatment of the Merger, the role of GBT's Board and its senior management and employees if GBT were to become a wholly owned subsidiary of SIS, the price, in the form of SIS Common Stock, that SIS would be willing to pay to acquire GBT and various other business issues. Following this meeting, SIS submitted a revised indication of interest to GBT on August 7, in which it increased the price it would be willing to pay in shares of SIS Common Stock, subject to confirmatory due diligence, and further clarified the role that GBT's Board and its senior management and employees would play following any combination of GBT with SIS. On August 8, the GBT Board held a special meeting at which it considered the status of the SIS discussions, and reviewed with MB&D two unsolicited, preliminary indications of interest, one written and one oral, which had been received by GBT from other financial institutions while the parties were in the process of reviewing and refining SIS's proposal. Both the written and oral expressions expressed interest in a tax-free, stock-for-stock merger. Both indicated preliminary interest in offering consideration with a nominal value at the time of approximately $22 to $23 per share, which did not appear to be significantly higher than the firm offer made by SIS. In addition, neither expression represented a formal offer and both were subject to due diligence and further negotiation. The GBT Board believed that it was unlikely that SIS would continue to negotiate with GBT if GBT were to enter into negotiations with a third party, but acknowledged after consulting with counsel and MB&D that each alternative expression was substantial enough to warrant attention. The GBT Board requested that MB&D prepare analyses of the unsolicited expressions of interest, but also authorized management and GBT's advisers to continue negotiations with SIS. During the period from August 8 through August 11, SIS and its advisers undertook further detailed due diligence investigations of GBT, while GBT and its advisers likewise undertook due diligence investigations of SIS. In addition, during this period, SIS's counsel distributed proposed forms of the Merger Agreement and related documents, including the Plan of Merger and the Stock Option Agreement between GBT and SIS (the "Stock Option Agreement"), to GBT and its advisers, and engaged in extensive discussions regarding the terms and provisions contained in such documentation with GBT's counsel. 21 On August 12, the parties, with their counsel and financial advisers, met again to negotiate further a variety of issues pertaining to the proposed transaction, including various representations, warranties and covenants contained in the Merger Agreement, the terms of the Stock Option Agreement and the amount of the fee payable by GBT to SIS in the event that the Option were to become exercisable, the amount of the "breakup" fee payable under the Merger Agreement and the events that would cause such fee to become payable by either party, and whether SIS should agree to issue a fixed or variable number of shares to acquire GBT and the level at which such a fixed exchange ratio should be set. Following the parties' August 12 meeting, SIS's counsel revised further the Merger Agreement and related documents, including the Plan of Merger and the Stock Option Agreement, and the revised documents were presented to the GBT Board at a special meeting held on August 13. The following day, the parties and their financial advisers continued to negotiate a wide range of issues, including various representations and warranties contained in the Merger Agreement, the terms of the Stock Option Agreement, the fees payable by GBT under both the Merger Agreement and the Stock Option Agreement and the amount of the fixed exchange ratio that SIS would be willing to pay in the Merger, which had increased from 0.71 to 0.74 share of SIS Common Stock. The Board continued to discuss the other expressions of interest and asked MB&D to prepare an additional analysis of the oral expression. On the morning of August 15, SIS, its counsel and Oppenheimer met with GBT's counsel and MB&D and resolved to their satisfaction all open issues. Later that day, the GBT Board met to consider the proposed terms of the Merger, as negotiated to that point by GBT's advisers, and to again compare it, with the assistance and advice of MB&D and GBT's counsel, to the two other unsolicited preliminary indications of interest that GBT had received during the course of the negotiations with SIS (the second of which prospective acquirors had, during the course of such negotiations, documented its earlier oral preliminary indication of interest with one in writing). It was noted that the present nominal value of SIS's offer had risen to $22.39 per share, which represented an aggregate increase of $1.7 million and was an amount approximately the same as the two informal expressions of interest. At this meeting, the GBT Board considered numerous aspects of the fully negotiated SIS offer and the other two expressions, including their nominal value, the likelihood of closing, the degree of certainty that the actual value received by GBT shareholders would be approximately the nominal value fixed by negotiations with SIS and the uncertainty that the nominal value of the other expressions would result in an equivalent actual value, various financial analyses and performance measures of each acquiror and the long-term prospects of each potential acquiror and the relative marketability and long-term prospects of its stock. In determining that the SIS proposal was, in its judgment, superior to both of the unsolicited preliminary indications of interest, the GBT Board considered each proposal in its entirety and did not find it practicable, nor did it attempt, to determine the relative superiority of each aspect of each such proposal. Following these determinations, the GBT Board authorized GBT's advisers to obtain for the Board's review a final, definitive agreement with SIS on the basis of the terms discussed that morning between SIS and GBT's advisers. The GBT Board directed management to communicate this view to SIS. The parties and their counsel then undertook to finalize the Merger Agreement and related documents. Separate special meetings of the SIS Board and the GBT Board were held on August 17, 1997 to consider the proposed definitive form of the Merger Agreement and related documents. At the GBT Board meeting, the GBT Board reviewed the final terms of the Merger with counsel, and was advised orally by MB&D that, in its opinion, and based on facts known to MB&D at that time, the consideration to be paid by SIS in the Merger was fair, from a financial point of view, to GBT's shareholders as of that date and confirmed its readiness, in the absence of any intervening significant change, to render a written opinion to that effect immediately prior to the circulation of proxy materials for the GBT shareholders' meeting. After considering the best interests of GBT's shareholders and other constituencies, the GBT Board then unanimously approved the Merger Agreement and related agreements, including the Stock Option Agreement and Plan of Merger, and authorized Mr. Soucie to sign the Merger Agreement, the Stock Option Agreement and the SIS Stockholders Agreement on behalf of GBT. At the SIS Board meeting, presentations were delivered by SIS senior management concerning the strategic rationale for the proposed transaction and the results of SIS's detailed due diligence investigation of GBT, as well as the course of the parties' negotiations on various matters addressed by the Merger Agreement and related 22 documents. In addition, counsel reviewed in detail with the SIS Board the terms of the Merger Agreement, Stock Option Agreement and related documentation. The SIS Board was also advised by Oppenheimer in writing that the consideration to be paid by SIS in the Merger was fair, from a financial point of view, to SIS and its shareholders. After discussion and consideration by the SIS Board of the potential financial and strategic benefits and risks of the proposed transaction and other factors described below under "Recommendation of the SIS Board and Reasons for the Merger," the SIS Board unanimously approved the Merger Agreement and related agreements, including the Stock Option Agreement and Plan of Merger, and authorized Mr. Marshall to sign the Merger Agreement, the Stock Option Agreement, the Plan of Merger and the GBT Stockholders Agreement on behalf of SIS. On the morning of August 18, 1997, Messrs. Marshall and Soucie executed and delivered the Merger Agreement and the Stock Option Agreement on behalf of SIS and GBT, respectively, the executive officers and directors of GBT executed and delivered the GBT Stockholders Agreement, and the SIS directors executed and delivered the SIS Stockholders Agreement. Following SIS's subsequent organization of Interim Bank, the parties executed and delivered the Plan of Merger on September 12, 1997. RECOMMENDATION OF THE GBT BOARD AND REASONS FOR THE MERGER THE BOARD OF DIRECTORS OF GBT BELIEVES THAT THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF GBT AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS OF GBT UNANIMOUSLY RECOMMENDS THAT THE GBT STOCKHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND PLAN OF MERGER AND THE TRANSACTIONS CONTEMPLATED THEREBY. In reaching its determination that the Merger is in the best interests of the GBT shareholders, and recommending that the GBT shareholders approve the Merger, the GBT Board consulted with GBT management, as well as its financial and legal advisers, and considered a number of factors. Without assigning any relative or specific weights thereto, the following is a discussion of the material factors considered by the GBT Board in reaching its determination: (a) the amount and form of the consideration offered by SIS in relation to the estimated value of GBT Common Stock, the GBT Board's belief that of the alternatives available, the Merger offered the greatest opportunity for long-term value to the GBT shareholders, and the expectation that the Merger will be a tax-free transaction to GBT and its shareholders to the extent they receive SIS Common Stock in exchange for their shares; (b) SIS's business, results of operations, prospects and financial condition and the historical and potential future value of the SIS Common Stock and dividends paid thereon; (c) the potential operating efficiencies and financial strength the Merger would provide to the combined GBT-SIS organization, its customers and the communities it serves, and the immediate and long-term effect that it would have on such organization's ability to compete for new business; (d) the possible impact of the Merger on GBT's customers and that, following the Merger, the combined organization would be well situated to offer GBT's customers an expanded range of financial services; (e) the conditions to the Merger and the risks to GBT if the Merger were not consummated, including that the termination of the Merger Agreement might result in a decline in the market price of GBT Common Stock and might have other adverse operational consequences for GBT; (f) the fact that approval of the Merger Agreement and Plan of Merger requires the affirmative vote of the holders of two-thirds of the shares of GBT Common Stock outstanding and entitled to vote and that the GBT Board's decision to approve the Merger Agreement and Plan of Merger would empower the shareholders as a group to decide whether or not to accept SIS's proposal to acquire GBT; (g) MB&D's opinion that, subject to certain assumptions, the consideration to be paid to the GBT shareholders in connection with the Merger is fair, from a financial point of view, to GBT shareholders, and 23 that MB&D expected to be able to reconfirm in writing its opinion, absent intervening material changes, to such effect to accompany the Proxy Statement--Prospectus; and (h) the long- and short-term interests of GBT and its shareholders and, in accordance with the requirements of Connecticut law, the interests of GBT's customers, suppliers, employees and communities. RECOMMENDATION OF THE SIS BOARD AND REASONS FOR THE MERGER THE BOARD OF DIRECTORS OF SIS BELIEVES THAT THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF SIS AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS OF SIS UNANIMOUSLY RECOMMENDS THAT THE SIS STOCKHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. In reaching its determination that the Merger is in the best interests of the SIS shareholders, and recommending that the SIS shareholders approve the Merger, the SIS Board considered a number of factors. The following is a discussion of the material factors considered by the SIS Board in reaching its determination: (a) The Merger will enable SIS to expand and strengthen its franchise by generating new business and facilitating its entry into the Connecticut banking market, which is contiguous to SIS's core markets; (b) GBT's operations in Connecticut complement SIS's historical emphasis on a community banking strategy; (c) The acquisition of GBT offers an opportunity for additional operating efficiencies; (d) GBT's merchant processing and insurance activities will enable SIS to diversify its services and to offer new business lines; and (e) Oppenheimer's opinion that, subject to certain assumptions, the consideration to be paid by SIS to GBT's shareholders was fair to SIS and its shareholders, from a financial point of view. OPINIONS OF FINANCIAL ADVISERS Opinion of McConnell, Budd & Downes, Inc. On August 17, 1997, MB&D delivered to the GBT Board its oral opinion, that as of that date, the number of shares of SIS Common Stock to be received in exchange for each outstanding share of GBT Common Stock (the "Exchange Ratio") was fair, from a financial point of view, to GBT's shareholders. MB&D has subsequently delivered to the GBT Board its written opinion, as of the date of this Proxy Statement--Prospectus, that the Exchange Ratio is fair from a financial point of view, to GBT's shareholders. The mechanism for determination of the Exchange Ratio is described in detail elsewhere in this Proxy Statement-Prospectus and shareholders should read this document with care. MB&D has acted as financial adviser to GBT on a non-exclusive contractual basis since April 1997 in connection with GBT's evaluation of its strategic alternatives, including the evaluation of hypothetical affiliation opportunities. With respect to the pending transaction with SIS, MB&D advised GBT during the negotiation process leading up to the execution of the Merger Agreement and provided GBT with various analyses as to the range of financially feasible exchange ratios and cash acquisition prices that might be received in a hypothetical transaction. Representatives of MB&D met with the executive management and GBT Board on numerous occasions in connection with the analysis of GBT's options. The Exchange Ratio was arrived at in arm's-length negotiation between SIS and GBT in a process in which MB&D advised GBT. MB&D was retained based on its qualifications and experience in the financial analysis of banking and thrift institutions, knowledge of the Massachusetts and Connecticut banking markets in particular and New England 24 banking markets in general, and its extensive experience with merger and acquisition transactions involving banking institutions. Members of the Corporate Financial Department of MB&D have advised financial institution clients on more than 54 successfully completed mergers or acquisitions of financial institutions, many of those in the New England marketplace. The full text of the opinion of MB&D, which sets forth assumptions made, matters considered and limits on the review undertaken by MB&D, is attached hereto as a part of Appendix C. GBT's shareholders are urged to read the opinion in its entirety. MB&D's opinion is directed only to the Exchange Ratio and does not constitute a recommendation to any holder of GBT Common Stock as to how such holder should vote at the GBT Meeting. The summary of the opinion of MB&D set forth in this Proxy Statement--Prospectus was provided to GBT by MB&D and is qualified in its entirety by reference to the full text of the opinion itself. MB&D's opinion was necessarily based upon conditions as they existed and should be evaluated as of the date of the written opinion and the information made available to MB&D through such date. In arriving at its opinion, MB&D (i) reviewed the Merger Agreement and this Proxy Statement--Prospectus in substantially the form to be sent to GBT shareholders; (ii) reviewed publicly available business and financial information with respect to both GBT and SIS and certain internal financial information and financial projections prepared by the managements of GBT and SIS; (iii) held discussions with members of the senior management of GBT and the GBT Board concerning the past and current results of operations of GBT, its current financial condition and management's opinion of its future prospects; (iv) reviewed the historical reported price and record of trading volume for both GBT and SIS Common Stock; (v) held discussions with the senior management of SIS concerning the current and past results of operations of SIS, its current financial condition and management's opinion of its future prospects; (vi) considered the current state of and future prospects for the economies of Connecticut and Massachusetts generally and the relevant market areas for GBT and SIS in particular; (vii) reviewed the specific acquisition analysis models employed by MB&D to evaluate potential business combinations of banking companies; (viii) reviewed the reported financial terms of certain recent business combinations in the banking industry; and (ix) performed such other studies and analyses as MB&D considered appropriate under the circumstances associated with this particular transaction. In rendering its opinion, no limitations were imposed by GBT or SIS upon MB&D with respect to the investigations made or procedures followed by MB&D. As part of its ongoing financial advisory business, MB&D had previously entered into in 1996, and maintained a non-exclusive financial advisory relationship with SIS. In the context of this transaction, MB&D rendered financial advisory services exclusively to GBT and disclosed to the GBT Board and management the relationship with SIS. SIS retained and relied upon an independent third party firm as financial adviser for purposes of this transaction. MB&D's opinion takes into account its assessment of general economic, market and financial conditions and its experience in other transactions, as well as its experience in bank securities valuation and its knowledge of the banking industry generally. For purposes of reaching its opinion, MB&D has assumed and relied upon the accuracy and completeness of the information provided to it by GBT and SIS, including the adequacy of the reserve for loan losses established by each company, and does not assume any responsibility for the independent verification of such information. In the course of rendering its opinion, MB&D has not completed any independent valuation or appraisal of any of the assets or liabilities of GBT or SIS and has not been provided with any such valuations or appraisals from any other source. With respect to the financial projections reviewed by MB&D in the course of rendering its opinion, MB&D has assumed that such projections have been reasonably prepared to reflect the best currently available estimates and judgment of the management of each of GBT and SIS as to the most likely future performance of their respective companies. The following is a summary of material analyses employed by MB&D in connection with rendering its August17, 1997 oral opinion. Given that it is a summary, it does not purport to be a complete and comprehensive description of all the analyses performed, or an enumeration of all matters considered by MB&D in arriving at its opinion. The preparation of a fairness opinion is a complicated process, involving a determination as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular 25 circumstances. Therefore, such an opinion is not readily susceptible to a summary description. In arriving at its fairness opinion, MB&D did not attribute any particular weight to any one specific analysis or factor considered by it and made qualitative as well as quantitative judgments as to the significance of each analysis and factor. Therefore, MB&D believes that its analyses must be considered as a whole and feels that attributing undue weight to any single analysis or factor considered could create a misleading or incomplete view of the process leading to the formation of its opinion. In its analyses, MB&D has made certain assumptions with respect to banking industry performance, general business and economic conditions and other factors, many of which are beyond the control of management of either GBT or SIS. Estimates which are referred to in MB&D's analyses are not necessarily indicative of actual values or predictive of future results or values, which may vary significantly from those set forth. In connection with its opinion dated as of the date of this Proxy Statement- Prospectus, MB&D confirmed the appropriateness of its reliance on the analyses used to render its August 17, 1997 oral opinion by performing procedures to update certain of such analyses and by reviewing the assumptions on which such analyses were based and the factors considered in connection therewith. Analysis of the Anticipated Merger and the Exchange Ratio in Relation to SIS. The anticipated consideration to be paid in the Merger for each outstanding share of GBT Common Stock is 0.74 of a share of SIS Common Stock. However, if the Average Closing Price is less than $25.00, GBT shall have the right to terminate the Merger Agreement unless SIS elects, in its sole discretion, to adopt an Exchange Ratio equal to $18.50 divided by the Average Closing Price. When valued at the closing price of SIS Common Stock, $30.00, on August 15, 1997, the consideration represents the following transaction multiples: Transaction Value: $22.20 per GBT Common Share based upon the single-day SIS closing price on August 15, 1997. . Multiple of Earnings based upon the August 15, 1997 SIS single-day closing price: 15.10 times GBT's reported earnings per share for the twelve months ended June 30, 1997, and 15.86 times GBT's internally forecast earnings per share for the fiscal year 1997 ending December 31, 1997. . Multiple of Tangible Book Value based upon the August 15, 1997 SIS single-day closing price: 2.26 times GBT's tangible book value per share as of June 30, 1997. . Multiple of Accounting Book Value based upon the August 15, 1997 SIS single-day closing price: 2.26 times GBT's book value per share as of June 30, 1997. . Multiple of GBT's Market Value based upon the August 15, 1997 SIS single- day closing price: The approximate $22.20 in market value of the consideration for each share of GBT Common Stock, based upon the SIS closing price on August 15, 1997, represents an 11.0% premium over the closing price of GBT's Common Stock reported on the NASDAQ National Market as of the close of business on the last business day before the transaction was announced, Friday, August 15, 1997. Specific Acquisition Analysis. MB&D employs a number of proprietary analysis models to examine hypothetical transactions involving banking and/or thrift companies. The models involve the use of forecast earnings data, selected current period balance sheet, fully diluted common share information and income statement data, current and historic market and trading information and a number of assumptions as to interest rates for borrowed funds, opportunity costs of funds, discount rates, dividend streams, effective tax rates and transaction structures (the alternative or combined uses of common equity, cash, debt or other securities, to fund a transaction) to evaluate a hypothetical transaction. The models distinguish between purchase and pooling accounting treatments and inquire into the likely economic feasibility of a given hypothetical transaction at a given price level or specified exchange rate while employing a specified transaction structure. The models also permit evaluation of various levels of potential non-interest expense savings which might be achieved and potential implementation timetables for such savings as well as the possibility of revenue enhancement opportunities which may arise in a hypothetical transaction. The models also permit an examination of pro forma capital adequacy. 26 In this transaction, MB&D evaluated an exchange ratio of 0.74 of a share of SIS Common Stock for each share of GBT Common Stock in a common stock merger transaction which is to be accounted for as a pooling transaction. MB&D believes that the proposed transaction is financially feasible from an earnings per share dilution perspective, generating prospective earnings per share dilution which can be eliminated by a reduction of less than 20% of the annualized run rate for non-interest expenses for GBT. MB&D believes this is an achievable objective for the combined SIS and GBT and that the transaction can become accretive to the prospective earnings per share of SIS. MB&D is satisfied that the pro forma capitalization of SIS will be adequate after the consummation of the Merger. Discounted Cash Flow Analysis. MB&D reviewed a discounted cash flow analysis to permit the conceptual examination of the present discounted values of potential future results employing selected assumptions and discount rates. In the baseline discounted cash flow analysis, MB&D reviewed a cash flow model with GBT management and the GBT Board that used a projection of hypothetical earnings for the five twelve-month periods subsequent to June of 1997. A hypothetical dividend payout ratio assumption which depicted average annual payouts as a percentage of earnings increasing gradually from a level of 25% to 35% over the same five year period was also used. A long-term growth rate of 7.00% was also used. MB&D then assumed that the control sale price/earnings ratio at the end of a five-year period would approximate 14.5 times earnings, and in a separate exercise, a price to tangible book value ratio of 200%. Given the baseline model five-year time horizon and a discount rate of 12.5%, these cash flow calculations resulted in a range of present discounted values of cash flows of as little as $19.10 to $20.14. By testing the impact on cash flow calculations of alternative long term growth rates of 5.95% to 8.05%, discount rate ranges of 10.625% to 14.375% and return on asset ranges of 0.94% to 1.27%, cash flow calculations resulted in values of $14.90 to $29.76. All of these cash flow calculations can be compared to the nominal value of the proposed exchange ratio of approximately $22.20 based upon the closing price of SIS on August 15, 1997 as described above. It is important to note that the cash flow calculations and discount factors employed embody both the concept of a riskless time value of money and risk factors that reflect the uncertainty of the forecast cash flows, terminal price/earnings and price/book multiples, growth assumptions and other economic and financial variables. Conversely, use of lower discount rates result in higher discounted present values. MB&D advised the GBT Board that although discounted cash flow analysis is a widely used valuation methodology, it relies on numerous assumptions, including discount rates, terminal values, earnings and asset growth, as well as dividend payout ratios. Any or all of these assumptions may vary from actual future performance and results. Analysis of Other Comparable Transactions. MB&D is reluctant to place much emphasis on "comparables analysis" as a valuation methodology due to what it considers to be inherent limitations of the process which renders application of the results to specific cases questionable. It has observed that such analyses as performed by some industry observers and financial advisers often fail to adequately take into consideration such factors as material differences in the underlying capitalization of the comparable institutions which are being acquired; differences in the historic earnings (or loss) patterns recorded by the compared institutions which can depict a very different trend than might be implied by examining only recent financial results; failure to exclude non-recurring profit or loss items from the last twelve months earnings streams of target companies which can distort apparent earnings multiples; differences in the form or forms of consideration used to complete the transaction; differences between the planned method of accounting for the completed transaction; and such less accessible factors as the relative population, business and economic demographics of the acquired entities markets as compared or contrasted to such factors for the markets in which comparables are doing business. Comparable analysis also rarely seems to take into consideration the degree or absence of facilities overlap between the acquiror's market and that of the target or the absence of such overlap and the resulting cost savings differentials between otherwise apparently comparable transactions. MB&D consequently believes that comparables analysis has serious limitations and should not be relied upon to any material extent by members of GBT's management, the GBT Board or GBT's shareholders in considering the presumed merits of a pending transaction. 27 Nevertheless, in the course of its analysis of the proposed transaction, MB&D reviewed a universe of 23 publicly announced transactions in the financial institutions industry in which either a bank or thrift (or their respective holding companies) were acquired by another financial institution. These transactions were announced after January 1, 1996, and prior to August 15, 1997. All of the examined transactions involved entities doing business in New England. The 8 transactions announced in 1997 and reviewed by MB&D are as follows: North Fork Bancorp's acquisition of Branford Savings Bank, Peoples Heritage's acquisition of Atlantic Bank, Granite State Bancshares' acquisition of Primary Bank, CFX Corporation's acquisition of Community Bankshares, MASSBANK Corp.'s acquisition of Glendale Co-op Bank, New England Community's acquisition of First Bank of West Hartford, CFX Corporation's acquisition of Portsmouth Bankshares and Eagle Financial Corp's acquisition of MidConn Bank. The 15 transactions announced in 1996 and reviewed by MB&D are as follows: Vermont Financial Service's acquisition of Eastern Bancorp, Citizens Financial Group's acquisition of Grove Bank, Webster Financial Corp.'s acquisition of DS Bancorp, BostonFed Bancorp's acquisition of Broadway Capital Corporation, UST Corporation's acquisition of Walden Bancorp, Grove Bank's acquisition of Greater Boston Bank, First Essex Bancorp's acquisition of Finest Financial Corp., NH Thrift Bancshares' acquisition of Landmark Bank, Hubco, Inc.'s acquisition of Westport Bancorp, First Union's acquisition of Center Financial Corp., Peoples Heritage's acquisition of Family Bancorp, Hubco, Inc.'s acquisition of Hometown Bancorp, CFX Corporation's acquisition of Milford Co- op Bank, Hubco, Inc.'s acquisition of Lafayette American and CFX Corporation's acquisition of Safety Fund Corp. Within the group of 8 transactions announced in 1997, the median multiple of tangible book value paid by the acquiror was 177.0%, the maximum multiple paid was 227.8% and the minimum multiple was 115.5%. Within the group of 15 transactions announced in 1996, the median multiple of tangible book value paid by the acquiror was 166.1%, the maximum multiple paid was 255.5% and the minimum multiple was 138.0%. These statistics can be compared to multiples derived using the indicated value as of August 15, 1997, which can be derived for the proposed acquisition of GBT by SIS as 211% based upon the nominal present value of the proposed exchange ratio of approximately $22.20 based upon the closing price of SIS on August 15, 1997. With respect to the trailing 12 months earnings multiples for this same data sample of 8 transactions announced in 1997, the median price/earnings multiple paid was 17.3 and the maximum multiple was 24.6, while the minimum multiple was 13.0. With respect to trailing 12 months earnings multiples for this same data sample of 15 transactions announced in 1996, the median price/earnings multiple paid was 13.9 and the maximum multiple was 17.4, while the minimum multiple was 7.2. These statistics can be compared to multiples derived using the indicated values on August 15, 1997, which can be derived for the proposed acquisition of GBT by SIS as 15.10 based upon the nominal present value of the proposed exchange ratio of approximately $22.20 based upon the closing price of SIS on August 15, 1997 as described above. For the reasons detailed above, MB&D does not believe that the comparable data presented should be viewed as the most meaningful analytic tool with respect to a thorough review and understanding of the proposed transaction. Pursuant to a letter agreement with GBT entered into in April 1997, MB&D will receive a fee equal to 0.75% of the fair market value of all consideration received by GBT shareholders for services rendered to GBT in connection with the proposed transaction, if the transaction is consummated. The fee represents compensation for services rendered in connection with the analysis of the hypothetical transaction, support of the negotiations and for the rendering of its opinion. GBT paid MB&D $10,000 upon signing the agreement and $50,000 following the execution of the Merger Agreement. An additional $50,000 became payable at the mailing of this proxy statement and the remainder will become payable at the closing of the transaction. Based upon a hypothetical transaction value at closing of $40.6 million, MB&D would receive total compensation of $304,500. In addition, GBT has agreed to reimburse MB&D for its reasonable out-of-pocket expenses incurred in connection with the services provided by MB&D and to indemnify and hold harmless MB&D and certain related parties to the fullest extent lawfully permitted from and against certain liabilities and expenses, including certain liabilities under federal securities law, incurred in connection with MB&D's engagement. 28 Opinion of Oppenheimer & Co., Inc. Pursuant to an engagement letter dated August 1, 1997, SIS retained Oppenheimer as its financial adviser in connection with the Merger. Oppenheimer has rendered its written opinions to the SIS Board dated August 17, 1997 and dated the date of this Proxy Statement-Prospectus that, based upon and subject to the various considerations set forth therein, the proposed Merger Consideration is fair to SIS from a financial point of view. No limitations were imposed by SIS upon Oppenheimer with respect to investigations made or procedures followed by Oppenheimer in rendering its opinions. THE FULL TEXT OF OPPENHEIMER'S OPINION AS OF THE DATE OF THIS PROXY STATEMENT--PROSPECTUS, WHICH SETS FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN BY OPPENHEIMER, IS ATTACHED HERETO AS APPENDIX D. SIS SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY. OPPENHEIMER'S OPINION IS DIRECTED ONLY TO THE MERGER CONSIDERATION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY SIS SHAREHOLDER AS TO HOW SUCH SHAREHOLDER SHOULD VOTE AT THE SIS MEETING. THE SUMMARY SET FORTH IN THIS PROXY STATEMENT--PROSPECTUS OF THE OPPENHEIMER OPINION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION ATTACHED HERETO AS APPENDIX D. In connection with rendering its opinion, Oppenheimer reviewed among other things: (a) the Merger Agreement (including the Plan of Merger); (b) the GBT and SIS Stockholders Agreements and the Stock Option Agreement; (c) audited consolidated financial statements and management's discussion and analysis of the financial condition and results of operation for each of SIS and GBT for the three fiscal years ended December 31, 1996 (as available); (d) unaudited consolidated financial statements for each of SIS and GBT for the six months ended June 30, 1997; (e) certain other publicly available business and financial information relating to SIS and GBT; (f) certain interim financial analyses, budgets, projections and forecasts for SIS and GBT, including estimates as to the future cost savings relating to the Merger, prepared by and reviewed with the management of SIS; (g) certain other summary materials and analyses with respect to GBT's loan portfolio and deposits prepared by SIS; (h) the views of senior management of SIS and GBT of the past and current business operations, results thereof, financial condition and future prospects; (i) a comparison of certain financial information for SIS and GBT, in each case with similar information for certain other companies considered comparable to SIS and GBT; (j) the financial terms of certain recent business combinations in the banking industry; (k) the pro forma effect of the transaction on SIS based on certain assumptions provided by SIS; (l) the current market environment generally and the banking environment in particular; and (m) such other information, financial studies, analyses and investigations and financial, economic and market criteria as Oppenheimer considered appropriate in the circumstances. Oppenheimer assumed and relied upon, without independent verification, the accuracy and completeness of the information reviewed by it for the purposes of its opinion. With respect to the financial projections, including the estimates of cost savings expected to result from the Merger, Oppenheimer assumed that they were reasonably prepared and reflected the best currently available estimates and judgments of the future financial performance of SIS and GBT. Oppenheimer did not make any independent valuation or appraisal of the assets or liabilities of SIS or GBT, nor was it furnished with any such appraisal. In addition, Oppenheimer did not examine any individual loan credit files of SIS or GBT. Oppenheimer's opinion was based on economic, market and other conditions as in effect on, and the information made available to it as of, the date of the opinion. The projections furnished to Oppenheimer for each of SIS and GBT were prepared by the respective management of each company. As a matter of policy, neither SIS nor GBT publicly discloses internal management projections of the type provided to Oppenheimer in connection with its analysis of the Merger, and such projections were not prepared with a view toward public disclosure. These projections were based on numerous variables and assumptions which are inherently uncertain and which may not be within the control of management, including, without limitation, factors relating to general economic and competitive conditions and prevailing interest rates. Accordingly, actual results could vary significantly from those set forth in such projections. 29 The following is a summary of the analyses presented by Oppenheimer to the SIS Board at its meeting on August 17, 1997 in connection with Oppenheimer's opinion dated such date: Pro Forma Analysis. Oppenheimer analyzed the pro forma effects of the Merger on the capital ratios, earnings per share and book value per share of SIS. This analysis indicated that the Merger would result in earnings per share accretion of $0.07 per share (equal to approximately 3%) in 1998. Comparable Companies Analysis. Using publicly available information, Oppenheimer compared selected financial information for GBT with similar information for the following five selected public Connecticut banks with assets between $125 million and $450 million that Oppenheimer deemed comparable: BNH Bancshares Inc., Bank of Southington, New England Community Bancorp, New Milford Bank and Trust Co., and Village Bancorp Inc. (collectively the "Comparable Companies"). For each of the Comparable Companies, Oppenheimer calculated certain financial ratios and percentages and compared the results of these calculations to calculations made by Oppenheimer for GBT. This analysis showed that GBT had a ratio of loans/deposits at June 30, 1997 of 72.20%, compared to the average for the Comparable Companies of 75.37%, and that GBT had a return on average assets and a return on average equity for the six months ended June 30, 1997 (annualized on a fully taxed basis) of 0.99% and 14.59%, respectively, compared to 0.81% and 9.67%, respectively, for the Comparable Companies. GBT's net interest margin, general and administrative expenses/average assets and efficiency ratios for the period were 4.33%, 3.66%, and 68.1%, respectively, as compared to the Comparable Companies' averages of 4.97%, 3.51%, and 67.96%, respectively. This analysis also showed that GBT's ratio of non-performing assets to total assets at June 30, 1997 was 1.04%, compared to an average ratio for the Comparable Companies of 1.33%. GBT's ratios of loan loss reserves to non- performing loans and to total gross loans at such date were 197% and 2.20%, respectively, compared to averages for the Comparable Companies of 91% and 1.63%, respectively. GBT's equity/assets ratio at such date was 6.87% as compared to the Comparable Companies average of 8.21%. Discounted Cash Flow Analysis. Using a discounted cash flow analysis, Oppenheimer estimated the present value of the future streams of after-tax cash flows that GBT could produce through December 31, 2001 based on projections furnished by management of both SIS and GBT. In this analysis, Oppenheimer assumed that GBT's net income was adjusted in each year to reflect an assumed net charge-off ratio of 0.25% of total loans and a level of provision for loan losses for each year based on an assumed ratio of loan loss reserves to total loans which was maintained in each projected year at approximately 2.00%. No dividend payments were assumed, nor did Oppenheimer's analysis reflect any cost savings anticipated to result from the Merger. Oppenheimer calculated a range of terminal values by applying earnings multiples of 15 and 16 (based upon its observation of price to earnings multiples in the comparable transactions referred to below) to GBT's estimated after-tax cash flows for the twelve months ended December 31, 2001. The cash flows were discounted to present values using different rates (ranging from 11% to 12%) chosen to reflect different assumptions regarding the required rates of return to prospective buyers of GBT. This analysis indicated an implied range of values for GBT ranging from $37.5 million to $44.1 million. Comparable Transactions Analysis. Oppenheimer compared the financial terms of the Merger to the financial terms, to the extent publicly available, of the seven New England bank transactions with announced transaction values in excess of $25 million announced or completed from January 1, 1996 through August 15, 1997 (the "Recent New England Bank Acquisitions"). Oppenheimer believed these seven transactions to be most comparable for purpose of determining the imputed values of GBT. Included in the Recent New England Bank Acquisitions are four Connecticut bank transactions. 30 The Recent New England Bank Acquisitions included the following: Peoples Heritage Financial Group / Atlantic Bancorp, Citizens Financial Group / BNH Bancshares Inc., First Essex Bancorp, Inc. / Finest Financial Corp., Hubco, Inc. / Westport Bancorp, Hubco, Inc. / Hometown Bancorp, Hubco, Inc. / Lafayette American Bank, CFX Corporation / Safety Fund Corp. Connecticut bank acquisitions included in the Recent New England Bank Acquisitions included the following: Citizens Financial Group / BNH Bancshares, Inc., Hubco, Inc. / Westport Bancorp, Hubco Inc. / Hometown Bancorp, Hubco, Inc. / Lafayette American Bank. For each of these transactions, Oppenheimer calculated, among other things, the high, mean, median and low price to book value, price to last twelve months ("LTM"), net income and core deposit premium (defined as the transaction value minus book value divided by core deposits, excluding certificates of deposit with balances equal to or greater than $100,000), and compared the results of these calculations to calculations made by Oppenheimer for the proposed Merger as follows. Oppenheimer's analysis indicated that the Recent New England Bank Acquisitions had a mean price/book multiple of 2.04x, price/LTM earnings multiple of 16.4x, and a core deposit premium of 12.11%. The Recent New England Bank Acquisitions had a median price/book multiple of 2.17x, price/LTM earnings multiple of 18.14x and a core deposit premium of 11.44%. From August 15, 1997 through September 15, 1997, there was one New England bank acquisition with an announced transaction value in excess of $25 million: Hubco, Inc. / Bank of Southington. The recent New England Bank Acquisitions, adjusted to include this acquisition, had a mean price/book multiple of 2.08x, price/LTM earnings multiple of 18.6x and a core deposit premium of 12.39% and an adjusted median price/book multiple of 2.20x, price/LTM earnings multiple of 20.0x and a core deposit premium of 11.47%. Oppenheimer then calculated the comparable multiples implied by the Merger Consideration. This analysis indicated, among other things, that the Merger Consideration represented a multiple to June 30, 1997 book value of 2.26x, a multiple of latest twelve months ended June 30, 1997 stated net income of 15.1x (16.3x annualized last six months ended June 31, 1997 net income), and a core deposit premium of 11%. The implied values for GBT derived from this analysis were a mean of $42.2 million and a median of $42.7 million based on the Recent New England Bank Acquisitions, adjusted to include acquisitions announced through September 15, 1997 with announced transaction values in excess of $25 million. In connection with its opinion dated as of the date of this Proxy Statement--Prospectus, Oppenheimer confirmed the appropriateness of its reliance on the analyses used to render its August 17, 1997 opinion by performing procedures to update certain of such analyses and by reviewing the assumptions on which such analyses were based and the factors considered in connection therewith. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to a partial analysis or summary description. Oppenheimer believes that its analyses must be considered as a whole and that selecting portions of its analyses, without considering the analyses taken as a whole, would create an incomplete view of the process underlying the analyses set forth in its opinions. In addition, Oppenheimer considered the results of all such analyses and did not assign relative weights to any of the analyses, so that the ranges of valuations resulting from any particular analysis described above should not be taken to be Oppenheimer's view of the actual value of GBT or the combined entity. In performing its analyses, Oppenheimer made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of SIS or GBT. The analyses performed by Oppenheimer are not necessarily indicative of actual values, which may be significantly more or less favorable than suggested by such analyses. Such analyses were prepared solely as a part of Oppenheimer's August 17, 1997 opinion. The analyses do not purport to be appraisals or to reflect the prices at which a company might actually be sold. 31 The SIS Board retained Oppenheimer based upon its experience and expertise. Oppenheimer is a nationally recognized investment banking and advisory firm. Oppenheimer, as part of its investment banking business, is continuously engaged in the valuation of business and securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for corporate and other purposes. In the course of its market making and other trading activities, Oppenheimer may, from time to time, have a long or short position in, and may buy or sell, securities of SIS both for its own account and for the accounts of customers. As compensation for Oppenheimer's services as financial advisor, SIS has agreed to pay Oppenheimer a fee equal to 1.00% of the fair market value of all consideration received by GBT and its shareholders, $250,000 of which amount became payable upon the delivery of Oppenheimer's fairness opinion and the remainder of which will become payable at the closing of the transaction. Based upon a hypothetical transaction value at closing of $40.6 million, Oppenheimer would receive total compensation of $406,000. EFFECTIVE TIME OF THE MERGER; CLOSING DATE If the Merger Agreement is approved and adopted by the requisite vote of SIS and GBT shareholders, and the other conditions to the Merger are satisfied or (where permissible) waived, the Merger will be consummated and become effective upon the close of business on the date on which a copy of the Plan of Merger is filed with the Secretary of State of Connecticut (the "Effective Time"). Under the terms of the Merger Agreement, the "Closing Date" shall be the date on which the Effective Time occurs. CONVERSION OF SHARES OF GBT COMMON STOCK PURSUANT TO THE MERGER At the Effective Time, automatically and without any action on the part of the holder thereof, each share of GBT Common Stock issued and outstanding immediately prior to the Effective Time (other than shares held by dissenting shareholders ("Dissenting Shares"), shares held directly or indirectly by SIS, other than shares in trust accounts, merged accounts and the like which are beneficially owned by third parties ("Trust Account Shares") and other shares held in respect of a debt previously contracted ("DPC Shares"), and any shares held as treasury stock by GBT) will become and be converted into 0.74 of one share of SIS Common Stock (together with the number of preferred stock purchase rights ("SIS Rights") granted pursuant to a Rights Agreement dated as of January 22, 1997 between SIS and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (the "Rights Agreement") or fraction thereof associated therewith) plus cash in lieu of any fractional share of SIS Common Stock. If the Average Closing Price (as such term is defined below) is less than $25.00 per share (the "Minimum Price"), GBT will have the right to terminate the Merger Agreement, unless SIS elects, in its sole discretion, to adopt as the Exchange Ratio the Adjusted Exchange Ratio (as such term is defined below). Assuming the Merger is approved by the holders of GBT Common Stock, the GBT Board could elect to consummate the Merger without resoliciting GBT shareholders if the Average Closing Price were less than $25.00 and SIS did not elect to adopt the Adjusted Exchange Ratio, even though the calculated value of the shares of SIS Common Stock (based on the Average Closing Price) to be exchanged for each share of GBT Common Stock would be less than $18.50. In such a situation, in considering whether to consummate the Merger without the resolicitation of GBT shareholders, the GBT Board would take into account, consistent with its fiduciary duties, all relevant facts and circumstances that exist at such time, including, without limitation, the advice of its financial advisers and legal counsel. The MB&D fairness opinion included with this Proxy Statement--Prospectus has been delivered and speaks as of the date of this Proxy Statement--Prospectus. Consequently, if a decline of such magnitude in the Average Closing Price were to occur and SIS did not elect to adopt the Adjusted Exchange Ratio, the GBT Board could not under such circumstances rely on MB&D's opinion unless it sought and received MB&D's agreement that it could do so. Shareholder approval of the Merger Agreement and each of the transactions contemplated thereby confers upon the GBT Board the power, consistent with its fiduciary duties, to elect to consummate the Merger notwithstanding that the Average Closing Price is less than $25.00 and SIS has not elected to adopt the Adjusted Exchange Ratio. Under such circumstances, GBT's shareholders would assume 100% of the market risk associated with the price of SIS Common Stock. See "--Conditions to the Merger" below. As of the Effective Time, each share of GBT Common Stock held directly or indirectly by SIS, other than Trust Account Shares and DPC Shares, and held by GBT as treasury stock will be canceled, retired and cease to exist, and no payment shall be made with respect thereto. 32 The "Average Closing Price" is defined as the average of the closing bid prices of shares of SIS Common Stock as reported on the Nasdaq National Market for the twenty consecutive trading days ending on the fifth business day prior to the Closing Date. "Merger Consideration" is defined as the shares of SIS Common Stock that holders of GBT Common Stock are entitled to receive under the Merger Agreement. "Adjusted Exchange Ratio" is defined as that number, rounded to the nearest thousandth, determined by dividing $18.50 by the Average Closing Price. Each certificate which immediately prior to the Effective Time represented outstanding shares of GBT Common Stock shall on and after the Effective Time be deemed for all purposes to represent the Merger Consideration into which the shares of GBT Common Stock represented by such certificate shall have been converted. CERTIFICATE EXCHANGE PROCEDURES Certificates which represent shares of GBT Common Stock that are outstanding immediately prior to the Effective Time and are converted into the Merger Consideration (the "Certificates"), shall, after the Effective Time, be deemed to represent the Merger Consideration into which such shares have been converted and shall be exchangeable by the holders thereof for new certificates representing the shares of SIS Common Stock into which such shares have been converted. In lieu of the issuance of fractional shares of SIS Common Stock, a payment in cash, without interest, will be made to the holders of GBT Common Stock in respect of any fractional share that would otherwise be issuable equal to an amount in cash determined by multiplying such holder's fractional interest by the Average Closing Price (rounded up to the nearest cent). Upon surrender of a Certificate, together with a duly executed letter of transmittal and any other required documents, the holder of such Certificate shall be entitled to receive, in exchange therefor, as soon as practicable, a certificate for the number of shares of SIS Common Stock and/or a check for the cash amount to which such holder is entitled, and such Certificate shall forthwith be canceled. In the event any Certificate shall have been lost, stolen or destroyed, upon receipt of appropriate evidence as to such loss, theft or destruction and to the ownership of such Certificate by the person claiming such Certificate to be lost, stolen or destroyed, and the receipt by SIS of appropriate and customary indemnification, SIS will deliver in exchange for such lost, stolen or destroyed Certificate the Merger Consideration and any fractional share payment. If any Merger Consideration is to be issued in a name other than that in which the Certificate surrendered in exchange therefor is registered, it shall be a condition of the issuance thereof that the Certificate so surrendered shall be properly endorsed (or accompanied by an appropriate instrument of transfer) and otherwise in proper form for transfer and that the person requesting such exchange shall pay to ChaseMellon Shareholder Services, L.L.C. (the "Exchange Agent") in advance any transfer or other taxes required by reason of the delivery of the Merger Consideration. CONDUCT OF BUSINESS PENDING THE MERGER Pursuant to the Merger Agreement, GBT has agreed that, except as specifically required or permitted pursuant to the Merger Agreement or as otherwise specifically disclosed therein, prior to the Effective Time, it will conduct its business in the ordinary course consistent with past practice. In addition, GBT has agreed that, except as contemplated by the Merger Agreement, prior to the Effective Time, it will not, directly or indirectly, do any of the following without the prior written consent of SIS: (a) engage or participate in any material transaction or incur or sustain any material obligation or liability except in the ordinary, regular and usual course of its business consistent with past practices; (b) accept, renew or roll over any "brokered deposit" or offer an interest rate with respect to any deposit that would either constitute an impermissible interest rate with respect to deposits of an 33 undercapitalized insured depository institution or otherwise generally set interest rates on deposits that depart from past practices of GBT; (c) except in the ordinary, regular and usual course of business consistent with past practices and in an immaterial aggregate amount, sell, lease, transfer, assign, encumber or otherwise dispose of or enter into any contract, agreement or understanding to lease, transfer, assign, encumber or dispose of any of its assets; (d) open or relocate, or file any application to open or relocate, any branch office; (e) terminate, or give any notice (written or verbal) to customers or governmental authorities or agencies to terminate the operations of any branch office; (f) waive any material right, whether in equity or at law, that it has with respect to any asset except in the ordinary, regular and usual course of business consistent with past practices; (g) declare or pay any dividends on or make any other distributions in respect of the GBT Common Stock, except that GBT may declare and pay its regular quarterly dividend to its shareholders of $0.09 per share and may, if SIS increases its regular quarterly dividend of $0.14 per share, increase its quarterly dividend by an amount proportionate to the increase in the SIS dividend: (h) adopt or amend in any material respect any pension plan or benefit plan or enter into any employment, severance or similar contract with any person or amend any such existing agreements, plans or contracts to increase any amounts payable thereunder or benefits provided thereunder, or grant or permit any increase in compensation to or pay any bonus to its employees, except in the ordinary course of business consistent with past practices or as disclosed in the Merger Agreement, or hire any new employee at an annual salary rate of $40,000 or more or promote any existing employee to the level of vice president or above; (i) subject to its directors' fiduciary duties and obligations, authorize, recommend, propose or announce an intention to authorize, recommend or propose, or enter into an agreement with respect to, any merger, consolidation, purchase and assumption transaction or business combination (other than the Merger), any acquisition of a material amount of assets or securities or assumption of liabilities, any disposition of a material amount of assets or securities, or any release or relinquishment of any material contract rights not in the ordinary course of business and inconsistent with past practices; (j) propose or adopt amendments to its certificate of incorporation or bylaws; (k) issue, deliver or sell any shares of its capital stock except upon exercise of the Seller Option, or effect any stock split, reverse stock split, recapitalization, reclassification or similar transaction or otherwise change its equity capitalization; (l) grant, confer or award any options, warrants, conversion rights or other rights, not existing on the date of the Merger Agreement, to acquire any shares of its capital stock; (m) purchase, redeem or otherwise acquire any shares of its capital stock or any securities convertible into or exercisable for any shares of its capital stock, except in a fiduciary capacity; (n) impose, or suffer the imposition, on any share of capital stock held by it or by any of its subsidiaries of any material lien, charge or encumbrance, or permit any such lien, charge or encumbrance to exist; (o) incur, or permit any of its subsidiaries to incur, any additional debt obligation or other obligation for borrowed money, or guaranty any additional debt obligation or other obligation for borrowed money, except in the ordinary course of business consistent with past practices; (p) incur or commit to any capital expenditures or any obligations or liabilities in connection therewith, other than capital expenditures and such related obligations or liabilities incurred or committed to in the ordinary and usual course of business consistent with past practices, which, in all cases, do not individually exceed $25,000 or cumulatively exceed $75,000; (q) change its methods of accounting in effect at December 31, 1996, except as may be required by changes in GAAP, or change its fiscal year; or 34 (r) agree, in writing or otherwise, to take any actions prohibited under the Merger Agreement or any action which would make any of its representations or warranties contained in the Merger Agreement untrue or incorrect or would otherwise violate any of its other agreements or commitments contained in the Merger Agreement in any material respect. GBT has also agreed that, except as may be specifically required or permitted pursuant to the Merger Agreement or specifically described therein or in the accompanying disclosure schedule, it shall: (a) use all reasonable efforts, and cause each of its subsidiaries to use all reasonable efforts, to preserve intact its business organization and goodwill in all material respects, keep available the services of its officers and employees as a group and maintain satisfactory relationships with borrowers, depositors, other customers and others having business relationships with it; and (b) at SIS's request, use all reasonable efforts to cooperate with SIS with respect to preparation for the combination and integration of the businesses, systems and operations of GBT and SIS, including the conversion of GBT's data processing and related electronic information systems to appropriate systems used by SIS, and confer on a regular and frequent basis with one or more representatives of SIS to report on operational and related matters. GBT and SIS have each also agreed that, except as may be specifically required or permitted pursuant to the Merger Agreement or specifically described therein or in the accompanying disclosure schedule, each will: (a) subject to any restrictions under applicable law or regulation, promptly notify the other of any emergency or other change in the normal course of its or its subsidiaries' businesses or in the operation of its or its subsidiaries' properties and of any governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated) if such emergency, change, complaint, investigation or hearing would be material to its or its subsidiaries' assets, properties, liabilities, business, results of operations, condition (financial or otherwise) or prospects; and (b) file all reports, applications and other documents required to be filed by it with the Federal Reserve Board, the FDIC, the MBBI, the Connecticut Banking Commissioner and any other applicable governmental agency or authority between the date of the Merger Agreement and the Effective Time and shall furnish to the other copies of all such reports promptly after the same are filed. CONDITIONS TO CONSUMMATION OF THE MERGER Mutual Conditions. The respective obligations of SIS and GBT to consummate the Merger are subject to satisfaction at or prior to the Effective Time of the following conditions: (a) The Merger Agreement and the transactions contemplated thereby shall have been approved and adopted by the requisite vote of GBT and SIS shareholders; (b) Other than the filing of the Plan of Merger, all necessary approvals, authorizations and consents of any court, administrative agency or commission or other governmental authority or instrumentality (each a "Governmental Entity") required to consummate the transactions contemplated by the Merger Agreement shall have been obtained and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired or been terminated (all such approvals and the expiration of all such waiting periods being referred to herein as the "Requisite Regulatory Approvals"); (c) No order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger or any of the other transactions contemplated by the Merger Agreement shall be in effect; and (d) No stop order suspending the effectiveness of the Registration Statement registering the shares of SIS Common Stock to be issued in the Merger shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the SEC. 35 Conditions to SIS's Obligations. The obligation of SIS to effect the Merger and the transactions contemplated thereby is also subject to the following conditions, any or all of which may be waived in whole or in part by SIS in its sole discretion: (a) No material adverse changes shall have occurred in the business, operations, results of operations, assets, liabilities or condition of GBT; (b) SIS shall have received assurance that GBT's representations and warranties are true at the Closing Date and all of GBT's pre-closing obligations have been complied with; (c) All required approvals of non-governmental third parties that are the responsibility of GBT to obtain shall have been obtained; (d) SIS shall have received a legal opinion from Sullivan & Worcester LLP, SIS's outside counsel, that the Merger and resultant acquisition by SIS of GBT will constitute a tax-free reorganization within the meaning of Section 368(a) of the Code; (e) SIS shall have received a legal opinion from Tyler Cooper & Alcorn, LLP, GBT's outside counsel, regarding certain corporate and other matters as are customary in transactions of this type; (f) SIS shall have received from Price Waterhouse LLP, its independent accountants, a letter to the effect that, based on a review of the Merger Agreement and the transactions contemplated thereby and certain additional information provided by SIS and GBT's independent certified public accountants, Shatswell, MacLeod & Company, P.C., Price Waterhouse LLP concurs in SIS's determination that no conditions exist that would preclude SIS's accounting for the Merger as a pooling of interests in accordance with Accounting Principles Board Opinion No. 16; and (g) GBT shall have delivered a letter identifying persons deemed to be its affiliates and, to the extent received by GBT, letters from such persons agreeing to comply with certain limitations applicable to their sales of GBT Common Stock prior to the Effective Time and to their sales of SIS Common Stock received in the Merger after the Effective Time. Conditions to GBT's Obligations. The obligation of GBT to effect the Merger and the other transactions contemplated in the Merger Agreement is also subject to the satisfaction of the following conditions, any or all of which may be waived by GBT in its sole discretion: (a) No material adverse change shall have occurred in the business, operations, results of operations, assets, liabilities, or condition of SIS; (b) GBT shall have received assurance that SIS's representations and warranties are true at the Effective Time and all of SIS's pre-closing obligations have been complied with; (c) All required approvals of non-governmental third parties that are the responsibility of SIS to obtain shall have been obtained; (d) GBT shall have received a legal opinion from Tyler Cooper & Alcorn, LLP, GBT's outside counsel, that the Merger and resultant acquisition by SIS of GBT will constitute a tax-free reorganization within the meaning of Section 368(a) of the Code; (e) The shares of SIS Common Stock issuable at the Effective Time shall have been authorized for listing on Nasdaq National Market upon official notice of issuance; and (f) GBT shall have received a legal opinion from Sullivan & Worcester LLP, SIS's outside counsel, regarding certain corporate and other matters as are customary in transactions of this type. TERMINATION The Merger Agreement is subject to termination (i) by mutual agreement of the parties, (ii) if the Merger has not been consummated on or before June 30, 1998, (iii) by either party if any Requisite Regulatory Approval or the approval of the shareholders of GBT or the shareholders of SIS is not obtained or if consummation of the transactions contemplated by the Merger Agreement is enjoined or otherwise prohibited, (iv) by either party for 36 a material breach of any representation, warranty or covenant or other agreement contained in the Merger Agreement by the other party, which breach is not cured after 30 days written notice thereof is given to the party committing such breach, (v) by GBT if the Average Closing Price is less than $25.00 per share, subject to SIS's right to elect to increase the number of shares of SIS Common Stock issuable in the Merger by using the Adjusted Exchange Ratio, and (vi) by SIS if GBT's Board does not recommend to GBT's shareholders the approval of the proposals to be submitted to such shareholders in accordance with the Merger Agreement or if such recommendation is subsequently withdrawn, modified or amended in any way that is materially adverse to SIS. If either party terminates the Merger Agreement for any of the foregoing reasons, neither party shall have any further liability under the Merger Agreement; provided, however, in the event of a party's gross negligence or willful breach, the breaching party will remain liable for any and all damages, costs and expenses sustained or incurred by the non-breaching party or, alternatively, will be liable to the non-breaching party for $1.0 million in liquidated damages. GBT may also be liable (but not in addition to the liquidated damages described in the preceding sentence or the cash payment that may be payable under the Stock Option Agreement as described below) for a cash payment of $1.0 million if (i) SIS has terminated the Merger Agreement due to the failure of GBT's Board to make or maintain the required recommendations to GBT's shareholders or due to GBT's gross negligence or willful breach of the Merger Agreement and (ii) either within 12 months of such termination GBT has become involved in an Alternative Transaction (as defined in the Merger Agreement) or, in the case of a termination by SIS due to the failure of GBT's Board to make or maintain the required recommendations to GBT's shareholders, any person other than SIS or its affiliates has made a publicly disclosed, bona fide proposal to GBT or its shareholders to engage in an Alternative Transaction (as defined in the Merger Agreement). AMENDMENT, EXTENSION AND WAIVER At any time prior to the consummation of the transactions contemplated by the Merger Agreement or termination of the Merger Agreement, whether before or after the approvals of the parties' respective shareholders, the parties may amend the Merger Agreement, extend the time for the performance of any of the obligations or other acts of any other party hereto, waive any inaccuracies in the representations and warranties contained therein or in any document delivered pursuant thereto, or waive compliance with any of the agreements or conditions with respect to covenants of the parties or closing conditions of the Merger (other than the mutual conditions described above); provided, however, that there may not be, without further approval of the parties' shareholders, to the extent required by law, any amendment, extension or waiver of the Merger Agreement which changes the amount or form of the consideration to be delivered to the GBT shareholders other than as may be expressly contemplated by the Merger Agreement. The Merger Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties thereto. Any agreement on the part of any party to any extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party, but such waiver or failure to insist on strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. REQUISITE REGULATORY APPROVALS The Merger and resultant acquisition by SIS of GBT are subject to the prior approval of the Federal Reserve Bank of Boston (the "Reserve Bank"), acting on delegated authority from the Federal Reserve Board, under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and applicable Federal Reserve Board regulations. The required notice of the proposed acquisition of GBT by SIS to the Reserve Bank has been filed by SIS. In reviewing the application, the Reserve Bank must take into consideration, among other factors, the financial and managerial resources and future prospects of the institutions and the convenience and needs of the communities to be served. In addition, under the BHCA, the Merger may not be consummated until the 15th day following the date of Reserve Bank approval of the Merger, during which time the Department of Justice may challenge the Merger on antitrust grounds. The commencement of an antitrust action during the waiting period would stay the effectiveness of such approval unless a court specifically orders otherwise. The Reserve Bank approved the Merger on October 22, 1997. 37 The acquisition of GBT by SIS is also subject to the prior approval of the Massachusetts Board of Bank Incorporation, which must determine in connection with the application that has been filed by SIS that the Merger does not unreasonably affect competition and that it promotes public convenience and advantage. SIS and, with respect to certain matters, GBT are also required to obtain, and have filed applications for, the prior approval of the Connecticut Department of Banking for the organization of Interim Bank, the completion of the Merger and SIS's acquisition of 100% of the voting stock of GBT, which will occur upon consummation of the Merger. In addition, GBT and Interim Bank are required to obtain, and have filed an application for, the approval of the FDIC for the completion of the Merger. Although there can be no assurances given that all Requisite Regulatory Approvals will be received for the Merger and resultant acquisition by SIS of ownership and control of GBT, the parties believe that all required regulatory approvals will be obtained. The parties are not aware of any other regulatory approvals or filings that are required for consummation of the Merger, except as described above. Should any other approvals or filings be required, it is presently contemplated that such approvals or filings will be sought or made, as appropriate. There can be no assurances given, however, that any other approvals, if required, will be obtained. The Merger will not be consummated unless all of the requisite regulatory approvals or other filings pertaining to the transactions contemplated by the Merger Agreement, are obtained or made, as appropriate. See "--Conditions to Consummation of the Merger" above. EXPENSES Each party will pay its own expenses in connection with the Merger, subject to certain provisions to the contrary contained in the Merger Agreement. STOCK OPTION AGREEMENT Simultaneously with the execution of the Merger Agreement, SIS and GBT entered into the Stock Option Agreement. Pursuant to the Stock Option Agreement, GBT granted to SIS an option to purchase, subject to adjustment in certain events, up to 170,080 shares of GBT Common Stock at an exercise price of $18.00 per share, subject to adjustment if additional shares of GBT Common Stock are issued or become outstanding after August 18, 1997. The Option becomes exercisable in whole or in part, after the occurrence of both an Initial Triggering Event and a Subsequent Triggering Event (each as defined below). In the event that the Option becomes exercisable in accordance with its terms, GBT is further obligated to pay to SIS the cash sum of $1.5 million. The term "Initial Triggering Event" means the occurrence at any time after August 18, 1997 of: (i) the agreement by GBT or any subsidiary thereof to enter into, or the approval or acceptance by the GBT Board of or recommendation by the GBT Board to GBT's shareholders of, any transaction involving a merger or consolidation, a purchase, lease or other acquisition of all or substantially all of the assets of GBT or any significant subsidiary of GBT (except as contemplated by the Merger Agreement), or a purchase or other acquisition of securities representing 10% or more of the voting power of GBT or any significant subsidiary of GBT (each of the foregoing an "Acquisition Transaction") without SIS's prior written consent; (ii) the acquisition by any person (other than SIS, its subsidiaries and GBT acting in a fiduciary capacity) owning beneficially less than 10% of the outstanding shares of GBT Common Stock on August 18, 1997 of beneficial ownership or the right to acquire beneficial ownership of 10% or more of the outstanding shares of GBT Common Stock, or the acquisition by any person owning beneficially more than 10% of the outstanding shares of GBT Common Stock on August 18, 1997 of beneficial ownership of an additional 3% of the outstanding shares of GBT Common Stock; (iii) the making by any person, other than SIS or any subsidiary of SIS, of a bona-fide proposal to GBT or its shareholders to engage in an Acquisition Transaction by public announcement 38 or written communication that shall be or become the subject of public disclosure; (iv) the breach by GBT after a proposal as described in the preceding clause (iii) of certain covenants in the Merger Agreement, unless remedied within an applicable notice period; or (v) the filing by any person other than SIS or any subsidiary of SIS, other than in connection with a transaction to which SIS has given its prior written consent, of an application or notice with the FDIC or Federal Reserve Board or other federal or state bank regulatory authority, which application or notice has been accepted for processing, for approval to engage in an Acquisition Transaction. The term "Subsequent Triggering Event" means either (i) the acquisition after August 18, 1997 by any person of beneficial ownership of 20% or more of the then outstanding GBT Common Stock; or (ii) the occurrence of the Initial Triggering Event described in subparagraph (i) of the foregoing paragraph, except that, in respect of the purchase or other acquisition of securities of GBT or any significant subsidiary of GBT, the percentage of voting power represented by such securities shall be 20% rather than 10%. The Option will expire upon the earliest of: (i) the Effective Time of the Merger; (ii) any termination of the Merger Agreement in accordance with the provisions thereof if such termination occurs prior to the occurrence of an Initial Triggering Event; or (iii) twelve months after the termination of the Merger Agreement in accordance with the provisions thereof after the occurrence of an Initial Triggering Event. Notwithstanding the termination of the Option, SIS will be entitled to purchase those Option Shares with respect to which it has exercised the Option in whole or in part prior to the termination of the Option. Within 30 days (subject to extension as provided in the Option Agreement) after the Option becomes exercisable, SIS may also by written notice require GBT to repurchase the unexercised Option in whole or in part (to the extent not otherwise prohibited by applicable law or regulations), at a purchase price intended to provide SIS with the same economic benefit as it would realize if it exercised the Option and subsequently sold the Option Shares. SIS may also by written notice require GBT to repurchase any Option Shares that it has acquired upon exercise of the Option (to the extent not otherwise prohibited by applicable law or regulations). The potential liability of such a repurchase to GBT would be the excess of the aggregate value of the Option Shares over the $18.00 per share exercise price. GBT anticipates that it would fund any such repurchase of the unexercised Option or Option Shares out of working capital. The Stock Option Agreement was required by SIS as a condition to its entering into the Merger Agreement, and is intended to increase the likelihood that the Merger will be consummated in accordance with the terms of the Merger Agreement. The Stock Option Agreement may have the effect of discouraging persons who might now or prior to the Effective Time be interested in acquiring all of or a significant interest in GBT from considering or proposing such an acquisition. STOCKHOLDERS AGREEMENTS GBT directors and executive officers, who own a total of 419,622 shares of GBT Common Stock, representing approximately 22.93% of the shares of GBT Common Stock issued and outstanding on the GBT Record Date, have executed the GBT Stockholders Agreement, pursuant to which such shareholders have agreed to certain restrictions on their respective shares of GBT Common Stock. Specifically, such shareholders agreed, with respect to all presently owned or after-acquired stock, (a) to vote such stock in favor of the Merger and against any other merger or acquisition transaction with a party other than SIS or its affiliates, and (b) generally not to sell, assign, transfer, encumber or otherwise dispose of such stock. SIS directors, who beneficially own a total of 188,019 shares of SIS Common Stock (including 76,560 shares subject to vested stock options), representing approximately 3.36% of the shares of SIS Common Stock issued and outstanding on the SIS Record Date, also have executed the SIS Stockholders Agreement, pursuant to which they have agreed to vote all of their shares of SIS Common Stock in favor of the Merger. 39 Both the GBT Stockholders Agreement and the SIS Stockholders Agreement and resultant acquisition by SIS of GBT shall remain in effect until the earlier of the consummation of the Merger or the termination of the Merger Agreement in accordance with its terms. NO SOLICITATION GBT will not (and will use all reasonable efforts to cause its officers, directors, employees, representatives and agents, not to), directly or indirectly, encourage, solicit, initiate or, subject to the fiduciary obligations of the GBT Board (as advised in writing by outside counsel), participate in any discussions or negotiations with, or provide any information to, any corporation, partnership, person or other entity or group (other than SIS and its affiliates or representatives) concerning any merger, tender offer, sale of substantial assets, sale of shares of capital stock or debt securities or similar transaction involving GBT. Notwithstanding the foregoing, GBT or the GBT Board is not prohibited from taking and disclosing to GBT's shareholders a position with respect to a tender offer by a third party pursuant to certain rules promulgated under the Exchange Act or from making such disclosure to GBT's shareholders which, in the judgment of the GBT Board with the written advice of outside counsel, may be required under applicable law. GBT will immediately communicate to SIS the terms of any proposal, discussion, negotiation or inquiry and the identity of the party making such proposal or inquiry. Any such communication shall be delivered no less promptly than by telephone within twenty-four hours of GBT's receipt of any such proposal or inquiry or its receipt of any request for information from the Federal Reserve Board, Department of Justice or any other governmental agency or authority with respect to any transaction described in the first sentence above. MANAGEMENT AND OPERATIONS AFTER THE MERGER Following the consummation of the Merger, GBT will maintain its separate corporate existence, but will become a wholly owned subsidiary of SIS. GBT's corporate headquarters will continue to be located in Glastonbury, Connecticut. The management and boards of directors of both SIS and GBT will not change, except that F. William Marshall, Jr., the President and Chief Executive Officer and a director of SIS, will join the GBT Board, and Ronald E. Bourbeau, a director of GBT, will join the SIS Board. INTERESTS OF CERTAIN PERSONS IN THE MERGER The Merger Agreement provides that the provisions with respect to indemnification existing in favor of, and all limitations on the personal liability of, any director, officer or other employee of GBT or any of its subsidiaries contained in the GBT Certificate and GBT Bylaws on the date of the Merger Agreement with respect to matters occurring prior to the Effective Time shall survive the Merger. SIS has also agreed to use all reasonable efforts to cause to be maintained in effect for a period of not less than six years from the Effective Time the current policies of the directors' and officers' liability insurance of GBT (or substitute policies of at least the same coverage with terms and conditions that are not less favorable than those presently maintained by GBT), with respect to matters occurring at or prior to the Effective Time. SIS has also agreed that it will not interfere with GBT's continuing to advance payment after the Effective Time for litigation costs incurred by certain GBT directors in connection with certain pending shareholder derivative proceedings, so long as the statutory requirements that would permit such directors to be indemnified by GBT in connection with such proceedings under applicable Connecticut law continue to be satisfied. Each of GBT's four senior officers has certain severance protections under existing employment agreements in the form of salary and benefits continuation, which would be triggered in the event of the officer's termination of employment within two years following the consummation of the Merger. The maximum cash amounts payable to GBT's senior officers, assuming that the employment of each was terminated on the Closing Date (which is not anticipated), would be as follows: Mr. Soucie: $410,038; Mr. Balocca: $257,576; Mr. Rowley: $217,407; and Mr. Patenaude: $212,756. 40 EMPLOYMENT OBLIGATIONS SIS will provide the employees of GBT and its affiliates who are so employed at the Effective Time with the employee benefits disclosed in the Merger Agreement as maintained for their benefit immediately prior to the Effective Time through March 31, 1998, or such other date as SIS in its sole discretion may determine. Following the Effective Time, SIS will, or will cause GBT to, honor in accordance with their terms all employment, severance and other compensation contracts disclosed to SIS under the Merger Agreement between GBT and any director, officer or employee thereof, and all provisions for benefits or other amounts earned or accrued through the Effective Time under GBT pension plans or benefit plans. SIS will cause each plan, program or arrangement included among the benefits of SIS to be provided to such employees after the Effective Time, to treat the prior service of each such employee with GBT, to the extent such prior service is recognized under the comparable plan, program or arrangement of GBT, as service rendered to SIS or its affiliate, as the case may be, for purposes of the eligibility to participate, vesting, and eligibility for special benefits under each such plan, program or arrangement of SIS, but not in any case for benefit accrual attributable to any period before the Effective Time. RESALE OF SIS COMMON STOCK The shares of SIS Common Stock to be issued pursuant to the Merger Agreement have been registered under the Securities Act by means of the registration statement of which this Proxy Statement--Prospectus forms a part. Accordingly, such shares should be freely transferable under the Securities Act, except for shares issued to persons who are affiliates of GBT at the time of the GBT Meeting and persons who are affiliates of SIS at the time of such proposed transfer. Such persons will generally be able to resell such shares only pursuant to an effective registration statement under the Securities Act or pursuant to a statutory or regulatory exemption or "safe harbor" from the registration requirements of the Securities Act. Affiliates of a person are other persons who control, are controlled by, or are under common control with the person. The affiliates of a corporation are generally thought to include its executive officers, directors and significant (i.e., 10% or more) shareholders. Affiliates of SIS who wish to dispose of shares of SIS Common Stock acquired in the Merger may utilize the "safe harbor" provided by Rule 144 promulgated under the Securities Act ("Rule 144"). Rule 144 permits, among other things, the resale of such shares if certain conditions are met. These conditions include the requirement that SIS have filed all reports required of it under the Exchange Act for the past 12 months, a limitation on the number of shares sold by the affiliate in any three-month period, and a restriction on the manner in which the sale is made. In most cases, a notice of proposed sale must also be filed with the SEC. Persons who are affiliates of GBT at the time of the GBT Meeting and are not affiliates of SIS at the time of a proposed resale may utilize the resale provisions of Rule 145 promulgated under the Securities Act ("Rule 145"). During the year following the Effective Time, such resale would be subject to the satisfaction of the conditions imposed under Rule 144 which are described above, other than the notice of proposed sale. After such one-year period, only the condition relating to SIS's Exchange Act reports is applied and, after two years, Rule 145 would impose no restriction on dispositions by persons who were not affiliates of SIS for at least three months preceding the proposed disposition. This Proxy Statement-Prospectus does not cover the resale of any shares of SIS Common Stock to be issued in the Merger. SIS is not obligated to file a registration statement under the Securities Act to facilitate resale of any such shares. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion summarizes the material U.S. federal income tax consequences of the Merger, including certain consequences to shareholders of GBT who are citizens or residents of the United States and who hold their shares as capital assets. It does not discuss all aspects of federal income taxation that may be relevant to a particular GBT shareholder in light of his or her personal circumstances (for example, a GBT shareholder who acquired his or her shares of GBT Common Stock pursuant to the exercise of employee stock 41 options or otherwise as compensation), or to GBT shareholders subject to special federal income tax treatment (such as insurance companies, regulated investment companies, dealers in securities, certain retirement plans, financial institutions, tax exempt organizations, persons subject to the alternative minimum tax, persons who hold GBT common stock as part of a hedging or conversion transaction or foreign persons). In addition, this summary does not address any aspects of state, local, foreign or other tax laws that may be relevant to holders of GBT Common Stock. It is the policy of the Internal Revenue Service ("IRS") not to rule directly on the tax status of transactions such as the Merger, and no such ruling will be sought. Each of SIS's and GBT's respective obligations to effect the Merger is conditioned upon its receipt from its counsel of an opinion dated as of the Closing Date, in form and substance reasonably satisfactory to it, substantially to the effect that for federal income tax purposes the Merger constitutes a reorganization within the meaning of Section 368 of the Code (noting, however, that the nontaxability of the shareholders of GBT resulting from such reorganization does not extend to cash received in lieu of a fractional share interest in SIS Common Stock or cash received by dissenting shareholders, if any). Such opinions are not binding on the IRS and would not, in any event, prevent the IRS from challenging the tax-free nature of the Merger under the Code. Tax Consequences to Holders of GBT Common Stock As noted above, GBT's obligation to effect the Merger is conditional on delivery of an opinion from Tyler Cooper & Alcorn, LLP, its counsel, dated as of the Closing Date, based upon certain customary representations and warranties set forth therein, substantially to the effect that for federal income tax purposes the Merger constitutes a reorganization within the meaning of Section 368(a) of the Code. If the receipt of such opinion were waived and if the material federal income tax consequences to GBT shareholders were materially different from those set forth below, GBT would resolicit the approval of its shareholders before it proceeded with the Merger. Based on such opinion, and subject to the foregoing, the material federal income tax consequences to holders of GBT Common Stock would be as set forth below. No gain or loss will be recognized by GBT shareholders upon receipt of SIS Common Stock in exchange for their GBT Common Stock, except that a holder of GBT Common Stock who receives cash in lieu of a fractional share of SIS Common Stock will recognize gain or loss equal to the difference between the amount of such cash and the tax basis allocated to such shareholder's fractional share of SIS Common Stock. The tax basis of the SIS Common Stock received by a GBT shareholder will be the same as the aggregate tax basis of such shareholder's GBT Common Stock exchanged therefor, decreased by any cash received in lieu of fractional shares. The holding period of the SIS Common Stock in the hands of a GBT shareholder will include the holding period of such shareholder's GBT Common Stock exchanged therefor, provided that such GBT Common Stock is held as a capital asset at the Effective Time. A GBT shareholder who exercises dissenters' rights and receives cash will recognize gain for federal income tax purposes, the tax rate on which will depend upon the holding period for his or her GBT Common Stock. The exchange of shares for cash upon the exercise of dissenters' rights could be treated as substantially equivalent to a dividend and, therefore, taxed as ordinary income if the recipient of cash owns or constructively owns other shares of SIS Common Stock. Shares owned by spouses, children, grandchildren, parents and other relatives and by entities that are 50% owned by a shareholder are generally treated as constructively owned by that shareholder. Tax Consequences to Holders of SIS Common Stock SIS has been advised by its counsel, Sullivan & Worcester LLP, that the holders of SIS Common Stock, as such, will not recognize gain or loss as a result of the Merger. 42 THE FOREGOING DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE INTERNAL REVENUE CODE, EXISTING AND PROPOSED U.S. TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE AND ANY SUCH CHANGE COULD AFFECT THE CONTINUING VALIDITY OF THIS DISCUSSION. GBT SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO THEM, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS. ACCOUNTING TREATMENT It is anticipated that the Merger will be accounted for as a "pooling of interests" transaction under GAAP. Under the pooling of interests method of accounting, the recorded assets and liabilities of the separate companies generally become the recorded assets and liabilities of the combined corporation. The assets of the constituent entities are recorded on the resulting corporation's books at their historical cost. In order to qualify for this accounting treatment, SIS intends to issue and sell at market value certain shares of SIS Common Stock presently held in treasury prior to the consummation of the Merger. SIS filed a separate Registration Statement on Form S-3 with the SEC on September 12, 1997 to register the issuance of such shares. The shares sold will reduce SIS's treasury shares to a level that will qualify the Merger for pooling treatment under applicable accounting rules. The exact number of shares of SIS Common Stock to be sold will depend upon the extent to which GBT stockholders dissenting from the Merger choose to assert appraisal rights-if appraisal rights are asserted in respect of more shares, a greater number of shares will be sold. If no dissenters' rights are asserted, approximately 13,000 shares will be sold, but if sufficient GBT stockholders assert dissenters' rights, the number of shares sold could be as high as 146,400. 43 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS The following unaudited pro forma condensed combined financial statements give effect to the Merger of SIS and GBT under the pooling of interests method of accounting. For a description of the effect of the pooling of interests accounting on the Merger and the historical financial statements of SIS, See "THE MERGER--Accounting Treatment." These pro forma financial statements are presented for illustrative purposes only and, therefore, are not necessarily indicative of the operating results and financial position that might have been achieved had the Merger occurred as of an earlier date, nor are they necessarily indicative of operating results and financial position that may occur in the future. The pro forma amounts do not include any adjustments for estimated operating efficiencies or revenue enhancements resulting from the Merger. A pro forma condensed combined balance sheet is provided as of June 30, 1997, giving effect to the Merger as though it had been consummated on that date. Pro forma condensed combined income statements are provided for the six- month periods ended June 1997 and 1996, and the years ended December 31, 1996, 1995, and 1994, giving effect to the Merger as though it had occurred at the beginning of the earliest period presented. The condensed historical statements of income for annual periods are derived from the historical consolidated financial statements of SIS and GBT and should be read in conjunction with the historical consolidated financial statements and notes thereto for SIS and GBT incorporated herein by reference. The historical unaudited financial statements as of or for the six months ended June 30, 1997 and 1996 have been prepared in accordance with GAAP applicable to interim financial information and, in the opinion of the respective managements of SIS and GBT, include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of financial information for such periods. 44 SIS BANCORP, INC. UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AS OF JUNE 30, 1997 (IN THOUSANDS)
HISTORICAL PRO FORMA -------------------- ------------------------ SIS GBT ADJUSTMENTS COMBINED ---------- -------- ----------- ---------- ASSETS Cash and due from banks....... $ 42,807 $ 11,251 $ 390 (a) $ 54,448 Investment securities available for sale........... 493,862 54,291 548,153 Investment securities held to maturity..................... 184,993 26,742 211,735 Loans, net of allowance for possible loan losses......... 645,877 152,942 798,819 Other assets.................. 67,006 16,072 83,078 ---------- -------- ------- ---------- Total assets................ $1,434,545 $261,298 $ 390 $1,696,233 ========== ======== ======= ========== LIABILITIES Deposits...................... $1,015,404 $216,594 $ $1,231,998 Securities sold under agreements to repurchase..... 158,809 4,805 163,614 Other liabilities............. 157,059 21,936 1,375 (b) 180,370 ---------- -------- ------- ---------- Total liabilities........... 1,331,272 243,335 1,375 1,575,982 ---------- -------- ------- ---------- SHAREHOLDERS' EQUITY Common Stock.................. 57 4,575 (4,561)(c) 71 Additional paid-in capital.... 43,039 6,609 4,613 (d) 54,261 Unearned compensation......... (3,306) -- (3,306) Retained earnings............. 65,472 7,069 (1,375)(e) 71,166 Net unrealized gain (loss) on investment securities available for sale........... 1,976 (290) 1,686 Treasury stock................ (3,965) -- 338 (f) (3,627) ---------- -------- ------- ---------- Total shareholders' equity.. 103,273 17,963 (985) 120,251 ---------- -------- ------- ---------- Total liabilities and shareholders' equity....... $1,434,545 $261,298 $ 390 $1,696,233 ========== ======== ======= ==========
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements 45 SIS BANCORP, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1997 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA -------------------- --------------------- SIS GBT ADJUSTMENTS COMBINED --------- --------- ----------- --------- Interest and dividend income: Loans....................... $ 26,327 $ 6,672 $ 32,999 Investment securities....... 22,766 2,394 25,160 Other....................... 359 70 429 --------- --------- --------- Total interest and dividend income.......... 49,452 9,136 58,588 --------- --------- --------- Interest expense: Deposits.................... 16,879 3,471 20,350 Borrowings.................. 7,524 680 8,204 --------- --------- --------- Total interest expense.... 24,403 4,151 28,554 --------- --------- --------- Net interest and dividend income....................... 25,049 4,985 30,034 Less: Provision for loan losses....................... 801 120 921 --------- --------- --------- Net interest and dividend income after provision for loan losses................ 24,248 4,865 29,113 --------- --------- --------- Noninterest income: Merchant income............. -- 909 909 Fees and other income....... 5,579 720 6,299 --------- --------- --------- Total noninterest income.. 5,579 1,629 7,208 --------- --------- --------- Noninterest expense: Operating expenses: Salaries and employee benefits................... 9,660 1,907 11,567 Occupancy expense of bank premises, net.............. 1,903 456 2,359 Furniture and equipment expense.................... 1,031 532 1,563 Other operating expense..... 7,241 1,662 8,903 --------- --------- --------- Total operating expenses.. 19,835 4,557 24,392 Foreclosed real estate income, net................ (32) (53) (85) Net expense of real estate operations................. 479 -- 479 --------- --------- --------- Total noninterest expense.................. 20,282 4,504 24,786 --------- --------- --------- Income before income tax provision.................... 9,545 1,990 11,535 Income tax provision.......... 3,785 755 4,540 --------- --------- --------- Net income.................. $ 5,760 $ 1,235 $ 6,995 ========= ========= ========= === Earnings per share(g) Primary..................... $ 1.03 $ 0.68 $ 1.00 Fully diluted............... $ 1.02 $ 0.68 $ 1.00 Weighted average shares(g) Primary..................... 5,608,141 1,829,920 6,962,282 Fully diluted............... 5,640,349 1,829,920 6,994,490
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements 46 SIS BANCORP, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA -------------------- --------------------- SIS GBT ADJUSTMENTS COMBINED --------- --------- ----------- --------- Interest and dividend income: Loans........................... $ 23,474 $ 6,351 $ 29,825 Investment securities........... 15,511 2,151 17,662 Other........................... 259 48 307 --------- --------- --------- Total interest and dividend income....................... 39,244 8,550 47,794 --------- --------- --------- Interest expense: Deposits........................ 16,068 3,065 19,133 Borrowings...................... 3,148 637 3,785 --------- --------- --------- Total interest expense........ 19,216 3,702 22,918 --------- --------- --------- Net interest and dividend income.. 20,028 4,848 24,876 Less: Provision for loan losses... 1,450 375 1,825 --------- --------- --------- Net interest and dividend income after provision for loan losses......................... 18,578 4,473 23,051 --------- --------- --------- Noninterest income: Merchant income................. -- 881 881 Fees and other income........... 5,318 665 5,983 --------- --------- --------- Total noninterest income...... 5,318 1,546 6,864 --------- --------- --------- Noninterest expense: Operating expenses: Salaries and employee benefits.. 8,492 1,885 10,377 Occupancy expense of bank premises, net.................. 1,577 508 2,085 Furniture and equipment expense........................ 1,056 562 1,618 Other operating expense......... 6,771 2,014 8,785 --------- --------- --------- Total operating expenses...... 17,896 4,969 22,865 Foreclosed real estate expense (income), net.................. 223 (29) 194 Net income of real estate operations..................... (162) -- (162) --------- --------- --------- Total noninterest expense..... 17,957 4,940 22,897 --------- --------- --------- Income before income tax provision........................ 5,939 1,079 7,018 Income tax provision.............. 490 -- 490 --------- --------- --------- Net income...................... $ 5,449 $ 1,079 $ 6,528 ========= ========= ========= Earnings per share(g) Primary......................... $ 1.00 $ 0.59 $ 0.96 Fully diluted................... $ 1.00 $ 0.59 $ 0.96 Weighted average shares(g) Primary......................... 5,432,265 1,829,920 6,786,406 Fully diluted................... 5,445,968 1,829,920 6,800,109
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements 47 SIS BANCORP, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA -------------------- --------------------- SIS GBT ADJUSTMENTS COMBINED --------- --------- ----------- --------- Interest and dividend income: Loans........................... $ 48,657 $ 12,884 $ 61,541 Investment securities........... 35,051 4,275 39,326 Other........................... 569 302 871 --------- --------- --------- Total interest and dividend income....................... 84,277 17,461 101,738 --------- --------- --------- Interest expense: Deposits........................ 32,638 6,435 39,073 Borrowings...................... 8,535 1,307 9,842 --------- --------- --------- Total interest expense........ 41,173 7,742 48,915 --------- --------- --------- Net interest and dividend income.. 43,104 9,719 52,823 Less: Provision for loan losses... 2,950 675 3,625 --------- --------- --------- Net interest and dividend income after provision for loan losses...... 40,154 9,044 49,198 --------- --------- --------- Noninterest income: Merchant income................. -- 1,894 1,894 Fees and other income........... 11,470 1,303 12,773 --------- --------- --------- Total noninterest income...... 11,470 3,197 14,667 --------- --------- --------- Noninterest expense: Operating expenses: Salaries and employee benefits.. 17,839 3,933 21,772 Occupancy expense of bank premises, net.................. 3,291 1,017 4,308 Furniture and equipment expense........................ 2,240 1,193 3,433 Other operating expense......... 14,199 4,321 18,520 --------- --------- --------- Total operating expenses...... 37,569 10,464 48,033 Foreclosed real estate expense, net............................ 440 9 449 Net income of real estate operations..................... (272) -- (272) --------- --------- --------- Total noninterest expense..... 37,737 10,473 48,210 --------- --------- --------- Income before income tax benefit.. 13,887 1,768 15,655 Income tax benefit................ (4,273) (757) (5,030) --------- --------- --------- Net income...................... $ 18,160 $ 2,525 $ 20,685 ========= ========= ========= Earnings per share(g) Primary......................... $ 3.29 $ 1.38 $ 3.01 Fully diluted................... $ 3.26 $ 1.38 $ 2.99 Weighted average shares(g) Primary......................... 5,522,594 1,829,920 6,876,735 Fully diluted................... 5,573,390 1,829,920 6,927,531
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements 48 SIS BANCORP, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA -------------------- ----------------------- SIS GBT ADJUSTMENTS COMBINED --------- --------- ----------- --------- Interest and dividend income: Loans......................... $ 45,536 $ 12,270 $ $ 57,806 Investment securities......... 23,064 4,179 27,243 Other......................... 1,316 69 1,385 --------- --------- ------- --------- Total interest and dividend income..................... 69,916 16,518 86,434 --------- --------- --------- Interest expense: Deposits...................... 30,424 5,900 36,324 Borrowings.................... 2,132 992 3,124 --------- --------- ------- --------- Total interest expense...... 32,556 6,892 39,448 --------- --------- --------- Net interest and dividend income......................... 37,360 9,626 46,986 Less: Provision (benefit) for loan losses.................... 4,359 (213) 2,045 (h) 6,191 --------- --------- ------- --------- Net interest and dividend income after provision (benefit) for loan losses.... 33,001 9,839 (2,045) 40,795 --------- --------- ------- --------- Noninterest income: Merchant income............... -- 1,690 1,690 Fees and other income......... 8,124 1,445 410 (h) 9,979 --------- --------- ------- --------- Total noninterest income.... 8,124 3,135 410 11,669 --------- --------- ------- --------- Noninterest expense: Operating expenses: Salaries and employee benefits..................... 15,961 3,588 19,549 Occupancy expense of bank premises, net................ 3,459 851 4,310 Furniture and equipment expense...................... 1,943 1,285 3,228 Other operating expense....... 13,768 3,636 17,404 --------- --------- ------- --------- Total operating expenses.... 35,131 9,360 44,491 Foreclosed real estate expense, net................. 521 837 1,358 Net income of real estate operations................... (227) -- (227) --------- --------- ------- --------- Total noninterest expense... 35,425 10,197 45,622 --------- --------- --------- Loss on bulk sale of loans...... -- 2,045 (2,045)(h) -- Recovery on National Premium CD Program........................ -- (410) 410 (h) -- --------- --------- ------- --------- Income before income tax benefit........................ 5,700 1,142 6,842 Income tax benefit.............. (5,759) (500) (6,259) --------- --------- ------- --------- Net income.................... $ 11,459 $ 1,642 $ $ 13,101 ========= ========= ======= ========= Earnings per share(g) Primary....................... $ 2.21 $ 1.22 $ 2.12 Fully diluted................. $ 2.19 $ 1.22 $ 2.11 Weighted average shares(g) Primary....................... 5,174,037 1,352,057 6,174,559 Fully diluted................. 5,220,778 1,352,057 6,221,300
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements 49 SIS BANCORP, INC. UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL PRO FORMA -------------------- ----------------------- SIS GBT ADJUSTMENTS COMBINED --------- --------- ----------- --------- Interest and dividend income: Loans......................... $ 42,637 $ 11,688 $ $ 54,325 Investment securities......... 14,749 3,646 18,395 Other......................... 527 119 646 --------- --------- ------- --------- Total interest and dividend income..................... 57,913 15,453 73,366 --------- --------- --------- Interest expense: Deposits...................... 23,792 5,195 28,987 Borrowings.................... -- 742 742 --------- --------- ------- --------- Total interest expense...... 23,792 5,937 29,729 --------- --------- --------- Net interest and dividend in- come........................... 34,121 9,516 43,637 Less: Provision for loan loss- es............................. 25,742 1,789 27,531 --------- --------- ------- --------- Net interest and dividend income after provision for loan losses.................. 8,379 7,727 16,106 --------- --------- --------- Noninterest income: Merchant income............... -- 1,549 1,549 Fees and other income......... 8,329 2,494 (1,370)(h) 9,453 --------- --------- ------- --------- Total noninterest income.... 8,329 4,043 (1,370) 11,002 --------- --------- ------- --------- Noninterest expense: Operating expenses: Salaries and employee benefits..................... 16,808 3,684 20,492 Occupancy expense of bank premises, net................ 3,410 883 4,293 Furniture and equipment expense...................... 1,830 1,326 3,156 Other operating expense....... 15,109 4,043 19,152 --------- --------- ------- --------- Total operating expenses.... 37,157 9,936 47,093 Foreclosed real estate expense, net................. 5,470 1,289 6,759 Net expense of real estate operations................... 988 -- 988 --------- --------- ------- --------- Total noninterest expense... 43,615 11,225 54,840 --------- --------- --------- Loss on National Premium CD Pro- gram........................... -- 1,370 (1,370)(h) -- --------- --------- ------- --------- Loss before income tax provision...................... (26,907) (825) (27,732) Income tax provision............ -- 35 35 --------- --------- ------- --------- Net loss...................... $ (26,907) $ (860) $ $ (27,767) ========= ========= ======= ========= Loss per share(g) Primary....................... $ (5.21) $ (0.67) $ (4.53) Fully diluted................. $ (5.21) $ (0.67) $ (4.50) Weighted average shares(g) Primary....................... 5,174,037 1,289,920 6,128,578 Fully diluted................. 5,220,778 1,289,920 6,175,319
See Accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements 50 NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The unaudited pro forma condensed consolidated financial statements are presented for illustrative purposes only, giving effect to the Merger as accounted for by the pooling of interests method. The pro forma condensed consolidated balance sheet is as of June 30, 1997. Pro forma condensed consolidated statements of operations are presented for the six months ended June 30, 1997 and 1996, and the years ended December 31, 1996, 1995, and 1994. Because the transaction has not been completed, costs of the Merger transaction can only be estimated at this time. The pro forma condensed combined statement of income for the six months ended June 30, 1997 excludes (i) the positive effects of potential cost savings which may be achieved upon combining the resources of the companies, and (ii) transaction costs of approximately $1.4 million, including investment banking, legal and accounting and other related fees. The pro forma condensed combined balance sheet as of June 30, 1997 includes, in accordance with SEC reporting rules, the impact of all transactions, whether of a recurring or nonrecurring nature, that can be reasonably estimated and should be reflected as of that date. 2. PRO FORMA ADJUSTMENTS Intercompany Transactions--There were no intercompany transactions which required elimination from the pro forma consolidated operating results or balance sheet. (a) Cash and Due from Banks--Cash has been adjusted to reflect the sale of 13,000 shares of SIS Common Stock out of treasury shares to one or more independent third parties prior to the Effective Time. (b) Other Liabilities--Other liabilities has been adjusted to reflect transaction costs associated with the Merger of approximately $1.4 million. (c) Common Stock--Common stock has been adjusted to reflect the assumed issuance of 1,354,141 shares of SIS Common Stock in exchange for 1,829,920 shares of GBT Common Stock outstanding as of June 30, 1997, using the Exchange Ratio of 0.74. (d) Additional Paid-In Capital--Additional paid-in capital is adjusted for the effects of: (i) the issuance of 1,354,141 shares of SIS Common Stock with a par value of $.01 per share in exchange for GBT Common Stock having a par value of $2.50 per share; and (ii) the sale of 13,000 shares of SIS Common Stock out of treasury shares to one or more independent third parties prior to the Effective Time. (e) Retained Earnings--Retained earnings has been adjusted to include the Merger transaction costs of approximately $1.4 million. (f) Treasury Stock--Treasury stock is adjusted for the sale of 13,000 shares of SIS Common Stock out of treasury shares to one or more independent third parties prior to the Effective Time. (g) Earnings Per Share and Weighted Shares Outstanding--Pro forma earnings per share and weighted shares outstanding for all periods presented are based upon SIS's and GBT's combined historical weighted average shares, after adjustment of GBT's historical number of shares by the Exchange Ratio of 0.74. (h) Pro Forma Combined Statements of Income--Amounts have been reclassified to conform GBT's classification to that of SIS. 51 INFORMATION REGARDING GBT GBT is a state-chartered Connecticut commercial bank founded in 1919. GBT provides banking and banking-related services in central Connecticut. The principal executive offices of GBT are located at 2461 Main Street, Glastonbury, Connecticut 06033. Its telephone number is (860) 633-4695. For more information about GBT, reference is made to GBT's 1996 annual report to shareholders, a copy of which accompanies this Proxy Statement--Prospectus, and to GBT's most recent annual report on Form F-2 and subsequent quarterly reports on Form F-4, which are incorporated herein by reference. See "WHERE YOU CAN FIND MORE INFORMATION" and "INFORMATION INCORPORATED BY REFERENCE." INFORMATION REGARDING SIS SIS is a bank holding company established as a Massachusetts corporation in 1996 and is registered under the Bank Holding Company Act of 1956, as amended, with its principal asset being the stock of the Bank. Through its banking subsidiary, SIS provides banking and banking-related services in western Massachusetts. The principal executive offices of SIS are located at 1441 Main Street, Springfield, Massachusetts 01102. Its telephone number is (413) 748- 8000. For more information about SIS, reference is made to SIS's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q, which are incorporated herein by reference. See "WHERE YOU CAN FIND MORE INFORMATION" and "INFORMATION INCORPORATED BY REFERENCE." DESCRIPTION OF SIS CAPITAL STOCK COMMON STOCK General. As of the SIS Record Date, the capital stock of SIS consisted of 30,000,000 authorized shares, par value $.01 per share, 25,000,000 of which are shares of SIS Common Stock, of which 5,580,842 were issued and outstanding (exclusive of treasury shares), and 5,000,000 of which are shares of SIS Preferred Stock, none of which are outstanding. SIS Common Stock is traded on the Nasdaq National Market under the trading symbol "SISB." Shares of SIS Common Stock may be issued from time to time, in such amount and proportions and for such consideration as may be fixed by the SIS Board. No holder of SIS Common Stock has any preemptive or preferential rights to purchase or to subscribe for any shares of capital stock or other securities which may be issued by SIS. SIS Common Stock has no redemption or sinking fund provisions applicable thereto and has no conversion rights. The outstanding shares of SIS Common Stock are fully paid and nonassessable. Liquidation. In the event of any liquidation, dissolution or winding up of SIS, whether voluntary or involuntary, the holders of SIS Common Stock are entitled to receive, on a share-for-share basis, any assets or funds of SIS which are distributable to the holders of SIS Common Stock upon such events, subject to the prior rights of creditors of SIS and the holders of outstanding shares of SIS Preferred Stock, if any. Voting. The holders of SIS Common Stock are entitled to one vote for each share in all matters voted upon by the shareholders of SIS. The shares of SIS Common Stock have noncumulative voting rights; consequently, the holders of a majority in interest of SIS Common Stock can conceivably elect all of the directors of SIS and, in such event, the holders of the remaining shares voting for election of directors would not be able to elect any person or persons to the SIS Board. Dividends. When and if dividends, payable as cash, stock or other property, are declared by the SIS Board out of funds legally available therefor, the holders of SIS Common Stock are entitled to share equally, share for share, in such dividends. The payment of dividends on SIS Common Stock is subject to applicable bank regulatory approval. 52 Preferred Share Purchase Rights. On January 22, 1997, the SIS Board authorized the issuance of one Preferred Share Purchase Right (a "Right") for each outstanding share of SIS Common Stock pursuant to a Rights Agreement, dated as of January 22, 1997, between the SIS Company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (the "Rights Agreement"). The issuance was made to shareholders of record as of the close of business on February 3, 1997. Holders of SIS Common Stock issued subsequent to that date automatically receive the Rights with their shares. Each Right entitles the holder thereof to purchase under certain circumstances one one-hundredth of a share of Series A Junior Participating Preferred Stock, par value $.01 per share, or, in certain circumstances, to receive cash, property, shares of SIS Common Stock or other securities of SIS at a purchase price of $100.00 per one-hundredth of a preferred share (the "Purchase Price"). The Rights automatically attach to all certificates representing shares of SIS Common Stock and no separate Rights certificates have been distributed. The Rights would separate from the shares of SIS Common Stock and a "Distribution Date" would occur upon the earlier of (i) 10 business days (or such later date as the SIS Board may determine before a Distribution Date occurs) following a public announcement by SIS that a person or group of affiliated or associated persons, with certain exceptions (an "Acquiring Person"), has acquired, or has obtained the right to acquire, beneficial ownership of 10% or more of the outstanding shares of SIS Common Stock (the date of such announcement being the "Stock Acquisition Date") or (ii) 10 business days (or such later date as the SIS Board may determine before a Distribution Date occurs) following the commencement of a tender offer or exchange offer that would result in a person becoming an Acquiring Person. Until a Distribution Date occurs, the Rights are evidenced by the certificates for shares of SIS Common Stock and are transferred with and only with such SIS Common Stock certificates, and the surrender for transfer of any such certificates also constitutes the transfer of the Rights associated with the shares represented by such certificates. As soon as practicable after a Distribution Date, Rights certificates would be mailed to holders of record of shares of SIS Common Stock as of the close of business on the Distribution Date and, from and after the Distribution Date, the separate Rights Certificates alone would represent the Rights. The Rights are not exercisable until a Distribution Date and will expire at the close of business on January 22, 2007, unless earlier redeemed or exchanged by SIS as described below. In the event (a "Flip-In Event") that a person becomes an Acquiring Person (except pursuant to a tender or exchange offer for all outstanding shares of SIS Common Stock at a price and on terms which a majority of SIS's Outside Directors (as defined in the Rights Agreement) determines to be fair to and otherwise in the best interests of SIS and its shareholders (a "fair offer")), each holder of a Right thereafter has the right to receive, upon exercise of such Right, shares of SIS Common Stock (or, in certain circumstances, cash, property or other securities of SIS) having a Current Market Price (as defined in the Rights Agreement) equal to two times the exercise price of the Right. Notwithstanding the foregoing, following the occurrence of any Flip-In Event, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person (or by certain related parties) become null and void in the circumstances set forth in the Rights Agreement. However, Rights are not exercisable following the occurrence of any Flip-In Event until such time as the Rights are no longer redeemable by SIS as described below. In the event (a "Flip-Over Event") that, at any time on or after the Stock Acquisition Date, (i) SIS shall take part in a merger or other business combination transaction (other than certain mergers that follow a fair offer) and SIS shall not be the surviving entity or (ii) SIS shall take part in a merger or other business combination transaction in which the shares of SIS Common Stock are changed or exchanged (other than certain mergers that follow a fair offer) or (iii) 50% or more of SIS's assets or earning power is sold or transferred, each holder of a Right (except Rights which previously have been voided, as described above) thereafter has the right to receive, upon exercise, a number of shares of common stock of the acquiring company having a Current Market Price equal to two times the exercise price of the Right. The Purchase Price payable and the number of shares of Series A Junior Participating Preferred Stock (or the amount of cash, property or other securities) issuable upon exercise of the Rights are subject to adjustment 53 from time to time to prevent dilution (i) in the event of a share dividend on, or a subdivision, combination or reclassification of, the shares of Series A Junior Participating Preferred Stock, (ii) if holders of the shares of Series A Junior Participating Preferred Stock are granted certain rights or warrants to subscribe for shares of Series A Junior Participating Preferred Stock or convertible securities at less than the Current Market Price of the Series A Junior Participating Preferred Stock or (iii) upon the distribution to holders of shares of the Series A Junior Participating Preferred Stock of evidences of indebtedness or assets (excluding regular quarterly cash dividends) or of subscription rights or warrants (other than those referred to above). At any time until 10 business days following a Stock Acquisition Date, SIS may redeem the Rights in whole, but not in part, at a price of $.01 per Right, payable, at the option of SIS, in cash, shares of SIS Common Stock or other consideration as the SIS Board may determine. Immediately upon the effectiveness of the action of the SIS Board ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the $.01 per Right redemption price. The terms of the Rights, other than key financial terms and the date on which the Rights expire, may be amended by the SIS Board prior to a Distribution Date. Thereafter, the provisions of the Rights Agreement may be amended by the SIS Board only in order to cure any ambiguity, defect or inconsistency, to make changes which do not adversely affect the interests of holders of Rights (excluding the interests of any Acquiring Person and certain other related parties) or to shorten or lengthen any time period under the Rights Agreement; provided, however, that no amendment to lengthen the time period governing redemption shall be made at such time as the Rights are not redeemable. The foregoing description of the Rights does not purport to be complete and is qualified in its entirety by reference to the Rights Agreement as included as Exhibit 4.1 to SIS's Registration Statement on Form 8-A dated January 23, 1997. PREFERRED STOCK Under the SIS Articles, the SIS Board is authorized, without further shareholder action, to provide for the issuance of the SIS Preferred Stock, in one or more series, with such designations or titles, dividend rates, special or relative rights in the event of liquidation, distribution or sale of assets or dissolution or winding up of SIS, sinking fund provisions, redemption or purchase account provisions, conversion provisions, and voting rights as shall be set forth as and when established by the SIS Board. 54 MARKET FOR SIS COMMON STOCK SIS Common Stock is traded over-the-counter on the Nasdaq National Market under the symbol "SISB." At October 10, 1997, there were 5,580,842 shares of SIS Common Stock outstanding and approximately 1,200 shareholders of record. This does not reflect the number of persons or entities who hold their stock in nominee or street name through various brokerage firms. The price information regarding SIS common stock in the following table is based on high and low closing prices on the Nasdaq National Market.
CASH DIVIDENDS PER SHARE OF QUARTER ENDED HIGH LOW COMMON STOCK ------------- ------ ------ -------------- 1995 March 31........................................ $11.06 $ 9.63 -- June 30......................................... 13.06 10.88 -- September 30.................................... 16.00 12.88 -- December 31..................................... 17.13 14.63 -- 1996 March 31........................................ 18.75 16.25 -- June 30......................................... 18.63 16.75 -- September 30.................................... 23.63 17.50 -- December 31..................................... 24.50 22.13 -- 1997 March 31........................................ 27.33 22.33 $0.12 June 30......................................... 29.63 23.33 0.12 September 30.................................... 34.75 27.63 0.14 through October 22.............................. 37.00 34.50
On October 22, 1997, SIS announced a quarterly dividend of $0.14 per share payable on November 21, 1997 to holders of record as of the close of business on November 4, 1997. On August 15, 1997, the last business day prior to the public announcement of the Merger, the closing price of SIS Common Stock on the Nasdaq National Market was $30.00 per share. On October 22, 1997, the last practicable trading day prior to the printing of this Proxy Statement-Prospectus, the closing price was $35.50. Dividends The Federal Reserve Board has authority to prohibit bank holding companies from paying dividends if such payment would constitute an unsafe or unsound practice. The Federal Reserve Board has indicated generally that it may be an unsound practice for bank holding companies to pay dividends unless the bank holding company's net income over the preceding year is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organization's capital needs, asset quality, and overall financial condition. SIS's ability to pay dividends is dependent upon the flow of dividend income to it from its subsidiaries, which may be affected or limited by regulatory restrictions imposed by federal or state bank regulatory agencies. At June 30, 1997, the Bank had available approximately $26.9 million for payment of dividends to SIS under applicable Massachusetts statutory limitations. 55 COMPARISON OF RIGHTS OF HOLDERS OF SIS COMMON STOCK AND GBT COMMON STOCK At the Effective Time, the shareholders of GBT, except those shareholders exercising dissenters' rights, will become shareholders of SIS. As shareholders of GBT, their rights are presently governed by Connecticut law and by the GBT certificate of incorporation (the "GBT Certificate") and the GBT bylaws (the "GBT Bylaws"). As shareholders of SIS, their rights will be governed by Massachusetts law, the SIS Articles and the SIS bylaws (the "SIS Bylaws"). The following discussion summarizes the material differences between the rights of holders of GBT Common Stock and holders of SIS Common Stock and differences between the charters and by-laws of GBT and SIS. This summary does not purport to be complete and is qualified in its entirety by reference to the GBT Certificate, the GBT Bylaws, the SIS Articles and the SIS Bylaws and the relevant provisions of Connecticut and Massachusetts law. SPECIAL MEETINGS OF SHAREHOLDERS GBT. Connecticut law provides that special meetings of shareholders may be called by the board of directors, the person or persons authorized to do so by the certificate of incorporation or bylaws or upon written application to the secretary of the corporation by the holders of at least 10% of all shares entitled to vote at the meeting, provided that a corporation need not hold such meeting except upon the demand of holders of not less than 35% of such shares if the corporation has a class of voting stock registered pursuant to Section 12 of the Exchange Act and if no person held 10% or more of such votes on February 1, 1988. The GBT Bylaws provide that, unless otherwise prescribed by statute, a special meeting may be called only by the Chairman of the Board, the President, or the board of directors, or upon written application therefor by the holders of not less than 35% of the shares entitled to vote at the meeting. SIS. Massachusetts law provides that special meetings of shareholders may be called by the president or the directors or upon written application to the clerk of the corporation by the holders of at least 10% of all shares entitled to vote at the meeting, provided that, unless otherwise provided in its articles of organization or bylaws, a corporation with a class of voting stock registered pursuant to the Exchange Act need not hold such meeting except upon the demand of holders of not less than 40% of such shares. The SIS Bylaws provide that a special meeting may be called at any time only by the President or by the affirmative vote of a majority of the directors then in office. The time, date and place of the special meeting may be changed at any time by vote of the SIS Board. If at the time a special meeting is called, there is an Interested Shareholder (as defined below), such call shall also require the affirmative vote of a majority of the Continuing Directors (as defined below) then in office. Only those matters set forth in the notice of the special meeting may be considered or acted upon at such special meeting, unless otherwise provided by law. "Interested Shareholder" means any person (other than SIS, any subsidiary of SIS or any employee stock ownership plan formed by SIS and/or any subsidiary) who or which: (i) is the beneficial owner, directly or indirectly, of more than 10% of the voting power of the then outstanding voting stock of SIS; (ii) is an affiliate of SIS and at any time within the two-year period immediately prior to and including the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding voting stock of SIS; or (iii) is an assignee of or has otherwise succeeded to the beneficial ownership of any shares of voting stock which were at any time within the two-year period immediately prior to and including the date in question beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act and such assignment or succession was not approved by the affirmative vote of a majority of the Continuing Directors. "Continuing Director" means (i) any member of the SIS Board who is not an Interested Shareholder or an affiliate or associate of an Interested Shareholder and was a member of the SIS Board prior to the time that the Interested Shareholder became an Interested Shareholder, and (ii) any successor of a Continuing Director who is not an affiliate or associate of the Interested Shareholder and is recommended to succeed a Continuing Director by the affirmative vote of a majority of the Continuing Directors. If at any relevant time there is no Interested Shareholder, the term "Continuing Director" means any member of the SIS Board. 56 INSPECTION RIGHTS GBT. Under Connecticut law, a shareholder may inspect and copy, among other things, a corporation's certificate of incorporation and any amendments thereto, its bylaws and any amendments thereto, resolutions adopted by its board of directors creating one or more series or classes of shares and fixing their relative rights, privileges and preferences, if shares issued pursuant to those resolutions are outstanding, records of all minutes of all shareholder meetings and records of all actions taken by shareholders without a meeting for the past three years and all written communications to shareholders within the past three years (including certain financial statements), a list of the names and business addresses of its current directors and officers, and its most recent annual report delivered to the Connecticut Secretary of State, if the shareholder's demand is in writing and delivered to the corporation at least five business days before the date on which the shareholder wishes to so inspect and copy. Further, shareholders may inspect and copy excerpts from minutes of any meeting of the Board of Directors or records of any action of a committee of the Board of Directors acting in lieu thereof, records of action taken by the Board of Directors without a meeting, accounting records of the corporation, and the record of shareholders, provided that the shareholders' demand is in writing, is made in good faith, states a proper purpose, describes with reasonable particularity the purpose and the records desired to be inspected, and the records are directly connected with such purpose. In addition, shareholders have the right to inspect the shareholder list during the period such list is available for inspection beginning two business days after the notice of the meeting is given for which the list was prepared and continuing through the meeting. SIS. Under Massachusetts law, shareholders have the right to inspect a corporation's articles of organization, bylaws, records of incorporators' and shareholders' meetings and, upon demonstration of a proper purpose, a corporation's stock ledger and shareholder list. ACTION BY CONSENT OF SHAREHOLDERS GBT. Under Connecticut law, any action to be taken by shareholders may be taken without a meeting if the action is taken with the written consent of all shareholders entitled to vote on the action or, if the certificate of incorporation so provides, by a written consent signed by persons holding the proportion, but not less than a majority, of voting shares designated in the certificate of incorporation. The GBT Certificate contains no provision authorizing a less-than-unanimous written consent on any matter. SIS. Under Massachusetts law, unless the articles of organization provide otherwise, any action to be taken by shareholders may be taken without a meeting, without prior notice, and without a vote, if the shareholders consent unanimously in writing to the action. However, under the SIS Articles, any action required or permitted to be taken by shareholders must be effected at a duly called annual or special meeting and may not be effected by any consent in writing. PREEMPTIVE RIGHTS GBT. Under Connecticut law, shareholders do not generally have a preemptive right to acquire the corporation's unissued shares except to the extent provided in its certificate of incorporation. However, under a "grandfather" clause of the CBCA, GBT shareholders do have preemptive rights because the GBT Certificate as adopted in 1919 does not expressly prohibit such rights. SIS. Unless otherwise provided in the corporation's articles, Massachusetts law does not grant any preemptive rights. The SIS Articles provide that shareholders do not have preemptive rights. DIVIDENDS AND REPURCHASES OF STOCK GBT. Under Connecticut law, the payment of dividends and the repurchase of a corporation's stock are generally permissible, if such actions do not violate the corporation's certificate of incorporation and, if after giving effect to such actions, the corporation is able to pay its debts as they become due in the usual course of business and the corporation's total assets exceed the sum of its total liabilities plus the amount needed to satisfy the rights of those shareholders whose rights are superior to those receiving any dividend. The Connecticut 57 Banking Law prohibits Connecticut-chartered banks such as GBT from paying dividends except out of its "net profits" for the current year and any retained net profits from the preceding two years. In addition, the Connecticut Banking Law and the Federal Deposit Insurance Act prohibit banks such as GBT from repurchasing their capital stock except with the prior approval of the Connecticut Banking Commissioner and the FDIC, respectively. SIS. Under Massachusetts law, the payment of dividends and the redemption or repurchase of a corporation's stock are generally permissible, if such actions do not violate the corporation's articles of organization, provided that the corporation is not insolvent or rendered insolvent by the action. CLASSIFICATION OF THE BOARD OF DIRECTORS GBT. Under Connecticut law, a corporation's certificate of incorporation may provide for staggering the terms of directors by dividing the total number of directors into up to five groups, with each group containing approximately the same percentage of the total, as near as may be. The GBT Certificate does not provide for such staggering. SIS. Massachusetts law requires classification of the board of directors of any Massachusetts corporation having a class of voting stock registered under the Exchange Act, as does SIS, into three classes, unless the corporation has affirmatively elected in accordance with the applicable statutory requirements to be exempt from such statutory director classification requirement. SIS has made no such election, and, to the contrary, the SIS Articles provide that the SIS Board is to be divided into three classes, with the directors in each class being elected for staggered three-year terms. REMOVAL OF DIRECTORS GBT. Under Connecticut law, shareholders may vote to remove directors with or without cause, at a meeting expressly called for that purpose, unless the corporation's certificate of incorporation provide that directors may be removed only for cause. The GBT Certificate does not require that cause be shown to remove a director. Neither the Connecticut Banking Law nor the CBCA expressly provides for the removal of directors by other directors, and neither the GBT Certificate nor GBT Bylaws provide for such removal. SIS. Under Massachusetts law, unless the articles of organization or bylaws provide otherwise, shareholders may by a majority vote generally remove directors with or without cause and directors may by a majority vote generally remove directors for cause. The SIS Bylaws provide that, subject to the rights of holders of any series of preferred stock or any class of stock entitled to elect additional directors, any director may be removed from office only for cause and only by an affirmative vote of at least 80% of the voting power of the then outstanding voting stock, voting as a single class. VACANCIES ON THE BOARD OF DIRECTORS GBT. Under Connecticut law, unless the certificate of incorporation provides otherwise, vacancies on the board or directors, including a vacancy resulting from an increase in the number of directors, may be filled by shareholders or directors. If the directors remaining in office constitute less than a quorum of the board of directors, they may fill the vacancy by the affirmative vote of a majority of the remaining directors. The GBT Bylaws provides that vacancies created by an increase in the number of directors shall be filled by action of the shareholders and that any other vacancy shall be filled by the GBT Board. SIS. Under Massachusetts law, unless otherwise provided in the articles of organization or bylaws, vacancies on the board of directors and newly created directorships resulting from any increase in the authorized number of directors may be filled in the manner prescribed in the bylaws or, in the absence of such a bylaw, by the directors. The SIS Bylaws permit vacancies to be filled in accordance with Massachusetts law, unless there is an Interested Shareholder, in which case the filling of such vacancy shall also require the affirmative vote of a 58 majority of the Continuing Directors then in office. Any director so chosen shall hold office for the remainder of the term to which the director has been selected and until such director's successor shall have been elected and qualified. EXCULPATION OF DIRECTORS AND OFFICERS GBT. Connecticut law provides that a director is not liable for any action taken as a director or any failure to take any action if he performed the duties of his office in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances and in a manner he reasonably believes to be in the best interests of the corporation. Both the GBT Certificate and Connecticut law provide, that the personal liability of a director to GBT or its shareholders for monetary damages for breaches of fiduciary duty shall be limited to the amount of the director's compensation during the year of the violation if such breach did not (i) involve a knowing and culpable violation of law by the director, (ii) enable the director or an associate to receive an improper personal economic gain, (iii) show a lack of good faith and a conscious disregard for the duty of the director to the institution under circumstances in which the director was aware that his conduct or omission created an unjustifiable risk of serious injury to the institution, (iv) constitute a sustained and unexcused pattern of inattention that amounted to an abdication of the director's duty to the institution or (v) create liability under Section 36-9 of the Connecticut General Statutes. SIS. Massachusetts law permits, and the SIS Articles provide, that no director shall be personally liable to SIS or its shareholders for monetary damages for breaches of fiduciary duty except where such exculpation is expressly prohibited. In Massachusetts, a director is not exculpated from liability under provisions of Massachusetts law relating to unlawful payments of dividends and unlawful stock purchases or redemptions. In addition, the SIS Articles provide that the this limitation cannot apply to liability of a director (i) for breach of the director's duty of loyalty to the corporation or its shareholders, (ii) for acts and omissions not in good faith or which involve intentional misconduct or knowing violation of law; or (iii) for any transaction from which the director derived an improper personal benefit. INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of SIS, SIS has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by SIS in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, SIS will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. GBT. Under Connecticut law, a corporation may indemnify a director, officer, employee or agent against liability if that person conducted himself in good faith and with the reasonable belief that his conduct in his official capacity with the corporation was in the best interests of the corporation or that his conduct in any other case was not opposed to its best interests. In addition, Connecticut law provides that, unless limited by the corporation's certificate of incorporation, indemnification is mandatory if a director was wholly successful in defense of a claim, and a court may impose an order to enforce mandatory indemnification or to grant indemnification in an instance where the director or officer is fairly and reasonably entitled to indemnification in view of all relevant circumstances. Indemnification is not permissible in connection with proceedings by or in the right of a corporation or those charging improper personal benefit in which the director is adjudged liable. The GBT Bylaws provide for indemnification of directors and officers and employees of the corporation. SIS. Massachusetts law generally permits indemnification of directors and officers for expenses incurred by them by reason of their position with the corporation, if the director or officer has acted in good faith and with the reasonable belief that his conduct was in the best interests of the corporation. The SIS Bylaws provide 59 that each person made or threatened to be made a party in any proceeding by reason of the fact that he or she was a director, officer, employee or agent of SIS shall be indemnified and held harmless by SIS against all expense, liability and loss reasonably incurred by such indemnitee in connection with such proceeding, provided that such indemnitee shall have acted in good faith in the reasonable belief that such action was in, or not opposed to, the best interests of SIS. TRANSACTIONS WITH INTERESTED PERSONS GBT. Connecticut law provides that a transaction may not be enjoined, set aside or give rise to an award of damages or other sanctions, in a proceeding by a shareholder or by or in the right of the corporation, because a director has a conflicting interest in the transaction, if (i) the transaction received the affirmative vote of a majority, but no fewer than two, of those directors who do not have a conflicting interest or a familial, financial, professional or employment relationship with a director who does have a conflicting interest after required disclosure to them, (ii) the transaction received the affirmative vote of a majority of the shares cast at a duly called meeting after required notice and disclosure, but not including shares beneficially owned by a director who has a conflicting interest or a related person of the director, or (iii) the transaction is established to have been fair to the corporation. SIS. The SIS Articles provide that, unless entered into in bad faith or in violation of the SIS Articles, no contract or transaction by SIS shall be void, voidable or in any way affected by reason of the fact that it is with an Interested Shareholder. The SIS Articles also provide that, unless entered into in bad faith or in violation of the SIS Articles, no person, whether a director, officer, stockholder, employee or otherwise interested in SIS (or any entity in which any such person is in any way interested), shall be liable to SIS or to any other person or organization for any loss or expense incurred by reason of such a contract or transaction or shall be accountable for any gain or profit realized from such a contract or transaction. MERGERS, SHARE EXCHANGES OR ASSET SALES; ANTI-TAKEOVER PROVISIONS OF STATE LAW GBT. Connecticut law requires that the board of directors shall adopt and recommend a plan of merger or share exchange or a sale of all or substantially all of the corporation's assets other than in the regular course of business to the shareholders, unless the board of directors determines that because of a conflict of interest or otherwise it should make no recommendation and communicates the basis for its determination to the shareholders. The Connecticut Banking Law requires the affirmative vote of the holders of at least two-thirds of the shares of each voting group entitled to vote on the plan or transaction unless the certificate of incorporation or a board resolution requires otherwise. SIS. Massachusetts law requires the approval of the directors and the vote of the holders of a majority of the outstanding stock entitled to vote thereon for the merger of the corporation into any other corporation, although the certificate of incorporation may require a higher shareholder vote. The SIS Articles provide that any Business Combination (as defined below) involving SIS and an Interested Shareholder must be approved by the holders of at least 80% of the outstanding shares of SIS's voting stock (the "Voting Requirement") voting together as a single class at a duly constituted meeting of shareholders called expressly for such purpose. Such affirmative vote shall be in addition to and not in lieu of any other vote required under applicable law and is required notwithstanding the fact that no vote may be required or that a lesser percentage may be specified by law. The Voting Requirement does not apply and the affirmative vote of only a majority of SIS's voting stock is required, if (i) the Business Combination is approved by an affirmative vote of a majority of both the Continuing Directors then in office or (ii) certain "fair price" (defined generally to mean, among other things, that the consideration to be received by shareholders in such Business Combination shall be in the same form and kind as the consideration paid by the Interested Shareholder for SIS's capital stock owned by such person and shall be at least equal to the highest of the following: (A) the highest per share price paid by such Interested Shareholder in acquiring any of its holdings of SIS Common Stock within the two year period immediately prior to the first public announcement of the proposal of the Business Combination (the 60 "Announcement Date") or in the transaction through which such person became an Interested Shareholder; (B) the highest Fair Market Value (as defined in the SIS Articles) per share of SIS Common Stock on any date during the one-year period prior to and including the Announcement Date; and (C) the price per share equal to (1) the Fair Market Value per share of common stock on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder, whichever is higher, multiplied by (2) a fraction (x) the numerator of which is the highest per share price paid by the Interested Shareholder for any share of SIS Common Stock acquired by it within the two- year period immediately prior to and including the Announcement Date and (y) the denominator of which is the Fair Market Value per share of SIS Common Stock on the first day in such two-year period on which the Interested Shareholder acquired any shares of SIS Common Stock) and other criteria are met. As defined in the SIS Articles, a "Business Combination" includes, among other things (i) any merger or consolidation of SIS or any subsidiary with an Interested Shareholder or affiliate thereof, (ii) the sale, lease, exchange, mortgage, pledge, transfer or other disposition by SIS of assets having a fair market value of $1,000,000 or more to or with an Interested Shareholder or an affiliate thereof, (iii) the issuance or transfer by SIS or any subsidiary (in one transaction or a series of transactions) of any securities of SIS or any subsidiary to an Interested Shareholder or any affiliate thereof in exchange for cash, securities or other property (or a combination thereof) having an aggregate fair market value of $1,000,000 or more, (iv) the adoption of a plan or proposal for the liquidation or dissolution of SIS proposed by or on behalf of an Interested Shareholder or an affiliate thereof and (v) any transaction that has the effect, directly or indirectly, of increasing the proportionate share of any class of equity or convertible security of SIS or any subsidiary that is beneficially owned by an Interested Shareholder or any affiliate thereof. The CBCA, which is applicable to GBT in these circumstances, contains similar provisions. Connecticut Anti-Takeover Law. Sections 33-840 through 33-845 of the CBCA cover business combinations involving Connecticut corporations, and under the Connecticut Banking Laws are also applicable to business combinations involving Connecticut banks such as GBT. Section 33-841 provides that no Connecticut corporation shall engage in any business combination with any interested shareholder unless the business combination is approved by the Board of Directors of the corporation and by the affirmative vote of at least 80% of the outstanding voting stock of the corporation and at least 66 2/3% of the outstanding voting stock which is not held by the interested shareholder. For purposes of this provision, an "interested shareholder" is defined as any person that (i) is the owner of 10% or more of the outstanding voting stock of the corporation, or (ii) is an affiliate or associate of the corporation and was the owner of 10% or more of the outstanding voting stock of the corporation at any time within two years immediately prior to the relevant date. In addition, Section 33-844 provides generally that no corporation incorporated in Connecticut and possessing certain statutory indicia reflecting substantial ties to Connecticut shall engage in any business combination with any interested shareholder for a five-year period following the date that such shareholder becomes an interested shareholder unless, prior to such date, the Board of Directors of the corporation (including a majority of the nonemployee directors, of which there shall be at least two) have approved either the business combination or the transaction that resulted in the shareholder becoming an interested shareholder. For purposes of this provision, an "interested shareholder" is defined as any person that (i) is the owner of 10% or more of the outstanding voting stock of the corporation, or (ii) is an affiliate or associate of the corporation and was the owner of 10% or more of the outstanding voting stock of the corporation at any time within five years immediately prior to the relevant date. Under certain circumstances, these provisions of the CBCA make it more difficult for an interested shareholder to effect various business combinations with a corporation for the specified period, although the shareholders may, by adopting an amendment to the corporation's certificate of incorporation or by-laws, elect not to be governed by these sections. The GBT Certificate and the GBT Bylaws do not exclude GBT from the restrictions imposed by Sections 33-840 through 33-845 of the CBCA. Massachusetts Anti-Takeover Laws. Chapter 110D of the Massachusetts General Laws covers "control share acquisitions" affecting corporations incorporated in Massachusetts that have at least 200 shareholders and possess certain statutory indicia reflecting additional substantial ties to Massachusetts (as is the case with SIS). 61 Chapter 110D limits the voting rights of shares held by persons who have acquired 20% or more of the voting power of the target corporation. Under this statute, shares acquired in a control share acquisition retain the same voting rights as all other shares of the same class or series only to the extent authorized by a vote of the majority of all shares entitled to vote for the election of directors, excluding such acquired shares. A corporation that is otherwise subject to Chapter 110D may expressly provide in its articles of organization or bylaws that the statute does not apply. SIS has not included any such "opt out" provision in either the SIS Articles or SIS Bylaws. Chapter 110F of the Massachusetts General Laws provides that if any acquiror buys 5% or more of a target company's stock, where the target company has at least 200 shareholders and possesses certain statutory indicia reflecting substantial ties or nexus to Massachusetts (as is the case with SIS), without the prior approval of the target company's board of directors, such acquirer generally may not, for a period of three years, (i) complete the acquisition of the target company through a merger, (ii) pledge or sell any assets of the target company or (iii) engage in other self-dealing transactions with the target company. The prior board of directors approval requirement does not apply if the acquirer buys at least 90% of the target company's outstanding stock in the transaction in which it crosses the 5% threshold or if the acquirer, after crossing the threshold, obtains the approval of the target company's board of directors and two-thirds of the target company's stock held by persons other than the acquirer. A corporation that would otherwise be covered by Chapter 110F may expressly provide in its articles of organization that the statute does not apply. The SIS Articles do not contain any such "opt out" provision. AMENDMENTS TO CHARTER GBT. Under Connecticut law, unless the certificate of incorporation provides otherwise, a corporation's board of directors may amend the certificate of incorporation without shareholder action for certain limited purposes including extending the corporation's duration (if it was incorporated at a time when limited duration was required by law). All material charter amendments require recommendation of the amendment by the corporation's board of directors to its shareholders (unless because of a conflict of interest or other special circumstances the board of directors communicates to shareholders that it will make no recommendation), and approval of the amendment by the holders of a majority of the shares of each voting group entitled to vote on the amendment (two-thirds in the event of a proposed change of name), unless a higher percentage is required by the certificate of incorporation or by board resolution. The GBT Certificate requires no such higher vote requirement. SIS. Under Massachusetts law, charter amendments require the approval of the directors and the vote of the holders of a majority of the outstanding stock and a majority of each class of stock outstanding and entitled to vote thereon as a class, unless the certificate of incorporation require a greater proportion. In addition, Massachusetts law requires a class vote when, among other things, an amendment will adversely affect the powers, preferences or special rights of a class of stock. Pursuant to the SIS Articles, no amendment, addition, alteration, change or repeal of the SIS Articles shall be made, unless the same is first adopted by the affirmative vote of a majority of the board of directors of SIS then in office, and thereafter approved by the shareholders by not less than two-thirds of the total votes eligible to be cast at a duly constituted meeting, or, in the case of Articles 1, 2, 3 and the first sentence of Article 4 of the SIS Articles, by not less than a majority of the total votes eligible to be cast at a duly constituted meeting provided, however, that if, at any time within the sixty day period immediately preceding the meeting at which the shareholder vote is to be taken, there is an Interested Shareholder, such amendment, addition, alteration, change or repeal shall also require the approval of a majority of the Continuing Directors then in office, prior to approval by the shareholders. AMENDMENTS TO BYLAWS GBT. Connecticut law provides that both shareholders and directors may amend a corporation's bylaws unless the certificate of incorporation or certain sections of the CBCA reserve that power to the shareholders in whole or part. The GBT Bylaws permits the directors to amend or repeal the GBT Bylaws. 62 SIS. Under Massachusetts law, the power to adopt, amend or repeal bylaws lies in shareholders entitled to vote; provided, however, that if authorized by the corporation's articles of organization, the bylaws may confer the power to adopt, amend or repeal bylaws upon the directors. The SIS Articles provide that the SIS Bylaws may be amended by the affirmative vote of a majority of the directors (unless at the time of such action there shall be an Interested Shareholder, in which case such action shall also require the affirmative vote of a majority of the Continuing Directors then in office) or by vote of the holders of at least 80% of the voting stock, voting together as a single class. DISSENTERS' APPRAISAL RIGHTS GBT. Connecticut law permits a shareholder to obtain fair value for his shares in the event of, among others, consummation of a plan of merger to which the corporation is a party, provided that the shareholder follows the requirements of the Dissenters' Rights Statute. A shareholder wishing to assert dissenters' rights must deliver to the corporation, before the vote at the shareholders' meeting pursuant to which corporate action creating dissenters' rights takes place, written notice of his intent to demand payment for his shares if the proposed action is taken and such shareholder must not vote his shares in favor of the proposed action. Failure to follow both these steps prevents a shareholder from asserting dissenters' rights. GBT shareholders may exercise dissenters' rights in connection with the Merger. See "THE MERGER-- Appraisal Rights and Dissenting Shareholders." SIS. Under Massachusetts law, appraisal rights are available in connection with certain statutory mergers or consolidations, but are not available to holders of shares of stock of a corporation which is to be the surviving corporation if no vote of its shareholders is required to approve the merger. Because the Merger involves a subsidiary of SIS rather than SIS itself, holders of SIS Common Stock do not have appraisal rights with respect to the Merger. SHAREHOLDERS RIGHTS PLAN GBT. GBT has no shareholders rights plan. SIS. SIS has distributed to each holder of SIS Common Stock one Right for each outstanding share of SIS Common Stock. The Rights entitle the shareholder to certain rights in the event of certain transactions involving SIS. See "DESCRIPTION OF SIS CAPITAL STOCK--Common Stock--Preferred Share Purchase Rights." LEGAL MATTERS The validity of the shares of SIS Common Stock to be issued in the Merger will be passed upon by Sullivan & Worcester LLP, Boston, Massachusetts. Certain legal matters relating to the Merger, including the tax-free nature of the Merger, will be passed upon, for SIS, by Sullivan & Worcester LLP, and, for GBT, by Tyler Cooper & Alcorn, LLP, Hartford, Connecticut. EXPERTS The consolidated financial statements incorporated in this Proxy Statement-- Prospectus by reference to SIS's Annual Report on Form 10-K for the year ended December 31, 1996 have been so incorporated in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The consolidated financial statements of GBT included in the GBT annual report delivered with this Proxy Statement--Prospectus and incorporated herein by reference have been certified by Shatswell, MacLeod & Company, P.C., independent certified public accountants, given on the authority of that firm as experts in accounting and auditing, as set forth in their report included with such consolidated financial statements. 63 WHERE YOU CAN FIND MORE INFORMATION SIS files annual, quarterly and special reports, proxy statements and other information with the SEC, and GBT files such reports, statements and other information with the FDIC. You may read and copy any reports, statements or other information filed by SIS at the SEC's public reference rooms in Washington, D.C., New York, New York or Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. You may read and copy any reports, statements or other information filed by GBT at the FDIC's public reference facilities located in Washington, D.C. You may also obtain reports and documents filed by GBT by writing the FDIC's Registration, Disclosure and Securities Operations Unit at 550 17th Street, N.W., Room F-6043, Washington, D.C. 20429, or calling 202-898-8913. Requests may also be faxed to the FDIC at 202-898-3909. SIS's SEC filings are also available to the public from commercial document retrieval services and at the web site maintained by the SEC at "http://www.sec.gov." SIS filed a Registration Statement on Form S-4 to register with the SEC the SIS common stock to be issued to GBT shareholders in the Merger. This Proxy Statement-Prospectus is a part of that Registration Statement and constitutes a prospectus of SIS in addition to being a proxy statement of SIS and GBT for the special meetings. As allowed by SEC rules, this Proxy Statement-Prospectus does not contain all the information you can find in the Registration Statement or the exhibits to the Registration Statement. INFORMATION INCORPORATED BY REFERENCE The SEC allows us to "incorporate by reference" information into this Proxy Statement-Prospectus, which means that we can disclose important information to you by referring you to another document filed separately with the SEC by SIS or with the FDIC by GBT. The information incorporated by reference is deemed to be part of this Proxy Statement-Prospectus, except for any information superseded by information in this Proxy Statement-Prospectus. This Proxy Statement-Prospectus incorporates by reference the documents set forth below that we have previously filed with the SEC or the FDIC. These documents contain important information about our companies and their finances.
SIS SEC FILINGS (FILE NO. 000-20809) PERIOD - ------------------------------------ ------ Annual Report on Form 10-K Year ended December 31, 1996 Quarterly Reports on Form 10-Q Quarters ended March 31, 1997 and June 30, 1997 Current Report on Form 8-K Filed on August 18, 1997 The description of SIS's common stock Filed on June 4, 1996 contained in its Registration Statement on Form 8-A The Rights Agreement governing the terms of Filed on January 23, 1997 SIS's shareholders rights plan filed as Exhibit 4.1 to its Registration Statement on Form 8-A
GBT FDIC FILINGS PERIOD - ---------------- ------ Annual Report on Form F-2 Year ended December 31, 1996 Quarterly Reports on Form F-4 Quarters ended March 31, 1997 and June 30, 1997
GBT is also incorporating by reference certain portions of its annual report to shareholders for the year ended December 31, 1996, relating to its business, the market for its common stock, its selected financial data, the GBT management's discussion and analysis of GBT's condition and operations and GBT's consolidated financial statements, including the notes to the financial statements. A copy of the annual report is being delivered to shareholders with this Proxy Statement-Prospectus. We are also incorporating by reference additional documents that SIS files with the SEC or GBT files with the FDIC between the date of this Proxy Statement-Prospectus and the dates of the Special Meetings of our shareholders. 64 SIS has supplied all information contained or incorporated by reference in this Proxy Statement-Prospectus relating to SIS and GBT has supplied all such information relating to GBT. If you are a shareholder, we may have sent you some of the documents incorporated by reference, but you can obtain any of them through us or the SEC or the FDIC. Documents incorporated by reference are available from us without charge, excluding all exhibits unless we have specifically incorporated by reference an exhibit in this Proxy Statement-Prospectus. Shareholders may obtain documents incorporated by reference in this Joint Proxy Statement-Prospectus by requesting them in writing or by telephone from the appropriate party at the following addresses: Michael E. Tucker, Clerk Camille S. Bushnell, Secretary SIS Bancorp, Inc. Glastonbury Bank & Trust Company 1441 Main Street 2461 Main Street Springfield, Massachusetts 01102 Glastonbury, Connecticut 06033 Telephone: 413-748-8000 Telephone: 860-633-4695 If you would like to request documents from us, please do so by November 26, 1997 to receive them before the Special Meetings. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY STATEMENT-PROSPECTUS TO VOTE ON THE MERGER. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS. THIS PROXY STATEMENT- PROSPECTUS IS DATED OCTOBER 28, 1997. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND NEITHER THE MAILING OF THIS PROXY STATEMENT- PROSPECTUS TO SHAREHOLDERS NOR THE ISSUANCE OF SIS COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY. 65 Appendix A to Joint Proxy Statement--Prospectus AGREEMENT AND PLAN OF REORGANIZATION AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement"), dated as of August 18, 1997, by and between SIS Bancorp, Inc., a Massachusetts corporation (the "Buyer"), and Glastonbury Bank and Trust Company, a Connecticut bank and trust company (the "Seller"). The Buyer and the Seller deem it advisable and in the best interests of their respective stockholders to consummate the business combination provided for herein. In consideration of the mutual covenants, representations, warranties and agreements contained herein and in consideration of (a) the execution and delivery of the Seller Option Agreement (as hereinafter defined in Article I hereof) between the Seller and the Buyer pursuant to which the Seller has on this day granted the Seller Option (as defined in Article I hereof) to the Buyer and (b) the execution and delivery by the Insider Stockholders of the Seller Stockholders' Agreement (as such terms are defined in Article I hereof), each as a condition and inducement to the Buyer to enter into this Agreement, the parties agree as follows: ARTICLE I DEFINITIONS Except as otherwise provided herein or as otherwise clearly required by the context, the following terms shall have the respective meanings indicated when used in this Agreement: "Acquisition Merger" shall mean the merger of Merger Subsidiary with and into Seller in accordance with the terms and conditions of this Agreement and the Bank Merger Agreement. "Acquisition Transaction" shall have the meaning ascribed thereto in Section 5.03 hereof. "Adjusted Exchange Ratio" shall have the meaning ascribed thereto in Section 2.01(b) of the Bank Merger Agreement. "Agreement" shall mean this Agreement and Plan of Reorganization by and among the Buyer and the Seller. "Alternative Transaction" shall have the meaning ascribed thereto in Section 8.02(b) hereof. "Average Closing Price" shall have the meaning ascribed thereto in Section 2.01(b) of the Bank Merger Agreement. "Bank Merger Agreement" shall mean that certain Agreement and Plan of Merger to be entered into by and among the Buyer, the Seller and Merger Subsidiary at or prior to the Effective Time, substantially in the form attached hereto as Exhibit A. "BHCA" shall mean the Bank Holding Company Act of 1956, as amended. "BLC" shall mean the Banking Laws of the State of Connecticut as set forth in Title 36A of the Connecticut General Statutes. "Buyer" shall have the meaning ascribed thereto in the preamble to this Agreement. "Buyer Bank" shall mean Buyer's banking subsidiary, Springfield Institution for Savings, a Massachusetts savings bank in stock form. A-1 "Buyer Balance Sheet" shall have the meaning ascribed thereto in Section 3.05 hereof. "Buyer Common Stock" shall have the meaning ascribed thereto in Section 3.02(a) hereof. "Buyer Disclosure Schedule" shall mean the disclosure schedule prepared by Buyer and delivered to Seller on the date hereof in conjunction with the parties' execution and delivery of this Agreement. "Buyer Employee Plans" shall have the meaning ascribed thereto in Section 3.11 hereof. "Buyer Preferred Stock" shall have the meaning ascribed thereto in Section 3.02(a) hereof. "Buyer Registration Statement" shall have the meaning ascribed thereto in Section 5.04 hereof. "Buyer Reports" shall have the meaning ascribed thereto in Section 3. l 1 hereof. "Buyer Rights" shall have the meaning ascribed thereto in Section 3.02 hereof. "Buyer Rights Agreement" shall mean that Rights Agreement dated as of January 22, 1997, between the Buyer and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. "Buyer Stockholders' Agreement" means that certain letter agreement or agreements of even date herewith executed and delivered to Seller by each member of the Buyer's Board of Directors in the form attached hereto as Exhibit C-1. "Closing Date" shall mean the date on which the Effective Time occurs. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Companies" shall have the meaning ascribed thereto in Section 4.10(a) hereof. "Connecticut Commissioner" shall have the meaning ascribed thereto in Section 3.04 hereof. "Connecticut Transfer Act" shall mean the Connecticut Transfer Act (Connecticut General Statutes (S)22a-134). "Confidentiality Agreement" shall mean that certain confidentiality agreement between the Buyer and the Seller dated July 24, 1997. "Confidential Information" shall have the meaning ascribed thereto in Section 5.02(b) hereof. "CRA" shall mean the Community Reinvestment Act of 1977, as amended, or any substantially similar state statute. "DOJ" shall mean the United States Department of Justice. "DPC Shares" shall have the meaning ascribed thereto in Section 3.14 hereof. "Effective Time" shall mean the specific time on the Closing Date at which the Acquisition Merger has become effective pursuant to the laws of the State of Connecticut. "EPA" shall mean the United States Environmental Protection Agency. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "Exchange Act" shall have the meaning ascribed thereto in Section 3.05 hereof. A-2 "Exchange Ratio" shall have the meaning ascribed thereto in Section 2.01(b) of the Bank Merger Agreement. "FDIA" shall mean the Federal Deposit Insurance Act, as amended. "FDIC" shall mean the Federal Deposit Insurance Corporation. "Federal Reserve Board" shall mean the Board of Governors of the Federal Reserve System or the Federal Reserve Bank of Boston, as applicable. "GAAP" shall mean generally accepted accounting principles and practices in effect from time to time within the United States applied consistently throughout the period involved. "Injunction" shall have the meaning ascribed thereto in Section 6.01(d) hereof. "Insider Stockholders" shall mean those persons identified in Section 1.00 of the Seller Disclosure Schedule. "IRS" shall mean the United States Internal Revenue Service. "Loans" shall have the meaning set forth in Section 4.24 hereof. "Massachusetts Board" shall have the meaning ascribed thereto in Section 3.04 hereof. "Material Adverse Effect" shall mean with respect to Buyer or Seller, or any other entity, a material adverse effect on the assets, properties, liabilities, business, operations, results of operations, condition (financial or otherwise) or prospects of Buyer or Seller or such other entity, as the case may be, and its subsidiaries, taken as a whole. "Merger Subsidiary" shall mean that certain interim bank, which shall be organized as a wholly-owned direct subsidiary of Buyer under the laws of the State of Connecticut for the purpose of merging with the Seller pursuant to the terms of this Agreement and the Bank Merger Agreement. "Minimum Price" shall have the meaning ascribed thereto in Section 2.01(b) of the Bank Merger Agreement. "NASD" shall mean the NASD, Inc. "NASDAQ" shall mean the Nasdaq Stock Market, including both the National Market and the SmallCap Market systems. "PBGC" shall mean the Pension Benefit Guaranty Corporation. "Proxy Statement" shall have the meaning ascribed thereto in Section 5.04(a) hereof. "Records" means all records, agreements and original documents in the Seller's possession which pertain to and are utilized by the Seller and its subsidiaries to administer, reflect, monitor, evidence or record information respecting Seller's consolidated business and operations, including but not limited to all records and documents relating to (a) corporate, regulatory, supervisory and litigation matters, (b) tax planning and payment of taxes, (c) personnel and employment matters, and (d) the business or conduct of the consolidated business of the Seller. "Requisite Regulatory Approvals" shall have the meaning ascribed thereto in Section 6.01(b) hereof. "SEC" shall have the meaning ascribed thereto in Section 3.04 hereof. A-3 "Securities Act" shall mean the Securities Act of 1933, as amended. "Seller" shall have the meaning ascribed thereto in the preamble to this Agreement. "Seller Affiliates" shall have the meaning ascribed thereto in Section 5.06 hereof. "Seller Affiliates Agreement" shall mean the form of written agreement to be executed and delivered to the Buyer prior to the Effective Time by the Seller Affiliates, substantially in the form attached hereto as Exhibit D. "Seller Balance Sheet" shall have the meaning ascribed thereto in Section 4.05 hereof. "Seller Common Stock" shall have the meaning ascribed thereto in Section 4.02(a) hereof. "Seller Disclosure Schedule" shall have the meaning ascribed thereto in Section 4.02(b) hereof. "Seller Employee Plans" shall have the meaning ascribed thereto in Section 4.11(a) hereof. "Seller Option" shall mean the option granted to the Buyer pursuant to the Seller Option Agreement. "Seller Option Agreement" shall mean that certain stock option agreement of even date herewith by and between the Buyer and the Seller in the form attached hereto as Exhibit B. "Seller Reports" shall have the meaning ascribed thereto in Section 4.15 hereof. "Seller Stockholders' Agreement" means that certain letter agreement or agreements of even date herewith executed and delivered to the Buyer by each of the Insider Stockholders in the form attached hereto as Exhibit C-2. "Significant Subsidiary" shall have the meaning ascribed thereto in Section 3.01(b) hereof. "subsidiaries" shall mean, when used with reference to a party, any corporation or other organization, whether incorporated or unincorporated, of which such party or any other subsidiary of such party is a general partner (excluding partnerships the general partnership interests of which held by such party or any subsidiary of such party do not have a majority of the voting interests in such partnership) or, with respect to such corporation or other organization, at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions is directly or indirectly owned or controlled by such party or by any one or more of its subsidiaries, or by such party and one or more of its subsidiaries. "Surviving Corporation" shall have the meaning ascribed thereto in Article II hereof. "Tax" shall have the meaning ascribed thereto in Section 4.10(r)(A) hereof. "Tax Return" shall have the meaning ascribed thereto in Section 4.10(r)(B) hereof. "Termination Date" shall have the meaning ascribed thereto in Section 8.01(b) hereof. "Trust Account Shares" shall have the meaning ascribed thereto in Section 3.12 hereof. "Valuation Period" shall have the meaning ascribed thereto in Section 2.01(b) of the Bank Merger Agreement. A-4 ARTICLE II THE ACQUISITION MERGER Subject to the terms and conditions of this Agreement and the Bank Merger Agreement, the Merger Subsidiary will merge with and into Seller (the "Acquisition Merger"), with Seller being the surviving corporation (the "Surviving Corporation"), pursuant to the provisions of, and with the effect provided in, the BLC. The Bank Merger Agreement provides for the terms and conditions of the Acquisition Merger, including but not limited to the conversion and exchange of the Seller Common Stock for the Buyer Common Stock, all of which are incorporated herein and made a part of this Agreement by reference. ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER Buyer hereby represents and warrants to Seller as follows: 3.01 Corporate Organization. (a) The Buyer is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts. The Buyer has the corporate power and authority to own, lease or operate all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned, leased or operated by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified would not result in, with respect to the Buyer, a Material Adverse Effect. The Buyer is a bank holding company registered with the Federal Reserve Board under the BHCA. (b) Each subsidiary of the Buyer that is a "significant subsidiary" as such term is defined in Regulation S-X of the SEC (each a "Significant Subsidiary") is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Each Significant Subsidiary of the Buyer has the corporate power and authority to own, lease or operate all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned, leased, or operated by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified would neither individually nor in the aggregate, result in, with respect to the Buyer, a Material Adverse Effect. (c) The minute books of the Buyer and its subsidiaries contain complete and accurate records of all meetings and other corporate actions authorized at such meetings held or taken since January 1, 1992 by its stockholders and Board of Directors or, in the case of Buyer Bank prior to February 7, 1995, its corporators and Board of Trustees. 3.02 Capitalization. (a) The authorized capital stock of the Buyer consists of 25,000,000 shares of common stock, par value $0.01 per share (the "Buyer Common Stock"), and 5,000,000 shares of preferred stock, par value $0.01 per share (the "Buyer Preferred Stock"). As of the close of business on June 30, 1997 there were 5,576,842 shares of the Buyer Common Stock issued and outstanding and no shares of the Buyer Preferred Stock issued and outstanding. As of the close of business on June 30, 1997, the Buyer had 5,576,842 preferred stock purchase rights issued and outstanding pursuant to the Buyer Rights Agreement, which entitle the holders thereof to purchase shares of Series A Junior Participating Preferred Stock under certain circumstances (the "Buyer Rights"). As of the close of business on June 30, 1997, there were 250,000 shares of Series A Junior Participating Preferred Stock reserved for issuance upon exercise of such preferred stock purchase rights, none of which shares were issued and outstanding. There were also 150,400 shares of the Buyer Common Stock held in the Buyer's treasury as of the close of business on June 30, 1997. In A-5 addition, as of the close of business on June 30, 1997, there were 104,350 shares of the Buyer Common Stock reserved for issuance upon exercise of outstanding stock options. All issued and outstanding shares of the Buyer Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. Except for awards of shares of Buyer Common Stock and grants of options to purchase shares of Buyer Common Stock, such awards and grants made pursuant to certain of the Buyer Employee Plans, the Buyer does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the Buyer to issue, deliver or sell, or cause to be issued, delivered or sold any shares of the Buyer Common Stock or any other equity security of the Buyer or any Buyer subsidiary or any securities convertible into, exchangeable for or representing the right to subscribe for, purchase or otherwise receive any shares of the Buyer Common Stock or any other equity security of the Buyer or any Buyer subsidiary or obligating the Buyer to grant, extend or enter into any such subscriptions, options, warrants, calls, commitments or agreements. As of the date hereof, there are no outstanding contractual obligations of the Buyer to repurchase, redeem or otherwise acquire any shares of capital stock of the Buyer or any Buyer subsidiary. (b) Buyer's Annual Report on Form 10-K, as filed with the SEC for the year ended December 31, 1996, lists each of the subsidiaries of the Buyer as of December 31, 1996 and indicates for each such subsidiary as of such date the percentage and type of equity securities owned or controlled by the Buyer and the jurisdiction of incorporation. No other Significant Subsidiary has been organized or acquired by Buyer since December 31, 1996. No subsidiary of the Buyer has or is bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for such Buyer subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, any equity security of the Buyer or of any Buyer subsidiary or any securities convertible into, exchangeable for or representing the right to subscribe for, purchase or otherwise receive any such equity security or obligating a Buyer subsidiary to grant, extend or enter into any such subscriptions, options, warrants, calls, commitments or agreements. As of the date hereof, there are no outstanding contractual obligations of any Buyer subsidiary to repurchase, redeem or otherwise acquire any shares of capital stock of the Buyer or any Buyer subsidiary. All of the shares of capital stock of each of the Buyer's subsidiaries held by the Buyer are fully paid and nonassessable and are owned by the Buyer free and clear of any claim, lien, encumbrance or agreement with respect thereto. 3.03 Authority; No Violation. (a) The Buyer has full corporate power and authority to execute and deliver this Agreement, the Bank Merger Agreement and the Seller Option Agreement and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement, the Bank Merger Agreement and the Seller Option Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly approved by the Board of Directors of the Buyer. The Board of Directors of the Buyer has directed that this Agreement and the transactions contemplated hereby be submitted to the stockholders of the Buyer for approval at a meeting of such stockholders and no other corporate proceedings on the part of the Buyer are necessary to consummate any of the transactions contemplated by this Agreement, the Bank Merger Agreement or the Seller Option Agreement. This Agreement and the Seller Option Agreement have been, and the Bank Merger Agreement will be, duly and validly executed and delivered by the Buyer and (assuming due authorization, execution and delivery by the Seller) constitute the valid and binding obligations of the Buyer, enforceable against the Buyer in accordance with their respective terms, except that enforcement thereof may be limited by the receivership, conservatorship and supervisory powers of bank regulatory agencies generally as well as bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting enforcement of creditors' rights generally and except that enforcement thereof may be subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) and the availability of equitable remedies. (b) The Merger Subsidiary will have full corporate power and authority to execute and deliver the Bank Merger Agreement and to consummate the transactions contemplated thereby. The execution and A-6 delivery of the Bank Merger Agreement and the consummation of the transactions contemplated thereby will be duly and validly approved by the Board of Directors of the Merger Subsidiary and by the Buyer as the sole stockholder of the Merger Subsidiary. No other corporate proceedings on the part of the Merger Subsidiary are necessary to consummate the Acquisition Merger. The Bank Merger Agreement will be duly and validly executed by the Merger Subsidiary and (assuming due authorization, execution and delivery by the Seller) will constitute the valid and binding obligation of the Merger Subsidiary, enforceable against the Merger Subsidiary in accordance with its terms, except that enforcement thereof may be limited by receivership, conservatorship and supervisory powers of bank regulatory agencies generally as well as bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting enforcement of creditors' rights generally and except that enforcement thereof may be subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) and the availability of equitable remedies. (c) Neither the execution and delivery of this Agreement, the Bank Merger Agreement and the Seller Option Agreement by the Buyer, nor the execution and delivery of the Bank Merger Agreement by the Merger Subsidiary, nor the consummation by the Buyer and the Merger Subsidiary, as applicable, of the transactions contemplated by this Agreement, the Bank Merger Agreement and the Seller Option Agreement, nor compliance by the Buyer and the Merger Subsidiary, as applicable, with any of the terms or provisions of this Agreement, the Bank Merger Agreement and the Seller Option Agreement, will (i) assuming that the consents and approvals referred to in Section 3.04 hereof are duly obtained, violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to the Buyer or any of its subsidiaries or any of their respective properties or assets, or, (ii) violate, conflict with, result in a breach of any provisions of, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of, accelerate the performance required by, or result in a right of termination or acceleration or the creation of any lien, security interest, charge or other encumbrance upon any of the respective properties or assets of the Buyer or any of its subsidiaries under, any of the terms, conditions or provisions of (A) the articles of organization or other charter document of like nature or by-laws of the Buyer, or such Buyer subsidiary, as the case may be, or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Buyer or any of its subsidiaries is a party thereto as issuer, guarantor or obligor, or by which they or any of their respective properties or assets may be bound or affected, except, in the case of clause (ii)(B) above, for such violations, conflicts, breaches or defaults which either individually or in the aggregate will not result, with respect to the Buyer, in a Material Adverse Effect. 3.04 Consents and Approvals. Except for consents, waivers or approvals of, notice to, or filings or registrations with, the Federal Reserve Board, the Massachusetts Board of Bank Incorporation (the "Massachusetts Board"), the FDIC, the Banking Commissioner of the State of Connecticut (the "Connecticut Commissioner"), the Securities and Exchange Commission (the "SEC"), the NASD and/or NASDAQ, the DOJ, the Connecticut Secretary of State and certain state "Blue Sky" or securities commissioners, no consents, waivers or approvals of, notices to, or filings or registrations with, any public body or authority are necessary, and no consents or approvals of or notices to any third parties (which term does not include the Board of Directors or stockholders of the Buyer or of the Merger Subsidiary) are necessary, in connection with (i) the execution and delivery by the Buyer of this Agreement, the Bank Merger Agreement or the Seller Option Agreement, (ii) the execution and delivery by the Merger Subsidiary of the Bank Merger Agreement or (iii) the consummation by the Buyer and the Merger Subsidiary, as applicable, of the transactions contemplated by this Agreement, the Bank Merger Agreement and the Seller Option Agreement. The affirmative vote of the holders of a majority of the Buyer Common Stock present and voting at the meeting of stockholders to be called to consider and vote upon this Agreement and the transactions contemplated hereby is the only vote of the holders of any class or series of the Buyer's capital stock or other securities necessary to approve this Agreement and the transactions contemplated hereby. 3.05 Financial Statements. The Buyer has made available to the Seller copies of (a) the consolidated balance sheets of the Buyer and its subsidiaries as of December 31 for the fiscal years 1994 through 1996, A-7 inclusive, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the fiscal years 1994 through 1996, inclusive, as reported in the Buyer's Annual Reports on Form 10-K (or F-2 as previously applicable to Buyer Bank) for each of the three fiscal years ended December 31, 1994 through December 31, 1996 filed with the SEC (or FDIC as previously applicable to Buyer Bank) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in each case accompanied by the audit report of Price Waterhouse LLP, independent accountants for the Buyer, and (b) the unaudited consolidated balance sheets of Buyer and its subsidiaries as of June 30, 1997 and June 30, 1996, and the related unaudited consolidated statements of income, changes in stockholders' equity and cash flows for the six months ended June 30, 1997 and June 30, 1996, all as reported in Buyer's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 filed with the SEC under the Exchange Act. The December 31, 1996 consolidated balance sheet (the "Buyer Balance Sheet") of the Buyer (including the related notes, where applicable) and the other financial statements referred to herein (including the related notes, where applicable) fairly present, and the financial statements to be included in any reports or statements (including reports on Forms 10-Q, 10-K and 8-K) to be filed by the Buyer with the SEC after the date hereof will fairly present, the consolidated financial position and results of the consolidated operations and cash flows and changes in stockholders' equity of the Buyer and its subsidiaries for the respective fiscal periods or as of the respective dates therein set forth; and each of such statements (including the related notes, where applicable) has been and will be prepared in accordance with GAAP consistently applied during the periods involved, except as otherwise set forth in the notes thereto (subject, in the case of unaudited interim statements, to normal year-end adjustments). The books and records of the Buyer and its subsidiaries have been, and are being, maintained in accordance with GAAP and applicable legal and regulatory requirements and reflect only actual transactions. 3.06 Absence of Undisclosed Liabilities. As of December 31, 1996, none of the Buyer or any of its subsidiaries had any obligation or liability (contingent or otherwise) that is material on a consolidated basis to the Buyer, or that when combined with all similar obligations or liabilities would be material on a consolidated basis to the Buyer, except as disclosed or reflected in the Buyer Balance Sheet. 3.07 Broker's Fees. Neither the Buyer nor any of its officers or directors has employed any broker or finder or incurred any liability for any broker's fees, commissions or finder's fees in connection with any of the transactions contemplated by this Agreement and the Bank Merger Agreement, except that Buyer has engaged, and will pay a fee or commission to, Oppenheimer & Co., Inc. 3.08 Absence of Certain Changes or Events. Since December 31, 1996, the Buyer and its subsidiaries have not incurred any material liability, except in the ordinary course of their business consistent with their past practices, nor has there been any change in the business, assets, condition (financial or otherwise) or results of operations of the Buyer or any of its subsidiaries which has had or could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect on the Buyer. 3.09 Legal Proceedings. Except as disclosed in Section 3.09 of the Buyer Disclosure Schedule, there is no suit, action or proceeding pending or, to the best knowledge of the Buyer, threatened, against the Buyer or any subsidiary of the Buyer or challenging the validity or propriety of the transactions contemplated by this Agreement or the Bank Merger Agreement, as to which there is a reasonable probability of an adverse determination and which, if adversely determined, would have or could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect on the Buyer or otherwise materially adversely affect the Buyer's ability to perform its obligations under this Agreement and the Bank Merger Agreement, as applicable, nor is there any judgment, decree, injunction, rule or order of any legal or administrative body or arbitrator outstanding against the Buyer or any subsidiary of the Buyer having any such effect. 3.10 Taxes and Tax Returns. Except as disclosed in Section 3.10 of the Buyer Disclosure Schedule: (a) The Buyer has timely filed all Tax Returns (as such term is defined in Section 4.10 hereof) required to be filed by it, each such Tax Return has been prepared in compliance with all applicable laws and regulations, and all such Tax Returns are true and accurate in all respects material to the financial condition A-8 of the Buyer and its subsidiaries, taken as a whole. All Taxes (as such term is defined in Section 4.10 hereof) shown on such Tax Returns as due and payable by Buyer have been paid and Buyer will not be liable for any additional Taxes for any taxable period ending on or before the Closing Date in excess of the amounts set up as reserves for taxes on the Buyer Balance Sheet. Buyer has made available to Buyer correct and complete copies of all federal and state income and excise Tax Returns filed with respect to Buyer for taxable periods ended on or after December 31, 1990, and all examination reports, and statements of deficiencies assessed against or agreed to by Buyer with respect to such taxable periods; (b) Buyer has neither requested nor been granted an extension of the time for filing any Tax Return to a date later than the Closing Date; (c) With respect to each taxable period of Buyer, either such taxable period has been audited by the relevant taxing authority or the time for assessing or collecting income Tax with respect to each such taxable period has closed and such taxable period is not subject to review by any relevant taxing authority; (d) Buyer has not consented to extend the time in which any Tax may be assessed or collected by any tax authority; (e) No deficiency or proposed adjustment which has not been settled or otherwise resolved for any amount of Tax has been asserted or assessed by any taxing authority against Buyer; (f) There is no action, suit, taxing authority proceeding or audit now in progress, pending or, to the knowledge of Buyer, threatened against or with respect to Buyer with respect to any Tax; (g) No claim has been made by a taxing authority in a jurisdiction for taxable periods ended on or after December 31, 1990 where Buyer does not pay Tax or file Tax Returns that Buyer is or may be subject to Taxes assessed by that jurisdiction; (h) There are no liens for Taxes (other than current Taxes not yet due and payable) on the assets of Buyer; (i) Buyer has not filed or been included in a combined, consolidated or unitary income Tax Return (other than consolidated Tax Returns in which it is the parent corporation); (j) Buyer has neither made nor is affected by any elections under Code Sections 108(b)(5), 338(g), or 565, or Treasury Regulation Sections 1.1502- 20(g) or 1.1502-32(f)(2); (k) Buyer is not a party to or bound by any Tax allocation or Tax sharing agreement nor does Buyer have any current or potential contractual obligation to indemnify any other person or entity with respect to Taxes (other than the tax sharing agreement among Buyer and its subsidiaries); (l) Buyer has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party; (m) Buyer has no permanent establishment in any foreign country, as defined in the relevant tax treaty between the United States of America and such foreign country, nor otherwise operates or conducts business through any branch in any foreign country; (n) Buyer will not be required, as a result of a change in method of accounting for any period ending on or before the Closing Date, to include any adjustment under Section 481(c) of the Code (or any similar or corresponding provision or requirement of federal, state, local or foreign income Tax law) in taxable income for any period ending after the Closing Date; (o) None of the assets of Buyer directly or indirectly secures any indebtedness the interest on which is tax-exempt under Section 103(a) of the Code, and Buyer is not directly or indirectly an obligor or a guarantor with respect to any such indebtedness; (p) Buyer has not filed a consent under Section 341(f) of the Code concerning collapsible corporations; and (q) Buyer has not made any payments, nor is obligated to make any payments, nor is it a party to any agreement that under certain circumstances could obligate it to make any payments that will not be deductible under Section 280G of the Code. A-9 3.11 Employees. (a) Section 3.11(a) of the Buyer Disclosure Schedule contains a complete list of all "employee benefit plans" (as defined in Section 3(3) of ERISA), and all other plans, policies and practices (whether or not subject to ERISA) applicable to employees or former employees of the Buyer or any of its subsidiaries, including, without limitation, plans, funds, or programs providing medical, surgical, or hospital care or benefits, benefits in the event of sickness, accident, disability, death, or unemployment; vacation benefits, apprenticeship or other training programs; day care centers or dependent care; credit union, scholarship funds; prepaid legal services; benefits described in Section 302(c) of the Labor Management Relations Act; retirement income; income deferral for periods extending to the termination of covered employment or beyond; bonus or incentive compensation pay arrangements, stock purchase plans, severance pay arrangements; and supplemental retirement income payments including, but not limited to, any individual benefit arrangement, policy or practice with respect to any current or former officer, employee or director of the Buyer or any of its subsidiaries (the "Buyer Employee Plans"). (b) The Buyer and its subsidiaries have made available to Seller correct and complete copies of all Buyer Employee Plans, and, where applicable, each of the following documents with respect to such plans; (i) any amendments, (ii) any related trust documents, (iii) the two most recently filed IRS Forms 5500 with all attachments thereto, (iv) the last IRS determination letter, (v) the last actuarial report, (vi) the most recent summary plan descriptions and summaries of material modifications, and (vii) written communications to employees to the extent the substance of the Buyer Employee Plans described therein differs materially from the other documentation furnished under this Section 3.11. (c) None of the Buyer Employee Plans is subject to Title IV of ERISA or Section 412 of the Code, and the Buyer and its subsidiaries from time to time have not within the preceding six years had any obligation to make any contribution to a retirement plan subject to Title IV of ERISA or incurred any liability (contingent or otherwise) under Title IV or ERISA and neither the Buyer nor any of its subsidiaries has any actual or potential obligation or liability to any multiemployer plan (as defined in Section 4001(a)(3) of ERISA). (d) Each Buyer Employee Plan, including any associated trust, intended to qualify under Section 401 of the Code does so qualify. (e) The Buyer Employee Plans have been maintained and administered in accordance with their terms and with the provisions of ERISA, the Code and other applicable laws. (f) There are no pending or, to the Buyer's knowledge, threatened actions, claims or lawsuits that have been asserted or instituted against any of the Buyer Employee Plans, the assets of any of the trusts under such plans or the plan sponsor, plan administrator or fiduciary of any of the Buyer Employee Plans with respect to the operation of such plans (other than routine benefit claims) that individually or in the aggregate could have a Material Adverse Effect with respect to the Buyer. (g) Except as disclosed in Section 3.11(g) of the Buyer Disclosure Schedule, the Buyer and its subsidiaries do not provide, and are not obligated to provide, retiree life insurance or retiree health benefits to any current or former employee after his or her termination of employment with the Buyer or any subsidiary, except as may be required under Section 4980B of the Code and Part 6 of Subtitle B of Title I or ERISA. (h) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment becoming due to any employee (current or former) of the Buyer or any subsidiary, (ii) increase any benefits otherwise payable under any Buyer Employee Plan or (iii) result in the acceleration of the time of payment or the vesting of any benefits under any Buyer Employee Plan. (i) Except as disclosed on Section 3.11(i) of the Buyer Disclosure Schedule, (i) no employee of the Buyer or any subsidiary will be entitled to any severance payments upon the sale or change of control of the Buyer or any subsidiary, or any divisions or business units thereof, absent an employee's actual loss of employment and (ii) none of the employees of the Buyer or any subsidiary are eligible to receive any A-10 payment under any severance pay, stay bonus or other retention plan, program or arrangement of the Buyer or any of its subsidiaries. (j) There have been no acts or omissions by the Buyer or any subsidiary which have given rise to or may give rise to any material fines, penalties, taxes or related charges under Sections 502(c), 502(i) or 4071 of ERISA or Chapter 43 of the Code for which the Buyer or any subsidiary may be liable. (k) There are no claims (other than routine claims for benefits) pending or, to the best knowledge of Buyer, threatened involving any of the Buyer Employee Plans or the assets of any of such plans, and no facts exist which could give rise to any such claims (other than routine claims for benefits); (l) With respect to every Buyer Employee Plan that provides group medical benefits, the Buyer has fully complied with the notice and continuation coverage requirements of Section 4980B of the Code and Sections 601 through 608 of ERISA and the proposed regulations thereunder. (m) With respect to any of the Buyer Employee Plans, neither the Buyer nor any of the subsidiaries nor any administrator nor any fiduciary or trustee of any of the Buyer Employee Plans or of the related trusts thereof, has engaged in any prohibited transaction as described in Section 406 of ERISA or Section 4975 of the Code. 3.12 Agreements with Banking Authorities. Neither Buyer nor any of its subsidiaries is a party to any commitment letter, written agreement, memorandum of understanding or order to cease and desist with, or has adopted any resolutions at the request of, any federal or state governmental entity charged with the supervision or regulation of banks or bank holding companies or engaged in the insurance of bank deposits which restricts the conduct of its business, or in any manner relates to its capital adequacy, credit policies, management or overall safety and soundness or such entity's ability to perform its obligations hereunder. 3.13 Material Agreements. Except as set forth in the index of exhibits in the Buyer's Annual Report on Form 10-K for the year ended December 31, 1996 or as otherwise disclosed in Section 3.13 of the Buyer Disclosure Schedule and except for this Agreement and the agreements specifically referred to herein, neither the Buyer nor any of its subsidiaries is a party to or is bound by (a) any written (or oral, if material) agreement, arrangement or commitment relating to the employment (including severance) of any person; (b) any contract, agreement or understanding with any labor union; or (c) any other contract or agreement or amendment thereto that is material to the business, operations, results of operations or condition (financial or otherwise) of the Buyer on a consolidated basis. 3.14 Ownership of Property. The Buyer and its subsidiaries have good and marketable title to all assets and properties, whether real or personal, tangible or intangible (including, without limitation, the capital stock of its subsidiaries and all other assets and properties), reflected on the Buyer Balance Sheet, or acquired subsequent thereto subject to no encumbrances, liens, mortgages, security interests or pledges, except (a) those items that secure liabilities that are reflected in the Buyer Balance Sheet or the notes thereto or incurred in the ordinary course of business after the date of such balance sheet, (b) statutory liens for amounts not yet delinquent or which are being contested in good faith, (c) those items that secure public or statutory obligations or any discount with, borrowing from, or other obligations to any Federal Reserve Bank, Federal Home Loan Bank, inter-bank credit facilities, or any transaction by the Buyer or any subsidiary acting in a fiduciary capacity, and (d) such encumbrances, liens, mortgages, security interests, and pledges that are not in the aggregate material to the Buyer on a consolidated basis. The Buyer and its subsidiaries as lessees have the right under valid and existing leases to use, possess and control all of the personal property and real estate leased by Buyer and its subsidiaries as presently used, possessed and controlled by the Buyer and its subsidiaries. 3.15 Reports. Since January 1, 1994, the Buyer and its subsidiaries have filed, and subsequent to the date hereof will file, all reports, registrations and statements, together with any amendments required to be made with respect thereto, that were and are required to be filed with (a) the SEC, including, but not limited to, Forms 10-K, Forms 10-Q, Forms 8-K and proxy statements (and all such reports, registrations and statements have been or will be made available by the Buyer to the Seller), (b) the Federal Reserve Board, (c) the Massachusetts A-11 Division of Banks, (d) the FDIC and (e) any applicable state securities authorities (except, in the case of state securities authorities, no such representation is made as to filings which are not material) (all such reports and statements are collectively referred to herein as the "Buyer Reports"). As of their respective dates, the Buyer Reports complied and, with respect to filings made after the date of this Agreement, will at the date of filing comply, in all material respects with all of the statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed. As of their respective dates, the Buyer Reports did not contain and, with respect to filings made after the date of this Agreement, will not at the date of filing contain, any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.16 Compliance with Applicable Law. Buyer and its subsidiaries hold all material licenses, franchises, permits and authorizations necessary for the lawful conduct of Buyer's consolidated business, and Buyer and its subsidiaries have complied with, and are not in default in any respect under any, applicable law, statute, order, rule, regulation or policy of, or agreement with, any federal, state or local governmental agency or authority relating to Buyer on a consolidated basis, other than where such default or noncompliance does not have and could not reasonably be expected to have a Material Adverse Effect on Buyer or otherwise materially adversely affect Buyer's ability to perform its obligations under this Agreement or the Bank Merger Agreement, as applicable, and the Buyer has not received notice of any violation of, or commencement of any proceeding in connection with any violation of any such law, statute, order, rule, regulation, policy or agreement, as to which there is a reasonable probability of an adverse determination and which, if adversely determined, would, individually or in the aggregate, result in the imposition of civil money penalties under Section 8(i) of the FDIA or otherwise expose Buyer or any of its subsidiaries to any financial liability. Each of the ratings assigned to Buyer Bank in the three most recent CRA examinations of Buyer Bank completed by the FDIC and the Massachusetts Commissioner of Banks has been "Outstanding". 3.17 Environmental Matters. Buyer and its subsidiaries are in compliance and have always been in compliance with all environmental laws, rules, regulations and standards promulgated, adopted or enforced by the EPA and of similar agencies in states in which they conduct their respective business, except for any noncompliance that singly or in the aggregate would not have a Material Adverse Effect on Buyer. There is no suit, claim, action or proceeding now pending before any court, governmental agency or board or other forum or, to the knowledge of Buyer, threatened by any person, as to which there is a reasonable probability of an adverse determination and which, if adversely determined, would, individually or in the aggregate, have a Material Adverse Effect on Buyer (i) for alleged noncompliance with any environmental law, rule or regulation or (ii) relating to the discharge or release into the environment of any hazardous material or waste at or on a site presently or formerly owned, leased or operated by Buyer or any subsidiary of Buyer or in which Buyer or any Buyer subsidiary has a lien or other security interest. 3.18 Buyer Common Stock. The Buyer Common Stock (and the associated Buyer Rights) to be issued in connection with the Acquisition Merger is duly authorized and, when issued in accordance with Article II hereof, will be validly issued, fully paid and nonassessable and not subject to preemptive rights, with no personal liability attaching thereto. 3.19 Ownership of Seller Common Stock. Neither the Buyer nor, to its best knowledge, any of its affiliates or associates (as such terms are defined under the Exchange Act), (a) beneficially own, directly or indirectly, or (b) are parties to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of, in each case, shares of capital stock of the Seller, which in the aggregate represent five percent (5%) or more of the outstanding shares of capital stock of the Seller entitled to vote generally in the election of directors (other than shares in trust accounts, managed accounts and the like that are beneficially owned by third parties (any such shares, "Trust Account Shares") and any other shares held in respect of a debt previously contracted (any such shares, "DPC Shares")). 3.20 Insurance. The Buyer and each of its subsidiaries is presently insured, and since January 1, 1994 has been insured, for reasonable amounts against such risks as companies engaged in a similar business in a similar location would, in accordance with good business practice, customarily be insured. A-12 3.21 Labor. No work stoppage involving the Buyer or any of its subsidiaries is pending or, to the best knowledge of Buyer, threatened. Neither the Buyer nor any of its subsidiaries is involved in, or, to the best knowledge of the Buyer, threatened with or affected by, any dispute, arbitration, lawsuit or administrative proceeding relating to labor or employment matters which might reasonably be expected to result in a Material Adverse Effect with respect to the Buyer. No employees of the Buyer or any of its subsidiaries are represented by any labor union, and no labor union is attempting to organize employees of the Buyer or any of its subsidiaries. 3.22 Loans. All currently outstanding loans of, or current extensions of credit by, Buyer (individually, a "Loan," and collectively, the "Loans") were solicited, originated and currently exist in material compliance with all applicable requirements of federal and state statutory and common law and regulations and regulatory policies promulgated thereunder. The Loans are adequately documented and each note evidencing a Loan or loan or credit agreement or security instrument related to the Loans constitutes a valid, legal and binding obligation of the obligor thereunder, enforceable in accordance with the terms thereof, except where the failure thereof, individually or in the aggregate, would not have a Material Adverse Effect with respect to Buyer. There are no oral modifications or amendments or additional agreements related to the Loans that are not reflected in Buyer's records, no claims of defense as to the enforcement of any Loan has been asserted and Buyer is aware of no acts or omissions which would give rise to any claim or right of rescission, set-off, counterclaim or defense, except where any of the foregoing would not have, either individually or in the aggregate, a Material Adverse Effect with respect to Buyer. Buyer currently maintains, and shall continue to maintain, an allowance for loan losses allocable to the Loans which is adequate to provide for all known and estimable losses, net of any recoveries relating to such extensions of credit previously charged off, on the Loans, such allowance for loan losses complying in all material respects with all applicable loan loss reserve requirements established in accordance with GAAP and by any governmental authorities having jurisdiction with respect to Buyer or any of its subsidiaries. 3.23 Investment Securities. None of the investments reflected in the Buyer Balance Sheet and none of the investments made by the Buyer since December 31, 1996, is subject to any restriction (contractual, statutory or otherwise) that would materially impair the ability of the entity holding such investment freely to dispose of such investment at any time, except to the extent that any such restriction would not have, either individually or in the aggregate, a Material Adverse Effect with respect to Buyer. Buyer has (a) properly reported as such any investment securities which are required under GAAP to be classified as "available for sale" at fair value, and (b) accounted for any decline in the market value of its securities portfolio in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 115, including without limitation the recognition through the Buyer's consolidated statement of income of any unrealized loss with respect to any individual security as a realized loss in the accounting period in which a decline in the market value of such securities is determined to be "other than temporary" except to the extent that any such failure to so properly report or to so properly account would not have, either individually or in the aggregate, a Material Adverse Effect with respect to Buyer. 3.24 Derivative Transactions. Except as disclosed in Section 3.24 of the Buyer Disclosure Schedule, neither Buyer nor any Buyer subsidiary has engaged in transactions in or involving forwards, futures, options on futures, swaps or other derivative instruments. 3.25 Intellectual Property. Buyer, together with its subsidiaries collectively, owns or, to Buyer's knowledge, possesses valid and binding licenses and other rights to use all material patents, copyrights, trade secrets, trade names, servicemarks and trademarks used in its businesses, each without payment, and Buyer has not received any notice of conflict with respect thereto that asserts the rights of others. Buyer, together with its subsidiaries collectively, has performed in all material respects all the obligations required to be performed by it and is not in default in any material respect under any contract, agreement, arrangement or commitment relating to any of the foregoing. 3.26 Administration of Fiduciary Accounts. The Buyer and each of its subsidiaries has properly administered in all material respects all accounts for which it acts as a fiduciary, including but not limited to A-13 accounts for which it serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment advisor, in accordance with the terms of the governing documents and applicable law. Neither the Buyer nor its officers, directors or employees has committed any breach of trust with respect to any fiduciary account which, either individually or in the aggregate, has had or could reasonably be expected to have a Material Adverse Effect on Buyer. The accountings for each such fiduciary account are true and correct in all material respects and accurately reflect the assets of such fiduciary account. 3.27 Continued Independence. Buyer's expectation is to maintain Seller as a viable, operating, independent banking subsidiary for a period of not less than two (2) years after the Closing Date, and to retain its current Board of Directors (subject to normal retirement and currently unexpected resignations and as expanded in accordance with Section 5.19 hereof) for at least two (2) years after the Closing Date. Buyer's intends to consult with and consider the views of the Seller's Board of Directors with regard to the opportunities for expansion of Seller's business, the treatment of Seller's employees, the Seller's role in and contributions to the communities it serves, and such other business matters as would ordinarily be determined by the Seller's Board of Directors alone were the Seller to remain an independent, publicly owned institution. 3.28 Accounting Treatment. To the best of Buyer's knowledge, there are no facts or set of circumstances existing as of the date of this Agreement which are reasonably likely to prevent the Acquisition Merger from being accounted for as a pooling of interests in accordance with Accounting Principles Board Opinion No. 16. 3.29 Buyer Information. The information relating to the Buyer and its subsidiaries to be contained or incorporated by reference in the Buyer Registration Statement and the Proxy Statement, as described in Section 5.04 hereof, and any other documents filed with the SEC, the FDIC or any regulatory agency in connection herewith, to the extent such information is provided in writing by the Buyer, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make such information not misleading. 3.30 Disclosure. No representation or warranty contained in this Agreement, and no statement contained in any certificate, list or other writing furnished to the Seller pursuant to the provisions hereof, to the best knowledge of the Buyer, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements herein or therein not misleading. No information believed by Buyer to be material to Seller's interests in the transactions contemplated by this Agreement, which has not otherwise been disclosed to Seller in connection with this Agreement, has been intentionally withheld from Seller. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Buyer as follows: 4.01 Corporate Organization. (a) The Seller is a bank and trust company duly organized, validly existing and in good standing under the laws of the State of Connecticut. The Seller has the corporate power and authority to own, lease or operate all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned, leased or operated by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified would not result in, with respect to the Seller, any Material Adverse Effect. The deposits of the Seller are insured by the FDIC in accordance with the FDIA, and the Seller has paid all assessments that have become due and payable to the FDIC. (b) Each subsidiary of the Seller is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. Each subsidiary of the Seller has the corporate power and A-14 authority to own, lease or operate all of its properties and assets and to carry on its business as it is now being conducted, and is duly licensed or qualified to do business in each jurisdiction in which the nature of the business conducted by it or the character or location of the properties and assets owned, leased or operated by it makes such licensing or qualification necessary, except where the failure to be so licensed or qualified would, neither individually nor in the aggregate, result in, with respect to the Seller, a Material Adverse Effect. (c) The minute books of the Seller and its subsidiaries contain complete and accurate records of all meetings and other corporate actions authorized at such meetings held or taken since January 1, 1992 by its stockholders and Board of Directors. 4.02 Capitalization. (a) The authorized capital stock of the Seller consists of 2,000,000 shares of common stock, par value $2.50 per share (the "Seller Common Stock"), and no shares of preferred stock. As of the close of business on June 30, 1997, there were 1,829,920 shares of the Seller Common Stock issued and outstanding and no shares of the Seller Common Stock held in the Seller's treasury. All issued and outstanding shares of the Seller Common Stock have been duly authorized and validly issued and are fully paid, nonassessable and free of preemptive rights, with no personal liability attaching to the ownership thereof. Except for the Seller Option Agreement, the Seller does not have and is not bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for the Seller to issue, deliver or sell, or cause to be issued, delivered or sold any shares of the Seller Common Stock or any other equity security of the Seller or any Seller subsidiary or any securities convertible into, exchangeable for or representing the right to subscribe for, purchase or otherwise receive any shares of the Seller Common Stock or any other equity security of the Seller or any Seller subsidiary or obligating the Seller to grant, extend or enter into any such subscriptions, options, warrants, calls, commitments or agreements. As of the date hereof, except for the Seller Option Agreement, there are no outstanding contractual obligations of the Seller to repurchase, redeem or otherwise acquire any shares of capital stock of the Seller or any Seller subsidiary. (b) Section 4.02(b) to the disclosure schedule prepared by the Seller and delivered to the Buyer on the date hereof in conjunction with the parties' execution and delivery of this Agreement (the "Seller Disclosure Schedule") lists each of the subsidiaries of the Seller as of the date of this Agreement and indicates for each such subsidiary as of such date the number, percentage and type of equity securities owned or controlled by the Seller and the jurisdiction of incorporation. No subsidiary of the Seller has or is bound by any outstanding subscriptions, options, warrants, calls, commitments or agreements of any character calling for such Seller subsidiary to issue, deliver or sell, or cause to be issued, delivered or sold, any equity security of the Seller or of any Seller subsidiary or any securities convertible into, exchangeable for or representing the right to subscribe for, purchase or otherwise receive any such equity security or obligating a Seller subsidiary to grant, extend or enter into any such subscriptions, options, warrants, calls, commitments or agreements. As of the date hereof, there are no outstanding contractual obligations of any Seller subsidiary to repurchase, redeem or otherwise acquire any shares of capital stock of the Seller or any Seller subsidiary. All of the shares of capital stock of each of the Seller's subsidiaries held by the Seller are fully paid and nonassessable and are owned by the Seller free and clear of any claim, lien, encumbrance or agreement with respect thereto. 4.03 Authority; No Violation. (a) The Seller has full corporate power and authority to execute and deliver this Agreement, the Bank Merger Agreement and the Seller Option Agreement and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement, the Bank Merger Agreement and the Seller Option Agreement and the consummation of the transactions contemplated hereby and thereby have been duly and validly approved by the Board of Directors of the Seller. The Board of Directors of Seller has directed that this Agreement, the Bank Merger Agreement and the transactions contemplated hereby and thereby be submitted to the stockholders of the Seller for approval at a meeting of such stockholders and no other corporate proceedings on the part of Seller are necessary to consummate any of the transactions A-15 so contemplated by this Agreement, the Bank Merger Agreement or the Seller Option Agreement. This Agreement and the Seller Option Agreement have been duly and validly executed and delivered by the Seller and (assuming due authorization, execution and delivery of this Agreement and the Seller Option Agreement by the Buyer) constitute the valid and binding obligations of the Seller, enforceable against it in accordance with their respective terms, except that enforcement thereof may be limited by the receivership, conservatorship and supervisory powers of bank regulatory agencies generally as well as bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting enforcement of creditors' rights generally and except that enforcement thereof may be subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) and the availability of equitable remedies. (b) The Bank Merger Agreement will be duly and validly executed by the Seller and (assuming due authorization, execution and delivery by the Buyer and the Merger Subsidiary) will constitute the valid and binding obligation of the Seller, enforceable against the Seller in accordance with its terms, except that enforcement thereof may be limited by receivership, conservatorship and supervisory powers of bank regulatory agencies generally as well as bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting enforcement of creditors' rights generally and except that enforcement thereof may be subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law) and the availability of equitable remedies. (c) Neither the execution and delivery of this Agreement, the Seller Option Agreement and the Bank Merger Agreement by the Seller, nor the consummation by the Seller of the transactions contemplated hereby and thereby, nor compliance by the Seller with any of the terms or provisions hereof or thereof, will, except as disclosed in Section 4.03(c) of the Seller Disclosure Schedule, (i) violate any statute, code, ordinance, rule, regulation, judgment, order, writ, decree or injunction applicable to the Seller or any of its subsidiaries or any of their respective properties or assets, or (ii) violate, conflict with, result in a breach of any provisions of, constitute a default (or an event which, with notice or lapse of time, or both, would constitute a default) under, result in the termination of, accelerate the performance required by, or result in a right of termination or acceleration or the creation of any lien, security interest, charge or other encumbrance upon any of the respective properties or assets of the Seller or any of its subsidiaries under, any of the terms, conditions or provisions of (A) the certificate of incorporation or other charter documents of like nature or By-laws of the Seller or such Seller subsidiary, as the case may be, or (B) any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Seller or any of its subsidiaries is a party thereto as issuer, guarantor or obligor, or by which they or any of their respective properties or assets may be bound or affected, except, in the case of clause (ii)(B) above, for such violations, conflicts, breaches or defaults which either individually or in the aggregate will not result, with respect to the Seller, in a Material Adverse Effect. 4.04 Consents and Approvals. Except for consents, waivers or approvals of, notices to, or filings or registrations with, the Federal Reserve Board, the Massachusetts Board, the FDIC, the Connecticut Commissioner, the SEC, the NASD and/or NASDAQ, the DOJ, the Connecticut Secretary of State or as may be set forth in Section 4.04 of the Seller Disclosure Schedule, no consents, waivers or approvals of, notices to, or filings or registrations with, any public body or authority are necessary, and no consents or approvals of or notices to any third parties (which term does not include the Board of Directors or stockholders of the Seller) are necessary, in connection with the execution and delivery by the Seller of this Agreement, the Seller Option Agreement and the Bank Merger Agreement or the consummation by the Seller of the transactions contemplated by this Agreement, the Seller Option Agreement and the Bank Merger Agreement. The affirmative vote of holders of two-thirds of the outstanding shares of the Seller Common Stock is the only vote of the holders of any class or series of the Seller's capital stock or other securities necessary to approve this Agreement, the Bank Merger Agreement and the transactions contemplated hereby and thereby. 4.05 Financial Statements. The Seller has made available to the Buyer copies of (a) the consolidated balance sheets of the Seller and its subsidiaries as of December 31 for the fiscal years 1994 through 1996, inclusive, and the related consolidated statements of income, changes in stockholders' equity and cash flows for A-16 the fiscal years 1994 through 1996, inclusive, as reported in the Seller's Annual Report on Form F-2 for each of the three fiscal years ended December 31, 1994 through 1996 filed with the FDIC under the Exchange Act, in each case accompanied by the audit report of Shatswell, MacLeod & Company, P.C., independent accountants for the Seller, and (b) the unaudited consolidated balance sheets of the Seller and its subsidiaries as of June 30, 1997 and June 30, 1996 and the related unaudited consolidated statements of income, changes in stockholders' equity and cash flows for the six months ended June 30, 1997 and June 30, 1996, all as reported in Seller's Quarterly Report on Form F-4 for the quarter ended June 30, 1997 filed with the FDIC under the Exchange Act. The December 31, 1996 consolidated balance sheet (the "Seller Balance Sheet") of the Seller (including the related notes, where applicable) and the other financial statements referred to herein (including the related notes, where applicable) fairly present, and the financial statements to be included in any reports or statements to be filed by the Seller with the FDIC after the date hereof will fairly present, the consolidated financial position and results of the consolidated operations and cash flows and changes in shareholders' equity of the Seller and its subsidiaries for the respective fiscal periods or as of the respective dates therein set forth; and each of such statements (including the related notes, where applicable) has been and will be prepared in accordance with GAAP consistently applied during the periods involved, except as otherwise set forth in the notes thereto (subject, in the case of unaudited interim statements, to normal year-end adjustments). The books and records of the Seller and its subsidiaries have been, and are being, maintained in accordance with GAAP and applicable legal and regulatory requirements and reflect only actual transactions. 4.06 Absence of Undisclosed Liabilities. As of December 31, 1996, none of the Seller or any of its subsidiaries had any obligation or liability (contingent or otherwise) that is material on a consolidated basis to the Seller, or that when combined with all similar obligations or liabilities would be material on a consolidated basis to the Seller, except as disclosed or reflected in the Seller Balance Sheet. 4.07 Broker's Fees. Neither the Seller or any of its subsidiaries nor any of their respective officers or directors has employed any broker or finder or incurred any liability for any broker's fees, commissions or finder's fees in connection with any of the transactions contemplated by this Agreement and the Bank Merger Agreement, except that Seller has engaged, and will pay a fee or commission to, McConnell, Budd & Downes, Inc. 4.08 Absence of Certain Changes or Events. Since December 31, 1996, the Seller and its subsidiaries have not incurred any material liability, except in the ordinary course of their business consistent with their past practices, nor has there been any change in the business, assets, condition (financial or otherwise) or results of operations of the Seller or any of its subsidiaries which has had or could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect on the Seller. 4.09 Legal Proceedings. Except as disclosed in Section 4.09 of the Seller Disclosure Schedule, there is no suit, action or proceeding pending or, to the best knowledge of the Seller, threatened, against the Seller or any subsidiary of the Seller or challenging the validity or propriety of the transactions contemplated by this Agreement or the Bank Merger Agreement, as to which there is a reasonable probability of an adverse determination and which, if adversely determined, would have or could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect on the Seller or otherwise materially adversely affect the Seller's ability to perform its obligations under this Agreement, the Seller Option Agreement or the Bank Merger Agreement, as applicable, nor is there any judgment, decree, injunction, rule or order of any legal or administrative body or arbitrator outstanding against the Seller or any subsidiary of the Seller having any such effect. 4.10 Taxes and Tax Returns. Except as disclosed in Section 4.10 of the Seller Disclosure Schedule: (a) The Seller has timely filed all Tax Returns required to be filed by it, each such Tax Return has been prepared in compliance with all applicable laws and regulations, and all such Tax Returns are true and accurate in all respects material to the financial condition of the Seller and its subsidiaries, taken as a whole. All Taxes shown on such Tax Returns as due and payable by Seller have been paid and Seller will not be A-17 liable for any additional Taxes for any taxable period ending on or before the Closing Date in excess of the amounts set up as reserves for taxes on the Seller Balance Sheet. Seller has made available to Buyer correct and complete copies of all federal and state income and excise Tax Returns filed with respect to Seller for taxable periods ended on or after December 31, 1990, and all examination reports, and statements of deficiencies assessed against or agreed to by Seller with respect to such taxable periods; (b) Seller has neither requested nor been granted an extension of the time for filing any Tax Return to a date later than the Closing Date; (c) With respect to each taxable period of Seller, either such taxable period has been audited by the relevant taxing authority or the time for assessing or collecting income Tax with respect to each such taxable period has closed and such taxable period is not subject to review by any relevant taxing authority; (d) Seller has not consented to extend the time in which any Tax may be assessed or collected by any tax authority; (e) No deficiency or proposed adjustment which has not been settled or otherwise resolved for any amount of Tax has been asserted or assessed by any taxing authority against Seller; (f) There is no action, suit, taxing authority proceeding or audit now in progress, pending or, to the knowledge of Seller, threatened against or with respect to Seller with respect to any Tax; (g) No claim has been made by a taxing authority in a jurisdiction for taxable periods ended on or after December 31, 1990 where Seller does not pay Tax or file Tax Returns that Seller is or may be subject to Taxes assessed by that jurisdiction; (h) There are no liens for Taxes (other than current Taxes not yet due and payable) on the assets of Seller; (i) Seller has not filed or been included in a combined, consolidated or unitary income Tax Return (other than consolidated Tax Returns in which it is the parent corporation); (j) Seller has neither made nor is affected by any elections under Code Sections 108(b)(5), 338(g), or 565, or Treasury Regulation Sections 1.1502- 20(g) or 1.1502-32(f)(2); (k) Seller is not a party to or bound by any Tax allocation or Tax sharing agreement nor does Seller have any current or potential contractual obligation to indemnify any other person or entity with respect to Taxes (other than the tax sharing agreement among Seller and its subsidiaries); (l) Seller has withheld and paid all Taxes required to have been withheld and paid in connection with amounts paid or owing to any employee, creditor, independent contractor or other third party; (m) Seller has no permanent establishment in any foreign country, as defined in the relevant tax treaty between the United States of America and such foreign country, nor otherwise operates or conducts business through any branch in any foreign country; (n) Seller will not be required, as a result of a change in method of accounting for any period ending on or before the Closing Date, to include any adjustment under Section 481(c) of the Code (or any similar or corresponding provision or requirement of federal, state, local or foreign income Tax law) in taxable income for any period ending after the Closing Date; (o) None of the assets of Seller directly or indirectly secures any indebtedness the interest on which is tax-exempt under Section 103(a) of the Code, and Seller is not directly or indirectly an obligor or a guarantor with respect to any such indebtedness; (p) Seller has not filed a consent under Section 341(f) of the Code concerning collapsible corporations; (q) Seller has not made any payments, nor is obligated to make any payments, nor is it a party to any agreement that under certain circumstances could obligate it to make any payments that will not be deductible under Section 280G of the Code; and A-18 (r) For purposes of this Agreement: (A) "Tax" means any federal, state, local or foreign income, gross receipts, franchise, estimated, alternative minimum, add-on minimum, sales, use, transfer, registration, value added, excise, natural resources, severance, stamp, occupation, premium, windfall profit, environmental, customs, duties, real property, personal property, capital stock, intangibles, social security, unemployment, disability, payroll, license, employee or other tax or levy, of any kind whatsoever, including any interest, penalties or additions to tax in respect of the foregoing. (B) "Tax Return" means any return, declaration, report, claim for refund, information return or other document (including any related or supporting estimates, elections, schedules, statements or information) filed or required to be filed in connection with the determination, assessment or collection of any Tax or the administration of any laws, regulations or administrative requirements relating to any Tax. 4.11 Employees. (a) Section 4.11(a) of the Seller Disclosure Schedule contains a complete list of all "employee benefit plans" (as defined in Section 3(3) of ERISA), and all other plans, policies and practices (whether or not subject to ERISA) applicable to employees or former employees of the Seller or any of its subsidiaries, including, without limitation, plans, funds, or programs providing medical, surgical, or hospital care or benefits, benefits in the event of sickness, accident, disability, death, or unemployment; vacation benefits, apprenticeship or other training programs; day care centers or dependent care; credit union, scholarship funds; prepaid legal services; benefits described in Section 302(c) of the Labor Management Relations Act; retirement income; income deferral for periods extending to the termination of covered employment or beyond; bonus or incentive compensation pay arrangements, stock purchase plans, severance pay arrangements; and supplemental retirement income payments including, but not limited to, any individual benefit arrangement, policy or practice with respect to any current or former officer, employee or director of the Seller or any of its subsidiaries (the "Seller Employee Plans"). (b) The Seller and its subsidiaries have made available to Buyer correct and complete copies of all Seller Employee Plans, and, where applicable, each of the following documents with respect to such plans; (i) any amendments, (ii) any related trust documents, (iii) the two most recently filed IRS Forms 5500 with all attachments thereto, (iv) the last IRS determination letter, (v) the last actuarial report, (vi) the most recent summary plan descriptions and summaries of material modifications, and (vii) written communications to employees to the extent the substance of the Seller Employee Plans described therein differs materially from the other documentation furnished under this Section 4.11. (c) Except as disclosed in Section 4.11(c) of the Seller Disclosure Schedule, none of the Seller Employee Plans is subject to Title IV of ERISA or Section 412 of the Code, and the Seller and its subsidiaries from time to time have not within the preceding six years had any obligation to make any contribution to a retirement plan subject to Title IV of ERISA or incurred any liability (contingent or otherwise) under Title IV or ERISA and neither the Seller nor any of its subsidiaries has any actual or potential obligation or liability to any multiemployer plan (as defined in Section 4001(a)(3) of ERISA). (d) Each Seller Employee Plan, including any associated trust, intended to qualify under Section 401 of the Code does so qualify. (e) The Seller Employee Plans have been maintained and administered in accordance with their terms and with the provisions of ERISA, the Code and other applicable laws. (f) There are no pending or, to the Seller's knowledge, threatened actions, claims or lawsuits that have been asserted or instituted against any of the Seller Employee Plans, the assets of any of the trusts under such plans or the plan sponsor, plan administrator or fiduciary of any of the Seller Employee Plans with respect to the operation of such plans (other than routine benefit claims) that individually or in the aggregate could have a Material Adverse Effect with respect to the Seller. A-19 (g) The Seller and its subsidiaries do not provide, and are not obligated to provide, retiree life insurance or retiree health benefits to any current or former employee after his or her termination of employment with the Seller or any subsidiary, except as may be required under Section 4980B of the Code and Part 6 of Subtitle B of Title I or ERISA. (h) Except as disclosed on Section 4.11(h) of the Seller Disclosure Schedule, neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby will (i) result in any payment becoming due to any employee (current or former) of the Seller or any subsidiary, (ii) increase any benefits otherwise payable under any Seller Employee Plan or (iii) result in the acceleration of the time of payment or the vesting of any benefits under any Seller Employee Plan. (i) Except as disclosed on Section 4.11(i) of the Seller Disclosure Schedule, (i) no employee of the Seller or any subsidiary will be entitled to any severance payments upon the sale or change of control of the Seller or any subsidiary, or any divisions or business units thereof, absent an employee's actual loss of employment and (ii) none of the employees of the Seller or any subsidiary are eligible to receive any payment under any severance pay, stay bonus or other retention plan, program or arrangement of the Seller or any of its subsidiaries. (j) There have been no acts or omissions by the Seller or any subsidiary which have given rise to or may give rise to any material fines, penalties, taxes or related charges under Sections 502(c), 502(i) or 4071 of ERISA or Chapter 43 of the Code for which the Seller or any subsidiary may be liable. (k) There are no claims (other than routine claims for benefits) pending or, to the best knowledge of Seller, threatened involving any of the Seller Employee Plans or the assets of any of such plans, and no facts exist which could give rise to any such claims (other than routine claims for benefits); (l) With respect to every Seller Employee Plan that provides group medical benefits, the Seller has fully complied with the notice and continuation coverage requirements of Section 4980B of the Code and Sections 601 through 608 of ERISA and the proposed regulations thereunder. (m) With respect to any of the Seller Employee Plans, neither the Seller nor any of the subsidiaries nor any administrator nor any fiduciary or trustee of any of the Seller Employee Plans or of the related trusts thereof, has engaged in any prohibited transaction as described in Section 406 of ERISA or Section 4975 of the Code. 4.12 Agreements with Banking Authorities. Neither the Seller nor any of its subsidiaries is a party to any commitment letter, written agreement, memorandum of understanding or order to cease and desist with, or has adopted any resolutions at the request of, any federal or state governmental entity charged with the supervision or regulation of banks or bank holding companies or engaged in the insurance of bank deposits which restricts the conduct of its business, or in any manner relates to its capital adequacy, credit policies, management or overall safety and soundness or such entity's ability to perform its obligations hereunder. 4.13 Material Agreements. Except as set forth in the index of exhibits in the Seller's Annual Report on Form F-2 for the year ended December 31, 1996 or as otherwise disclosed in Section 4.13 of the Seller Disclosure Schedule and except for this Agreement and the agreements specifically referred to herein, neither the Seller nor any of its subsidiaries is a party to or is bound by (a) any agreement, arrangement, or commitment other than contracts entered into in the ordinary course of the Bank's banking business that are consistent with past practice and have terms of not more than one year and require payments by the Seller or any subsidiary of not more than $50,000 annually; (b) any written (or oral, if material) agreement, arrangement or commitment relating to the employment (including severance) of any person; (c) any contract, agreement or understanding with any labor union; or (d) any other contract or agreement or amendment thereto that is material to the business, operations, results of operations or condition (financial or otherwise) of the Seller on a consolidated basis. 4.14 Ownership of Property. The Seller and its subsidiaries have good and marketable title to all assets and properties, whether real or personal, tangible or intangible (including, without limitation, the capital stock of A-20 its subsidiaries and all other assets and properties), reflected on the Seller Balance Sheet, or acquired subsequent thereto subject to no encumbrances, liens, mortgages, security interests or pledges, except (a) those items that secure liabilities that are reflected in the Seller Balance Sheet or the notes thereto or incurred in the ordinary course of business after the date of such balance sheet, (b) statutory liens for amounts not yet delinquent or which are being contested in good faith, (c) those items that secure public or statutory obligations or any discount with, borrowing from, or other obligations to any Federal Reserve Bank, Federal Home Loan Bank, inter-bank credit facilities, or any transaction by the Seller or any subsidiary acting in a fiduciary capacity, and (d) such encumbrances, liens, mortgages, security interests, and pledges that are not in the aggregate material to the Seller on a consolidated basis. The Seller and its subsidiaries as lessees have the right under valid and existing leases to use, possess and control all of the personal property and real estate leased by Seller and its subsidiaries as presently used, possessed and controlled by the Seller and its subsidiaries. 4.15 Reports. Since January 1, 1994, the Seller and its subsidiaries have filed, and subsequent to the date hereof will file, all reports, registrations and statements, together with any amendments required to be made with respect thereto, that were and are required to be filed with (a) the FDIC, (b) the Connecticut Department of Banking (including without limitation the Connecticut Commissioner), (c) the Connecticut Department of Insurance and (d) any applicable state securities authorities (except, in the case of state securities authorities, no such representation is made as to filings which are not material) (all such reports, registrations and statements have been or will be, as applicable, made available by Seller to Buyer and are collectively referred to herein as the "Seller Reports"). As of their respective dates, the Seller Reports complied and, with respect to filings made after the date of this Agreement, will at the date of filing comply, in all material respects with all of the statutes, rules and regulations enforced or promulgated by the regulatory authority with which they were filed. As of their respective dates, the Seller Reports did not contain and, with respect to filings made after the date of this Agreement, will not at the date of filing contain, any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.16 Compliance with Applicable Law. Seller and its subsidiary hold all material licenses, franchises, permits and authorizations necessary for the lawful conduct of Seller's consolidated business, and the Seller and its subsidiaries have complied with and are not in default in any respect under any, applicable law, statute, order, rule, regulation or policy of, or agreement with, any federal, state or local governmental agency or authority relating to the Seller on a consolidating basis, other than where such default or noncompliance does not have and could not reasonably be expected to have a Material Adverse Effect on Seller or otherwise materially adversely affect Seller's ability to perform its obligations under this Agreement, the Seller Option Agreement or the Bank Merger Agreement, as applicable, and the Seller has not received notice of any violation of, or commencement of any proceeding in connection with any violation of any such law, statute, order, rule, regulation, policy or agreement, as to which there is a reasonable probability of an adverse determination and which, if adversely determined, would, individually or in the aggregate, result in the imposition of civil money penalties under Section 8(i) of the FDIA or otherwise expose Seller or any of its subsidiaries to any financial liability. None of the ratings assigned to Seller in any of the three most recent CRA examinations of Seller completed by the FDIC or the Connecticut Commissioner has been less than "Satisfactory". 4.17 Environmental Matters. Except as disclosed in Section 4.17 of the Seller Disclosure Schedule, Seller and its subsidiaries are in compliance and have always been in compliance with all environmental laws, rules, regulations and standards promulgated, adopted or enforced by the EPA and of similar agencies in states in which they conduct their respective business, except for any noncompliance that singly or in the aggregate would not have a Material Adverse Effect on Seller. Except as disclosed in Section 4.17 of the Disclosure Schedule, there is no suit, claim, action or proceeding now pending before any court, governmental agency or board or other forum or, to the knowledge of Seller, threatened by any person, as to which there is a reasonable probability of an adverse determination and which, if adversely determined, would, individually or in the aggregate, have a Material Adverse Effect on Seller (i) for alleged noncompliance with any environmental law, rule or regulation or (ii) relating to the discharge or release into the environment of any hazardous material or A-21 waste at or on a site presently or formerly owned, leased or operated by Seller or any subsidiary of Seller or in which Seller or any Seller subsidiary has a lien or other security interest. 4.18 Antitakeover Statutes Not Applicable. Assuming the accuracy of Buyer's representation in Section 3.19 above, no "fair price," "moratorium," "control share acquisition" or other form of antitakeover statute or regulation is applicable to the transactions contemplated by this Agreement. 4.19 Ownership of Buyer Common Stock. As of the date hereof, neither the Seller nor, to its best knowledge, any of its affiliates or associates (as such terms are defined under the Exchange Act), (a) beneficially own, directly or indirectly, or (b) are parties to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of, in each case, shares of capital stock of the Buyer, which in the aggregate represent five percent (5%) or more of the outstanding shares of capital stock of the Buyer entitled to vote generally in the election of directors (other than Trust Account Shares or DPC Shares). 4.20 Insurance. The Seller and each of its subsidiaries is presently insured, and since January 1, 1994 has been insured, for reasonable amounts against such risks as companies engaged in a similar business in a similar location would, in accordance with good business practice, customarily be insured. Section 4.20 of the Seller Disclosure Schedule lists each of the Seller's insurance policies, all of which are in full force and effect, and contains a summary of the coverages and deductibles under each such policy. 4.21 Labor. No work stoppage involving the Seller or any of its subsidiaries is pending or, to the best knowledge of the Seller, threatened. Neither the Seller nor any of its subsidiaries is involved in, or, to the best knowledge of the Seller, threatened with or affected by, any dispute, arbitration, lawsuit or administrative proceeding relating to labor or employment matters which might reasonably be expected to result in a Material Adverse Effect with respect to the Seller. No employees of the Seller or any of its subsidiaries are represented by any labor union, and no labor union is attempting to organize employees of the Seller or any of its subsidiaries. 4.22 Material Interests of Certain Persons. Except as disclosed in Section 4.22 of the Seller Disclosure Schedule, no officer or director of the Seller, or any "associate" (as such term is defined in Rule 14a-1 under the Exchange Act) of any such officer or director, has any material interest in any material contract or property (real or personal), tangible or intangible, used in or pertaining to the business of the Seller or any of its subsidiaries. 4.23 Absence of Registration Obligations. Neither the Seller nor any of its subsidiaries is under any obligation, contingent or otherwise, by reason of any agreement to register or otherwise issue any of its securities which will continue after the Effective Time. 4.24 Loans. All currently outstanding loans of, or current extensions of credit by, Seller (individually, a "Loan," and collectively, the "Loans") were solicited, originated and currently exist in material compliance with all applicable requirements of federal and state statutory and common law and regulations and regulatory policies promulgated thereunder. The Loans are adequately documented and each note evidencing a Loan or loan or credit agreement or security instrument related to the Loans constitutes a valid, legal and binding obligation of the obligor thereunder, enforceable in accordance with the terms thereof, except where the failure thereof, individually or in the aggregate, would not have a Material Adverse Effect with respect to Seller. There are no oral modifications or amendments or additional agreements related to the Loans that are not reflected in Seller's records, no claims of defense as to the enforcement of any Loan has been asserted and Seller is aware of no acts or omissions which would give rise to any claim or right of rescission, set-off, counterclaim or defense, except where any of the foregoing would not have, either individually or in the aggregate, a Material Adverse Effect with respect to Seller. Seller currently maintains, and shall continue to maintain, an allowance for loan losses allocable to the Loans which is adequate to provide for all known and estimable losses, net of any recoveries relating to such extensions of credit previously charged off, on the Loans, such allowance for loan losses complying in all material respects with all applicable loan loss reserve requirements established in accordance A-22 with GAAP and by any governmental authorities having jurisdiction with respect to Seller or any of its subsidiaries. Except as disclosed in Section 4.24 of the Seller Disclosure Schedule, (i) none of the Loans are presently serviced by third parties and there is no obligation which could result in any Loan becoming subject to any third party servicing and (ii) no Loan has been sold with continuing recourse liability on the part of Seller or any of its subsidiaries. 4.25 Investment Securities. Except as disclosed in Section 4.25 of the Seller Disclosure Schedule, none of the investments reflected in the Seller Balance Sheet and none of the investments made by the Seller since December 31, 1996, is subject to any restriction (contractual, statutory or otherwise) that would materially impair the ability of the entity holding such investment freely to dispose of such investment at any time, except to the extent that any such restriction would not have, either individually or in the aggregate, a Material Adverse Effect with respect to Seller. Seller has (a) properly reported as such any investment securities which are required under GAAP to be classified as "available for sale" at fair value, and (b) accounted for any decline in the market value of its securities portfolio in accordance with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 115, including without limitation the recognition through the Seller's consolidated statement of income of any unrealized loss with respect to any individual security as a realized loss in the accounting period in which a decline in the market value of such security is determined to be "other than temporary" except to the extent that any such failure to so properly report or to so properly account would not have, either individually or in the aggregate, a Material Adverse Effect with respect to Seller. 4.26 Derivative Transactions. Except as disclosed in Section 4.26 of the Seller Disclosure Schedule, neither Seller nor any Seller subsidiary has engaged in transactions in or involving forwards, futures, options on futures, swaps or other derivative instruments. 4.27 Intellectual Property. Seller, together with its subsidiaries collectively, owns or, to Seller's knowledge, possesses valid and binding licenses and other rights to use all material patents, copyrights, trade secrets, trade names, servicemarks and trademarks used in its businesses, each without payment, and Seller has not received any notice of conflict with respect thereto that asserts the rights of others. Seller, together with its subsidiaries collectively, has performed in all material respects all the obligations required to be performed by it and is not in default in any material respect under any contract, agreement, arrangement or commitment relating to any of the foregoing. 4.28 Administration of Fiduciary Accounts. The Seller and each of its subsidiaries has properly administered in all material respects all accounts for which it acts as a fiduciary, including but not limited to accounts for which it serves as a trustee, agent, custodian, personal representative, guardian, conservator or investment advisor, in accordance with the terms of the governing documents and applicable law. Neither the Seller nor its officers, directors or employees has committed any breach of trust with respect to any fiduciary account which, either individually or in the aggregate, has had or could reasonably be expected to have a Material Adverse Effect on Seller. The accountings for each such fiduciary account are true and correct in all material respects and accurately reflect the assets of such fiduciary account. 4.29 Accounting Treatment. To the best of Seller's knowledge, there are no facts or set of circumstances existing as of the date of this Agreement which are reasonably likely to prevent the Acquisition Merger from being accounted for as a pooling of interests in accordance with Accounting Principles Board Opinion No. 16. 4.30 Seller Information. The information relating to the Seller and its subsidiaries to be contained or incorporated by reference in the Buyer Registration Statement and the Proxy Statement as described in Section 5.04 hereof, and any other documents filed with the SEC, the FDIC or any regulatory agency in connection herewith, to the extent such information is provided in writing by the Seller, will not contain any untrue statement of a material fact or omit to state a material fact necessary to make such information not misleading. 4.31 Disclosure. No representation or warranty contained in this Agreement, and no statement contained in any certificate, list or other writing, including but not necessarily limited to the Seller Disclosure Schedules, A-23 furnished to the Buyer pursuant to the provisions hereof, to the best knowledge of the Seller, contains or will contain any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements herein or therein not misleading. No information believed by Seller to be material to Buyer's interests in the transactions contemplated by this Agreement, which has not otherwise been disclosed to Buyer in connection with this Agreement, has been intentionally withheld from Buyer. ARTICLE V COVENANTS OF THE PARTIES 5.01 Conduct of the Business of Seller. During the period from the date of this Agreement to the Effective Time, and except as may be specifically required or permitted pursuant to this Agreement or as specifically described in Section 5.01 of the Seller Disclosure Schedule, the parties shall comply, as applicable, with the following requirements: (a) Seller shall, and shall cause each of its subsidiaries to, conduct its business and engage in transactions only in the ordinary and usual course of business consistent with past practices, which shall include, without limitation, conducting its banking, trust, insurance and other businesses in the ordinary and usual course consistent with past practices, and refraining from any of the activities described in Section 5.01(b) below; (b) Seller shall not and shall not permit any of its subsidiaries to, without the prior written consent of the Buyer: (i) engage or participate in any material transaction or incur or sustain any material obligation or liability except in the ordinary, regular and usual course of its businesses consistent with past practices; (ii) accept, renew or roll over any "brokered deposit" as defined under 12 C.F.R. 337.6(a)(3) or offer an interest rate with respect to any deposit that would either constitute an impermissible interest rate with respect to deposits of an undercapitalized insured depository institution pursuant to the limitations contained under 12 C.F.R. 337.6(b)(3)(ii) or otherwise set interest rates on deposits that depart from past practices of the Seller with respect to the setting of interest rates on deposits; (iii) except in the ordinary, regular and usual course of business consistent with past practices and in an immaterial aggregate amount, sell, lease, transfer, assign, encumber or otherwise dispose of or enter into any contract, agreement or understanding to lease, transfer, assign, encumber or dispose of any of its assets; (iv) open or relocate, or file any application to open or relocate, any branch office; (v) terminate, or give any notice (written or verbal) to customers or governmental authorities or agencies to terminate the operations of any branch office; or (vi) waive any material right, whether in equity or at law, that it has with respect to any asset except in the ordinary, regular and usual course of business consistent with past practice; (c) Seller shall use all reasonable efforts, and cause each of its subsidiaries to use all reasonable efforts, to preserve intact its business organization and goodwill in all material respects, keep available the services of its officers and employees as a group and maintain satisfactory relationships with borrowers, depositors, other customers and others having business relationships with it; (d) Seller shall, at the Buyer's request and expense, use its best efforts to plan for, and cooperate with the Buyer with respect to, the preparation for the combination and integration of the businesses, systems and operations of the Seller and the Buyer, including the conversion of the Seller's data processing and related electronic informational systems to those used by the Buyer and its subsidiaries, and shall confer on a regular and frequent basis with one or more representatives of the Buyer to report on operational and related matters; A-24 (e) each of Buyer and Seller shall, subject to any restrictions under applicable law or regulation, promptly notify the other of any emergency or other change in the normal course of its or its subsidiaries' businesses or in the operation of its or its subsidiaries' properties and of any governmental complaints, investigations or hearings (or communications indicating that the same may be contemplated) if such emergency, change, complaint, investigation or hearing would be material to the assets, properties, liabilities, business, results of operations, condition (financial or otherwise) or prospects of the Buyer or any of its subsidiaries or the Seller or any of its subsidiaries, as the case may be; (f) Seller shall not declare or pay any dividends on or make any other distributions in respect of the Seller Common Stock, except that the Seller may declare and pay its regular $0.09 per share quarterly dividend and may increase such per share quarterly dividend if Buyer increases its regular $0.14 per share quarterly dividend (any such increased per share quarterly dividend of Seller not to exceed the product of Seller's then current regular per share quarterly dividend and a fraction, the numerator of which is equal to the per share amount of such increased per share quarterly dividend of Buyer which gives rise to the authorization for such increased per share quarterly dividend of Seller hereunder and the denominator of which is the per share amount of Buyer's regular per share quarterly dividend in effect immediately prior to such increase by Buyer of such dividend), and the parties agree to consult with respect to the amount of the last Seller quarterly cash dividend payable prior to the Effective Time with the objective of ensuring that the stockholders of Seller do not receive a shortfall or a premium based on the record and payment dates of their last dividend prior to the Effective Time and the record and payment dates of the first dividend of Buyer following the Effective Time; (g) Seller shall not adopt or amend (other than amendments required by applicable law or amendments that reduce amounts payable by it or its subsidiaries) in any material respect any Seller Employee Plan or enter (or permit any of its subsidiaries to enter) into any employment, severance or similar contract with any person (including, without limitation, contracts with management which might require that payments be made upon the consummation of the transactions contemplated hereby) or amend any such existing agreements, plans or contracts to increase any amounts payable thereunder or benefits provided thereunder, or grant or permit any increase in compensation to any of its or its subsidiaries' employees or pay any bonus to any such employees, except in the ordinary course of business consistent with past practices or as disclosed in Section 5.01(g) of the Seller Disclosure Schedule, or hire any new employee at an annual rate of salary of $40,000 or more or promote any existing employee to the level of vice president or above; (h) subject to its directors' fiduciary duties, Seller shall not, with respect to itself or any of its subsidiaries, authorize, recommend, propose or announce an intention to authorize, recommend or propose, or enter into an agreement with respect to, any merger, consolidation, purchase and assumption transaction or business combination (other than the Acquisition Merger), any acquisition of a material amount of assets or securities or assumption of liabilities (including deposit liabilities), any disposition of a material amount of assets or securities, or any release or relinquishment of any material contract rights not in the ordinary course of business and consistent with past practices; (i) Seller shall not propose or adopt amendments to its certificate of incorporation or by-laws; (j) Seller shall not authorize, issue, deliver or sell any shares (whether original issuance or from treasury shares) of its capital stock or securities convertible into or exercisable for shares of its capital stock (or permit any of its subsidiaries to issue, deliver or sell any shares of such subsidiaries' capital stock or securities convertible into or exercisable for shares of such subsidiaries' capital stock), except upon exercise of the Seller Option, or effect any stock split, reverse stock split, recapitalization, reclassification or similar transaction or otherwise change its equity capitalization as it exists on the date hereof; (k) Seller shall not grant, confer or award any options, warrants, conversion rights or other rights, not existing on the date hereof, to acquire any shares of its capital stock; (l) Seller shall not purchase, redeem or otherwise acquire, or permit any of its subsidiaries to purchase, redeem or otherwise acquire, any shares of its capital stock or any securities convertible into or exercisable for any shares of its capital stock, except in a fiduciary capacity; A-25 (m) Seller shall not impose, or suffer the imposition, on any share of capital stock held by it or by any of its subsidiaries of any material lien, charge, or encumbrance, or permit any such lien, charge, or encumbrance to exist; (n) Seller shall not incur, or permit any of its subsidiaries to incur, any additional debt obligation or other obligation for borrowed money, or to guaranty any additional debt obligation or other obligation for borrowed money, except in the ordinary course of business consistent with past practices, which shall include but not necessarily be limited to creation of deposit liabilities, purchases of federal funds and entry into repurchase agreements or other similar arrangements commonly employed by banks; (o) Seller shall not incur or commit to any capital expenditures or any obligations or liabilities in connection therewith, other than capital expenditures and such related obligations or liabilities incurred or committed to in the ordinary and usual course of business consistent with past practices, which, in all cases, do not individually exceed $25,000 or cumulatively exceed $75,000; (p) Seller shall not change its methods of accounting in effect at December 31, 1996, except as may be required by changes in GAAP as concurred in by the Seller's independent auditors, and the Seller shall not change its fiscal year; (q) each of the Buyer and Seller shall file all reports, applications and other documents required to be filed by it with the SEC, the Federal Reserve Board, the Massachusetts Board, the FDIC, the Connecticut Commissioner and any other governmental agency or authority applicable to Buyer or Seller, as the case may be, between the date of this Agreement and the Effective Time and shall furnish to the other party copies of all such reports promptly after the same are filed; and (r) neither Seller nor Buyer, to the extent applicable, shall agree, in writing or otherwise, to take any of the actions prohibited under this Section 5.01 or any action which would make any of its representations or warranties contained in this Agreement untrue or incorrect or would otherwise violate any of its other agreements or commitments contained in this Agreement in any material respect. 5.02 Access to Properties and Records; Confidentiality. (a) The Seller shall permit the Buyer reasonable access to its properties and those of its subsidiaries, and shall disclose and make available to the Buyer all Records, including all books, papers and records relating to the assets, stock ownership, properties, operations, obligations and liabilities of the Seller and its subsidiaries, including, but not limited to, all books of account (including the general ledger), tax records, minute books of directors and stockholders meetings, organizational documents, by-laws, material contracts and agreements, filings with any regulatory authority, accountants' work papers, litigation files, plans affecting employees, and any other business activities or prospects in which the Buyer may reasonably have an interest in light of the transactions contemplated hereby. Each of the parties shall make arrangements with each third party provider of services to such party to permit the other party reasonable access to all of the disclosing party's Records (to the extent that such Records are otherwise required to be disclosed hereunder) held by each such third party. The Buyer shall permit the Seller reasonable access to such properties and records of the Buyer and/or its subsidiaries in which the Seller may reasonably have an interest in light of the transactions contemplated hereby. Neither the Buyer nor the Seller nor any of their respective subsidiaries shall be required to provide access to or to disclose information where such access or disclosure would violate or prejudice the rights of any customer, would jeopardize the attorney-client privilege of the institution in possession or control of such information, or would contravene any law, rule, regulation, order, judgment, decree or binding agreement. The parties will use all reasonable efforts to make appropriate substitute disclosure arrangements under circumstances in which the restrictions of the preceding sentence apply. (b) All Confidential Information, as such term is defined below, furnished by each party hereto to the other, or to any of its affiliates or to any of its affiliates' directors, officers, employees, or representatives or agents (such persons being referred to collectively herein as "Representatives") shall be treated as the sole property of the party furnishing the information until consummation of the transactions contemplated hereby, and, if such transactions shall not occur, the party receiving the information, or any of its affiliates A-26 or Representatives, as the case may be, shall, upon request, return to the party which furnished such information all documents or other materials containing, reflecting or referring to such information, shall keep confidential all such information for the period hereinafter referred to, and shall not directly or indirectly at any time use such information for any competitive or other commercial purpose; provided, however, that each of the parties and its affiliates shall be permitted to retain and share with their regulators, examiners and auditors (who need to know such information and are informed of the confidential nature thereof and directed to treat such information confidentially), and with no other persons, such materials, files and information relating to or constituting such party's or any of its affiliates' or Representatives' work product, presentations or evaluation materials as such party deems reasonably necessary or advisable in connection with auditing or examination purposes, and neither party shall make use of any such materials, files or information for any other purpose. The obligation to keep such information confidential shall continue for two years from the date this Agreement is terminated or as long as may be required by law. In the event that either party or its affiliates or Representatives are requested or required in the context of a litigation, governmental, judicial or regulatory investigation or other similar proceeding (by oral questions, interrogatories, requests for information or documents, subpoenas, civil investigative demands or similar process) to disclose any Confidential Information, the party or its affiliate or its Representative so requested or required will directly or through the party or such affiliate or Representative, if practicable and legally permitted, prior to providing such information, and as promptly as practicable after receiving such request, provide the other party with notice of each such request or requirement so that the other party may seek an appropriate protective order or other remedy or, if appropriate, waive compliance with the provisions of this Agreement. If, in the absence of a protective order or the receipt of a waiver hereunder, the party or affiliate or Representative so requested or required is, in the written opinion of its counsel, legally required to disclose Confidential Information to any tribunal, governmental or regulatory authority, or similar body, the party or affiliate or Representative so required may disclose that portion of the Confidential Information which it is advised in writing by such counsel it is legally required to so disclose to such tribunal or authority or similar body without liability to the other party hereto for such disclosure. The parties and their affiliates and Representatives will exercise reasonable efforts, at the expense of the party who disclosed Confidential Information to the other party, to obtain assurance that confidential treatment will be accorded the information so disclosed. As used in this Section 5.02(b), "Confidential Information" means all data, reports, interpretations, forecasts and Records (whether in written form, electronically stored or otherwise) containing or otherwise reflecting information concerning the disclosing party or its affiliates which is not available to the general public and which the disclosing party or any affiliate or any of their respective Representatives provides or has previously provided to the receiving party or to the receiving party's affiliates or Representatives at any time in connection with the transactions contemplated by this Agreement, including but not limited to any information obtained by meeting with Representatives of the disclosing party or its affiliates, together with summaries, analyses, extracts, compilations, studies, personal notes or other documents or records, whether prepared by the receiving party or others, which contain or otherwise reflect such information. Notwithstanding the foregoing, the following information will not constitute "Confidential Information": (i) information that is or becomes generally available to the public other than as a result of a disclosure by the receiving party or any affiliate or Representative of the receiving party, (ii) information that was previously known to the receiving party or its affiliates or Representatives on a nonconfidential basis prior to its disclosure by the disclosing party, its affiliates or Representatives, (iii) information that became or becomes available to the receiving party or any affiliate or Representative thereof on a nonconfidential basis from a source other than the disclosing party or any affiliate or Representatives of the disclosing party, provided that such source is not known by the disclosing party or its affiliates or Representatives to be subject to any confidentiality agreement or other legal restriction on disclosing such information and (iv) information that has been independently acquired or developed by the receiving party or its affiliates or Representatives without violating the obligations of this Section 5.02(b). 5.03 No Solicitation. Unless and until this Agreement shall have been properly terminated by either party pursuant to Section 8.01 hereof, neither the Seller nor any of its subsidiaries shall (and the Seller and each of its A-27 subsidiaries shall use all reasonable efforts to cause its officers, directors, employees, representatives and agents, including, but not limited to, investment bankers, attorneys and accountants, not to), directly or indirectly, encourage, solicit, initiate or, subject to the fiduciary obligations of the Seller's Board of Directors (as advised in writing by outside counsel), participate in any discussions or negotiations with, or provide any information to, any corporation, partnership, person or other entity or group (other than the Buyer and its affiliates or representatives) concerning any merger, tender offer, sale of substantial assets, sale of shares of capital stock or debt securities or similar transaction involving the Seller or any of its subsidiaries (any of the foregoing being referred to herein as an "Acquisition Transaction"). Notwithstanding the foregoing, nothing contained in this Section 5.03 shall prohibit the Seller or its Board of Directors from taking and disclosing to the Seller's stockholders a position with respect to a tender offer by a third party pursuant to Rules 14d-9 and 14e-2(a) promulgated under the Exchange Act or from making such disclosure to the Seller's stockholders which, in the judgment of the Board of Directors, with the written advice of outside counsel, may be required under applicable law. The Seller will immediately communicate to the Buyer the terms of any proposal, discussion, negotiation or inquiry relating to an Acquisition Transaction and the identity of the party making such proposal or inquiry which it may receive in respect of any such transaction (which shall mean that any such communication shall be delivered no less promptly than by telephone within twenty-four (24) hours of the Seller's receipt of any such proposal or inquiry) or its receipt of any request for information from the Federal Reserve Board, DOJ or any other governmental agency or authority with respect to a proposed Acquisition Transaction. 5.04 Regulatory Matters; Consents. (a) The parties will cooperate in connection with (i) the preparation and filing by the Buyer with the SEC under the Securities Act of a registration statement on Form S-4 and/or such other form as may be necessary or appropriate relating to the shares of the Buyer Common Stock to be issued in connection with the Acquisition Merger (the "Buyer Registration Statement"), and (ii) the preparation by the Buyer and the Seller of a joint proxy statement (the "Proxy Statement") as shall be necessary or desirable in order to consummate the transactions contemplated by this Agreement, each to be undertaken as promptly as practicable, and the Buyer and the Seller will use their respective best efforts to have the Buyer Registration Statement declared effective by the SEC and to mail the Proxy Statement to the Buyer's and the Seller's stockholders as promptly as practicable. The parties shall also take any reasonable action required to be taken under any state "Blue Sky" laws in connection with the consummation of the transactions contemplated by this Agreement. In addition to the foregoing, neither party shall take or permit any of its subsidiaries to take any action that materially adversely affects its ability to consummate the transactions contemplated under this Agreement or the Bank Merger Agreement in a timely manner. (b) Each of the Seller and the Buyer will cooperate with the other and use all reasonable efforts to prepare all documentation, to effect all filings and to obtain all permits, consents, approvals and authorizations of all third parties and governmental bodies necessary or appropriate to consummate the transactions contemplated by this Agreement and the Bank Merger Agreement. Each party hereto shall have the right to review and approve in advance all descriptions of it and its subsidiaries which appear in any filing made in connection with the transactions contemplated by this Agreement, including without limitation all filings contemplated by Section 5.04(a) above, with any governmental body. In exercising the foregoing right, the parties hereto shall act reasonably and as promptly as practicable. 5.05 Approval of Stockholders. Each of the Buyer and the Seller will (a) as promptly as practicable, take all steps necessary to duly call, give notice of, convene and hold a meeting of its stockholders for the purpose of approving this Agreement and the transactions contemplated hereby, and for such other purposes as may be necessary or desirable, (b) subject to the fiduciary duties of its board of directors as advised in writing by outside counsel, recommend to its stockholders the approval of such foregoing matters to be submitted by it to its stockholders, and (c) cooperate and consult with each other with respect to each of the foregoing matters. Subject to the fiduciary duties of its board of directors as advised in writing by outside counsel, each of the Buyer and the Seller will use its respective best efforts to obtain the necessary approvals of its stockholders of the proposals described above to be submitted by it in connection with this Agreement, including without limitation retaining nationally recognized proxy solicitation firms to provide such services as are customary in transactions of the A-28 nature contemplated hereby. If the board of directors of either party is required by applicable law to review or restate the recommendation to its stockholders contemplated in clause (b) of the preceding sentence, this Section 5.05 shall not prohibit accurate disclosure by such party that is required in any release or regulatory filing (including the Proxy Statement and the Buyer Registration Statement) or otherwise under applicable law in the opinion of such party's board of directors, upon the written advice of outside counsel, as of the date of such release or regulatory filing or such other required disclosure as to the transactions contemplated hereby or as to any Acquisition Transaction. 5.06 Agreements of Seller's Affiliates. The Seller shall identify in a letter to the Buyer, after consultation with its counsel and outside accountants, all persons who, at the time of the meeting of its stockholders referred to in Section 5.05 hereof, it believes may be deemed to be "affiliates" of the Seller, as that term is defined for purposes of paragraphs (c) and (d) of Rule 145 under the Securities Act and/or used in and for purposes of Accounting Series, Releases 130 and 135, as amended, of the SEC (the "Seller Affiliates"). The Seller shall use all reasonable efforts to cause each person who is identified as a Seller Affiliate in the letter referred to above to deliver to the Buyer at least forty (40) days prior to the Closing Date an executed copy of the Seller Affiliates Agreement. Prior to the Closing Date, the Seller shall amend and supplement such letter and use all reasonable efforts to cause each additional person who is identified as a Seller Affiliate as of the Closing Date to execute a copy of the Seller Affiliates Agreement. Within thirty (30) days after the end of the first complete calendar month ending at least thirty (30) days after the Closing Date, Buyer will publish results including at least thirty (30) days of combined operations of Buyer and Seller as referred to in the Seller Affiliates Agreement. 5.07 Further Assurances. Subject to the terms and conditions herein provided, each of the parties hereto agrees to use its respective best efforts to take, as promptly as practicable, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement and the Bank Merger Agreement. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement or the Bank Merger Agreement, the proper officers and directors of each party to this Agreement and the Bank Merger Agreement, as applicable, shall take all such necessary action. 5.08 Disclosure Supplements. From time to time prior to the Effective Time, and in any event immediately prior to the Effective Time, Seller will promptly supplement or amend the Seller Disclosure Schedule with respect to any matter hereafter arising which, if existing, occurring or known at the date of this Agreement, would have been required to be set forth or described in the Seller Disclosure Schedule or which is necessary to correct any information in the Seller Disclosure Schedule which has become inaccurate. No such supplement or amendment to the Seller Disclosure Schedules pursuant to this Section 5.08 shall have any effect for the purpose of determining satisfaction of any of the conditions set forth in Article VI hereof. 5.09 Public Announcements. Except as otherwise required by law or the rules of the NASD or NASDAQ, the Seller and the Buyer will cooperate with each other in the development and distribution of all news releases and other public information disclosures with respect to this Agreement or any of the transactions contemplated hereby, and Seller shall not issue or otherwise distribute any such news releases or other public disclosures without the prior approval of Buyer (which shall not be unreasonably withheld). 5.10 Organization of Merger Subsidiary. Prior to the Effective Time, Buyer shall cause Merger Subsidiary to be organized under the laws of the State of Connecticut. All of the authorized and issued shares of the capital stock of Merger Subsidiary shall be held directly by Buyer. Prior to the Effective Time, Merger Subsidiary shall not conduct any business or otherwise engage in any material activities or incur any material liabilities, except as specifically contemplated by this Agreement or as the parties hereto may otherwise agree. Following the organization of Merger Subsidiary, Buyer shall cause Merger Subsidiary to execute and deliver the Bank Merger Agreement. 5.11 Tax-Free Reorganization Treatment. None of the parties hereto or any of their respective subsidiaries or affiliates has taken, shall take or will cause to be taken any action, whether before or after the A-29 Effective Time, which would disqualify the Acquisition Merger and the transactions contemplated by this Agreement and the Bank Merger Agreement as a "reorganization" within the meaning of Section 368(a) of the Code; provided, however, that nothing herein shall limit the ability of the Buyer to exercise its rights under the Seller Option Agreement. 5.12 Stock Exchange Listing. The Buyer shall use all reasonable efforts to cause the shares of the Buyer Common Stock to be issued in connection with the Acquisition Merger to be approved for listing on the Nasdaq Stock Market- National Market system, subject to official notice of issuance, as of or prior to the Effective Time. 5.13 Employee Benefit Matters. (a) Maintenance of Plans; Benefits Service Credit. Through March 31, 1998, or such other date as Buyer in its sole discretion may determine (the "Transition Date"), Buyer agrees to provide the employees of Seller and its affiliates who are so employed at the Effective Time with the employee benefits set forth in Section 4.11 of the Seller Disclosure Schedule as maintained for their benefit immediately prior to the Effective Time. After the Transition Date, Buyer agrees to provide employees of Seller and its affiliates with the group benefits maintained by Buyer and its affiliates from time to time for the benefit of their employees similarly situated to such Seller employees. Buyer shall cause each such plan, program or arrangement to treat the prior service of each such employee with the Seller or its affiliates, to the extent such prior service is recognized under the comparable plan, program or arrangement of the Seller, as service rendered to Buyer or its affiliate, as the case may be, for purposes of eligibility to participate, vesting, and eligibility for special benefits under each such plan, program or arrangement of Buyer, but not for benefit accrual attributable to any period before the Effective Time. Without limiting the foregoing, Buyer and its affiliates shall not treat any employee of Seller or any of its affiliates as a "new" employee for purposes of any exclusion under any health or similar plan of Buyer or any of its affiliates for a preexisting medical condition, and will make appropriate arrangements with its insurance carrier(s) to ensure such result. (b) Additional Obligations. Following the Effective Time, Buyer shall, or shall cause the Surviving Corporation to, honor in accordance with their terms all employment, severance, and other compensation contracts between Seller or any subsidiary thereof and any director, officer or employee thereof, as all such contracts are disclosed in Section 4.13 of the Seller Disclosure Schedule, and all provisions for benefits or other amounts earned or accrued through the Effective Time under the Seller Employee Plans. 5.14 Directors' and Officers' Indemnification and Insurance. (a) In the event of any threatened or actual claim, action, suit, proceeding or investigation, whether civil, criminal or administrative, including, without limitation, any such claim, action, suit, proceeding or investigation in which any person who is now, or has been at any time prior to the date of this Agreement, or who becomes prior to the Effective Time, a director or officer or employee of the Seller or any of Seller's subsidiaries (the "Indemnified Parties") is, or is threatened to be, made a party based in whole or in part on, or arising in whole or in part out of, or pertaining to (i) the fact that he or she is or was a director, officer or employee of the Seller or any of Seller's subsidiaries or (ii) this Agreement or any of the transactions contemplated hereby, whether in any case asserted or arising before or after the Effective Time, the parties hereto agree to cooperate and use all reasonable efforts to defend against and respond thereto. It is understood and agreed that Seller (with the prior consent of Buyer, which shall not be unreasonably withheld) shall indemnify and hold harmless, and that after the Effective Time Buyer shall indemnify and hold harmless, as and to the fullest extent permitted by applicable law, each such Indemnified Party against any losses, claims, damages, liabilities, costs, expenses (including reasonable attorney's fees and expenses), judgments, fines and amounts paid in settlement in connection with any such threatened or actual claim, action, suit, proceeding or investigation, and in the event of any such threatened or actual claim, action, suit, proceeding or investigation (whether asserted or arising before or after the Effective Time), (i) Seller (with the prior consent of Buyer, which shall not be unreasonably withheld), and Buyer after the Effective Time, shall promptly pay expenses in advance of the final disposition of any claim, action, suit, proceeding or investigation to each Indemnified Party to the fullest extent permitted by law, (ii) the Indemnified Parties may retain counsel mutually satisfactory to them and Seller and, after the Effective Time, Buyer, and Seller A-30 (with the prior consent of Buyer, which shall not be unreasonably withheld), and Buyer after the Effective Time, shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties within thirty days after statements therefor are received, and (iii) Seller, and Buyer after the Effective Time, will use all reasonable efforts to assist in the vigorous defense of any such matter; provided, however, that neither Seller nor Buyer shall be liable for any settlement effected without its prior written consent (which consent shall not be unreasonably withheld); and provided further, however, that the Buyer shall have no obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine that indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable law. Any Indemnified Party wishing to claim indemnification, upon learning of any such claim, action, suit, proceeding or investigation, shall notify Seller and, after the Effective Time, Buyer thereof, provided that the failure to so notify shall not affect the obligations of Seller or Buyer, except to the extent such failure to notify materially prejudices such party. (b) Buyer agrees that all rights to indemnification existing in favor, and all limitations on the personal liability, of any director, officer or other employee of Seller or any of its subsidiaries provided for in Seller's certificate of incorporation or by-laws as in effect as of the date hereof with respect to matters occurring prior to the Effective Time shall survive the Acquisition Merger. In the event Buyer or the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other person and shall not be the continuing or surviving corporation or entity of such consolidation or merger, or (ii) transfers or conveys all or substantially all of its properties and assets to any person, then, and in each such case, to the extent necessary, proper provision shall be made so that the successors and assigns of Buyer or the Surviving Corporation, as the case may be, assume the obligations set forth in this Section 5.14. (c) Buyer shall use all reasonable efforts to cause the persons serving as officers and directors of the Seller and any subsidiary of Seller immediately prior to the Effective Time to be covered for a period of six (6) years from the Closing Date by the directors' and officers' liability insurance policy maintained as of the date hereof by the Seller (provided that Buyer may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are not less advantageous than such policy) with respect to acts or omissions occurring at or prior to the Effective Time, which were committed by such officers and directors in their capacity as such. (d) Buyer shall not take any actions after the Effective Time to prevent Seller's payment for or reimbursement of reasonable expenses incurred by any current or former director of Seller who is a party to any proceeding as of the date hereof in advance of the final disposition of any such proceeding, so long as all of the requirements contained in Section 33-773 of the Connecticut General Statutes have been satisfied with respect to each such current or former director as of the date hereof and continue to be satisfied at all times after the Effective Time, including without limitation that Seller's determination that indemnification to each such current or former director is not precluded under Sections 33-770 through 33-778, inclusive, of the Connecticut General Statutes, continues to be a reasonable determination, properly supported by the facts then known or ascertainable by Seller, at all such times following the Effective Time. 5.15 Accountants' Letters. Each of the parties shall cause to be delivered to the other "comfort" letters from its independent public accountants, dated the date on which the Buyer Registration Statement (or last amendment thereto) shall become effective and dated the Closing Date, relating to the information about such party included in the Buyer Registration Statement, including the Proxy Statement, and addressed to the other party, in form and substance which is reasonably satisfactory to the receiving party and customary in transactions of the nature contemplated hereby. 5.16 Maintenance of Records. Through the Effective Time, the Seller will maintain the Records in the same manner and with the same care that the Records have been maintained prior to the execution of this Agreement. The Buyer may, at its own expense, make such copies of and excerpts from the Records as it may deem desirable. All Records, whether held by the Buyer or the Seller, shall be maintained for such periods as are required by law, unless the parties shall, applicable law permitting, agree in writing to a different period. A-31 5.17 Leases. Seller shall consult with Buyer before renewing or extending any lease of Seller or any subsidiary of real property or any material lease of Seller or any subsidiary relating to furniture, fixtures or equipment (i.e., any such lease having a term of more than one year or requiring a total payment by Seller or any such subsidiary of more than $25,000 during the term thereof), in each case that is currently in effect but that would otherwise expire on or prior to the Effective Time. Seller shall not cancel, terminate or take other action that is likely to result in any cancellation or termination of any such lease without first consulting with Buyer. 5.18 Certain Policies of Seller. At the request of Buyer, after the time at which all Requisite Regulatory Approvals have been received for the Acquisition Merger, all other conditions precedent to Seller's obligations under this Agreement have been satisfied or waived and Buyer has confirmed in writing that all other conditions precedent to Buyer's obligations under this Agreement have been satisfied or waived, and prior to the Effective Time, Seller shall cooperate with Buyer with the objective of modifying and changing its receivables, loan accrual, charge-off, real estate valuation, loan loss reserve and investment policies and practices and such other accounting and/or financial policies and practices as may be requested by Buyer to reflect Buyer's plans with respect to the conduct of Seller's business following the Acquisition Merger and to make adequate provision for the cost and expenses relating thereto. The Seller's representations, warranties and covenants contained in this Agreement shall not be deemed to be untrue or breached in any respect for any purpose as a consequence of any modifications or changes undertaken solely on account of this Section 5.18. 5.19 Post-Closing Governance. As of the Effective Time, Seller shall have taken all necessary action to increase the size of its Board of Directors by one and shall have elected to its Board of Directors such person as shall be designated by the Buyer. Immediately after the Effective Time, the Board of Directors of the Surviving Corporation shall consist of those persons comprising the Board of Directors of the Seller immediately prior to the Effective Time plus such additional person designated by the Buyer, each to hold office in accordance with the certificate of incorporation and by-laws of the Surviving Corporation. As of the Effective Time, the Buyer shall have taken all necessary action to increase the size of its Board of Directors by one and shall have elected to its Board of Directors (into the class the term of which shall expire at the annual meeting of Buyer's stockholders to be held in 2000) such person as shall be designated by the Seller. Immediately after the Effective Time, the Board of Directors of Buyer shall consist of those persons comprising the Board of Directors of Buyer immediately prior to the Effective Time plus such additional person designated by the Seller, each to hold office in accordance with the articles of organization and by-laws of Buyer. 5.20 Compliance with Connecticut Transfer Act. The Seller shall take all necessary actions to ensure its full compliance under the Connecticut Transfer Act, Sections 22a-134 through 22a-134d, inclusive, of the Connecticut General Statutes, including but not necessarily limited to undertaking and completing the necessary environmental assessments on each parcel of real estate owned by the Seller immediately prior to the Effective Time. 5.21 Buyer and Seller Consultation as to Other Transactions. During the period from the date hereof until the Closing Date, Buyer shall advise Seller of any proposed material transaction involving Buyer's acquisition of or by, or merger with, another banking or financial services organization. Such advice shall be communicated to Seller's chief executive officer, who shall be required to keep such information confidential unless he determines, upon advice of counsel, that he has a fiduciary duty to inform the Seller's Board of Directors. If the Seller's chief executive officer does so determine, he will inform the Buyer's chief executive officer and Buyer shall, subject to receipt of confidentiality commitments (including without limitation commitments from individual officers, directors and outside advisers of Seller) that are satisfactory to Buyer and its counsel in their reasonable determination, provide to the Seller such relevant information about the proposed transaction as may be reasonably requested by Seller. A-32 ARTICLE VI CLOSING CONDITIONS 6.01 Conditions to Each Party's Obligations Under This Agreement. The respective obligations of each party under this Agreement shall be subject to the fulfillment at or prior to the Effective Time of the following conditions, none of which may be waived: (a) Stockholders' Approval. This Agreement and the transactions contemplated hereby shall have been approved by the affirmative votes required of the stockholders of each of the Buyer and the Seller in accordance with applicable law. (b) Governmental Consents. All authorizations, consents, orders or approvals of, or declarations or filings with, and all expirations of waiting periods imposed by, any governmental or regulatory authority or agency which are necessary for the consummation of the transactions contemplated by this Agreement and the Bank Merger Agreement, including without limitation the Acquisition Merger, shall have been filed, occurred or been obtained (all such authorizations, orders, declarations, approvals, filings and consents and the lapse of all such waiting periods being referred to as the "Requisite Regulatory Approvals") and all such Requisite Regulatory Approvals shall be in full force and effect. In addition, the Buyer shall have received all state securities or blue sky permits and other authorizations necessary to issue the Buyer Common Stock in connection with the Acquisition Merger in accordance with all applicable state securities or blue sky laws. (c) Buyer Registration Statement. The Buyer Registration Statement shall have become effective under the Securities Act and shall not be subject to a stop order or a threatened stop order. (d) No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition (an "Injunction") preventing the consummation of the transactions contemplated by this Agreement shall be in effect. 6.02 Conditions to the Obligations of Buyer Under This Agreement. The obligations of the Buyer under this Agreement shall be further subject to the satisfaction or waiver by the Buyer, at or prior to the Effective Time, of the following conditions: (a) Absence of Material Adverse Changes. There shall not have occurred any change in the business, operations, results of operations, assets, liabilities or condition (financial or otherwise) of the Seller or any of its subsidiaries which has had, individually or in the aggregate, a Material Adverse Effect on the Seller. (b) Representations and Warranties; Performance of Obligations. The obligations of the Seller required to be performed by it at or prior to the Effective Time pursuant to the terms of this Agreement shall have been duly performed and complied with and the representations and warranties of the Seller contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Effective Time as though made at and as of the Effective Time (except as otherwise specifically contemplated by this Agreement and except as to any representation or warranty which specifically relates to an earlier date) and the Buyer shall have received a certificate to that effect signed by the president and chief executive officer and by the chief financial officer of the Seller. (c) Third-Party Approvals. Any and all permits, consents, waivers, clearances, approvals and authorizations of all non-governmental and non- regulatory third parties which are necessary in connection with the consummation of the transactions contemplated by this Agreement and are required to be received or obtained by the Seller, shall have been obtained by the Seller, other than permits, consents, waivers, clearances, approvals and authorizations the failure of which to obtain would neither make it impossible to consummate the transactions contemplated by this Agreement and the Bank Merger Agreement nor result in any Material Adverse Effect on the Seller after the Effective Time. (d) Tax Opinion. The Buyer shall have received an opinion dated the Closing Date from its counsel, Sullivan & Worcester LLP, or other counsel selected by the Buyer and reasonably acceptable to the Seller, A-33 substantially to the effect that (A) the Acquisition Merger should be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code, (B) each of the Buyer and the Seller should be a party to a reorganization within the meaning of Section 368(b) of the Code, and (C) no gain or loss should be recognized by the Buyer or the Seller as a result of the Acquisition Merger. In rendering such opinion, Sullivan & Worcester LLP shall be entitled to require delivery of, and to refer to and rely upon, such facts and representations set forth in certificates received from the Buyer, the Seller and their respective officers, directors and affiliates, as Sullivan & Worcester LLP shall deem necessary or appropriate to enable it to render such opinion, and the parties hereto agree to use their respective best efforts to obtain such representations and certificates. (e) Seller Affiliates Agreements. Seller shall have delivered to Buyer the letter pertaining to the Seller Affiliates, as contemplated under Section 5.06 above, and each of the executed Seller Affiliates Agreements that have been received by Seller as of the Effective Time. (f) Accounting Treatment. Buyer shall have received a letter from its independent public accountants, Price Waterhouse LLP, dated the Closing Date, substantially to the effect that on the basis of a review of this Agreement and the transactions contemplated hereby and certain additional information provided in writing to Price Waterhouse LLP by Buyer and by Seller's independent public accountants, Shatswell, MacLeod & Company, P.C., Price Waterhouse LLP concurs that, as of the Closing Date, no conditions exist that would preclude Buyer's accounting for the Acquisition Merger as a pooling of interests in accordance with Accounting Principles Board Opinion No. 16. (g) Legal Opinion. The Buyer shall have received the opinion of Tyler Cooper & Alcorn LLP, or such other counsel as may be acceptable to Buyer and Seller, dated the Closing Date, such opinion to be substantially in the form attached hereto as Exhibit E. As to any matter in such opinion which involves matters of fact, such counsel may rely upon certificates of officers and directors of Seller or any of its subsidiaries and of public officials. In addition to the foregoing, the Seller will furnish the Buyer with such additional certificates, instruments or other documents in the name or on behalf of the Seller or any of its subsidiaries, as the case may be, executed by appropriate officers or others, including without limitation certificates or correspondence of governmental agencies or authorities or nongovernmental third parties, to evidence fulfillment of the conditions set forth in this Section 6.02 as the Buyer may reasonably request. 6.03 Conditions to the Obligations of Seller Under This Agreement. The obligations of the Seller under this Agreement shall be further subject to the satisfaction or waiver by the Seller, at or prior to the Effective Time, of the following conditions: (a) Absence of Material Adverse Changes. There shall not have occurred any change in the business, operations, results of operations, assets, liabilities or condition (financial or otherwise) of the Buyer or any of its subsidiaries which has had, individually or in the aggregate, a Material Adverse Effect on the Buyer. (b) Representations and Warranties; Performance of Obligations. The obligations of the Buyer required to be performed by it at or prior to the Effective Time pursuant to the terms of this Agreement shall have been duly performed and complied with and the representations and warranties of the Buyer contained in this Agreement shall be true and correct in all material respects as of the date of this Agreement and as of the Effective Time as though made at and as of the Effective Time (except as otherwise specifically contemplated by this Agreement and except as to any representation or warranty which specifically relates to an earlier date) and the Seller shall have received a certificate to that effect signed by the president and chief executive officer and by the chief financial officer of the Buyer. (c) Third-Party Approvals. Any and all permits, consents, waivers, clearances, approvals and authorizations of all non-governmental and non- regulatory third parties which are necessary in connection with the consummation of the transactions contemplated by this Agreement and are required to be received or obtained by the Buyer, shall have been obtained by the Buyer, other than permits, consents, waivers, A-34 clearances, approvals and authorizations the failure of which to obtain would neither make it impossible to consummate the transactions contemplated by this Agreement nor result in a Material Adverse Effect on the Buyer after the Effective Time. (d) Tax Opinion. The Seller shall have received an opinion dated the Closing Date from its counsel, Tyler Cooper & Alcorn LLP, or other counsel selected by the Seller and reasonably acceptable to the Buyer, substantially to the effect that (A) the Acquisition Merger should be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code, (B) each of the Buyer and the Seller should be a party to a reorganization within the meaning of Section 368(b) of the Code, and (C) no gain or loss will be recognized by the stockholders of the Seller upon the receipt, pursuant to this Agreement and the Bank Merger Agreement, of Buyer Common Stock solely in exchange for Seller Common Stock (it being understood that such opinion will not extend to cash received in lieu of fractional share interests or cash received by dissenters, if any). In rendering such opinion, Tyler Cooper & Alcorn LLP shall be entitled to require delivery of, and to refer to and rely upon, such facts and representations set forth in certificates received from the Buyer, the Seller and their respective officers, directors and affiliates, as Tyler Cooper & Alcorn LLP shall deem necessary or appropriate to enable it to render such opinion, and the parties hereto agree to use their respective best efforts to obtain such representations and certificates. (e) NASDAQ Listing. The shares of the Buyer Common Stock issuable upon the Effective Time shall have been authorized for listing on the Nasdaq Stock Market-National Market system upon official notice of issuance. (f) Legal Opinion. The Seller shall have received the Opinion of Sullivan & Worcester LLP, or such other counsel as may be acceptable to Buyer and Seller, dated the Closing Date, such opinion to be substantially in the form attached hereto as Exhibit F. As to any matter in such opinion which involves matters of fact, such counsel may rely upon the certificates of officers and directors of the Buyer or any of its subsidiaries and of public officials. In addition to the foregoing, the Buyer will furnish the Seller with such additional certificates, instruments or other documents in the name or on behalf of the Buyer, executed by appropriate officers or others, including without limitation certificates or correspondence of governmental agencies or authorities or nongovernmental third parties, to evidence fulfillment of the conditions set forth in this Section 6.03 as the Seller may reasonably request. ARTICLE VII CLOSING 7.01 Time and Place. Subject to the provisions of Articles VI and VIII hereof, the closing of the transactions contemplated by this Agreement shall take place at the Boston, Massachusetts offices of Sullivan & Worcester LLP at 10:00 A.M., local time, on such date that is not later than the fifth business day after the date on which all of the conditions contained in Article VI hereof are satisfied or waived; or at such other place, at such other time, or on such other date as Seller and Buyer may mutually agree upon for such closing to take place. 7.02 Deliveries at the Closing. Subject to the provisions of Articles VI and VIII hereof, at the closing contemplated by Section 7.01 above there shall be delivered to Seller and Buyer, the opinions, certificates and other documents and instruments required to be delivered under Article VI hereof. A-35 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER 8.01 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of this Agreement and the transactions contemplated hereby by the Seller's stockholders: (a) by mutual written consent of the Seller and the Buyer authorized by their respective Boards of Directors; (b) by the Seller or the Buyer if the Effective Time shall not have occurred on or prior to June 30, 1998 (the "Termination Date") or such later date as shall have been agreed to in writing by the Buyer and the Seller; (c) by the Buyer or the Seller (i) thirty days after the date on which any request or application for a Requisite Regulatory Approval shall have been denied, unless within the thirty-day period following such denial a petition for rehearing or an amended application has been filed with such governmental regulatory authority or agency, except that no party shall have the right to terminate this Agreement pursuant to this clause (i) if such denial shall be due to the failure of the party seeking to terminate this Agreement to perform or observe in any material respects the covenants and agreements of such party set forth herein, or (ii) if any governmental or regulatory authority or agency, or court of competent jurisdiction, shall have issued a final permanent order or Injunction enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement and the time for appeal or petition for reconsideration of such order or Injunction shall have expired without such appeal or petition being granted or such order or Injunction shall otherwise have become final and non-appealable; (d) by the Buyer or the Seller (provided that the terminating party is not then in material breach of any representation, warranty, covenant or other agreement contained herein or in the Seller Option Agreement), in the event of a material breach by the other party of any representation, warranty, covenant or other agreement contained herein (which, in the case of Seller, shall be deemed to include any intentional breach by any Insider Stockholder under the Seller Stockholders' Agreement and, in the case of Buyer, shall be deemed to include any intentional breach by a director of Buyer under the Buyer Stockholders' Agreement), in the Seller Option Agreement or in the Bank Merger Agreement, which breach is not cured after thirty (30) days written notice thereof is given to the party committing such breach; (e) by Buyer or Seller (provided that the terminating party is not then in material breach of any representation, warranty or covenant or other agreement contained herein or in the Seller Option Agreement), if the approval of either party's stockholders specified in Section 5.05 above shall not have been obtained by reason of such party's failure to have obtained the requisite stockholder vote at a duly held meeting of such party's stockholders or at any adjournment thereof; (f) by Buyer if Seller's Board of Directors does not publicly recommend in the Proxy Statement that Seller's stockholders approve the proposals submitted to them in accordance with this Agreement, or if after recommending in the Proxy Statement that Seller's shareholders approve such proposals, Seller's Board of Directors shall have withdrawn, modified or amended such recommendation in any respect materially adverse to Buyer; or (g) by Seller, by action of its Board of Directors, by giving written notice of such election to Buyer within two business days after the Valuation Period, in the event the Average Closing Price is less than the Minimum Price; provided, however, that no right of termination shall arise under this Section 8.01(g) if Buyer elects within two business days of receipt of such written notice to increase the Exchange Ratio by notifying Seller in writing that it has elected to utilize the Adjusted Exchange Ratio in lieu of the Exchange Ratio that would otherwise be required under Section 2.01(b) of the Bank Merger Agreement. 8.02 Effect of Termination. (a) In the event of termination of this Agreement by either the Seller or the Buyer as provided above, this Agreement shall forthwith become null and void (other than Sections 5.02(b), 8.02(b) (if applicable), A-36 8.02(c) (if applicable) and 9.01 hereof, which shall remain in full force and effect) and there shall be no further liability on the part of any of the parties hereto or their respective officers or directors to the others, except (a) any liability of any party under said Sections 5.02(b), 8.02(b) (if applicable), 8.02(c) (if applicable) and 9.01, (b) that the Seller Option Agreement shall be governed by its own terms as to termination, and (c) in the event of a party's gross negligence or willful breach of any representation, warranty, covenant or agreement contained in this Agreement (which, in the case of Seller, shall be deemed to include any gross negligence of or willful breach by any of the Insider Stockholders with respect to the terms of the Seller Stockholders' Agreement and, in the case of Buyer, shall be deemed to include any gross negligence of or willful breach by any of Buyer's directors with respect to the terms of the Buyer Stockholders' Agreement), in which case, the breaching party shall remain liable for any and all damages, costs and expenses, including all reasonable attorneys' fees, sustained or incurred by the non-breaching party as a result thereof or in connection therewith or with the enforcement of its rights hereunder, unless the non-breaching party otherwise invokes and seeks to enforce its rights under Section 8.02(b) or 8.02(c) hereof. (b) As a condition of Buyer's willingness, and in order to induce Buyer, to enter into this Agreement and to reimburse Buyer for incurring the costs and expenses related to entering into this Agreement and consummating the transactions contemplated by this Agreement, the Seller will make a cash payment to Buyer of $1,000,000.00 if and only if: (i) either (x) Buyer has terminated this Agreement because Seller's Board of Directors does not publicly recommend in the Proxy Statement that Seller's stockholders approve the proposals submitted to them in accordance with this Agreement, or if after recommending in the Proxy Statement that Seller's stockholders approve such proposals, Seller's Board of Directors shall have withdrawn, modified or amended such recommendation in any respect materially adverse to Buyer or (y) Buyer has terminated this Agreement pursuant to Section 8.01(d) and the breach of the representation, warranty, covenant or agreement was caused by the willful conduct or gross negligence of Seller (including the willful conduct of any Insider Stockholder in the event of a breach of the Seller Stockholders' Agreement); and (ii) either (x) within twelve months of any such termination, (A) Seller shall have entered into an agreement to engage in an Alternative Transaction (as hereinafter defined) with any person other than Buyer or any subsidiary or other affiliate of Buyer or (B) the Board of Directors of Seller shall have approved an Alternative Transaction or recommended that shareholders of Seller approve or accept any Alternative Transaction with any person other than Buyer or any subsidiary or other affiliate of Buyer, or (y) in the case of Section 8.01(f), at the time of such termination any person other than Buyer or any subsidiary or affiliate of Buyer shall have made a bona fide proposal to Seller or its shareholders to engage in an Alternative Transaction by public announcement or written communication that shall be or become the subject of public disclosure. Any payment required under this Section 8.02(b) will be (i) payable by Seller to Buyer (by wire transfer of immediately available funds to an account designated by Buyer) within five business days after demand by Buyer and (ii) net of any other cash payments made by Seller to Buyer pursuant to the provisions of Section 8.02(a) and 8.02(c) and the Seller Option Agreement (but in no event shall the amount payable under this Section 8.02(b) be less than zero). For purposes of this Agreement, "Alternative Transaction" shall mean (i) a merger, consolidation or other similar transaction involving Seller, (ii) any sale, lease or other disposition of 20% or more of the assets of Seller and its subsidiaries, taken as a whole, in a single transaction or series of transactions, (iii) any tender or exchange offer for 20% or more of the outstanding shares of Seller Common Stock, or (iv) any person having acquired beneficial ownership or the right to acquire beneficial ownership of, or any "group" (as such term is defined under Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder) having been formed which beneficially owns or has the right to acquire beneficial ownership of 20% or more of the then outstanding shares of capital stock of Seller. A-37 (c) If either Seller or Buyer fails to perform any material covenant or agreement in this Agreement as a result of its willful conduct or gross negligence, or if any representation or warranty by Seller or Buyer is determined to be materially untrue due to Seller's or Buyer's, as the case may be, willful misrepresentation or gross negligence (the party which so fails to perform or which so makes such an untrue representation or warranty being referred to as a "Breaching Party"), and if, at the time of such failure to perform or such untrue representation or warranty by the Breaching Party, the other party is not a Breaching Party (the "Non- Breaching Party"), and if the Agreement is thereafter terminated by the Non-Breaching Party prior to the Effective Time as a result of such failure to perform or such untrue representation or warranty by the Breaching Party, then the Breaching Party shall, within five (5) business days following demand, pay to the Non-Breaching Party $1,000,000.00 as liquidated damages (any such amount paid to Buyer shall be net of any cash payments made by Seller to Buyer pursuant to the provisions of Section 8.02(a) and 8.02(b) hereof and the Seller Option Agreement). The parties further acknowledge and agree that for purposes of this Section 8.02(c) any intentional breach by an Insider Stockholder under the Seller Stockholders' Agreement shall be deemed to be an intentional failure to perform a material covenant of this Agreement by the Seller hereunder and any intentional breach by a director of Buyer under the Buyer Stockholders' Agreement shall be deemed to be an intentional failure to perform a material covenant of this Agreement by the Buyer hereunder. 8.03 Amendment, Extension and Waiver. Subject to applicable law and as may be authorized by their respective Boards of Directors, at any time prior to the consummation of the transactions contemplated by this Agreement or termination of this Agreement in accordance with the provisions of Section 8.01 hereof, whether before or after approval of this Agreement and the transactions contemplated hereby by the stockholders of the Seller, the parties may, (a) amend this Agreement, (b) extend the time for the performance of any of the obligations or other acts of any other party hereto, (c) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, or (d) waive compliance with any of the agreements or conditions contained in Articles V and VI (other than Section 6.01) hereof; provided, however, that there may not be, without further approval of Seller's stockholders, any amendment, extension or waiver of this Agreement which reduces the amount or changes the form of the consideration to be delivered to such stockholders hereunder other than as may be expressly contemplated by this Agreement. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto. Any agreement on the part of a party hereto to any extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party, but such waiver or failure to insist on strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. ARTICLE IX MISCELLANEOUS 9.01 Expenses. Except as may otherwise be agreed to hereunder or in other writing by the parties, all legal and other costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses. 9.02 Non-Survival. None of the representations, warranties, covenants and agreements of the parties shall survive after the Effective Time, except for the agreements and covenants contained or referred to in Article II, Section 5.02(b), the last sentence of Section 5.07, Sections 5.11, 5.13, 5.14, 5.19, 8.02, 9.01 and 9.02 and the agreements of the Seller Affiliates delivered pursuant to Section 5.06, which agreements and covenants shall survive the Effective Time. 9.03 Notices. All notices or other communications hereunder shall be in writing and shall be deemed given if delivered personally or mailed by prepaid registered or certified mail (return receipt requested) or by telecopy, cable, telegram or telex addressed as follows: A-38 (a) If to the Seller, to: Glastonbury Bank and Trust Company 2461 Main Street Glastonbury, Connecticut 06033 Attention: J. Gilbert Soucie President Copy to: Tyler Cooper & Alcorn, LLP CityPlace--35th Floor Hartford, Connecticut 06103 Attention: William W. Bouton III, Esq. (b) If to the Buyer, to: SIS Bancorp, Inc. 1441 Main Street Springfield, Massachusetts 01102 Attention: F. William Marshall, Jr. President Copy to: Sullivan & Worcester LLP One Post Office Square Boston, Massachusetts 02109 Attention: Stephen J. Coukos, Esq. or such other address as shall be furnished in writing by any party, and any such notice or communication shall be deemed to have been given as of the date delivered to the recipient party. 9.04 Parties in Interest. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any party hereto without the prior written consent of the other parties, and that nothing in this Agreement, except for Sections 5.13 and 5.14 above, is intended to confer, expressly or by implication, upon any other person any rights or remedies under or by reason of this Agreement. 9.05 Entire Agreement. This Agreement, including the documents and other writing referred to herein or delivered pursuant hereto, including the Seller Disclosure Schedule, the Seller Option Agreement, the Seller Stockholders' Agreement and the Bank Merger Agreement, is complete, and all promises, representations, understandings, warranties and agreements with reference to the subject matter hereof, and all inducements to the making of this Agreement relied upon by either party hereto, have been expressed herein. This Agreement (including the aforementioned documents and writings) supersedes any prior or contemporaneous agreement or understanding between the parties hereto, oral or written, pertaining to any such matters, including without limitation the Confidentiality Agreement, which agreements or understandings shall be of no further force or effect for any persons. 9.06 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and each of which shall be deemed to be an original and shall become effective when a counterpart has been signed by each of the parties and delivered to each of the other parties. 9.07 Governing Law. This Agreement shall be governed by the laws of the Commonwealth of Massachusetts, without giving effect to the principles of conflicts of laws thereof, and, to the extent applicable, by federal law. A-39 9.08 Captions. The Article and Section headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 9.09 Effect of Investigations. No investigation by the parties hereto made heretofore or hereafter, whether pursuant to this Agreement or otherwise shall affect the representations and warranties of the parties which are contained herein and each such representation and warranty shall survive such investigation, subject, however, to Section 9.02 hereof. 9.10 Severability. In the event that any one or more provisions of this Agreement shall for any reason be held invalid, illegal or unenforceable in any respect, by any court of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any other provisions of this Agreement and the parties shall use their best efforts to substitute a valid, legal and enforceable provision which, insofar as practicable, implements the purposes and intents of this Agreement. 9.11 Specific Enforceability. The parties recognize and hereby acknowledge that it is impossible to measure in money the damages that would result to a party by reason of the failure of either of the parties to perform any of the obligations imposed on it by this Agreement. Accordingly, if any party should institute an action or proceeding seeking specific enforcement of the provisions hereof, each party against which such action or proceeding is brought hereby waives the claim or defense that the party instituting such action or proceeding has an adequate remedy at law and hereby agrees not to assert in any such action or proceeding the claim or defense that such a remedy at law exists. 9.12 Waiver of Jury Trial. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY RIGHTS THAT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED UPON, OR ARISING OUT OF, THIS AGREEMENT OR ANY OF THE RELATED AGREEMENTS OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS OR ACTIONS OF ANY OF THEM RELATING THERETO. 9.13 Alternative Structure. Notwithstanding anything to the contrary contained in this Agreement, at any time prior to the Effective Date, Buyer shall be entitled, with the prior written consent of Seller (which consent shall not be unreasonably withheld), to revise the structure of the Acquisition Merger as contemplated by this Agreement and the Bank Merger Agreement so long as the transactions comprising such revised structure shall (i) be capable of consummation in as timely a manner as the structure contemplated herein and (ii) not otherwise have a material adverse impact on the Seller or its stockholders, including on the financial benefits reasonably expected to be derived by such stockholders from the transactions provided for herein. This Agreement, the Bank Merger Agreement and any related documents shall be appropriately amended in order to reflect any such revised structure. [REMAINDER OF PAGE INTENTIONALLY BLANK] A-40 IN WITNESS WHEREOF, the parties have caused this Agreement and Plan of Reorganization to be executed as a sealed instrument by their duly authorized officers as of the day and year first above written., SIS Bancorp, Inc. /s/ F. William Marshall, Jr. By: _________________________________ F. William Marshall, Jr. President and Chief Executive Officer Glastonbury Bank and Trust Company /s/ J. Gilbert Soucie By: _________________________________ J. Gilbert Soucie President and Chief Executive Officer A-41 Exhibit A to Agreement and Plan of Reorganization AGREEMENT AND PLAN OF MERGER [OMITTED--SEE APPENDIX B TO JOINT PROXY STATEMENT--PROSPECTUS] A-42 Exhibit B to Agreement and Plan of Reorganization FORM OF STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT, dated as of August 18, 1997, between Glastonbury Bank and Trust Company, a Connecticut bank and trust company (the "Issuer") and SIS Bancorp, Inc., a Massachusetts corporation (the "Grantee"). WHEREAS, the Grantee and the Issuer are entering into an Agreement and Plan of Reorganization of even date herewith (the "Acquisition Agreement"), which agreement is being executed by the parties thereto simultaneously with this Agreement; and WHEREAS, as a condition to the Grantee's entry into the Acquisition Agreement and in consideration for such entry, the Issuer has agreed to grant the Grantee the Option and pay the related Option Fee (each as hereinafter defined). NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth herein and in the Acquisition Agreement, the parties hereto agree as follows: 1. (a) The Issuer hereby grants to the Grantee an unconditional, irrevocable option (the "Option") to purchase, subject to the terms hereof, up to 170,080 fully paid and nonassessable shares (the "Option Shares") of common stock, $2.50 par value per share, of the Issuer ("Common Stock") at a price of $18.00 per share (the "Option Price"). The number of shares of Common Stock that may be received upon the exercise of the Option and the Option Price are subject to adjustment as herein set forth provided that in no event shall the number of shares for which this Option is exercisable exceed 19.99% of the Issuer's issued and outstanding shares of Common Stock (without giving effect to any shares of Common Stock issuable pursuant to the Option) less the number of shares previously issued pursuant to exercise of the Option. (b) In the event that any additional shares of Common Stock are issued or otherwise become outstanding after the date of this Agreement (other than pursuant to exercise of the Option pursuant to this Agreement or as contemplated by Section 5(a) of this Agreement), including, without limitation, pursuant to stock option or other employee plans or as a result of the exercise of conversion rights, the number of Option Shares shall be increased so that, after such issuance, it equals not less than 9.29% of the number of shares of Common Stock then issued and outstanding, without giving effect to any shares subject or issued pursuant to the Option less the number of shares previously issued pursuant to exercise of the Option. Nothing contained in this Section 1(b) or elsewhere in this Agreement shall be deemed to authorize the Issuer to breach any provision of the Acquisition Agreement. 2. (a) Provided that the Grantee is not in material breach of the Acquisition Agreement, the Holder (as such term is defined in paragraph (c) below) may exercise the Option, in whole or part, if, but only if, both an Initial Triggering Event (as defined in paragraph (d) below) and a Subsequent Triggering Event (as defined in paragraph (e) below) shall have occurred prior to the occurrence of an Exercise Termination Event (as defined in paragraph (b) below), provided that the Holder shall have sent the written notice of such exercise (as provided in paragraph (g) of this Section 2) within thirty (30) days following such Subsequent Triggering Event and prior to the Exercise Termination Event. (b) The term "Exercise Termination Event" shall mean the earliest of (i) the Effective Time of the Acquisition Merger, (ii) any termination of the Acquisition Agreement in accordance with the provisions thereof if such termination occurs prior to the occurrence of an Initial Triggering Event, and (iii) in the event of any termination of the Acquisition Agreement in accordance with the provisions thereof after the occurrence of an Initial Triggering Event, the passage of twelve (12) months after such termination. Notwithstanding the termination of the Option, the Grantee shall be entitled to purchase those Option Shares with respect to which it has exercised the Option in whole or in part prior to the termination of the Option. A-43 (c) The term "Holder" shall mean the holder or holders of the Option. (d) The term "Initial Triggering Event" shall mean any of the following events or transactions occurring after the date hereof: (i) The Issuer or any subsidiary of the Issuer, without having received the Grantee's prior written consent, shall have entered into an agreement to engage in an Acquisition Transaction with any Person (the term "person" for purposes of this Agreement having the meaning assigned thereto in Sections 3(a)(9) and 13(d)(3) of the Exchange Act and the rules and regulations thereunder), other than the Grantee or any subsidiary of the Grantee, or, without the consent of the Grantee, the Board of Directors of the Issuer shall have approved an Acquisition Transaction or recommended that the shareholders of the Issuer approve or accept any Acquisition Transaction other than as contemplated by the Acquisition Agreement. For purposes of this Agreement, the term "Acquisition Transaction" shall mean (A) a merger or consolidation, or any similar transaction, with the Issuer or any subsidiary of the Issuer that is a "significant subsidiary" as defined in Regulation S-X promulgated by the SEC (a "Significant Subsidiary"), or any subsidiary of the Issuer which, after such transaction, would be a Significant Subsidiary of the Issuer, (B) a purchase, lease or other acquisition of all or substantially all of the assets of the Issuer or any Significant Subsidiary of the Issuer (except as contemplated by the Acquisition Agreement), or (C) a purchase or other acquisition (including by way of merger, consolidation, share exchange or otherwise) of securities representing ten percent (10%) or more of the voting power of the Issuer or any Significant Subsidiary of the Issuer; (ii) Any Person, other than the Grantee or any subsidiary of the Grantee or the Issuer in a fiduciary capacity, shall have acquired beneficial ownership (as hereinafter defined) or the right to acquire beneficial ownership of ten percent (10%) or more of the outstanding shares of Common Stock if such Person owned beneficially less than ten percent (10%) of the outstanding shares of Common Stock on the date of this Agreement, or any Person shall have acquired beneficial ownership of an additional three percent (3%) of the outstanding shares of Common Stock if such Person owned beneficially ten percent (10%) or more of the outstanding shares of Common Stock on the date of this Agreement (the term "beneficial ownership" for purposes of this Agreement having the meaning assigned thereto in Section 13(d) of the Exchange Act, and in the rules and regulations thereunder); (iii) Any Person, other than the Grantee or any subsidiary of the Grantee, shall have made a bona-fide proposal to the Issuer or its shareholders to engage in an Acquisition Transaction by public announcement or written communication that shall be or become the subject of public disclosure; (iv) After any Person other than the Grantee or any subsidiary of the Grantee has made a proposal to the Issuer or its shareholders to engage in an Acquisition Transaction, the Issuer shall have breached any covenant or obligation contained in Sections 5.01, 5.03, 5.04 or 5.05 of the Acquisition Agreement and such breach (A) would entitle the Grantee to terminate the Acquisition Agreement and (B) shall not have been remedied prior to the Notice Date (as defined in paragraph (g) below); or (v) Any Person other than the Grantee or any subsidiary of the Grantee, other than in connection with a transaction to which the Grantee has given its prior written consent, shall have filed an application or notice with the FDIC or Federal Reserve Board, as applicable, or other federal or state bank regulatory authority, which application or notice has been accepted for processing, for approval to engage in an Acquisition Transaction. (e) The term "Subsequent Triggering Event" shall mean either of the following events or transactions occurring after the date hereof: (i) The acquisition by any Person of beneficial ownership of 20% or more of the then outstanding Common Stock; or (ii) The occurrence of the Initial Triggering Event described in subparagraph (i) of paragraph (d) of this Section 2, except that the percentage referenced in clause (C) shall be 20% in lieu of ten percent (10%). A-44 (f) The Issuer shall notify the Grantee promptly in writing of the occurrence of any Initial Triggering Event or Subsequent Triggering Event (together, a "Triggering Event"), it being understood that the giving of such notice by the Issuer shall not be a condition to the right of the Holder to exercise the Option. (g) In the event the Holder is entitled to and wishes to exercise the Option, it shall send to the Issuer a written notice (the date of which being herein referred to as the "Notice Date") specifying (i) the total number of shares of Common Stock it will purchase pursuant to such exercise, and (ii) a place and date not earlier than three (3) business days nor later than forty- five (45) business days from the Notice Date for the closing of such purchase (the "Closing"); provided that if prior notification to or approval of the FDIC or Federal Reserve Board or any other regulatory agency is required in connection with such purchase, the Holder shall promptly file the required notice or application for approval and shall expeditiously process the same and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which any required notification periods have expired or been terminated or such approvals have been obtained and any requisite waiting period or periods shall have passed; provided, however, that in no event shall the Closing be more than sixteen (16) months after the Notice Date, and if the Closing shall not have occurred within sixteen (16) months after the Notice Date due to the failure of the Holder to obtain any such required approval, the exercise of the Option effected on the Notice Date shall be deemed to have expired. The term "business day" for purposes of this Agreement means any day, excluding Saturdays, Sundays and any other day that is a legal holiday in the Commonwealth of Massachusetts or a day on which banking institutions in the Commonwealth of Massachusetts are authorized by law or executive order to close. (h) At the Closing, the Holder shall pay to the Issuer the aggregate purchase price for the shares of Common Stock purchased pursuant to the exercise of the Option in immediately available funds by a wire transfer to a bank account designated by the Issuer, provided that failure or refusal of the Issuer to designate such a bank account shall not preclude the Holder from exercising the Option. (i) At such Closing, simultaneously with the delivery of immediately available funds as provided in paragraph (h) above, the Issuer shall deliver to the Holder a certificate or certificates representing the number of shares of Common Stock purchased by the Holder and, if the Option should be exercised in part only, a new Option evidencing the rights of the Holder thereof to purchase the balance of the shares purchasable hereunder, and the Holder shall deliver to the Issuer a copy of this Agreement and a letter agreeing that the Holder will not offer to sell or otherwise dispose of such shares in violation of applicable law or the provisions of this Agreement. (j) Certificates for the Common Stock delivered at a Closing hereunder may (in the sole discretion of the Issuer) be endorsed with a restrictive legend that shall read substantially as follows: "THE TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE SUBJECT TO RESTRICTIONS ARISING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, THE RULES OF THE FEDERAL DEPOSIT INSURANCE CORPORATION AND PURSUANT TO THE TERMS OF A STOCK OPTION AGREEMENT DATED AS OF AUGUST 18, 1997, A COPY OF WHICH AGREEMENT WILL BE PROVIDED TO THE HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT BY THE ISSUER OF A WRITTEN REQUEST THEREFOR." It is understood and agreed that (i) the reference to the resale restrictions of the Securities Act and the rules of the FDIC in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the Holder shall have delivered to the Issuer copies of letters from the staff of the SEC and the staff of the FDIC, or an opinion of counsel, in form and substance reasonably satisfactory to the Issuer, to the effect that such legend is not required for purposes of the Securities Act and the rules of the FDIC; (ii) the reference to the provisions of this Agreement in the above legend shall be removed by delivery of substitute certificate(s) without such reference if the shares have been sold or transferred in compliance with the provisions of this Agreement and under circumstances that do not require the retention of such reference; and (iii) the legend shall be removed in its entirety if the conditions in the preceding clauses (i) and (ii) are both satisfied. In addition, such certificates shall bear any other legend as may be required by law. A-45 (k) Upon the giving by the Holder to the Issuer of the written notice of exercise of the Option provided for under paragraph (g) above, the tender of the applicable purchase price in immediately available funds and the tender of a copy of this Agreement to the Issuer, such Holder shall be deemed to be the holder of record of the shares of Common Stock issuable upon such exercise, notwithstanding that the stock transfer books of the Issuer shall then be closed or that certificates representing such shares of Common Stock shall not then be actually delivered to the Holder. The Issuer shall pay all expenses, and any and all United States federal, state and local taxes and other charges that may be payable in connection with the preparation, issue and delivery of stock certificates under this Section 2 in the name of the Holder or its assignee, transferee or designee. (l) At such time as the Option first becomes exercisable in accordance with the terms of this Agreement, the Issuer shall be obligated to pay a fee in the amount of $1,500,000.00 (the "Option Fee") to the Grantee. The Option Fee, which is intended to compensate the Grantee for the Issuer's inability to grant the Option for such amount of shares of Common Stock as is customary in transactions of the type provided for in the Acquisition Agreement, shall be payable by the Issuer to the Grantee by wire transfer of immediately available funds to an account designated by the Grantee within five business days after the Option becomes exercisable hereunder. 3. The Issuer agrees (a) that it shall at all times maintain, free from preemptive rights, sufficient authorized but unissued or treasury shares of Common Stock so that the Option may be exercised without requiring the Issuer's stockholders to approve an increase in the number of authorized shares of Common Stock after giving effect to all other options, warrants, convertible securities and other rights to purchase Common Stock, (b) that it will not, by charter amendment or through reorganization, consolidation, merger, dissolution or sale of assets, or by any other voluntary act, avoid or seek to avoid the observance or performance of any of the covenants, stipulations or conditions to be observed or performed hereunder by the Issuer, and (c) promptly to take all action as may from time to time be required (including without limitation (i) complying with all applicable premerger notification, reporting and waiting period requirements specified in 15 U.S.C. (S) 18a and regulations promulgated thereunder and (ii) cooperating fully with any Holders in preparing any applications or notices required under the Bank Holding Company Act of 1956, as amended, or the Change in Bank Control Act of 1978, as amended, or any state banking law), in order to permit such Holders to exercise the Option and the Issuer duly and effectively to issue shares of Common Stock pursuant hereto. 4. This Agreement and the Option granted hereby are exchangeable, without expense, at the option of each Holder, upon presentation and surrender of this Agreement at the principal office of the Issuer, for other Agreements providing for Options of different denominations entitling the Holder thereof to purchase, on the same terms and subject to the same conditions as are set forth herein, in the aggregate the same number of shares of Common Stock purchasable hereunder. The terms "Agreement" and "Option" as used herein include any Stock Option Agreements and related Options for which this Agreement (and the Option granted hereby) may be exchanged. Upon receipt by the Issuer of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Agreement, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Agreement, if mutilated, the Issuer will execute and deliver a new Agreement of like tenor and date. Any such new Agreement executed and delivered shall constitute for all purposes and under all circumstances an additional contractual obligation on the part of the Issuer. 5. (a) In addition to the adjustment in the number of Option Shares pursuant to Section 1 of this Agreement, the number of Option Shares shall be subject to adjustment from time to time as provided in this Section 5. (i) In the event of any change in the shares of Common Stock by reason of stock dividend, split-up, merger, recapitalization, subdivision, conversion, combination, exchange of shares or similar transaction, the type and number of Option Shares, and the Option Price therefor, shall be adjusted appropriately in accordance with subsection (b) of this Section 5, and proper provision shall be made in the agreements governing such transaction, so that Grantee shall receive upon exercise of the Option the number and class of shares of Common Stock that Grantee would have held immediately after such event if the Option had been exercised immediately prior to such event, or the record date therefor, as applicable. A-46 (ii) Issuer may make such increases in the number of Option Shares, in addition to those required under subsection (a)(i), as shall be determined by its Board of Directors to be advisable in order to avoid taxation so far as practicable, of any dividend of stock or stock rights or any event treated as such for Federal income tax purposes to the recipients. (b) Whenever the number of Option Shares is adjusted as provided in this Section 5, the Option Price shall be adjusted by multiplying the Option Price by a fraction, the numerator of which is equal to the number of Option Shares prior to the adjustment and the denominator of which is equal to the number of Option Shares after the adjustment. 6. Upon the occurrence of a Subsequent Triggering Event that occurs prior to an Exercise Termination Event, and provided that the Grantee is not precluded, pursuant to subsection (a) of Section 2 hereof, from exercising the Option, the Issuer shall, at the request of the Grantee delivered within thirty (30) days following such Subsequent Triggering Event (whether on the Grantee's own behalf or on the behalf of any subsequent Holder of this Option (or part thereof) or any of the shares of Common Stock issued pursuant hereto), promptly prepare, file and keep current, with respect to the Option and the Option Shares, a "shelf " registration statement under Rule 415 of the Securities Act or any successor provision, if registration of such is required under the Securities Act, otherwise such registration or equivalent statement as may be required under the rules of the FDIC, and in any event an offering circular if no such registration is required in order to enable the Grantee to comply with Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and the Issuer shall use all reasonable efforts to qualify such shares under any applicable state securities laws. The Issuer will use all reasonable efforts to cause any such registration statement first to become effective and then to remain effective for such period not in excess of 180 days from the day such registration statement first becomes effective or such shorter time as may be reasonably necessary to effect sales or other dispositions of Option Shares. The Grantee shall have the right to demand two (2) such registrations or offerings. The foregoing notwithstanding, if, at the time of any request by the Grantee for registration or offering of the Option or Option Shares as provided above, the Issuer is in registration or other pre-offering process with respect to any underwritten public offering of shares of Common Stock, and if in the good faith judgment of the managing underwriter or managing underwriters, or, if none, the sole underwriter or underwriters, of such offering, the inclusion of the Option or Option Shares would interfere with the successful marketing of the shares of Common Stock offered by the Issuer in such underwritten public offering, the number of shares represented by the Option and/or the number of Option Shares otherwise to be covered in the registration statement or offering circular contemplated hereby may be reduced; provided, however, that if such reduction occurs, then the Issuer shall file a registration or equivalent statement if required or otherwise prepare an appropriate offering circular for the balance as promptly as practicable and no reduction shall thereafter occur. Each such Holder shall provide all information reasonably requested by the Issuer for inclusion in any such registration or equivalent statement or offering circular to be filed or otherwise prepared hereunder. If requested by any such Holder in connection with such registration or offering, the Issuer shall become a party to any underwriting agreement relating to the sale of such shares, but only to the extent of obligating itself in respect of representations, warranties, indemnities and other agreements customarily included in such underwriting agreements for the Issuer. 7. (a) Upon the occurrence of a Subsequent Triggering Event that occurs prior to an Exercise Termination Event, and provided that the Grantee is not precluded, pursuant to subsection (a) of Section 2 hereof, from exercising the Option, (i) at the request of any Holder, delivered within thirty (30) days following such occurrence (or such later period as provided in Section 10), the Issuer or any successor shall repurchase the Option from the Holder at a price (the "Option Repurchase Price") equal to the amount by which (A) the market/offer price (as defined below) exceeds (B) the Option Price, multiplied by the number of shares for which this Option may then be exercised, plus, to the extent not previously reimbursed, the Grantee's reasonable out-of-pocket expenses incurred in connection with the transactions contemplated by, and the enforcement of the Grantee's rights under, the Acquisition Agreement, including without limitation legal, accounting and investment banking fees (the "Grantee's Out-of-Pocket Expenses"), and (ii) at the request of any owner of Option Shares from time to time (the "Owner"), delivered within thirty (30) days following such occurrence (or such later A-47 period as provided in Section 10), the Issuer shall repurchase such number of the Option Shares from such Owner as the Owner shall designate at a price per share ("Option Share Repurchase Price") equal to the greater of (A) the market/offer price and (B) the average exercise price per share paid by the Owner for the Option Shares so designated, plus, to the extent not previously reimbursed, the Grantee's Out-of-Pocket Expenses. The term "market/offer price" shall mean the highest of (w) the price per share of the Common Stock at which a tender offer or exchange offer therefor has been made, (x) the price per share of the Common Stock to be paid by any Person, other than the Grantee or a subsidiary of the Grantee, pursuant to an agreement with the Issuer of the kind described in Section 2(d)(i), (y) the highest closing price for shares of Common Stock within the shorter of the period from the date of this Agreement up to the date on which such required repurchase of Options or Option Shares, as the case may be, occurs or the six (6) month period immediately preceding the date of such required repurchase of Options or Option Shares, as the case may be, or (z) in the event of a sale of all or substantially all of the Issuer's assets, the sum of the price paid in such sale for such assets and the current market value of the remaining assets of the Issuer as determined in good faith by a nationally recognized investment banking firm selected by a majority in interest of the Holders or the Owners, as the case may be, and reasonably acceptable to the Issuer, divided by the number of shares of Common Stock of the Issuer outstanding at the time of such sale. In determining the market/offer price, the value of consideration other than cash shall be determined in good faith by a nationally recognized investment banking firm selected by a majority in interest of the Holders or the Owners, as the case may be, and reasonably acceptable to the Issuer. (b) Each Holder and Owner, as the case may be, may exercise its right to require the Issuer to repurchase the Option and any Option Shares pursuant to this Section 7 by surrendering for such purpose to the Issuer, at its principal office, a copy of this Agreement or certificates for Option Shares, as applicable, accompanied by a written notice or notices stating that such Holder or Owner elects to require the Issuer to repurchase this Option and/or Option Shares in accordance with the provisions of this Section 7. As promptly as practicable, and in any event within ten (10) business days after the surrender of the Option and/or certificates representing Option Shares and the receipt of such notice or notices relating thereto, the Issuer shall deliver or cause to be delivered to each Holder the Option Repurchase Price and/or to each Owner the Option Share Repurchase Price therefor or the portion thereof that the Issuer is not then prohibited under applicable law and regulation from so delivering. (c) To the extent that the Issuer is prohibited under applicable law or regulation, or as a consequence of administrative policy, or as a result of a written agreement or other binding obligation with a governmental or regulatory body or agency, from repurchasing the Option and/or the Option Shares in full, the Issuer shall immediately so notify each Holder and/or each Owner and thereafter deliver or cause to be delivered, from time to time, to such Holder and/or Owner, as appropriate, the portion of the Option Repurchase Price and the Option Share Repurchase Price, respectively, that it is no longer prohibited from delivering, within ten (10) business days after the date on which the Issuer is no longer so prohibited; provided, however, that if the Issuer at any time after delivery of a notice of repurchase pursuant to paragraph (b) of this Section 7 is prohibited under applicable law or regulation, or as a consequence of administrative policy, from delivering to any Holder and/or Owner, as appropriate, the Option Repurchase Price and the Option Share Repurchase Price, respectively, in part or in full (and the Issuer hereby undertakes to use all reasonable efforts to receive all required regulatory and legal approvals and to file any required notices as promptly as practicable in order to accomplish such repurchase), such Holder or Owner may revoke its notice of repurchase of the Option or the Option Shares either in whole or to the extent of the prohibition, whereupon the Issuer shall promptly (i) deliver to such Holder and/or Owner, as appropriate, that portion of the Option Purchase Price or the Option Share Repurchase Price that the Issuer is not prohibited from delivering with respect to Options or Option Shares as to which the Holder or the Owner, as the case may be, has not revoked its repurchase demand; and (ii) deliver, as appropriate, either (A) to such Holder, a new Stock Option Agreement evidencing the right of such Holder to purchase that number of shares of Common Stock obtained by multiplying the number of shares of Common Stock for which the surrendered Stock Option Agreement was exercisable at the time of delivery of the notice of repurchase by a fraction, the numerator of which is the Option Repurchase Price less the portion thereof theretofore delivered to the Holder and the denominator of which is the Option Repurchase Price, or (B) to such Owner, a certificate for the Option Shares it is then so prohibited from repurchasing. A-48 8. (a) In the event that prior to an Exercise Termination Event, Issuer shall enter into an agreement (i) to consolidate with or merge into any person, other than Grantee or any subsidiary of Grantee, and Issuer shall not be the continuing or surviving corporation of such consolidation or merger, (ii) to permit any person, other than Grantee or a subsidiary of Grantee, to merge into Issuer and Issuer shall be the continuing or surviving corporation, but, in connection with such merger, the then outstanding shares of Common Stock shall be changed into or exchanged for stock or other securities of any other person or cash or any other property, or the then outstanding shares of Common Stock shall, after such merger, represent less than 50% of the outstanding shares and share equivalents of the merged company, or (iii) to sell or otherwise transfer all or substantially all of its assets to any person, other than Grantee or a subsidiary of Grantee, then, and in each such case, the agreement governing such transaction shall make proper provision so that the Option shall, upon the consummation of any such transaction and upon the terms and conditions set forth herein, be converted into, or exchanged for, an option (the "Substitute Option"), at the election of the Holder, of either (y) the Acquiring Corporation (as hereinafter defined) or (z) any person that controls the Acquiring Corporation. (b) The following terms have the meanings indicated: (i) The term "Acquiring Corporation" shall mean (A) the continuing or surviving corporation of a consolidation or merger with Issuer (if other than Issuer), (B) Issuer in a merger in which Issuer is the continuing or surviving person, and (C) the transferee of all or substantially all of Issuer's assets. (ii) The term "Substitute Common Stock" shall mean the common stock issued by the issuer of the Substitute Option upon exercise of the Substitute Option. (iii) The term "Assigned Value" shall mean the "market/offer price", as defined in Section 7. (iv) The term "Average Price" shall mean the average closing price of a share of the Substitute Common Stock for the one year immediately preceding the consolidation, merger or sale in question, but in no event higher than the closing price of the shares of the Substitute Common Stock on the day preceding such consolidation, merger or sale; provided that if Issuer is the issuer of the Substitute Option, the Average Price shall be computed with respect to a share of common stock issued by the person merging into Issuer or by any company which controls such person, as the Holder may elect. (c) The Substitute Option shall have the same terms as the Option, provided, that if the terms of the Substitute Option cannot, for legal reasons, be the same as the Option, such terms shall, to the extent legally permissible, be as similar as possible to, and in no event less advantageous to the Holder than, the terms of the Option. The issuer of the Substitute Option shall also enter into an agreement with the then Holder or Holders of the Substitute Option in substantially the same form as this Agreement, which shall be applicable to the Substitute Option. (d) The Substitute Option shall be exercisable for such number of shares of the Substitute Common Stock as is equal to the Assigned Value multiplied by the number of shares of Common Stock for which the Option is then exercisable, divided by the Average Price. The exercise price of the Substitute Option per share of the Substitute Common Stock shall then be equal to the Option Price multiplied by a fraction in which the numerator is the number of Option Shares and the denominator is the number of shares of the Substitute Common Stock for which the Substitute Option is exercisable. (e) In no event, pursuant to any of the foregoing paragraphs, shall the Substitute Option be exercisable for more than 19.99% of the aggregate of the shares of the Substitute Common Stock outstanding prior to exercise of the Substitute Option (without giving effect to any shares of Substitute Common Stock issued pursuant to the Substitute Option) less the number of shares previously issued pursuant to the Substitute Option. In the event that the Substitute Option would be exercisable for more than 19.99% of the shares of Substitute Common Stock outstanding prior to exercise but for this clause (e), the issuer of the Substitute Option (the "Substitute Option Issuer") shall make a cash payment to Holder equal to the excess of (i) the value of the Substitute Option without giving effect to the limitation in this clause (e) over (ii) the value of the Substitute Option after giving effect to the limitation in this clause (e). The difference in value shall be determined by a nationally recognized investment banking firm selected by a majority in interest of the Holders or the Owners, as the case may be. A-49 (f) Issuer shall not enter into any transaction described in subsection (a) of this Section 8 unless the Acquiring Corporation and any person that controls the Acquiring Corporation shall have assumed in writing all the obligations of Issuer hereunder. 9. (a) At the request of the holder of the Substitute Option (the "Substitute Option Holder"), the issuer of the Substitute Option (the "Substitute Option Issuer") shall repurchase the Substitute Option from the Substitute Option Holder at a price (the "Substitute Option Repurchase Price") equal to the amount by which (i) the Highest Closing Price (as hereinafter defined) exceeds (ii) the exercise price of the Substitute Option, multiplied by the number of shares of the Substitute Common Stock for which the Substitute Option may then be exercised, plus the Grantee's Out-of-Pocket Expenses, and at the request of each owner (the "Substitute Share Owner") of shares of the Substitute Common Stock (the "Substitute Shares"), the Substitute Option Issuer shall repurchase the Substitute Shares at a price per share (the "Substitute Share Repurchase Price") equal to the greater of (y) the Highest Closing Price and (z) the average exercise price per share paid by the Substitute Share Owner for the Substitute Shares so designated, plus Grantee's Out-of-Pocket Expenses. The term "Highest Closing Price" shall mean the highest closing price for shares of the Substitute Common Stock within the six-month period immediately preceding the date the Substitute Option Holder gives notice of the required repurchase of the Substitute Option or the Substitute Share Owner gives notice of the required repurchase of the Substitute Shares, as applicable. (b) Each Substitute Option Holder and the Substitute Share Owner, as the case may be, may exercise its respective right to require the Substitute Option Issuer to repurchase the Substitute Option and the Substitute Shares pursuant to this Section 9 by surrendering for such purpose to the Substitute Option Issuer, at its principal office, the agreement for such Substitute Option (or, in the absence of such an agreement, a copy of this Agreement) and certificates for Substitute Shares accompanied by a written notice or notices stating that such Substitute Option Holder or Substitute Share Owner elects to require the Substitute Option Issuer to repurchase the Substitute Option and/or the Substitute Shares in accordance with the provisions of this Section 9. As promptly as practicable, and in any event within five business days after the surrender of the Substitute Option and/or the certificates representing Substitute Shares and the receipt of such notice or notices relating thereto, the Substitute Option Issuer shall deliver or cause to be delivered to the Substitute Option Holder the Substitute Option Repurchase Price and/or to the Substitute Share Owner the Substitute Share Repurchase Price therefor, or the portion(s) thereof which the Substitute Option Issuer is not then prohibited under applicable law and regulation from so delivering. (c) To the extent that the Substitute Option Issuer is prohibited under applicable law or regulation, or as a consequence of administrative policy, or as a result of a written agreement or other binding obligation with a governmental or regulatory body or agency, from repurchasing the Substitute Option and/or the Substitute Shares in full, the Substitute Option Issuer shall immediately so notify each Substitute Option Holder and/or the Substitute Share Owner and thereafter deliver or cause to be delivered, from time to time, to the Substitute Option Holder and/or Substitute Share Owner, as appropriate, that portion of the Substitute Option Repurchase Price and the Substitute Share Repurchase Price, respectively, which it is no longer prohibited from delivering, within five business days after the date on which the Substitute Option Issuer is no longer so prohibited; provided, however, that if the Substitute Option Issuer is, at any time after delivery of a notice of repurchase pursuant to subsection (b) of this Section 9 prohibited under applicable law or regulation, or as a consequence of administrative policy, or as a result of a written agreement or other binding obligation with a governmental or regulatory body or agency, from delivering to the Substitute Option Holder and/or the Substitute Share Owner, as appropriate, the Substitute Option Repurchase Price and the Substitute Share Repurchase Price, respectively, in part or in full (and the Substitute Option Issuer shall use its best efforts to receive all required regulatory and legal approvals as promptly as practicable in order to accomplish such repurchase), the Substitute Option Holder or Substitute Share Owner may revoke its notice of repurchase of the Substitute Option or the Substitute Shares either in whole or to the extent of the prohibition, whereupon the Substitute Option Issuer shall promptly (i) deliver to the Substitute Option Holder or Substitute Share Owner, as appropriate, that portion of the Substitute Option Repurchase Price or the Substitute Share Repurchase Price that the Substitute Option Issuer is not A-50 prohibited from delivering; and (ii) deliver, as appropriate, either (A) to the Substitute Option Holder, a new Substitute Option evidencing the right of the Substitute Option Holder to purchase that number of shares of the Substitute Common Stock obtained by multiplying the number of shares of the Substitute Common Stock for which the surrendered Substitute Option was exercisable at the time of delivery of the notice of repurchase by a fraction, the numerator of which is the Substitute Option Repurchase Price less the portion thereof theretofore delivered to the Substitute Option Holder and the denominator of which is the Substitute Option Repurchase Price, or (B) to the Substitute Share Owner, a certificate for the Substitute Option Shares it is then so prohibited from repurchasing. 10. The thirty (30) day period for exercise of certain rights under Sections 2, 6, 7 and 12 hereof shall be extended in each such case: (i) to the extent necessary to obtain all regulatory approvals for the exercise of such rights and for the expiration of all statutory waiting periods; and (ii) to the extent necessary to avoid liability under Section 16(b) of the Exchange Act by reason of such exercise, provided that notice of intent to exercise such rights shall be given to the Issuer within the requisite thirty (30) day period and the Grantee and the Holders shall use all reasonable efforts to promptly obtain all requisite approvals and cause the expiration of all requisite waiting periods. 11. The Issuer hereby represents and warrants to the Grantee, as the Grantee hereby represents and warrants to the Issuers, as applicable, as follows: (a) The Issuer has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of the Issuer and no other corporate proceedings on the part of the Issuer are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by the Issuer. This Agreement is the valid and legally binding obligation of the Issuer. (b) The Issuer has taken all necessary corporate action to authorize and reserve and to permit it to issue, and at all times from the date hereof through the termination of this Agreement in accordance with its terms will have reserved for issuance upon the exercise of the Option, that number of shares of Common Stock equal to the maximum number of shares of Common Stock at any time and from time to time issuable hereunder, and all such shares, upon issuance pursuant hereto, will be duly authorized, validly issued, fully paid, nonassessable, and will be delivered free and clear of all claims, liens, encumbrances and security interests and not subject to any preemptive rights. (c) The Grantee has full corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of the Grantee and no other corporate proceedings on the part of the Grantee are necessary to authorize this Agreement or to consummate the transactions so contemplated. This Agreement has been duly and validly executed and delivered by the Grantee. This Agreement is the valid and legally binding obligation of the Grantee. 12. Neither of the parties hereto may assign any of its rights or obligations under this Option Agreement or the Option created hereunder to any other Person, whether by operation of law or otherwise, without the express written consent of the other party, except that in the event a Subsequent Triggering Event shall have occurred prior to an Exercise Termination Event and the Grantee is not precluded, pursuant to Section 2(a), from exercising the Option, the Grantee may, subject to the right of first refusal set forth in Section 13, assign, transfer or sell in whole or in part its rights and obligations hereunder within thirty (30) days following such Subsequent Triggering Event (or such later period as provided in Section 10). 13. If at any time after the occurrence of a Subsequent Triggering Event and, with respect to shares of Common Stock or other securities acquired by the Grantee pursuant to an exercise of the Option, prior to the expiration of twenty-four (24) months after the expiration of the Option pursuant to Section 2(b), the Grantee A-51 shall desire to sell, assign, transfer or otherwise dispose of the Option, in whole or in part, or all or any of the shares of Common Stock or other securities acquired by the Grantee pursuant to the Option, the Grantee shall give the Issuer written notice of the proposed transaction (an "Offeror's Notice"), identifying the proposed transferee, accompanied by a copy of a binding offer to purchase the Option or such shares or other securities signed by such transferee and setting forth the terms of the proposed transaction. An Offeror's Notice shall be deemed an offer by the Grantee to the Issuer, which may be accepted within ten (10) business days of the receipt of such Offeror's Notice, on the same terms and conditions and at the same price at which the Grantee is proposing to transfer the Option or such shares or other securities to such transferee. The purchase of the Option or such shares or other securities by the Issuer shall be settled within ten (10) business days of the date of the acceptance of the offer and the purchase price shall be paid to the Grantee in immediately available funds, provided that, if prior notification to or approval, consent or waiver of the FDIC or Federal Reserve Board or any other regulatory authority is required in connection with such purchase, the Issuer shall promptly file the required notice or application for approval, consent or waiver and shall expeditiously process the same (and the Grantee shall cooperate with the Issuer in the filing of any such notice or application and the obtaining of any such approval) and the period of time that otherwise would run pursuant to this sentence shall run instead from the date on which, as the case may be, (a) the required notification period has expired or been terminated or (b) such approval has been obtained and, in either event, any requisite waiting period shall have passed. In the event of the failure or refusal of the Issuer to purchase the Option or the shares or other securities, as the case may be, covered by an Offeror's Notice or if the FDIC or Federal Reserve Board or any other regulatory authority disapproves the Issuer's proposed purchase of the Option or such shares or other securities, the Grantee may, within sixty (60) days following the date of the Offeror's Notice (subject to any necessary extension for regulatory notification, approval, or waiting periods), sell all, but not less than all, of the portion of the Option (which may be one hundred percent (100%)) or such shares or other securities, as the case may be, proposed to be transferred to the proposed transferee identified in the Offeror's Notice at no less than the price specified and on terms no more favorable to the proposed transferee than those set forth in the Offeror's Notice. The requirements of this Section 13 shall not apply to (i) any disposition of the Option or any shares of Common Stock or other securities by a Person to whom the Grantee has assigned its rights under the Option with the prior written consent of the Issuer, (ii) any sale by means of a public offering registered under the Securities Act in which steps are taken to reasonably ensure that no purchaser will own securities representing more than two percent (2%) of the outstanding shares of Common Stock of the Issuer or (iii) any transfer to a direct or indirect wholly-owned subsidiary of the Grantee which agrees in writing to be bound by the terms hereof. 14. Notwithstanding anything to the contrary herein, in the event that the Holder or Owner or any Related Person thereof (as hereinafter defined) is a person making an offer or proposal to engage in an Acquisition Transaction (other than the transaction contemplated by the Acquisition Agreement), then (i) in the case of a Holder or any Related Person thereof, the Option held by it shall immediately terminate and be of no further force or effect, and (ii) in the case of an Owner or any Related Person thereof, the Option Shares held by it shall, at the Issuer's election, be immediately repurchasable by Issuer at the Option Price. For purposes of this Agreement, a Related Person of a Holder or Owner means any Affiliate (as defined in Rule 12b-2 of the rules and regulations under the Exchange Act) of the Holder or Owner and any person that is required to file a Schedule 13D or Form F-11 or other analogous schedule or form under the applicable rules of the FDIC with the Holder or Owner with respect to shares of Common Stock or options to acquire the Common Stock. 15. Each of the Grantee and the Issuer will use all reasonable efforts to make all filings with, and to obtain consents of, all third parties and governmental authorities necessary to the consummation of the transactions contemplated by this Agreement, including without limitation applying to the FDIC or the Federal Reserve Board, as applicable, for approval to acquire the shares issuable hereunder. 16. The parties hereto acknowledge that damages would be an inadequate remedy for a breach of this Agreement by either party hereto and that the obligations of the parties hereto shall be enforceable by either party hereto through injunctive or other equitable relief. A-52 17. If any term, provision, covenant or restriction contained in this Agreement is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions and covenants and restrictions contained in this Agreement shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. If for any reason such court or regulatory agency determines that the Holder is not permitted to acquire, or the Issuer is not permitted to repurchase pursuant to Section 7, the full number of shares of Common Stock provided in Section l(a) hereof (as adjusted pursuant to Sections l(b) or 5 hereof), it is the express intention of the Issuer to allow the Holder to acquire or to require the Issuer to repurchase such lesser number of shares as may be permissible, without any amendment or modification hereof. 18. All notices, requests, claims, demands and other communications hereunder shall be deemed to have been duly given when delivered in person, by cable, telegram, telecopy or telex, or by registered or certified mail (postage prepaid, return receipt requested) at the respective addresses of the parties set forth in the Acquisition Agreement. 19. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. 20. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. 21. Except as otherwise expressly provided herein or in the Acquisition Agreement, each of the parties hereto shall bear and pay all costs and expenses incurred by it or on its behalf in connection with the transactions contemplated hereunder, including fees and expenses of its own financial consultants, investment bankers, accountants and counsel. 22. Except as otherwise expressly provided herein, this Agreement contains the entire agreement between the parties with respect to the transactions contemplated hereunder and supersedes all prior arrangements or understandings with respect thereof, written or oral. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to confer upon any party, other than the parties hereto, and their respective successors and permitted assigns, any rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided herein. 23. Capitalized terms used in this Agreement and not defined herein shall have the meanings assigned thereto in the Acquisition Agreement. IN WITNESS WHEREOF, each of the parties has caused this Stock Option Agreement to be executed as a sealed instrument on its behalf by its officers thereunder duly authorized, all as of the day and year first above written. Glastonbury Bank and Trust Company By: _________________________________ J. Gilbert Soucie President and Chief Executive Officer SIS Bancorp, Inc. By: _________________________________ F. William Marshall, Jr. President and Chief Executive Officer A-53 Exhibit C-1 to Agreement and Plan of Reorganization August 18, 1997 Glastonbury Bank and Trust Company 2461 Main Street Glastonbury, Connecticut 06033 Ladies and Gentlemen: Each of the undersigned (each a "Stockholder" and collectively the "Stockholders") beneficially owns and has sole or shared voting power with respect to the number of shares of the common stock, par value $0.01 per share (the "Shares"), of SIS Bancorp, Inc., a Massachusetts corporation (the "Buyer"), indicated opposite each such Stockholder's name on Schedule 1 attached hereto. Simultaneously with the execution of this letter agreement, the Buyer and Glastonbury Bank and Trust Company (the "Seller") are entering into an Agreement and Plan of Reorganization (the "Acquisition Agreement") providing, among other things, for the acquisition of Seller by Buyer by means of the merger of an interim bank, to be organized as a wholly owned subsidiary of the Buyer, with and into Seller (the "Acquisition"). Each of the undersigned understands that the Seller has undertaken and will continue to undertake substantial expenses in connection with the negotiation and execution of the Acquisition Agreement and the subsequent actions necessary to consummate the transactions contemplated by the Acquisition Agreement. In consideration of, and as a condition to, the Seller's entering into the Acquisition Agreement, and in consideration of the expenses incurred and to be incurred by the Seller in connection therewith, each of the Stockholders and the Seller agree as follows: 1. Each Stockholder, while this letter agreement is in effect, shall vote or cause to be voted all of the Shares that such Stockholder shall be entitled to so vote, whether such Shares are beneficially owned by such Stockholder on the date of this letter agreement or are subsequently acquired, at any meeting of the Seller's stockholders that may be called and held following the date hereof, for the approval of the Acquisition, as contemplated under the Acquisition Agreement. 2. Each Stockholder represents that such Stockholder has the complete and unrestricted power and the unqualified right to enter into and perform the terms of this letter agreement. Each Stockholder further represents that this letter agreement (assuming this letter agreement constitutes a valid and binding agreement of the Seller) constitutes a valid and binding agreement with respect to such Stockholder, enforceable against such Stockholder in accordance with its terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors' rights and remedies generally. Except as may be set forth in Schedule 1, each Stockholder represents that such Stockholder beneficially owns the number of Shares indicated opposite such Stockholder's name on said Schedule 1, free and clear of any liens, claims, charges or other encumbrances or restrictions of any kind whatsoever ("Liens"), and has sole or shared, and otherwise unrestricted, voting power with respect to such Shares. 3. Notwithstanding anything herein to the contrary, the agreements contained herein shall remain in full force and effect until the earlier of (a) the consummation of the Acquisition or (b) the termination of the Acquisition Agreement in accordance with Article VIII thereof. 4. Each Stockholder has signed this letter agreement intending to be bound hereby. Each Stockholder expressly agrees that this letter agreement shall be specifically enforceable in any court of competent jurisdiction in accordance with its terms against such Stockholder. All of the covenants and agreements contained in this A-54 letter agreement shall be binding upon, and inure to the benefit of, the respective parties and their permitted successors, assigns, heirs, executors, administrators and other legal representatives, as the case may be. 5. This letter agreement may be executed in one or more counterparts, each of which will be deemed an original but all of which together shall constitute one and the same instrument. 6. No waivers of any breach of this letter agreement extended by the Seller to any Stockholder shall be construed as a waiver of any rights or remedies of the Seller with respect to any other Stockholder with respect to Shares held by such other Stockholder or with respect to any subsequent breach of the first referenced Stockholder or any other Stockholder hereunder. 7. This letter agreement is deemed to be signed as a sealed instrument and is to be governed by the laws of the Commonwealth of Massachusetts, without giving effect to the principles of conflicts of laws thereof. If any provision hereof is deemed unenforceable, the enforceability of the other provisions hereof shall not be affected. If the foregoing accurately reflects your understanding of the subject matter intended to be contained herein, please confirm our agreement by signing this letter where indicated below. Very truly yours, _____________________________________ _____________________________________ Sr. Mary Caritas John M. Naughton _____________________________________ _____________________________________ William B. Hart, Jr. Thomas O'Brien _____________________________________ _____________________________________ Charles L. Johnson Stephen A. Shatz _____________________________________ F. William Marshall, Jr. AGREED TO AND ACCEPTED BY AS OF THE DATE FIRST ABOVE WRITTEN GLASTONBURY BANK AND TRUST COMPANY By: _________________________________ J. Gilbert Soucie President and Chief Executive Officer A-55 SCHEDULE I
NAME OF NUMBER OF SHARES SHARES STOCKHOLDER BENEFICIALLY OWNED SUBJECT TO PLEDGE ----------- ------------------ ----------------- Sr. Mary Caritas.......................... 6,715 -0- William B. Hart, Jr....................... 6,120 6,120 Charles L. Johnson........................ 9,840 -0- F. William Marshall, Jr................... 115,034 20,772 John M. Naughton.......................... 19,000 -0- Thomas O'Brien............................ 8,520 -0- Stephen A. Shatz.......................... 20,790 -0- ------- Total................................... 186,019*
- -------- * Includes 78,560 shares subject to vested stock options (Caritas: 2,640; Hart: 1,320; Johnson: 2,640; Marshall: 64,000; Naughton: 4,000; O'Brien: 1,320; Shatz: 2,640) A-56 Exhibit C-2 to Agreement and Plan of Reorganization August 18, 1997 SIS Bancorp, Inc. 1441 Main Street Springfield, Massachusetts 01103 Ladies and Gentlemen: Each of the undersigned (each a "Stockholder" and collectively the "Stockholders") beneficially owns and has sole or shared voting power with respect to the number of shares of the common stock, par value $2.50 per share (the "Shares"), of Glastonbury Bank and Trust Company, a Connecticut bank and trust company (the "Seller"), indicated opposite each such Stockholder's name on Schedule 1 attached hereto. Simultaneously with the execution of this letter agreement, SIS Bancorp, Inc. (the "Buyer") and the Seller are entering into an Agreement and Plan of Reorganization (the "Acquisition Agreement") providing, among other things, for the acquisition of Seller by Buyer by means of the merger of an interim bank, to be organized as a wholly owned subsidiary of the Buyer, with and into Seller (the "Acquisition"). Each of the undersigned understands that the Buyer has undertaken and will continue to undertake substantial expenses in connection with the negotiation and execution of the Acquisition Agreement and the subsequent actions necessary to consummate the transactions contemplated by the Acquisition Agreement. In consideration of, and as a condition to, the Buyer's entering into the Acquisition Agreement, and in consideration of the expenses incurred and to be incurred by the Buyer in connection therewith, each of the Stockholders and the Buyer agree as follows: 8. Each Stockholder, while this letter agreement is in effect, shall vote or cause to be voted all of the Shares that such Stockholder shall be entitled to so vote, whether such Shares are beneficially owned by such Stockholder on the date of this letter agreement or are subsequently acquired, at any meeting of the Seller's stockholders that may be called and held following the date hereof, for the approval of the Acquisition, as contemplated under the Acquisition Agreement, and shall vote or cause to be voted all such Shares, at any such meeting or any other meeting of the Seller's stockholders following the date hereof, against the approval of any other agreement or proposal providing for a merger, acquisition, consolidation, sale of all or substantially all of the assets or other business combination of the Seller or any of its subsidiaries with any person or entity other than the Buyer or any subsidiary of the Buyer. 9. Each Stockholder will not sell, assign, transfer or otherwise dispose of (including, without limitation, by the creation of a Lien (as defined in paragraph 4 below)), or permit to be sold, assigned, transferred or otherwise disposed of, any Shares owned by such Stockholder, whether such Shares are held by such Stockholder on the date of this letter agreement or are subsequently acquired, except (a) transfers by will or by operation of law (in which case this letter agreement shall bind the transferee), (b) transfers pursuant to any pledge agreement (subject to the pledgee agreeing in writing to be bound by the terms of this letter agreement), (c) transfers, in connection with estate planning purposes, to members of such Stockholder's immediate family, trusts or charitable organizations, subject to the transferee agreeing in writing to be bound by the terms of this letter agreement, and (d) as the Buyer may otherwise agree in its sole discretion. The Buyer shall have the option to elect to have any existing certificates representing Shares subject to this letter agreement canceled and reissued bearing the following legend: "THIS CERTIFICATE, AND THE SHARES REPRESENTED HEREBY, ARE SUBJECT TO CERTAIN VOTING AND TRANSFER RESTRICTIONS CONTAINED IN A VOTING AGREEMENT BY AND BETWEEN SIS BANCORP, INC. AND THE BENEFICIAL OWNER OF THESE SHARES AND MAY BE TRANSFERRED ONLY IN COMPLIANCE THEREWITH. COPIES OF THE ABOVE- REFERENCED AGREEMENT ARE ON FILE AT THE OFFICES OF SIS BANCORP, INC." A-57 10. The agreements contained herein are intended to relate to restrictions on transferability and to continue only for such time as may reasonably be necessary to obtain all necessary approvals, including all necessary shareholder and governmental approvals, of the Acquisition and all other transactions contemplated by the Acquisition Agreement, and, in any event, will terminate coincident with termination of the Acquisition Agreement. 11. Each Stockholder represents that such Stockholder has the complete and unrestricted power and the unqualified right to enter into and perform the terms of this letter agreement. Each Stockholder further represents that this letter agreement (assuming this letter agreement constitutes a valid and binding agreement of the Buyer) constitutes a valid and binding agreement with respect to such Stockholder, enforceable against such Stockholder in accordance with its terms, except as enforcement may be limited by general principles of equity whether applied in a court of law or a court of equity and by bankruptcy, insolvency and similar laws affecting creditors' rights and remedies generally. Except as may be set forth in Schedule 1, each Stockholder represents that such Stockholder beneficially owns the number of Shares indicated opposite such Stockholder's name on said Schedule 1, free and clear of any liens, claims, charges or other encumbrances or restrictions of any kind whatsoever ("Liens"), and has sole or shared, and otherwise unrestricted, voting power with respect to such Shares. 12. Notwithstanding anything herein to the contrary, the agreements contained herein shall remain in full force and effect until the earlier of (a) the consummation of the Acquisition or (b) the termination of the Acquisition Agreement in accordance with Article VIII thereof. 13. Each Stockholder has signed this letter agreement intending to be bound hereby. Each Stockholder expressly agrees that this letter agreement shall be specifically enforceable in any court of competent jurisdiction in accordance with its terms against such Stockholder, subject to approval of this Agreement by the Banking Commissioner of the State of Connecticut (the "Commissioner"). Each Stockholder shall cooperate with Buyer and take all necessary and appropriate action, and otherwise use his or her best efforts, to obtain such approval of the Commissioner; provided, however, that nothing herein shall require the Stockholder to pay any fees or expenses, or expend any significant time, or assume any significant obligation in connection with such cooperation. Each Stockholder acknowledges and agrees that any breach by such Stockholder of any of the terms of this Agreement prior to the Commissioner's approval hereof shall be deemed to be a breach of this Agreement, and Buyer shall be entitled to enforce its rights to the fullest extent provided hereunder with respect to such breach at any time following the Commissioner's approval of this Agreement. All of the covenants and agreements contained in this letter agreement shall be binding upon, and inure to the benefit of, the respective parties and their permitted successors, assigns, heirs, executors, administrators and other legal representatives, as the case may be. 14. This letter agreement may be executed in one or more counterparts, each of which will be deemed an original but all of which together shall constitute one and the same instrument. 15. No waivers of any breach of this letter agreement extended by the Buyer to any Stockholder shall be construed as a waiver of any rights or remedies of the Buyer with respect to any other Stockholder with respect to Shares held by such other Stockholder or with respect to any subsequent breach of the first referenced Stockholder or any other Stockholder hereunder. 16. This letter agreement is deemed to be signed as a sealed instrument and is to be governed by the laws of the State of Connecticut, without giving effect to the principles of conflicts of laws thereof. If any provision hereof is deemed unenforceable, the enforceability of the other provisions hereof shall not be affected. A-58 If the foregoing accurately reflects your understanding of the subject matter intended to be contained herein, please confirm our agreement by signing this letter where indicated below. Very truly yours, _____________________________________ _____________________________________ Loren J. Andreo Mark A. Sheptoff _____________________________________ _____________________________________ Ronald E. Bourbeau J. Gilbert Soucie _____________________________________ _____________________________________ Camille S. Bushnell James Uccello _____________________________________ _____________________________________ John J. Carson Charles Balocca _____________________________________ _____________________________________ Alden A. Ives Wayne F. Patenaude _____________________________________ _____________________________________ Harvey A. Katz David B. Rowley _____________________________________ Grace C. Nome AGREED TO AND ACCEPTED BY AS OF THE DATE FIRST ABOVE WRITTEN SIS BANCORP, INC. By: _________________________________ F. William Marshall, Jr. President and Chief Executive Officer A-59 SCHEDULE I
NAME OF NUMBER OF SHARES SHARES STOCKHOLDER BENEFICIALLY OWNED SUBJECT TO PLEDGE ----------- ------------------ ----------------- Loren J. Andreo........................... 78,591 -0- Ronald E. Bourbeau........................ 179,823 128,000 Camille S. Bushnell....................... 1,190 -0- John J. Carson............................ 185 -0- Alden A. Ives............................. 11,944 -0- Harvey A. Katz............................ 80,084 -0- Grace C. Nome............................. 691 -0- Mark A. Sheptoff.......................... 5,456 -0- J. Gilbert Soucie......................... 54,310 -0- James Uccello............................. 2,059 -0- Charles Balocca........................... 2,000 -0- Wayne F. Patenaude........................ 2,289 -0- David B. Rowley........................... 1,000 -0- ------- Total................................... 419,622
A-60 Exhibit D to Agreement and Plan of Reorganization FORM OF SELLER AFFILIATE'S AGREEMENT , 1997 SIS Bancorp, Inc. 1441 Main Street Springfield, Massachusetts 01103 Ladies and Gentlemen: I have been advised that, as of the date hereof, I may be deemed to be an "affiliate" of Glastonbury Bank and Trust Company ("Seller"), as the term "affiliate" is (i) defined for purposes of paragraphs (c) and (d) of Rule 145 of the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933, as amended (the "Act"), and/or (ii) used in and for purposes of Accounting Series, Releases 130 and 135, as amended, of the Commission. In accordance with the terms of that certain Agreement and Plan of Reorganization, dated as of August 18, 1997 (the "Agreement"), by and between SIS Bancorp, Inc. ("Buyer") and Seller and pursuant to that certain Agreement and Plan of Merger, dated as of , 1997, by and among Buyer, Seller and SIS Interim Bank ("Merger Subsidiary"), a direct subsidiary of Buyer, Merger Subsidiary will be merged with and into Seller (the "Merger"). As a result of the Merger, I may receive shares of the common stock of Buyer, par value $0.01 per share ("Buyer Common Stock"). I would receive such shares of Buyer Common Stock in exchange for shares of the common stock of Seller, par value $2.50 per share ("Seller Common Stock"), held by me immediately prior to the consummation of the Merger. I represent, warrant and covenant to Buyer that, in the event I receive any shares of Buyer Common Stock as a result of the Merger: 1. I shall not make any sale, transfer or other disposition of such shares of Buyer Common Stock in violation of the Act or the Rules and Regulations. 2. I have carefully read this letter and the Agreement and discussed its requirements and other applicable limitations upon my ability to sell, transfer or otherwise dispose of shares of Buyer Common Stock to the extent I felt necessary, with my counsel or counsel for Seller. 3. I have been advised that the issuance of shares of Buyer Common Stock to me in accordance with the terms of the Agreement has been registered with the Commission under the Act. However, I have also been advised that, since, at the time the Merger was submitted for a vote of the stockholders of Seller, I may be deemed to have been an affiliate of Seller, and that the distribution by me of shares of Buyer Common Stock has not been registered under the Act, that I may not sell, transfer or otherwise dispose of any shares of Buyer Common Stock issued to me following the Merger unless (i) such sale, transfer or other disposition has been registered under the Act, (ii) such sale, transfer or other disposition is made in conformity with the volume and other limitations of Rule 145 promulgated by the Commission under the Act, or (iii) in the opinion of counsel reasonably acceptable to Buyer, such sale, transfer or other disposition is otherwise exempt from registration under the Act. 4. I understand that Buyer is under no obligation to register the sale, transfer or other disposition of shares of Buyer Common Stock by me or on my behalf under the Act or to take any other action necessary in order to make compliance with an exemption from such registration available. A-61 5. I also understand that stop transfer instructions will be given to Buyer's transfer agents with respect to the Buyer Common Stock and that there will be placed on the certificates for the shares of Buyer Common Stock issued to me, or any substitutions therefor, a legend stating in substance: "The shares represented by this certificate were issued in a transaction to which Rule 145 promulgated under the Securities Act of 1933 applied. The shares represented by this certificate may only be transferred in accordance with the terms of an agreement dated as of , 1997, between the registered holder hereof and [BUYER], a copy of which agreement is on file at the principal offices of [BUYER]." 6. I also understand that, unless the transfer by me of any shares of Buyer Common Stock has been registered under the Act or is a sale made in conformity with the provisions of Rule 145, Buyer reserves the right to put the following legend on the certificates issued to my transferee: "The shares represented by this certificate have not been registered under the Securities Act of 1933 and were acquired from a person who received such shares in a transaction to which Rule 145 promulgated under the Securities Act of 1933 applies. The shares have been acquired by the holder not with a view to, or for resale in connection with, any distribution thereof within the meaning of Securities Act of 1933 and may not be sold, pledged or otherwise transferred except in accordance with an exemption from the registration requirements of the Securities Act of 1933." It is understood and agreed that the legends set forth in paragraphs 5 and 6 above shall be removed by delivery of substitute certificates without such legends if the undersigned shall have delivered to Buyer a copy of a letter from the staff of the Commission, or an opinion of counsel in form and substance reasonable satisfactory to Buyer, to the effect that such legend is not required for purposes of the Act, or upon the expiration of the relevant time periods under Rule 145 (the expiration thereof having been demonstrated by the holder of the shares evidenced by such legended certificate(s) to the reasonable satisfaction of Buyer). I further represent to and covenant with Buyer that I will not, within the thirty (30) days prior to the Closing Date (as defined in the Agreement), sell, transfer or otherwise dispose of any shares of Seller Common Stock or shares of the capital stock of Buyer held by me and that I will not sell, transfer or otherwise dispose of any shares of Buyer Common Stock received by me in the Merger or other shares of the capital stock of Buyer until after such time as results covering at least 30 days of combined operations of Seller and Buyer have been published by Buyer, in the form of a quarterly earnings report, an effective registration statement filed with the Commission, a report to the Commission on Form 10-K, 10-Q or 8-K, or any other public filing or announcement which includes the combined results of operations. Very truly yours, _____________________________________ Accepted this day of , 1997, by SIS BANCORP. INC. By: _________________________________ Name: Title: A-62 Exhibit E to Agreement and Plan of Reorganization FORM OF OPINION OF SELLER'S COUNSEL [STANDARD PREFATORY LANGUAGE, INCLUDING AGREED-UPON QUALIFICATIONS AND ASSUMPTIONS, TO BE ADDED] 1. Seller is a bank and trust company duly organized, validly existing and in good standing under the laws of the State of Connecticut. Seller has the corporate power and authority to own, lease or operate all of its properties and assets and to conduct the business in which it is currently engaged. The deposits of Seller are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation up to the maximum allowable limit, and, to the best of our knowledge, there are no pending or threatened proceedings for the termination of such insurance. 2. Seller has full power, capacity and authority to enter into the Agreement and the Bank Merger Agreement and to perform its obligations thereunder. 3. The authorized capital stock of Seller consists of 2,000,000 shares of common stock, par value $2.50 per share ("Seller Common Stock"), and no shares of preferred stock. As of the date hereof, there are 1,829,920 shares of Seller Common Stock issued and outstanding, all of which have been validly issued and are fully paid and nonassessable. 4. The execution and delivery of the Agreement and the Bank Merger Agreement by the Seller and the performance by the Seller of its obligations thereunder have been duly authorized by all requisite corporate authorizations and approvals, including stockholder approval, required on the part of the Seller. 5. Each of the Agreement and the Bank Merger Agreement has been duly executed and delivered by the Seller and constitutes the valid and binding obligation of the Seller and is enforceable against the Seller in accordance with its terms. 6. The execution and delivery of the Agreement and the Bank Merger Agreement by the Seller does not, and the consummation by the Seller of the transactions contemplated thereby, including without limitation the Acquisition Merger, and the performance by the Seller of its obligations thereunder will not violate (a) any provision of the certificate of incorporation and bylaws of the Seller, (b) any provision of the laws or regulations of the State of Connecticut or of federal law or regulations applicable to the Seller or any of its subsidiaries, or (c) any decree, judgment or order, or material agreement or instrument known to us, to which the Seller is a party or by which it or any of its properties or assets is bound or affected. 7. Except for consents, waivers or approvals of, notices to, or filings with, governmental agencies or authorities required to be obtained, given or filed by the Seller, as set forth in Section 4.04 of the Agreement, all of which have been obtained or made, no approval or consent or other action by, and no notice or filing with, any governmental agency or authority is required under any provision of federal law or the laws of the State of Connecticut as a condition to the valid execution and delivery by the Seller of the Agreement and the Bank Merger Agreement and the performance by the Seller of its obligations thereunder. Except as disclosed in Section 4.04 of the Seller Disclosure Schedule, there are no consents or approvals of, or notices to, any nongovernmental third parties known to us to be required of the Seller, the absence of which would have a Material Adverse Effect on the Seller after the Effective Time or would otherwise deprive the Buyer of any material benefit under or contemplated by the Agreement. 8. We are not aware of any litigation pending or threatened against either the Seller or any of its subsidiaries which questions the legality, validity or propriety of the Agreement or the Bank Merger Agreement or of any action taken or to be taken by the Seller pursuant to the terms thereof. A-63 9. The Proxy Statement filed by the Seller with the FDIC pursuant to Section 5.04 of the Agreement complies as to form in all material respects with the requirements of the Exchange Act (except as to any financial statements and other financial, accounting and statistical data included or incorporated by reference therein and the information included or incorporated by reference therein which relates to the Buyer and its subsidiaries, as to which we express no opinion). In addition, we have participated in conferences with officers and other representatives of the Seller and representatives of the Buyer, at which the contents of the Proxy Statement and the Buyer Registration Statement and related matters were discussed and, although we are not passing upon and do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Proxy Statement or the Buyer Registration Statement and have not made any independent check or verification thereof, on the basis of the foregoing, no facts have come to our attention that lead us to believe that the Buyer Registration Statement, as of the time it became effective, or the Proxy Statement, as of the date of the special meeting of stockholders of the Seller to which it relates, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that we express no view with respect to the financial statements, notes, schedules and other financial, accounting and statistical data, and any information related to the Buyer and its subsidiaries, included in the Buyer Registration Statement or the Proxy Statement. A-64 Exhibit F to Agreement and Plan of Reorganization FORM OF OPINION OF BUYER'S COUNSEL [STANDARD PREFATORY LANGUAGE, INCLUDING AGREED-UPON QUALIFICATIONS AND ASSUMPTIONS, TO BE ADDED] 1. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts. Buyer has the corporate power and authority to own, lease or operate all of its properties and assets and to conduct the business in which it is currently engaged. Merger Subsidiary has been organized as an interim bank in accordance with Section of the General Statutes of the State of Connecticut. 2. Buyer has full power, capacity and authority to enter into the Agreement and the Bank Merger Agreement and to perform its obligations thereunder. Merger Subsidiary has full power, capacity and authority to enter into the Bank Merger Agreement and to perform its obligations thereunder. 3. The authorized capital stock of Buyer consists of 25,000,000 shares of common stock, par value $0.01 per share ("Buyer Common Stock"), and 5,000,000 shares of preferred stock, par value $0.01 per share ("Buyer Preferred Stock"). As of , 1997, there were shares of Buyer Common Stock issued and outstanding and no shares of Buyer Preferred Stock issued or outstanding. All of the shares of Buyer Common Stock to be issued upon the Effective Time will be validly issued, fully paid and nonassessable. The authorized capital stock of Merger Subsidiary immediately prior to the Effective Time consisted of shares of common stock, par value $ per share, and no shares of preferred stock, all of which shares of common stock were held at such time by Buyer. 4. The execution and delivery of the Agreement and the Bank Merger Agreement by the Buyer and Merger Subsidiary, as applicable, and the performance by the Buyer and Merger Subsidiary of their respective obligations thereunder have been duly authorized by all requisite corporate authorizations and approvals, including stockholder approvals, required on the part of both the Buyer and Merger Subsidiary. 5. Each of the Agreement and the Bank Merger Agreement has been duly executed and delivered by the Buyer and constitutes the valid and binding obligation of the Buyer and is enforceable against the Buyer in accordance with its terms. The Bank Merger Agreement has been duly executed and delivered by Merger Subsidiary and constitutes the valid and binding obligation of Merger Subsidiary and is enforceable against Merger Subsidiary in accordance with its terms. 6. The execution and delivery of the Agreement and the Bank Merger Agreement by the Buyer and Merger Subsidiary, as applicable, does not, and the consummation by the Buyer and Merger Subsidiary of the transactions contemplated thereby, including without limitation the Acquisition Merger, and the performance by the Buyer and Merger Subsidiary of their respective obligations thereunder will not violate (a) any provision of the articles of organization and bylaws of the Buyer, (b) any provision of the laws or regulations of the Commonwealth of Massachusetts or of federal law or regulations applicable to the Buyer or any of its subsidiaries, or (c) any decree, judgment or order, or material agreement or instrument known to us, to which the Buyer is a party or by which it or any of its properties or assets is bound or affected. 7. Except for consents, waivers or approvals of, notices to, or filings with, governmental agencies or authorities required to be obtained, given or filed by the Buyer, as set forth in Section 3.04 of the Agreement, all of which have been obtained or made, no approval or consent or other action by, and no notice or filing with, any governmental agency or authority is required under any provision of federal law or the laws of the Commonwealth of Massachusetts as a condition to the valid execution and delivery by the Buyer and Merger Subsidiary of the Agreement and the Bank Merger Agreement, as applicable, and the performance by the Buyer and Merger Subsidiary of their respective obligations thereunder. There are no consents or approvals of, or A-65 notices to, any nongovernmental third parties known to us to be required of the Buyer, the absence of which would have a Material Adverse Effect on Buyer after the Effective Time. 8. We are not aware of any litigation pending or threatened against the Buyer or any of its subsidiaries which questions the legality, validity or propriety of the Agreement or the Bank Merger Agreement or of any action taken or to be taken by the Buyer or Merger Subsidiary pursuant to the terms thereof. 9. The Proxy Statement and Buyer Registration Statement filed by the Buyer with the SEC pursuant to Section 5.04 of the Agreement complies as to form in all material respects with the requirements of the Exchange Act (except as to any financial statements and other financial, accounting and statistical data included or incorporated by reference therein and the information included or incorporated by reference therein which relates to the Seller and its subsidiaries, as to which we express no opinion). In addition, we have participated in conferences with officers and other representatives of the Buyer and representatives of the Seller, at which the contents of the Proxy Statement and the Buyer Registration Statement and related matters were discussed and, although we are not passing upon and do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Proxy Statement or the Buyer Registration Statement and have not made any independent check or verification thereof, on the basis of the foregoing, no facts have come to our attention that lead us to believe that the Buyer Registration Statement, as of the time it became effective, or the Proxy Statement, as of the date of the special meeting of stockholders of the Buyer to which it relates, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, except that we express no view with respect to the financial statements, notes, schedules and other financial, accounting and statistical data, and any information related to the Seller and its subsidiaries, included in the Buyer Registration Statement or the Proxy Statement. A-66 Appendix B to Joint Proxy Statement--Prospectus AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of September 12, 1997 (this "Plan of Merger") by and among SIS Bancorp Inc., a Massachusetts corporation (the "Buyer"), Glastonbury Bank and Trust Company, a Connecticut bank and trust company (the "Seller"), and SIS Interim Bank, a Connecticut interim bank and a direct subsidiary of the Buyer (the "Merger Subsidiary"). The Seller and the Merger Subsidiary are hereinafter sometimes collectively referred to as the "Constituent Corporations". This Plan of Merger is being entered into pursuant to an Agreement and Plan of Reorganization, dated as of August 18, 1997 (the "Agreement"), between the Buyer and the Seller. All capitalized terms used herein without definition are used with the meanings ascribed thereto in the Agreement. In consideration of the premises, and the mutual covenants and agreements herein contained, the parties hereto agree as follows: ARTICLE I THE MERGER 1.01 Surviving Corporation. In accordance with the provisions of this Plan of Merger and the Banking Laws of Connecticut, as set forth in Title 36A of the Connecticut General Statutes (the "BLC"), at the Effective Time (as hereinafter defined), the Merger Subsidiary shall be merged with and into the Seller (the "Merger"), and the separate corporate existence of the Merger Subsidiary shall cease. The Seller shall be the surviving corporation in the Merger (hereinafter sometimes referred to as the "Surviving Corporation") and shall continue its corporate existence under the laws of the State of Connecticut. The name of the Surviving Corporation shall be "Glastonbury Bank and Trust Company". 1.02 Purposes of Surviving Corporation. As of the Effective Time, the purposes of the Surviving Corporation shall continue to be as stated in the Certificate of Incorporation of the Seller immediately prior to the Effective Time. 1.03 Authorized Capital Stock of Surviving Corporation. As of the Effective Time, the Surviving Corporation shall be authorized to issue that number of shares of capital stock that the Seller is authorized to issue immediately prior to the Effective Time, which, in accordance with the terms of Seller's Certificate of Incorporation, as amended and in effect on the date hereof, shall be two million (2,000,000) shares of common stock, par value $2.50 per share. 1.04 Description of Classes of Stock. As of the Effective Time, each class or series of capital stock of the Surviving Corporation shall have the same par value, preferences, voting powers, qualifications, special or relative rights or privileges as such class or series of capital stock of the Seller possessed immediately prior to the Effective Time. 1.05 Effect of the Merger. (a) At the Effective Time, all of the estate, property, rights, privileges, powers and franchises of the Constituent Corporations and all of their property, real, personal and mixed, and all the debts due on whatever account to any of them, as well as all stock subscriptions and other choses in action belonging to any of them, shall be transferred to and vested in the Surviving Corporation, without further act or deed, and all claims, demands, property and other interest shall be the property of the Surviving Corporation, and B-1 the title to all real estate vested in any of the Constituent Corporations shall not revert or be in any way impaired by reason of the Merger, but shall be vested in the Surviving Corporation. (b) From and after the Effective Time, the rights of creditors or any liens upon property of any Constituent Corporation shall not in any manner be impaired, nor shall any liability or obligation, including taxes due or to become due, or any claim or demand in any cause existing against such corporation, or any stockholder, director, or officer thereof, be released or impaired by the Merger, but the Surviving Corporation shall be deemed to have assumed, and shall be liable for, all liabilities and obligations of each of the Constituent Corporations in the same manner and to the same extent as if the Surviving Corporation had itself incurred such liabilities or obligations. The stockholders, directors, and officers of the Constituent Corporations shall continue to be subject to all liabilities, claims and demands existing against them as such at or before the Merger. No action or proceeding then pending before any court or tribunal of the State of Connecticut or otherwise in which any Constituent Corporation is a party, or in which any such stockholder, director, or officer is a party, shall abate or be discontinued by reason of the Merger, but any such action or proceeding may be prosecuted to final judgment as though no merger had taken place, or the Surviving Corporation may be substituted as a party in place of any Constituent Corporation by the court in which such action or proceeding is pending. Any judgment rendered against any Constituent Corporation may be enforced against the Surviving Corporation. 1.06 Additional Actions. If, at any time after the Effective Time, the Surviving Corporation shall consider or be advised that any deeds, bills of sale, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm of record or otherwise in the Surviving Corporation its right, title or interest in, to or under any of the rights, properties or assets of the Seller or the Merger Subsidiary acquired or to be acquired by the Surviving Corporation as a result of, or in connection with, the Merger or to otherwise carry out this Plan of Merger, the officers and directors of the Surviving Corporation shall and will be authorized to execute and deliver, in the name and on behalf of the Constituent Corporations or otherwise, all such deeds, bills of sale, assignments and assurances and to take and do, in the name and on behalf of the Constituent Corporations or otherwise, all such other actions and things as may be necessary or desirable to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in the Surviving Corporation or to otherwise carry out this Plan of Merger. 1.07 Certificate of Incorporation. The Certificate of Incorporation and By- Laws of the Seller, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation and By-Laws of the Surviving Corporation and, subject to the rights of the Buyer as the sole stockholder, shall thereafter continue to be its Certificate of Incorporation and By-Laws until amended as provided therein or by law. A copy of the proposed Certificate of Incorporation of the Surviving Corporation, which shall be Seller's Certificate of Incorporation, as amended and in effect on the date hereof, is attached hereto as Exhibit A. 1.08 Directors and Officers. At the Effective Time, subject to the rights of the Buyer as the sole stockholder, the Board of Directors of the Surviving Corporation shall consist of those persons comprising the Board of Directors of the Seller immediately prior to the Effective Time plus one additional person as shall be designated by the Buyer prior to the Effective Time and the officers of the Surviving Corporation shall consist of those persons serving as officers of the Seller immediately prior to the Effective Time, each to hold office in accordance with the Certificate of Incorporation and By-Laws of the Surviving Corporation. In accordance with the Certificate of Incorporation of the Surviving Corporation, the Board of Directors of the Surviving Corporation shall consist of not less than nine nor more than fifteen directors. 1.09 Main Office. At the Effective Time, the main office of the Surviving Corporation shall be located at 2461 Main Street, Glastonbury, Connecticut. 1.10 Effective Time; Conditions. If all of the conditions precedent set forth in Article VI of the Agreement have been satisfied or waived, and this Plan of Merger is not terminated under Section 3.01 hereof, this Plan of Merger shall be filed and recorded pursuant to the BLC. The Merger shall become effective at, and the Effective B-2 Time shall be, the close of business on the date of such filing (such date and time is herein referred to as the "Effective Time"). 1.11 Dissenters' Rights. Notwithstanding anything in this Plan of Merger to the contrary and unless otherwise provided by applicable law, the shares of common stock of the Seller which are issued and outstanding immediately prior to the Effective Time and which are owned by stockholders who, pursuant to the BLC and Sections 33-855 to 33-872 of the Connecticut Business Corporations Act (the "CBCA"), (a) deliver to the Seller, before the taking of the vote of the Seller's stockholders on the Merger, written demand for the appraisal of their shares, if the Merger is effected, and (b) whose shares are not voted in favor of the Merger (the "Dissenting Shares"), shall not be converted into and become a right to receive the Merger Consideration (as such term is defined in Section 2.01(b) below) in accordance with the terms of this Plan of Merger, unless and until such holders shall have failed to perfect or shall have effectively withdrawn or lost their right of appraisal and payment under applicable laws. If any such holder shall have failed to perfect or shall have effectively withdrawn or lost such right of appraisal, the shares of the Seller's common stock held by such holder shall thereupon be deemed to have been converted into the right to receive and become exchangeable for, at the Effective Time, the Merger Consideration in accordance with the terms of this Plan of Merger. ARTICLE II CONVERSION OF SHARES 2.01 Effect on Outstanding Shares. (a) Merger Subsidiary Common Stock. By virtue of the Merger, automatically and without any action on the part of the holder thereof, each share of common stock of the Merger Subsidiary, par value $1.00 per share ("Merger Subsidiary Common Stock"), issued and outstanding immediately prior to the Effective Time (the number of which shares is anticipated to be 1,000), shall become and be converted into one (1.00) share of common stock of the Surviving Corporation, par value $2.50 per share ("Surviving Corporation Common Stock"). Each certificate which immediately prior to the Effective Time represented outstanding shares of the Merger Subsidiary Common Stock shall on and after the Effective Time be deemed for all purposes to represent the number of shares of Surviving Corporation Common Stock into which the shares of Merger Subsidiary Common Stock represented by such certificate shall have been converted in accordance with this Section 2.01(a). (b) Seller Common Stock. By virtue of the Merger, automatically and without any action on the part of the holder thereof, each share of common stock of Seller, par value $2.50 per share ("Seller Common Stock"), issued and outstanding immediately prior to the Effective Time (other than Dissenting Shares and any such shares held either directly or indirectly by the Buyer (other than Trust Account Shares and DPC Shares) or held as treasury stock by Seller, which in either case shall be canceled, retired and cease to exist, and for which no payment hereunder shall be made, shall become and be converted into and become exchangeable for 0.740 (the "Exchange Ratio") of a share of the common stock, par value $0.01 per share, of Buyer ("Buyer Common Stock") (together with the number of Buyer Rights or fraction thereof associated therewith). Notwithstanding the foregoing, however, if the Average Closing Price (as such term is defined below) is less than $25.00 per share (the "Minimum Price"), then Seller shall have the right to terminate the Agreement pursuant to Section 8.01(g) of the Agreement, unless Buyer elects, in its sole discretion, to adopt as the Exchange Ratio the Adjusted Exchange Ratio (as such term is defined below). For purposes of this Plan of Merger, (i) "Average Closing Price" shall mean the average of the closing bid prices of shares of Buyer Common Stock as reported on the Nasdaq Stock Market-National Market system composite transactions reporting system for the twenty consecutive trading days (the "Valuation Period") ending on the fifth business day prior to the Closing Date, (ii) "Merger Consideration" shall mean the shares of Buyer Common Stock that holders of Seller Common Stock are entitled to receive hereunder and (iii) "Adjusted Exchange Ratio" shall mean that number, rounded to the nearest thousandth, determined by dividing $18.50 by the Average Closing Price. Each certificate which immediately prior to the Effective B-3 Time represented outstanding shares of Seller Common Stock shall on and after the Effective Time be deemed for all purposes to represent the Merger Consideration into which the shares of Seller Common Stock represented by such certificate shall have been converted pursuant to this Section 2.01(b). (c) Dissenting Shares. No conversion under Section 2.01(b) hereof shall be made with respect to the Dissenting Shares (as such term is defined in Section 1.10 above), if any; provided, however, that (i) each Dissenting Share outstanding immediately prior to the Effective Time and held by a Seller stockholder who shall, at any time, withdraw his demand for appraisal or lose his right of appraisal, in either case pursuant to the applicable provisions of the CBCA, shall be deemed to be converted into and become a right to receive, as of the Effective Time, the Merger Consideration in accordance with Section 2.01(b) hereof. 2.02 Anti-Dilution. In the event that, subsequent to the date of this Plan of Merger but prior to the Effective Time, the outstanding shares of either the Buyer Common Stock or the Seller Common Stock shall have been increased, decreased, changed into or exchanged for a different number or kind of shares or securities through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other like changes in the Buyer's or Seller's capitalization, as the case may be, other than pursuant to the Agreement (a "Recapitalization"), then an appropriate and proportionate adjustment shall be made to the Exchange Ratio so that each holder of the Seller Common Stock shall receive under Section 2.01(b) hereof the number of shares of the Buyer Common Stock (except for fractional shares) that such holder would have held immediately following the Recapitalization if the Merger had occurred immediately prior to the Recapitalization or the record date therefor, as applicable. 2.03 Exchange Procedures. (a) Certificates which represent shares of the Seller Common Stock that are outstanding immediately prior to the Effective Time (a "Certificate") and are converted into the Merger Consideration pursuant to this Article II shall, after the Effective Time, be deemed to represent the Merger Consideration into which such shares have been converted and shall be exchangeable by the holders thereof in the manner provided in the transmittal materials described below for new certificates representing the shares of the Buyer Common Stock into which such shares have been converted. (b) As promptly as practicable after the Effective Time, the Buyer shall send to each holder of record of shares of the Seller Common Stock outstanding at the Effective Time transmittal materials (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass only upon delivery of such Certificates to the Exchange Agent) for use in exchanging the Certificates for such shares for the Merger Consideration into which such shares of the Seller Common Stock have been converted pursuant to this Article II. Upon surrender of a Certificate, together with a duly executed letter of transmittal and any other required documents, the holder of such Certificate shall be entitled to receive, in exchange therefor, a certificate for the number of shares of the Buyer Common Stock to which such holder is entitled pursuant to Section 2.01(b) hereof, and such Certificate shall forthwith be canceled. No dividend or other distribution payable after the Effective Time with respect to the Buyer Common Stock shall be paid to the holder of any unsurrendered Certificate until the holder thereof surrenders such Certificate, at which time, subject to Section 2.03(e) below, such holder shall receive all dividends and distributions, without interest thereon, previously payable but withheld from such holder pursuant hereto. After the Effective Time, there shall be no transfers on the stock transfer books of the Seller of shares of the Seller Common Stock which were issued and outstanding at the Effective Time and converted pursuant to the provisions of this Article II. If, after the Effective Time, Certificates are presented for transfer to the Seller, they shall be canceled and exchanged for the Merger Consideration deliverable in respect thereof as determined in accordance with the provisions and procedures set forth in this Article II. (c) In lieu of the issuance of fractional shares of the Buyer Common Stock pursuant to the applicable provisions of Section 2.01(b) above, cash adjustments, without interest, will be paid to the holders of the Seller Common Stock in respect of any fractional share that would otherwise be issuable and the amount of such cash adjustment shall be equal to an amount in cash determined by multiplying such holder's fractional interest by the Average Closing Price (rounded up to the nearest cent). For purposes of determining whether, B-4 and in what amounts, a particular holder of the Seller Common Stock would be entitled to receive cash adjustments under this Section 2.03(c), shares of record held by such holder and represented by two or more Certificates shall be aggregated. (d) After the Effective Time, holders of the Seller Common Stock shall cease to be, and shall have no rights as, stockholders of the Seller, other than (i) to receive the Merger Consideration into which such shares have been converted or fractional share payments pursuant to the provisions hereof and (ii) the rights afforded to any holder of Dissenting Shares under applicable provisions of the CBCA. (e) Notwithstanding any of the foregoing, neither the Buyer nor the Seller nor any other person shall be liable to any former holder of shares of the Seller Common Stock for any shares or any dividends or distributions with respect thereto or any other cash amounts properly delivered to a public official pursuant to applicable abandoned property, escheat or similar laws. (f) In the event any Certificate shall have been lost, stolen or destroyed, upon receipt of appropriate evidence as to such loss, theft or destruction and to the ownership of such Certificate by the person claiming such Certificate to be lost, stolen or destroyed, and the receipt by the Buyer of appropriate and customary indemnification, the Buyer will deliver, in exchange for such lost, stolen or destroyed Certificate the Merger Consideration and any fractional share payment deliverable in respect of such Certificate as determined in accordance with this Article II. (g) If any Merger Consideration is to be delivered in a name other than that in which the Certificate surrendered in exchange therefor is registered, it shall be a condition of the deliver thereof that the Certificate so surrendered shall be properly endorsed (or accompanied by an appropriate instrument of transfer) and otherwise in proper form for transfer (including, but not limited to that the signature of the transferor shall be properly guaranteed by a commercial bank, trust company, member firm of the New York Stock Exchange or other eligible guarantor institution), and that the person requesting such exchange shall pay to the Exchange Agent in advance any transfer or other taxes required by reason of the delivery of the Merger Consideration in any name other than that of the registered holder of the Certificate surrendered, or required for any other reason, or shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not payable. ARTICLE III Amendment and Termination 3.01 Termination. Notwithstanding the approval and adoption of this Plan of Merger by the stockholders of the Seller and Merger Subsidiary, this Plan of Merger shall terminate forthwith in the event that the Agreement shall be terminated as therein provided. In the event of the termination of this Plan of Merger as provided above, this Plan of Merger shall forthwith become null and void and there shall be no liability on the part of any of the parties hereto except as otherwise provided in the Agreement. 3.02 Amendment. This Plan of Merger shall not be amended except by an instrument in writing signed on behalf of each of the parties hereto pursuant to an amendment to the Agreement approved in the manner therein provided. If any such amendment to the Agreement is so approved, any amendment to this Plan of Merger required by such amendment to the Agreement shall be effected by the parties hereto by action taken by their respective Boards of Directors. ARTICLE IV Miscellaneous 4.01 Exchange Agent. Prior to the Effective Time, the Buyer shall appoint ChaseMellon Shareholder Services, L.L.C. or such other exchange agent as may be designated by Buyer as exchange agent for the purpose B-5 of exchanging certificates representing shares of the Buyer Common Stock for Certificates representing shares of the Seller Common Stock (the "Exchange Agent"). The Buyer shall issue and deliver to the Exchange Agent certificates representing the whole shares of Buyer Common Stock issuable pursuant to the Merger and shall pay to the Exchange Agent such aggregate amount of cash as shall be required to be delivered to holders of shares of the Seller Common Stock in lieu of fractional shares of Buyer Common Stock pursuant to Article II of this Plan of Merger. 4.02 Counterparts. This Plan of Merger may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to each of the other parties. 4.03 Governing Law. This Plan of Merger shall be governed by and construed in accordance with the laws of the State of Connecticut, without giving effect to the principles of conflicts of laws thereof. IN WITNESS WHEREOF, the parties hereto have caused this Plan of Merger to be duly executed and delivered as a sealed instrument as of the date first above written. SIS BANCORP, INC. /s/ F. William Marshall, Jr. By: _________________________________ F. William Marshall, Jr. President and Chief Executive Officer GLASTONBURY BANK AND TRUST COMPANY /s/ Loren Andreo /s/ Mark A. Sheptoff - ------------------------------------- ------------------------------------- Loren J. Andreo Mark A. Sheptoff /s/ Ronald E. Bourbeau /s/ J. Gilbert Soucie - ------------------------------------- ------------------------------------- Ronald E. Bourbeau J. Gilbert Soucie /s/ Camille S. Bushnell /s/ James Uccello - ------------------------------------- ------------------------------------- Camille S. Bushnell James Uccello /s/ John J. Carson /s/ Alden A. Ives - ------------------------------------- ------------------------------------- John J. Carson Alden A. Ives /s/ Harvey A. Katz /s/ Grace C. Nome - ------------------------------------- ------------------------------------- Harvey A. Katz Grace C. Nome SIS INTERIM BANK By: SIS BANCORP, Inc. as sole organizer /s/ F. William Marshall, Jr. By: _________________________________ F. William Marshall, Jr. President and Chief Executive Officer B-6 Appendix C to Joint Proxy Statement--Prospectus MCCONNELL, BUDD & DOWNES, INC. 365 SOUTH STREET MORRISTOWN, NEW JERSEY 07960 201-538-7800 FAX: 201-538-0522 October 28, 1997 The Board of Directors Glastonbury Bank & Trust Company 6241 Main Street Glastonbury, Connecticut 06033 The Board of Directors: You have requested our opinion as to the fairness from a financial point of view to the shareholders of Glastonbury Bank & Trust Company ("Glastonbury") of the consideration to be paid to the shareholders of Glastonbury in connection with the proposed acquisition of Glastonbury by SIS Bancorp, Inc. ("SIS") pursuant to the Agreement and Plan of Reorganization (the "Merger Agreement") dated as of August 18, 1997 by and between Glastonbury and SIS. Pursuant to the Merger Agreement, SIS will form an Acquirer Subsidiary, which will be merged with and into Glastonbury (the "Merger"). As is more specifically set forth in the Merger Agreement, upon consummation of the Merger, each outstanding share of the common stock of Glastonbury, par value $2.50 per share ("Glastonbury Common Stock"), except for any dissenting shares and except for shares held by SIS and its subsidiaries or by Glastonbury (in both cases, other than shares held in a fiduciary capacity or as a result of debts previously contracted), will be converted into and exchangeable for 0.74 of a share of the common stock, par value $0.01 per share, of SIS. However, if the average closing bid prices of SIS common stock on the Nasdaq National Market for the 20-trading-day period ending five business days before the Merger is less than $25.00, Glastonbury may terminate the Merger Agreement unless SIS increases the number of shares to be issued in the Merger to ensure that GBT shareholders will receive a minimum value of $18.50 in shares of SIS common stock. The reader is urged to carefully read all the terms of the Merger Agreement, which is reproduced in its entirety elsewhere in the Proxy Statement-- Prospectus. McConnell, Budd & Downes, Inc., as part of its investment banking business, is engaged exclusively in the valuation of bank holding companies and banks, thrift holding companies and thrifts and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements, competitive bidding processes, market making as a Nasdaq market maker, secondary distributions of listed securities and valuations for corporate, estate and other purposes. Our experience and familiarity with Glastonbury includes having worked as a financial advisor to Glastonbury since April of 1997 on a contractual basis and specifically includes our participation in the process and negotiations leading up to the proposed transaction with SIS. In the course of our role as financial advisor to Glastonbury in connection with the transaction we have received fees for our services and will receive additional fees contingent on the occurrence of certain defined events. We will receive a fee in connection with the rendering of this opinion. In the ordinary course of our business, we may, from time to time, trade the equity securities of Glastonbury in our capacity as a Nasdaq market maker, for our own account, for the accounts of our customers and for the accounts of individual employees of McConnell, Budd & Downes, Inc. Accordingly we may, from time to time, hold a long or short position in the equity securities of Glastonbury. In arriving at our opinion, we have reviewed the Merger Agreement and Proxy Statement--Prospectus in substantially the form to be mailed to Glastonbury and SIS shareholders. We have also reviewed publicly available business, financial and shareholder information relating to Glastonbury and its subsidiaries, certain C-1 publicly available financial information relating to SIS and certain financial information relating to SIS and its subsidiaries provided to Glastonbury by SIS management. In addition, we have reviewed certain other information, including internal reports and documents of Glastonbury and SIS and certain management-prepared financial information provided to us by Glastonbury and SIS. We have also met with and had discussions with members of the senior management of Glastonbury and SIS to discuss their past and current business operations, current financial condition and future prospects. In connection with the foregoing, we have reviewed the annual report to shareholders and annual report on Form 10K of SIS for the fiscal year ended December 31, 1996, and the report to shareholders for SIS Bank for the fiscal year ended December 31, 1995. We have similarly reviewed the annual reports of Glastonbury for the calendar years ended December 31, 1994, 1995 and 1996. We have reviewed and studied the historical stock prices and trading volumes of the common stock of Glastonbury and SIS as well as the terms and conditions of 23 recent acquisition transactions involving publicly traded financial institutions conducting business in the northeast which can be compared to the proposed acquisition of Glastonbury by SIS. We also considered the current state of and future prospects for the economies of Connecticut and Massachusetts generally and the relevant market areas for SIS and Glastonbury in particular. We have also conducted such other studies, analyses and investigations as we deemed appropriate under the circumstances surrounding this proposed transaction. In the course of our review and analysis we considered, among other things, such topics as relative capitalization, capital adequacy, profitability, availability of noninterest income, relative asset quality, adequacy of the reserve for loan losses and the composition of the loan portfolio of each of Glastonbury and SIS. We also considered management's estimates of cost savings and revenue enhancements which might result from a consolidation of Glastonbury and SIS. In the conduct of our review and analysis we have relied upon and assumed, without independent verification, the accuracy and completeness of the financial information provided to us by Glastonbury and SIS and or otherwise publicly obtainable. In reaching our opinion we have not assumed any responsibility for the independent verification of such information or any independent valuation or appraisal of any of the assets or the liabilities of either Glastonbury or SIS nor have we obtained from any other source, any current appraisals of the assets or liabilities of either Glastonbury or SIS. We have also relied on the management of Glastonbury as to the reasonableness of various financial and operating forecasts and of the assumptions on which they are based, which were provided to us for use in our analyses. In the course of rendering this opinion, which is being rendered prior to the receipt of certain required regulatory approvals necessary before consummation of the transaction, we have assumed that no conditions will be imposed by any regulatory agency in connection with its approval of the transaction that will have a material adverse effect on the results of operations, the financial condition or the prospects of SIS following consummation of the transaction. Based upon and subject to the foregoing, it is our opinion, that as of the date of this letter, the Exchange Ratio is fair to the shareholders of Glastonbury from a financial point of view. Very truly yours, McConnell, Budd & Downes, Inc. /s/ David A. Budd By: _________________________________ David A. Budd Managing Director C-2 Appendix D to Joint Proxy Statement--Prospectus Oppenheimer Tower OPPENHEIMER & CO., INC. World Financial Center New York, New York 10281 (212) 667-7000 INVESTMENT BANKING GROUP October 28, 1997 Board of Directors SIS Bancorp, Inc. 1441 Main Street Springfield, Massachusetts 01102-3034 Directors: You have requested our opinion as to the fairness, from a financial point of view, to SIS Bancorp, Inc. (the "Company") of the aggregate consideration to be paid by the Company (the "Consideration"), to the holders of the outstanding shares of common stock (the "Glastonbury Shares"), of Glastonbury Bank and Trust Company ("Glastonbury") pursuant to the Agreement and Plan of Reorganization to be dated as of August 18, 1997 by and between the Company and Glastonbury (the "Agreement"). Pursuant to the Agreement, Glastonbury will become a wholly-owned subsidiary of SIS Bancorp, Inc. (the "Merger"). In connection with this opinion we have reviewed, among other things: (a) the Agreement; (b) the Seller and Buyer Stockholders' Agreement and Seller Option Agreement (as such terms are defined in the Agreement); (c) audited consolidated financial statements and management's discussion and analysis of the financial condition and results of operation for each of Glastonbury and the Company for the three fiscal years ended December 31, 1996; (d) unaudited consolidated financial statements for each of Glastonbury and the Company for the six months ended June 30, 1997; (e) certain other publicly available business and financial information relating to the Company and Glastonbury; (f) certain internal financial analyses, budgets, projections and forecasts for Glastonbury and the Company, including estimates as to the future cost savings relating to the Merger; prepared by and reviewed with the management of the Company; (g) certain other summary materials and analyses with respect to Glastonbury's loan portfolio and deposits prepared by the Company; (h) the views of senior management of Glastonbury and the Company of the past and current business operations, results thereof, financial condition and future prospects; (i) a comparison of certain financial information for Glastonbury, with similar information for certain other companies we considered comparable to Glastonbury; (j) the financial terms of certain recent business combinations in the banking industry; (k) the pro forma effect of the transaction on the Company based on certain assumptions provided by the Company; (l) the current market environment generally and the banking environment in particular; and (m) such other information, financial studies, analyses and investigations and financial, economic and market criteria as we considered appropriate in the circumstances. We have relied, without independent verification or investigation, on all of the financial information, analyses and other information furnished to us for purposes of this opinion, including information relating to assets and liabilities, contingent or otherwise, as being complete and accurate. We have also relied upon the managements of Glastonbury and the Company as to the reasonableness and achievability of the financial and operating forecasts and projections, including estimates of future cost savings relating to the Merger (and the assumptions and bases therefore) provided to us. In that regard, we have assumed, with your consent, that such forecasts, projections and estimates have been reasonably prepared and reflect the best currently available estimates and judgements of the managements of Glastonbury and the Company as to the future financial performance of the Company and Glastonbury and that, for purposes of our opinion, such forecasts and projections will be realized in the amounts and in the time periods currently estimated by the managements of Glastonbury and the Company. We have not made an independent evaluation or appraisal of the assets and D-1 liabilities of Glastonbury or any of its respective subsidiaries and we have not been furnished with any such evaluation or appraisal. Furthermore, this opinion shall not constitute any such evaluation or appraisal. We are not experts in the evaluation of allowances for loan losses or liabilities (contingent or otherwise) and we have neither made an independent evaluation of the adequacy of the allowance for loan losses of Glastonbury or reviewed any individual loan credit files. You have informed us and we have assumed that the Merger will be accounted for as a pooling under generally accepted accounting principles. We have acted as financial advisor to the Company in connection with the Merger and will receive a fee for our services. In the ordinary course of our business, we may actively trade the equity securities of the Company for our own account and for the accounts of customers, and accordingly, may at any time hold a long or short position in such securities. It is understood that this opinion is for the information of the Board of Directors in connection with its consideration of the Merger and may not be quoted or referred to, in whole or in part, in any registration statement, prospectus, or proxy statement, or in any other document used in connection with the offering or sale of securities, nor shall this letter be used for any other purposes, without our prior written consent or as otherwise agreed to in our engagement letter. Based upon and subject to the foregoing and based upon such other matters as we consider relevant, it is our opinion that, as of the date hereof, the Consideration to be paid by the Company in the Merger is fair, from a financial point of view, to the Company and its shareholders. Very truly yours, /s/ Oppenheimer & Co., Inc. Oppenheimer & Co., Inc. D-2 Appendix E to Joint Proxy Statement--Prospectus TEXT OF CONNECTICUT BUSINESS CORPORATION LAW DISSENTERS' RIGHTS PART XIII. DISSENTERS' RIGHTS (A) RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES (S) 33-855. DEFINITIONS As used in sections 33-855 to 33-872, inclusive: (1) "Corporation" means the issuer of the shares held by a dissenter before the corporate action or the surviving or acquiring corporation by merger or share exchange of that issuer. (2) "Dissenter" means a shareholder who is entitled to dissent from corporate action under section 33-856 and who exercises that right when and in the manner required by sections 33-860 to 33-868, inclusive. (3) "Fair value", with respect to a dissenter's shares, means the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action. (4) "Interest" means interest from the effective date of the corporate action until the date of payment, at the average rate currently paid by the corporation on its principal bank loans or, if none, at a rate that is fair and equitable under all the circumstances. (5) "Record shareholder" means the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation. (6) "Beneficial shareholder" means the person who is a beneficial owner of shares held in a voting trust or by a nominee as the record shareholder. (7) "Shareholder" means the record shareholder or the beneficial shareholder. (S) 33-856. RIGHT TO DISSENT (a) A shareholder is entitled to dissent from, and obtain payment of the fair value of his shares in the event of, any of the following corporate actions: (1) Consummation of a plan of merger to which the corporation is a party (A) if shareholder approval is required for the merger by section 33-817 or the certificate of incorporation and the shareholder is entitled to vote on the merger or (B) if the corporation is a subsidiary that is merged with its parent under section 33-818; (2) Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, if the shareholder is entitled to vote on the plan; (3) Consummation of a sale or exchange of all, or substantially all, of the property of the corporation other than in the usual and regular course of business, if the shareholder is entitled to vote on the sale or exchange, including a sale in dissolution, but not including a sale pursuant to court order or a sale for cash pursuant to a plan by which all or substantially all of the net proceeds of the sale will be distributed to the shareholders within one year after the date of sale; (4) An amendment of the certificate of incorporation that materially and adversely affects rights in respect of a dissenter's shares because it: (A) Alters or abolishes a preferential right of the shares; (B) creates, alters or abolishes a right in respect of redemption, including a provision respecting a sinking fund for the redemption or repurchase, of the shares; (C) alters or abolishes a preemptive right of the holder of E-1 the shares to acquire shares or other securities; (D) excludes or limits the right of the shares to vote on any matter, or to cumulate votes, other than a limitation by dilution through issuance of shares or other securities with similar voting rights; or (E) reduces the number of shares owned by the shareholder to a fraction of a share if the fractional share so created is to be acquired for cash under section 33-668; or (5) Any corporate action taken pursuant to a shareholder vote to the extent the certificate of incorporation, bylaws or a resolution of the board of directors provides that voting or nonvoting shareholders are entitled to dissent and obtain payment for their shares. (b) Where the right to be paid the value of shares is made available to a shareholder by this section, such remedy shall be his exclusive remedy as holder of such shares against the corporate transactions described in this section, whether or not he proceeds as provided in sections 33-855 to 33-872, inclusive. (S) 33-857. DISSENT BY NOMINEES AND BENEFICIAL OWNERS (a) A record shareholder may assert dissenters' rights as to fewer than all the shares registered in his name only if he dissents with respect to all shares beneficially owned by any one person and notifies the corporation in writing of the name and address of each person on whose behalf he asserts dissenters' rights. The rights of a partial dissenter under this subsection are determined as if the shares as to which he dissents and his other shares were registered in the names of different shareholders. (b) A beneficial shareholder may assert dissenters' rights as to shares held on his behalf only if: (1) He submits to the corporation the record shareholder's written consent to the dissent not later than the time the beneficial shareholder asserts dissenters' rights; and (2) he does so with respect to all shares of which he is the beneficial shareholder or over which he has power to direct the vote. (S)(S) 33-858, 33-859. RESERVED FOR FUTURE USE (B) PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS (S) 33-860. NOTICE OF DISSENTERS' RIGHTS (a) If proposed corporate action creating dissenters' rights under section 33-856 is submitted to a vote at a shareholders' meeting, the meeting notice shall state that shareholders are or may be entitled to assert dissenters' rights under sections 33-855 to 33-872, inclusive, and be accompanied by a copy of said sections. (b) If corporate action creating dissenters' rights under section 33-856 is taken without a vote of shareholders, the corporation shall notify in writing all shareholders entitled to assert dissenters' rights that the action was taken and send them the dissenters' notice described in section 33-862. (S) 33-861. NOTICE OF INTENT TO DEMAND PAYMENT (a) If proposed corporate action creating dissenters' rights under section 33-856 is submitted to a vote at a shareholders' meeting, a shareholder who wishes to assert dissenters' rights (1) shall deliver to the corporation before the vote is taken written notice of his intent to demand payment for his shares if the proposed action is effectuated and (2) shall not vote his shares in favor of the proposed action. (b) A shareholder who does not satisfy the requirements of subsection (a) of this section is not entitled to payment for his shares under sections 33-855 to 33-872, inclusive. (S) 33-862. DISSENTERS' NOTICE (a) If proposed corporate action creating dissenters' rights under section 33-856 is authorized at a shareholders' meeting, the corporation shall deliver a written dissenters' notice to all shareholders who satisfied the requirements of section 33-861. E-2 (b) The dissenters' notice shall be sent no later than ten days after the corporation action was taken and shall: (1) State where the payment demand must be sent and where and when certificates for certificated shares must be deposited; (2) Inform holders of uncertificated shares to what extent transfer of the shares will be restricted after the payment demand is received; (3) Supply a form for demanding payment that includes the date of the first announcement to news media or to shareholders of the terms of the proposed corporate action and requires that the person asserting dissenters' rights certify whether or not he acquired beneficial ownership of the shares before that date; (4) Set a date by which the corporation must receive the payment demand, which date may not be fewer than thirty nor more than sixty days after the date the subsection (a) of this section notice is delivered; and (5) Be accompanied by a copy of sections 33-855 to 33-872, inclusive. (S) 33-863. DUTY TO DEMAND PAYMENT (a) A shareholder sent a dissenters' notice described in section 33-862 must demand payment, certify whether he acquired beneficial ownership of the shares before the date required to be set forth in the dissenters' notice pursuant to subdivision (3) of subsection (b) of said section and deposit his certificates in accordance with the terms of the notice. (b) The shareholder who demands payment and deposits his share certificates under subsection (a) of this section retains all other rights of a shareholder until these rights are cancelled or modified by the taking of the proposed corporate action. (c) A shareholder who does not demand payment or deposit his share certificates where required, each by the date set in the dissenters' notice, is not entitled to payment for his shares under sections 33-855 to 33-872, inclusive. (S) 33-864. SHARE RESTRICTIONS (a) The corporation may restrict the transfer of uncertificated shares from the date the demand for their payment is received until the proposed corporate action is taken or the restrictions released under section 33-866. (b) The person for whom dissenters' rights are asserted as to uncertificated shares retains all other rights of a shareholder until these rights are cancelled or modified by the taking of the proposed corporate action. (S) 33-865. PAYMENT (a) Except as provided in section 33-867, as soon as the proposed corporate action is taken, or upon receipt of a payment demand, the corporation shall pay each dissenter who complied with section 33-863 the amount the corporation estimates to be the fair value of his shares, plus accrued interest. (b) The payment shall be accompanied by: (1) The corporation's balance sheet as of the end of a fiscal year ending not more than sixteen months before the date of payment, an income statement for that year, a statement of changes in shareholders' equity for that year and the latest available interim financial statements, if any; (2) a statement of the corporation's estimate of the fair value of the shares; (3) an explanation of how the interest was calculated; (4) a statement of the dissenter's right to demand payment under section 33- 860; and (5) a copy of sections 33-855 to 33-872, inclusive. E-3 (S) 33-866. FAILURE TO TAKE ACTION (a) If the corporation does not take the proposed action within sixty days after the date set for demanding payment and depositing share certificates, the corporation shall return the deposited certificates and release the transfer restrictions imposed on uncertificated shares. (b) If after returning deposited certificates and releasing transfer restrictions, the corporation takes the proposed action, it must send a new dissenters' notice under section 33-862 and repeat the payment demand procedure. (S) 33-867. AFTER-ACQUIRED SHARES (a) A corporation may elect to withhold payment required by section 33-865 from a dissenter unless he was the beneficial owner of the shares before the date set forth in the dissenters' notice as the date of the first announcement to news media or to shareholders of the terms of the proposed corporate action. (b) To the extent the corporation elects to withhold payment under subsection (a) of this section, after taking the proposed corporate action, it shall estimate the fair value of the shares, plus accrued interest, and shall pay this amount to each dissenter who agrees to accept it in full satisfaction of his demand. The corporation shall send with its offer a statement of its estimate of the fair value of the shares, an explanation of how the interest was calculated and a statement of the dissenter's right to demand payment under section 33-868. (S) 33-868. PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER (a) A dissenter may notify the corporation in writing of his own estimate of the fair value of his shares and amount of interest due, and demand payment of his estimate, less any payment under section 33-865, or reject the corporation's offer under section 33-867 and demand payment of the fair value of his shares and interest due, if: (1) The dissenter believes that the amount paid under section 33-865 or offered under section 33-867 is less than the fair value of his shares or that the interest due is incorrectly calculated; (2) The corporation fails to make payment under section 33-865 within sixty days after the date set for demanding payment; or (3) The corporation, having failed to take the proposed action, does not return the deposited certificates or release the transfer restrictions imposed on uncertificated shares within sixty days after the date set for demanding payment. (b) A dissenter waives his right to demand payment under this section unless he notifies the corporation of his demand in writing under subsection (a) of this section within thirty days after the corporation made or offered payment for his shares. (C) JUDICIAL APPRAISAL OF SHARES (S) 33-871. COURT ACTION (a) If a demand for payment under section 33-868 remains unsettled, the corporation shall commence a proceeding within sixty days after receiving the payment demand and petition the court to determine the fair value of the shares and accrued interest. If the corporation does not commence the proceeding within the sixty-day period, it shall pay each dissenter whose demand remains unsettled the amount demanded. (b) The corporation shall commence the proceeding in the superior court for the judicial district where a corporation's principal office or, if none in this state, its registered office is located. If the corporation is a foreign corporation without a registered office in this state, it shall commence the proceeding in the superior court for the judicial district where the registered office of the domestic corporation merged with or whose shares were acquired by the foreign corporation was located. E-4 (c) The corporation shall make all dissenters, whether or not residents of this state, whose demands remain unsettled parties to the proceeding as in an action against their shares and all parties must be served with a copy of the petition. Nonresidents may be served by registered or certified mail or by publication as provided by law. (d) The jurisdiction of the court in which the proceeding is commenced under subsection (b) of this section is plenary and exclusive. The court may appoint one or more persons as appraisers to receive evidence and recommend decision on the question of fair value. The appraisers have the powers described in the order appointing them, or in any amendment to it. The dissenters are entitled to the same discovery rights as parties in other civil proceedings. (e) Each dissenter made a party to the proceeding is entitled to judgment (1) for the amount, if any, by which the court finds the fair value of his shares, plus interest, exceeds the amount paid by the corporation, or (2) for the fair value, plus accrued interest, of his after-acquired shares for which the corporation elected to withhold payment under section 33-867. (S) 33-872. COURT COSTS AND COUNSEL FEES (a) The court in an appraisal proceeding commenced under section 33-871 shall determine all costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court. The court shall assess the costs against the corporation, except that the court may assess costs against all or some of the dissenters, in amounts the court finds equitable, to the extent the court finds the dissenters acted arbitrarily, vexatiously or not in good faith in demanding payment under section 33-868. (b) The court may also assess the fees and expenses of counsel and experts for the respective parties, in amounts the court finds equitable: (1) Against the corporation and in favor of any or all dissenters if the court finds the corporation did not substantially comply with the requirements of sections 33- 860 to 33-868, inclusive; or (2) against either the corporation or a dissenter, in favor of any other party, if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously or not in good faith with respect to the rights provided by sections 33-855 to 33-872, inclusive. (c) If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated, and that the fees for those services should not be assessed against the corporation, the court may award these counsel reasonable fees to be paid out of the amounts awarded the dissenters who were benefited. E-5 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 67 of Chapter 156B of the Massachusetts General Laws, the Massachusetts Business Corporation Law (the "MBCL") provides, in effect, that a corporation may indemnify any person made a party to any action by reason of the fact that he is or was a director, officer, employee or agent of the corporation against, in the case of a nonderivative action, judgments, fines, amounts paid in settlement and reasonable expenses (including attorney's fees) incurred by him as a result of such action, and in the case of a derivative action, against expenses (including attorney's fees), if in either type of action he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation. This indemnification does not apply, in a derivative action, to matters as to which it is adjudged that the director, officer, employee or agent is liable to the corporation, unless upon court order it is determined that, despite such adjudication of liability, but in view of all the circumstances of the case, he is fairly and reasonable entitled to indemnity for expenses, and, in a nonderivative action, to any criminal proceeding in which such person had reasonable cause to believe his conduct was unlawful. Article 7 of SIS's Bylaws provides that SIS shall indemnify each person who is or was an officer or director of SIS to the fullest extent permitted by Section 67 of the MBCL. Section 6.8 of Article 6 of SIS's Articles of Organization states that no director of the Company shall be liable to the Company or its shareholders for monetary damages for breach of fiduciary duty as a director, except to the extent that exculpation from liability is not permitted under the MBCL as in effect when such breach occurred. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits
NUMBER DESCRIPTION ------ ----------- 2.1 Agreement and Plan of Reorganization dated as of August 18, 1997; included as Appendix A to Joint Proxy Statement--Prospectus. 2.2 Agreement and Plan of Merger dated as of September 12, 1997; included as Appendix B to Joint Proxy Statement--Prospectus. 2.3 Stock Option Agreement dated as of August 18, 1997; form included as Exhibit B to the Agreement and Plan of Reorganization (see Exhibit 2.1 above). 3.1 Articles of Organization of SIS (incorporated by reference to Exhibit 99.1 to SIS's Registration Statement on Form 8-A dated June 4, 1996). 3.2 Bylaws of SIS (incorporated by reference to Exhibit 99.2 to SIS's Registration Statement on Form 8-A dated June 4, 1996). 5 Opinion of Sullivan & Worcester LLP as to legality. 8.1 Opinion of Sullivan & Worcester LLP as to tax matters. 8.2 Opinion of Tyler Cooper & Alcorn, LLP as to tax matters. 10.1 Amended and Restated Employment Agreement between the Bank and F. William Marshall, Jr., dated June 30, 1997 (incorporated by reference to Exhibit 10.2 to SIS's Report on Form 10-Q for the quarter ended June 30, 1997). 10.2 Form of Employment and Severance Agreements for Messrs. Frank W. Barrett, B. John Dill and John F. Treanor (incorporated by reference to Exhibit 10.2 to SIS's Report on Form 10-Q for the quarter ended June 30, 1996). 10.3 Form of Employment and Severance Agreements for Messrs. Henry J. McWhinnie, Michael E. Tucker, Gilbert F. Ehmke and Christopher A. Sinton and Ms. Jeanne Rinaldo (incorporated by reference to Exhibit B to the FDIC Form F-2 filed as Exhibit 99.3 to SIS's Registration Statement on Form 8-A dated June 4, 1996).
II-1
NUMBER DESCRIPTION ------ ----------- 10.4 Form of "Second Addendum to Form of Employment and Severance Agreement for Senior Vice President and Executive Vice Presidents" of the Bank, executed by Messrs. Barrett, Dill, Treanor, Ehmke, Sinton, Tucker and McWhinnie and Ms. Rinaldo (incorporated by reference to Exhibit 10.1 to SIS's Report on Form 10-Q for the quarter ended June 30, 1997). 10.5 Director and Management Stock Option Plan, as amended (incorporated by reference to Exhibit 10.4 to SIS's Report on Form 10-Q for the quarter ended June 30, 1996). 10.6 Director and Management Restricted Stock Plan, as amended (incorporated by reference to Exhibit 10.5 to SIS's Report on Form 10-Q for the quarter ended June 30, 1996). 10.7 Rights Agreement dated January 22, 1997 by and between SIS and ChaseMellon Shareholder Services, L.L.C., as Rights Agent (incorporated by reference to Exhibit 4.1 to SIS's Registration Statement on Form 8-A dated January 23, 1997). 13.1 Report of Glastonbury Bank & Trust Company on Form F-2 for the year ended December 31, 1996. 13.2 Report of Glastonbury Bank & Trust Company on Form F-4 for the quarter ended March 31, 1997. 13.3 Report of Glastonbury Bank & Trust Company on Form F-4 for the quarter ended June 30, 1997. 13.4 Glastonbury Bank & Trust Company 1996 Annual Report to Stockholders 21 Subsidiaries of SIS. 22.1 Form of Proxy for GBT Meeting. 22.2 Form of Proxy for SIS Meeting. 22.3 Opinion of McConnell, Budd & Downes, Inc.; included as Appendix C to the Joint Proxy Statement--Prospectus. 22.4 Opinion of Oppenheimer & Co., Inc.; included as Appendix D to the Joint Proxy Statement--Prospectus. 23.1 Consent of Price Waterhouse LLP with respect to SIS. 23.2 Consent of Shatswell, MacLeod & Company, P.C. with respect to GBT. 23.3 Consent of Sullivan & Worcester LLP (included in Exhibit 5). 23.4 Consent of Tyler Cooper & Alcorn, LLP (included in Exhibit 8.2). 23.5 Consent of McConnell, Budd & Downes, Inc. 23.6 Consent of Oppenheimer & Co., Inc. 24 Powers of Attorney of certain directors and officers of SIS (included in page II-4). 99 Consent of Director Nominee
(b) Financial Statement Schedules--Not applicable. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i)To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii)To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this registration statement; (iii)To include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in this registration statement. (2) That for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the Securities offered herein, and the offering of such Securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the Securities being registered which remain unsold at the termination of the offering. II-2 Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), may be permitted to directors, officers and controlling persons of the registrant, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. The registrant hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (and where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act), that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered herein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. The undersigned registrant hereby undertakes to supply by means of a post- effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-3 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, SIS BANCORP, INC. HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SPRINGFIELD, COMMONWEALTH OF MASSACHUSETTS, ON OCTOBER 24, 1997. SIS BANCORP, INC. /s/ F.William Marshall, Jr. By: ________________________________ F. William Marshall, Jr. President and Chief Executive Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT ON FORM S-4 RELATING TO THE COMMON STOCK OF SIS BANCORP, INC. HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED; AND EACH OF THE UNDERSIGNED OFFICERS AND DIRECTORS OF SIS BANCORP, INC. HEREBY SEVERALLY CONSTITUTES AND APPOINTS F. WILLIAM MARSHALL, JR. AND JOHN F. TREANOR, AND EACH OF THEM, TO SIGN FOR HIM, AND IN HIS NAME IN THE CAPACITY INDICATED BELOW, SUCH REGISTRATION STATEMENT FOR THE PURPOSE OF REGISTERING SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ANY AND ALL AMENDMENTS THERETO, INCLUDING WITHOUT LIMITATION ANY REGISTRATION STATEMENT OR POST-EFFECTIVE AMENDMENT THEREOF FILED UNDER AND MEETING THE REQUIREMENTS OF RULE 462(B) UNDER THE SECURITIES ACT, HEREBY RATIFYING AND CONFIRMING OUR SIGNATURES AS THEY MAY BE SIGNED BY OUR ATTORNEYS TO SUCH REGISTRATION STATEMENT AND ANY AND ALL AMENDMENTS THERETO. SIGNATURE TITLE DATE /s/ F. William Marshall, Jr. President, Director October 24, - ------------------------------------- and Chief Executive 1997 F. William Marshall, Jr. Officer /s/ John F. Treanor Executive Vice October 24, - ------------------------------------- President, 1997 John F. Treanor Treasurer and Chief Financial Officer /s/ Laura Sotir Katz Vice President and October 24, - ------------------------------------- Controller (Chief 1997 Laura Sotir Katz Accounting Officer) /s/ John M. Naughton Director and October 24, - ------------------------------------- Chairman of the 1997 John M. Naughton Board /s/ Sister Mary Caritas-Geary, S.P. Director October 24, - ------------------------------------- 1997 Sister Mary Caritas-Geary, S.P. /s/ William B. Hart, Jr. Director October 24, - ------------------------------------- 1997 William B. Hart, Jr. /s/ Charles L. Johnson Director October 24, - ------------------------------------- 1997 Charles L. Johnson /s/ Thomas O'Brien Director October 24, - ------------------------------------- 1997 Thomas O'Brien /s/ Stephen A. Shatz Director October 24, - ------------------------------------- 1997 Stephen A. Shatz II-4 EX-5 2 OPINION OF SULLIVAN & WORCESTER LLP - LEGALITY EXHIBIT 5 [LETTERHEAD OF SULLIVAN & WORCESTER LLP] October 24, 1997 SIS Bancorp, Inc. 1441 Main Street Springfield, Massachusetts 01102 Re: Registration Statement on Form S-4 1,354,141 shares of Common Stock, par value $.01 per share ---------------------------------------------------------- Gentlemen: The following opinion is furnished to you in connection with the registration by SIS Bancorp, Inc., a Delaware corporation (the "Company"), pursuant to a registration statement on Form S-4 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Act"), of 1,354,141 shares (the "Shares") of Common Stock, par value $.01 par value (the "Common Stock"), which are to be offered by the Company in connection with the Agreement and Plan of Reorganization dated as of August 18, 1997 (the "Agreement") between the Company and Glastonbury Bank & Trust Company and the transactions contemplated thereby. We have acted as counsel to the Company in connection with the Agreement and the Registration Statement, and we have examined originals or copies, certified or otherwise identified to our satisfaction, of the Registration Statement, the Certificate of Incorporation of the Company as presently in effect, corporate records, certificates and statements of officers and accountants of the Company and of public officials, and such other documents as we have considered necessary in order to furnish the opinion hereinafter set forth. We express no opinion herein as to any laws other than the General Corporation Law of the State of Delaware. Based on and subject to the foregoing, we are of the opinion that: (a) the Shares have been duly and validly authorized by the Company; and (b) all necessary action on the part of the Company in connection with the issuance of said Shares has been taken and, upon issuance of the Shares in accordance with the terms of the Agreement, said Shares will be validly issued, fully paid and nonassessable by the Company. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm made therein under the caption "Legal Matters." In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Very truly yours, /s/ Sullivan & Worcester LLP Sullivan & Worcester LLP EX-8.1 3 OPINION OF SULLIVAN & WORCESTER LLP - TAX EXHIBIT 8.1 [LETTERHEAD OF SULLIVAN & WORCESTER LLP APPEARS HERE] October 24, 1997 SIS Bancorp, Inc. 1441 Main Street Springfield, Massachusetts 01102 Attention: F. William Marshall, Jr., President and Chief Executive Officer Ladies and Gentlemen: In connection with the registration by SIS Bancorp, Inc., a Massachusetts corporation ("SIS"), of shares of its Common Stock, par value $.01 per share, --- for issuance in connection with the Agreement and Plan of Reorganization dated as of August 18, 1997 by and between SIS and Glastonbury Bank & Trust Company, a Connecticut bank and trust company ("GBT"), this opinion is furnished to you to --- be filed as Exhibit 8.1 to the Registration Statement on Form S-4 (the "Registration Statement") under the Securities Act of 1933, as amended (the - ----------------------- "Securities Act"), to be filed with the Securities and Exchange Commission. - --------------- Capitalized terms used herein shall have the same meaning they have in the Registration Statement, except as otherwise defined herein. "Merger Agreement" ---------------- shall mean, collectively, the above-referenced Agreement and Plan of Reorganization, as amended, together with the Agreement and Plan of Merger dated as of September 12, 1997 by and among SIS, SIS Interim Bank, a Connecticut bank and wholly owned subsidiary of SIS ("SIS Merger Sub") and GBT, and all other -------------- agreements contemplated thereby. "Code" shall mean the Internal Revenue Code of ---- 1986, as amended. Facts. Pursuant to the Merger Agreement, SIS Merger Sub will be merged ----- with and into GBT (the "Merger"), and the GBT stockholders will in the Merger ------ receive common stock of SIS in exchange for their GBT stock surrendered. For federal income tax purposes, the Merger is intended to qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Code pursuant to Section 368(a)(2)(E) of the Code. Assumptions. In rendering our opinions, we have with your permission ----------- assumed the accuracy of the following assumptions, and we have assumed that the Merger will be consummated pursuant to the terms of and in accordance with the Merger Agreement. A. The fair market value of the SIS stock received by a GBT stockholder in the Merger will be approximately equal to the fair market value of the GBT shares surrendered by him in exchange therefor. B. There is no present plan or intention by the stockholders of GBT who own, directly or indirectly, a five percent (5%) or greater interest (by value) in GBT, and to the best knowledge of the management of GBT, there is no present plan or intention on the part of the remaining stockholders of GBT, to sell, exchange or otherwise dispose of a number of shares of SIS stock received in the Merger that would reduce the GBT stockholders' ownership of SIS stock to a number of shares having a value, as of the date of the Merger, of less than fifty percent (50%) of the value of all of the formerly outstanding stock of GBT as of the same date. For purposes of this assumption, shares of GBT stock surrendered by dissenters or exchanged for cash in lieu of fractional shares of SIS stock will be treated as outstanding GBT stock on the date of the Merger. Moreover, shares of GBT stock and shares of SIS stock held by GBT stockholders and otherwise sold, redeemed, or disposed of prior or subsequent to the Merger have been considered in making this assumption. C. Following the transaction, GBT will hold at least 90 percent of the fair market value of its net assets and at least 70 percent of the fair market value of its gross assets and at least 90 percent of the fair market value of SIS Merger Sub's net assets and at least 70 percent of the fair market value of SIS Merger Sub's gross assets held immediately prior to the transaction. For purposes of this representation, amounts paid by GBT or SIS Merger Sub to dissenters, amounts paid by GBT or SIS Merger Sub to shareholders who receive cash or other property, amounts used by GBT or SIS Merger Sub to pay reorganization expenses, and all redemptions and distributions (except for regular, normal dividends) made by GBT will be included as assets of GBT or SIS Merger Sub, respectively, immediately prior to the transaction. D. GBT has no plan or intention to issue additional shares of its stock that would result in SIS losing control of GBT within the meaning of Section 368(c)(1) of the Code. E. At the time of the Merger, SIS has no plan or intention to redeem or otherwise reacquire any of the SIS stock to be issued in the Merger. F. At the time of the Merger, SIS has no plan or intention to liquidate GBT, to merge GBT with or into another corporation, to sell or otherwise dispose of the stock of GBT except for transfers of stock to corporations controlled by SIS, or to cause GBT to sell or otherwise dispose of any of its assets or any of the assets acquired from SIS Merger Sub, except for dispositions made in the ordinary course of business or transfers to a corporation controlled by GBT. G. Following the Merger, SIS will continue the historic business of GBT or use a significant portion of GBT's business assets in a business. H. SIS, GBT, and the stockholders of GBT will pay their respective expenses, if any, incurred in connection with the Merger. I. There is no intercorporate indebtedness existing between SIS and GBT, or between SIS Merger Sub and GBT, that was issued, acquired, or will be settled at a discount. J. Neither SIS nor GBT is an "investment company" as defined in Sections 368(a)(2)(F)(iii) and (iv) of the Code. K. The liabilities (if any) of SIS Merger Sub assumed by GBT and the liabilities (if any) to which the transferred assets of SIS Merger Sub are subject were incurred by SIS Merger Sub in the ordinary course of its business. L. At the time of the Merger, the fair market value of the assets of GBT will exceed the sum of its liabilities, plus the amount of liabilities (if any) to which its assets are subject. M. Neither GBT nor SIS is under the jurisdiction of a court in a Title 11 or similar case within the meaning of Section 368(a)(3)(A) of the Code. N. No consideration for the Merger has been or will be provided by SIS or any affiliate of SIS to GBT or to the stockholders of GBT other than as expressly provided for in the Merger Agreement. O. The payment of cash in lieu of fractional shares of SIS stock is solely for the purpose of avoiding the expense and inconvenience to SIS of issuing fractional shares and does not represent separately bargained for consideration. The total cash consideration that will be paid in the Merger to GBT stockholders instead of issuing fractional shares of SIS stock will not exceed one percent (1%) of the total consideration that will be issued in the Merger to GBT stockholders in exchange for their shares of GBT stock. The fractional share interests of each holder of GBT stock will be aggregated, and no holder of GBT stock will receive cash in lieu of a fractional share in an amount equal to or greater than the value of one full share of SIS stock. Opinions. Based on the foregoing facts and assumptions and assuming the -------- accuracy thereof, we are of the opinion that for federal income tax purposes: 1. The merger of SIS Merger Sub with and into GBT pursuant to the Merger Agreement will constitute a reorganization within the meaning of Section 368(a)(1)(A) of the Code, pursuant to Section 368(a)(2)(E) of the Code. 2. GBT, SIS Merger Sub and SIS, will each be a "party to a reorganization" within the meaning of Section 368(b) of the Code. 3. No gain or loss will be recognized by SIS Merger Sub upon the transfer of its assets to GBT in exchange for GBT common stock and the assumption of its liabilities by GBT (Sections 357(a) and 361(a) of the Code). 4. The basis of the SIS Merger Sub property in the hands of GBT will be the same as the basis of the property in the hands of SIS Merger Sub immediately prior to the transaction (Section 362(b) of the Code). 5. The holding period of the SIS Merger Sub assets received by GBT in the exchange will include the period for which the assets were held by SIS Merger Sub (Section 1223(2) of the Code). 6. No gain or loss will be recognized to GBT on the receipt of the property of SIS Merger Sub in exchange for GBT stock (Section 1032(a) of the Code). 7. No gain or loss will be recognized by SIS upon the receipt of GBT stock in exchange for SIS Merger Sub stock (Section 354(a)(1) of the Code). 8. The basis of GBT's assets immediately after the Merger will be the same as the basis of such assets in the hands of GBT immediately prior to the Merger. Section 362 of the Code. 9. No gain or loss will be recognized by a SIS stockholder as a result of the Merger, and such stockholder's tax basis and holding period in his SIS stock will be the same following the Merger as they were preceding. No opinion is expressed concerning the consequences to any party of any matter other than those specifically addressed above. In particular, we express no opinion with respect to the state or local tax treatment of the Merger. Miscellaneous. The foregoing opinions are based on the Code as in effect ------------- on the date hereof and administrative and judicial interpretations of it. No assurance can be given that the Code will not change or that such interpretations will not be revised or amended adversely, possibly with retroactive effect. This opinion is not intended to satisfy the opinion required by Section 6.02(d) of the Merger Agreement, which opinion will be delivered at the closing of the Merger and be based upon executed representations made by SIS, GBT, and certain GBT stockholders. This opinion is intended solely for the benefit and use of SIS and its stockholders, and is not to be used, released, quoted, or relied upon by anyone else for any purpose (other than as required by law) without our prior written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm made therein under the caption "Legal Matters". In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act or the Rules and Regulations of the Commission promulgated thereunder. Very truly yours, /s/ Sullivan & Worcester LLP Sullivan & Worcester LLP EX-8.2 4 OPINION OF TYLER COOPER & ALCORN, LLP AS TO TAX MATTERS [LETTERHEAD OF TYLER COOPER & ALCORN, LLP APPEARS HERE] October 23, 1997 Glastonbury Bank and Trust Company 2461 Main Street Glastonbury, Connecticut 06033-2000 Re: Agreement and Plan of Reorganization, dated as of August 18, 1997, by and between SIS Bancorp, Inc. and Glastonbury Bank and Trust Company Ladies and Gentlemen: In connection with the registration by SIS Bancorp, Inc., a Massachusetts corporation ("SIS"), of shares of its Common Stock, par value $.01 per share, for issuance in connection with the Agreement and Plan of Reorganization dated as of August 18, 1997 by and between SIS and Glastonbury Bank & Trust Company, a Connecticut bank and trust company ("GBT"), this opinion is furnished to you to be filed as Exhibit 8.1 to the Registration Statement on Form S-4 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), to be filed with the Securities and Exchange Commission (the "SEC"). We have acted as counsel for GBT in connection with the transactions contemplated by the Agreement and Plan of Reorganization, dated as of August 18, 1997 (the "Agreement"), by and between SIS and GBT. All capitalized terms used herein and not otherwise defined herein shall have the same meanings assigned to them in the Agreement. In preparing this opinion, we have examined the documents indicated below and made such investigations of law as we have considered necessary or proper to render the opinions expressed below. We have assumed (a) the genuineness of all signatures of all person executing agreements, instruments, or documents examined or relied upon by us, (b) the due execution and delivery, pursuant to due authorization, of all agreements, instruments or documents by parties thereto other than GBT, (c) the authenticity of all documents submitted to us as originals and the conformity to authentic original documents of all documents submitted to us as certified, conformed, or photostatic copies, and (d) the legal capacity of natural persons. In connection with this opinion, we have examined the following documents: (a) The Agreement and the schedules thereto; and (b) The certification addressed to us and to Messrs. Sullivan & Worcester LLP attached hereto as Exhibit A. Although we have not independently investigated the matters therein described, we have assumed the authenticity and accuracy of the certification attached hereto, and on which we have relied in issuing this opinion. In rendering our opinion, we have considered the applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations, pertinent judicial authorities, interpretive rulings of the Internal Revenue Service, and such other authorities as we have considered relevant. Based upon and subject to the foregoing, we are of the opinion that the Acquisition Merger will, under current law, constitute a tax-free reorganization under Sections 368(a)(1)(A) and 368(a)(2)(E) of the Code, and SIS and GBT will each be a party to the Acquisition Merger within the meaning of Section 368(a) of the Code. As a tax-free reorganization, the Acquisition Merger will have the following Federal income tax consequences for GBT shareholders and GBT: 1. No gain or loss will be recognized by holders of common stock, par value of $.01 per share of GBT ("GBT Common Stock") as a result of the exchange of such shares for shares of SIS common stock, with a par value of $2.50 per share ("SIS Common Stock") pursuant to the Acquisition Merger, except that gain or loss will be recognized on the receipt of cash, if any, received in lieu of fractional shares and by shareholders electing to exercise their appraisal rights under Connecticut law. Any cash received by a shareholder of GBT in lieu of a fractional share or as a result of the appraisal process, will be treated as received in exchange for such fractional share and not as a dividend, and, assuming that the GBT Common Stock is a capital asset in the shareholder's hands, any gain or loss recognized as a result of the receipt of such cash will be capital gain or loss equal to the difference between the cash received and the portion of the shareholder's basis in GBT Common Stock allocable to such fractional share interest. 2. The aggregate tax basis of the shares of SIS Common Stock received by each shareholder of GBT will equal the aggregate tax basis of such shareholder's shares of GBT Common Stock (reduced by any amount allocable to fractional share interests for which cash is received) 2 exchanged in the Acquisition Merger. 3. The holding period for the shares of SIS Common Stock received by each shareholder of GBT will include the holding period for the shares of GBT Common Stock of such shareholder exchanged in the Acquisition Merger, provided that such shares are held as capital assets at the Effective Time. 4. GBT will not recognize gain or loss as a result of the Acquisition Merger. Except as set forth above, we express no opinion as to the tax consequences, whether Federal, state, local or foreign to any party, of the Acquisition Merger or of any transactions related to the Acquisition Merger or contemplated by the Agreement. We bring to your attention the fact that our legal opinions are an expression of professional judgment and are not a guarantee of a result. The information set forth herein is as of the date hereof. We assume no obligation to advise you of changes which may thereafter be brought to our attention. Our opinion is based on statutory laws, agency rules, regulations and policies and judicial decisions that are effective on the date hereof, and we do not opine with respect to any law, regulation, rule or governmental policy which may be enacted or adapted after the date hereof, nor do we assume any responsibility to advise you of future changes in our opinion. The opinion is also based upon the Acquisition Merger occurring in strict compliance with the Agreement and upon the accuracy at all times of the certification attached hereto as Exhibit A. In rendering this opinion, we have assumed that you have the power and authority to execute, deliver, and perform all agreements and documents executed by you; that you have duly and validly executed and delivered such agreements and documents; and that such agreements and documents are legally valid and binding on and enforceable against you. This opinion is solely for your benefit in connection with the consummation of the Acquisition Merger. This opinion may not be quoted, relied upon or furnished to any other person or entity, including any governmental entity, or be used for any other purpose, without the prior written consent of this firm. We hereby consent to the use of this opinion in connection with the registration of the offering and sale of SIS Common Stock with the SEC under the Securities Act, and to the reference to us in the Joint Proxy Statement- Prospectus which constitutes a portion of said registration and is incorporated 3 within the Registration Statement. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act or the Rules and Regulations of the SEC promulgated thereunder. Very truly yours, TYLER COOPER & ALCORN, LLP By: ______________________________ Partner 4 Exhibit A REPRESENTATIONS OF SIS BANCORP, INC. AND GLASTONBURY SURVIVING CORPORATION AND TRUST COMPANY Messrs. Tyler Cooper & Alcorn, LLP CityPlace \ 35th Floor Hartford, Connecticut 06103-3488 Messrs. Sullivan & Worcester LLP One Post Office Square Boston, Massachusetts 02109 These representations and warranties are being submitted by and on behalf of the corporations whose names appear below (collectively the "Merging Parties") and are furnished to you in connection with the consummation of the Mergers (collectively the "Merger") described in the Agreement and Plan of Reorganization among the Merging Parties dated as of August 18, 1997 (the "Agreement") and the rendering of your legal opinions as to the tax effects of the Merger upon the Merging Parties and their shareholders. Each of the Merging Parties hereby acknowledges that such opinions will be rendered in reliance on the representations and warranties contained herein. For purposes of this certificate, capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Agreement. As used herein, the term "the Surviving Corporation" shall mean GBT as the surviving corporation in the Merger. 1. The ratio for the exchange of shares of Glastonbury Surviving Corporation and Trust Company ("GBT") for common stock of SIS Bancorp, Inc. ("SIS") in the Merger was negotiated through arm's length bargaining. Accordingly, the fair market value of the SIS stock and other consideration received by each GBT shareholder will be approximately equal to the fair market value of the GBT stock surrendered in the exchange. 2. There is no plan or intention by the shareholders of GBT who own 5 percent or more of the GBT stock, and to the best of the knowledge of the management of GBT, there is no plan or intention on the part of the remaining shareholders of GBT, to sell, exchange or otherwise dispose of a number of shares of SIS stock received in the Merger that would reduce the GBT shareholder's ownership of SIS stock to a number of shares having a value, as of the date of the Merger, of less than 50 percent of the value of all of the formerly outstanding stock of GBT as of 5 the same date. For purposes of this representation, shares of GBT stock exchanged for cash or other property, surrendered by dissenters or exchanged for cash in lieu of fractional shares of SIS stock will be treated as outstanding GBT stock on the date of the Merger. Moreover, shares of GBT stock and shares of SIS stock held by GBT shareholders and otherwise sold, redeemed, or disposed of prior or subsequent to the Merger will be considered in making this representation. 3. Following the Merger, the Surviving Corporation will acquire at least 90 percent of the fair market value of the net assets and at least 70 percent of the fair market value of the gross assets held by GBT immediately prior to the Merger: For purposes of this representation, amounts paid by the Surviving Corporation to dissenters, amounts paid by the Surviving Corporation to shareholders who receive cash or other property, Surviving Corporation assets used to pay its reorganization expenses, and all redemptions and distributions (except for regular, normal dividends) made by GBT immediately preceding the transfer, will be included as assets of the Surviving Corporation held immediately prior to the Merger. 4. Prior to the Merger, SIS will be in control of the Merger Subsidiary within the meaning of Section 368(c)(1) of the Internal Revenue Code of 1986, as amended (the "Code"). 5. Following the Merger, the Surviving Corporation will not issue additional shares of its stock that would result in SIS' losing control of the Surviving Corporation within the meaning of Section 368(c)(1) of the Code. 6. SIS has no plan or intention to reacquire any of its stock issued in the Merger. 7. SIS has no plan or intention to liquidate the Surviving Corporation; to merge the Surviving Corporation with and into another corporation; to sell or otherwise dispose of the stock of the Surviving Corporation: or to cause the Surviving Corporation to sell or otherwise dispose of any of the assets of Surviving Corporation acquired in the Merger, except for dispositions made in the ordinary course of business or transfers described in Section 368(a)(2)(c) of the Code. 8. The liabilities of the Surviving Corporation and the liabilities to which the transferred assets of Surviving Corporation are subject were incurred by GBT in the ordinary course of its business. No liabilities of any person other than GBT will be assumed by SIS or the Surviving Corporation in the Merger, and none of the shares of Surviving Corporation to be surrendered in exchange for SIS common stock in the Merger will be subject to any liabilities. The assumption by the Surviving Corporation of the liabilities of GBT pursuant to the Merger is for a bona fide business purpose, and the principal purpose of such assumption is not the avoidance of Federal income tax on the transfer of assets from GBT to the Surviving Corporation pursuant to the Merger.] 9. Following the Merger, the Surviving Corporation will continue the historic business of GBT or use a significant portion of GBT's business assets in a business. 10. SIS, the Merger Subsidiary, GBT, and the GBT shareholders will pay their 6 respective expenses, if any, incurred in connection with the Merger. 11. There is no intercorporate indebtedness existing between SIS and GBT that was issued, acquired, or will be settled at a discount. 12. In the Merger, shares of GBT stock representing control of GBT, as defined in Section 368(c)(1) of the Code, will be exchanged solely for voting stock of SIS. For purposes of this representation, shares of GBT stock exchanged for cash or other property originating with SIS will be treated as outstanding GBT stock on the date of the Merger. 13. None of the parties to the Merger is an investment company as defined in Section 368(a)(2)(f)(iii) and (iv) of the Code. 14. None of the parties is under the jurisdiction of a court in a title 11 or similar case within the meaning of Section 368(a)(3)(a) of the Code. 15. On the date of the Merger's becoming effective, the fair market value of the assets of GBT transferred to the Surviving Corporation will equal or exceed the sum of the liabilities assumed by the Surviving Corporation, plus the amount of liabilities, if any, to which the transferred assets are subject. 15. No stock of the Surviving Corporation will be issued in the Merger. 16. The payment of cash in lieu of fractional shares of SIS stock is solely for the purpose of avoiding the expense and inconvenience to SIS of issuing fractional shares and does not represent separately bargained-for consideration. The total cash consideration that will be paid in the Merger to the GBT shareholders instead of issuing fractional shares of SIS stock will not exceed one percent of the total consideration that will be issued in the Merger to the GBT shareholders in exchange for their shares of GBT stock. The fractional share interests of each GBT shareholder will be aggregated, and no GBT shareholder will receive cash in an amount equal to or greater than the value of one full share of SIS stock. 17. None of the compensation received by any shareholder-employees of GBT will be separate consideration for, or allocable to, any of their shares of GBT stock: None of the shares of SIS stock received by any shareholder-employees will be separate consideration for, or allocable to, any employment agreement; and the compensation paid to any shareholder-employees will be for services actually rendered and will be commensurate with amounts paid to third parties bargaining at arm's-length for similar services. 18. SIS will pay or assume only those expenses of GBT that are solely and directly related to the Merger in accordance with the guidelines established in Rev. Rul. 73-54, 1973-1 C.B. 187. 19. The Merger will be consummated in compliance with the terms of the Agreement and none of the material terms and conditions has been waived or modified, and none of the 7 undersigned corporations has any plan or intention to waive or modify any such material condition. This certificate is being furnished to you solely for your benefit and for use in rendering your opinions and is not to be used, circulated, quoted or otherwise referred to for any other purpose other than inclusion in your opinions without the express written consent of each of the undersigned. All of the foregoing certifications are true to the best knowledge of the management of the undersigned corporations as those certifications relate to or affect the corporation which such management runs and operates. SIS BANCORP, INC. By___________________________________ Its President GLASTONBURY BANK AND TRUST COMPANY By___________________________________ Its President 8 EX-13.1 5 REPORT OF GLASTONBURY BANK FOR YEAR ENDED 12-31-96 Exhibit 13.1 FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C. FORM F-2 ANNUAL REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 FDIC CERTIFICATE No. 19702-5 THE GLASTONBURY BANK & TRUST COMPANY Incorporated in the State of Connecticut I.R.S. Employer Identification No. 06-0363160 2461 MAIN STREET GLASTONBURY, CONNECTICUT 06033 Telephone No. (860) 633-4695 Securities Registered Under Section 12(b) of the Act: None Securities Registered Under Section 12 (g) of the Act: Common Stock (par value $2.50 per share) 1,829,920 Shares Outstanding (as of December 31, 1996) Name of Exchange on which class is registered: Nasdaq SmallCap Market Indicate by check mark whether the Bank (1) has filed all reports required to be filed by section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO -------- -------- Aggregate Market Value of the Voting Stock as of March 3, 1997 $31,108,640 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrants definitive Proxy Statement dated April 1, 1997 are incorporated by reference into Part I (item 4) and Part III (items 9 and 10). The 1996 Annual Report to Shareholders is incorporated by reference into Part II (item 5,6,7,and 8) and Part IV (item 11). Portions of the Bank's Registration Statement on Form F-1 dated April 29, 1992 are incorporated by reference into Part IV (item 11). 1 PART I ------ ITEM 1 ------ BUSINESS -------- (a) The Glastonbury Bank and Trust Company (the "Bank") was organized as a Connecticut state-chartered commercial bank with full trust powers on September 19, 1919. Its primary regulators are the commissioner of Banking of the State of Connecticut and the Federal Deposit Insurance Corporation (the "FDIC"). The Bank owns an insurance agency subsidiary, GBT Insurance Group, Inc. (formerly The Glastonbury Company), which was organized on January 1, 1924, pursuant to Connecticut law. The Bank has a single class of equity securities; Common Stock, par value $2.50 per share. There are 2,000,000 shares of Common Stock authorized by the Bank. As of December 31, 1996, there were 1,829,920 shares of common stock issued and outstanding, and the Bank had 567 holders of record of its Common Stock. (b) (1) The Bank and its subsidiary provide comprehensive deposit, loan, investment, and insurance products and services to small and medium- sized businesses, professionals and individuals in its primary and secondary markets. Additionally, the Bank provides trusts services through an affiliation with the trust division of Peoples Savings Bank of New Britain. In 1995, the Bank agreed to sell its remaining trust relationships to Peoples Savings Bank of New Britain (Connecticut) and to receive compensation for referring future trust business. The Bank will continue to maintain its trust powers under this agreement. The deposits of the Bank are insured by the FDIC to the maximum extent allowed by law. The Bank conducts business from nine branches including its Main Office located at 2461 Main Street, Glastonbury, Connecticut, and eight other branch facilities in the towns of Colchester (1), East Hartford (1), Glastonbury (2), Portland (1), Rocky Hill (1), South Glastonbury (1) and Wethersfield (1). The Bank has defined its secondary market area to include the following towns in Connecticut: Columbia, Cromwell, East Haddam, East Hampton, Hebron, Lebanon, Manchester, Marlborough, Middletown, Newington and Salem. Individuals and businesses in the Bank's primary and secondary markets are served by many aggressive financial institutions (commercial banks, savings banks, savings and loan associations, credit unions and investment and insurance firms). Many residents work in the Greater Hartford, Greater Middletown or New London/Norwich areas and have access to an even broader base of banking services. There are over 15 financial institutions serving the primary marketplace serviced by the Bank. The dominant banking competitors in our market include: Fleet Bank, Bank of Boston, Mechanics Savings Bank, First Federal Savings, Savings Bank of Manchester, American Savings Bank, and Webster Bank. The consolidation trend continued in the Bank's market area in 1996. Following the merger of Fleet Bank of Connecticut (a subsidiary of the Fleet Financial 2 Group, Providence, RI) and Shawmut Bank NA of Connecticut (a subsidiary of Shawmut Corp., Boston, MA), Webster Bank (a subsidiary of Webster Financial Corporation, Waterbury, CT) acquired Derby Savings of Ansonia, CT, and First Union of Charlotte, NC acquired Center Bank Waterbury, CT. In 1995, Webster Bank purchased the Hartford area branches of Shawmut Bank, including one branch in Glastonbury. There was one Derby Savings branch located in Glastonbury that was merged into the one Webster branch. Webster's entry into the Bank's market area is not expected to negatively impact the Bank's market share. At June 30, 1996, the Bank had over a 20% deposit market share in Glastonbury. In May 1996, the FDIC terminated the Bank's Cease and Desist Order (the "Order"), which had been in effect since September 1993. The termination of the Order, among other things, lowered noninterest expenses, particularly FDIC insurance premiums, and allowed the Bank to devote greater resources to redesigning products and enhancing customer service. (2) No material portion of the Bank's deposits were obtained from a single person. The Bank and its Board of Directors are aware of a concentration of loans (direct and indirect) as defined by FDIC concentration guidelines. Please see Notes to Consolidated Financial Statements, Note 4 "Loans" for a discussion regarding the issue of concentration as it relates to loans. The Bank anticipates no losses from such concentrations. (3) The Bank conducts substantially the same business operations and services as any independent commercial bank with full trust powers. Through its nine branches and ATM (Automated Teller Machine) system, the Bank offers the following products and services: Consumer services: Checking accounts, savings accounts, certificates of deposit, individual retirement accounts, automobile loans, home equity loans, mortgage loans, student loans, other personal loans, INVEST investment (brokerage) services, trust services, money orders, travelers checks, welfare check cashing services, safety deposit boxes, funds transfer services, ATM services, point-of-sale ATM card services, notary services, direct deposit, telephone transfer services, fax services, electronic tax return filing, ACH origination services, account reconciliation services and education seminars. Commercial services: In addition to the above list, other commercial services include: treasury tax and loan services, cash management programs, commercial mortgages, SBA loans, equipment loans, other business loans, SEP-IRAs plan services, night depository services, ACH origination services, account reconciliation services, checking account programs that meet the criteria of IOLTA/IORETA (attorneys' client trust funds) requirements, and merchant processing services. GBT Insurance Group, Inc., the Bank's insurance agency subsidiary, offers consumers and businesses a broad selection of property and casualty insurance and is licensed to sell most other lines of insurance such as life, disability and health insurance. In the first quarter of 1997, the agency entered into a management agreement with the Louis Levine Agency of Waterford, Connecticut. 3 Under the terms of the agreement, the Levine Agency will manage the property and casualty operation of GBT Insurance Group, including providing state-of-the-art automation, appointment of insurance carriers, and personnel management. GBT Insurance Group expects to offer life and health products by mid-1997 under a similar management alliance. To enhance the Bank's residential lending products and service, the Bank, in November 1996, entered into an agreement with the Mortgage Service Center of New England ("MSCNE"), a division of Chittenden Corporation of Burlington, Vermont. MSCNE will originate, process, and service residential 1-4 family mortgage loans on behalf of the Bank, including FHA, VA, CHFA loans as well as other loan programs to meet the credit needs of consumers in the Bank's market area. This alliance with MSCNE has enabled the Bank to offer a complete array of residential mortgage products, without the cost of developing a full- scale residential mortgage operation. (4) The Bank holds no patents, franchises, concessions, or licenses (other than those required by regulatory authorities) which are material to the business of the bank and its subsidiary. (5) (i) The Bank conducts research activities related to customer product needs and identification of potential markets for the Bank's products. The cost of such research is considered to be necessary and customary given the size of the Bank and its market area. These costs were not considered to be material. (ii) The Bank's introduction of new products or business lines during the past two fiscal years has not required a material investment of total assets of the Bank. The level of investment in new products (or the redesign of existing products) and the introduction of new business lines is considered to be appropriate for the ongoing development of the Bank. (iii) No employees are engaged in full-time market research or development activities. (6) There were no material effects on the Bank, either monetary or otherwise, due to compliance with Federal, State or Local provisions which have been enacted or adopted to regulate the discharge of material into the environment. (7) The Bank and its subsidiaries employed 132 persons (110 full-time and 22 part-time) or 123 full time equivalents as of December 31, 1996. The Bank does not anticipate a material change in the number of employees in the next year; only steady growth in the ordinary course of business. (8) No material portion of the Bank's business is subject to seasonal fluctuations. There are no other material areas peculiar to the Bank's business or the business of its subsidiary. 4 ITEM 2 ------ PROPERTIES ---------- The following table summarizes the Bank's locations as of December 31, 1996.
Leased/ Leased Location - Town Address Owned Expiration - ----------------------- ------- ---------- Glastonbury - (2461 Main Street) Owned East Hartford - (29 Main Street) Leased 2000 Colchester - (64 Norwich Avenue) Owned Portland - (255 Main Street) Leased 1999 Rocky Hill - (38 Town Line Road) Leased 1997 Glastonbury - (730 Hebron Avenue) Leased 2003 Glastonbury - (Welles Street) Leased 2006 South Glastonbury - (901 Main Street) Leased 1999 Wethersfield - (171 Silas Deane Highway) Leased 1998
Additional information related to lease terms and rental expense appear in the Notes to Consolidated Financial statements Note 9, "Lease Commitments," on page 28 of the 1996 Annual Report to Shareholders and is incorporated herein by reference. ITEM 3 ------ LEGAL PROCEEDINGS ----------------- Due to the nature of its business, the Bank may be subject to legal actions which arise out of the normal course of its business. Based on information presently available and advice received from legal counsel representing the Bank in connection with such claims and lawsuits, it was the opinion of management that the disposition or ultimate determination of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Bank. Management's opinion extends to a lawsuit brought against the Bank and seven directors on or about November 1, 1995 by a former director of the Bank, Henry J. Stone, Jr., and contemporaneously, by Mr. Stone's wife, Merriam March. Both suits allege misconduct by the directors in connection with a proposed acquisition offer received by the Bank in 1994. Mr. Stone's suit sought damages directly from the Bank and the directors to be paid to Mr. Stone. Mr. Stone also sought to be returned to the Bank's Board of Directors despite his resignation in May of 1995. The damages portion of the suit was dismissed by the Connecticut Superior Court, and Mr. Stone has not taken an appeal from that dismissal. His action to be returned to the Board remains, and the Bank intends to continue to vigorously oppose Mr. Stone. 5 Among other things, the Bank's Board is elected annually, and Mr. Stone was neither nominated as a director nor did he seek election at the shareholders meeting in 1996, a year after his resignation and the shareholders meeting at which he should have been seated on the Board. Ms. March's suit does not seek damages from the Bank and the directors to be paid to Ms. March herself. Rather, it is a "derivative suit" in which she, as a shareholder, has sued the directors of the Bank on behalf of the Bank for damages they have allegedly caused to the Bank. Because the suit is "derivative", any monetary judgment obtained by Ms. March would be paid by the directors to the Bank. Thus, although the Bank considers her suit without merit, the Bank would nonetheless be benefitted in the event Ms. March's suit were to succeed. The derivative action by Ms. March seeks approximately $11.7 million in money damages from the directors. However, the Bank's Certificate of Incorporation, which tracks the language of Connecticut banking law, limits the personal liability of directors to the Bank and its shareholders to an amount equal to one year of the director's compensation. This limitation is inoperative only when the director (1) has committed a knowing and culpable violation of the law, (2) has obtained improper personal economic gain, (3) has shown a lack of good faith and a conscious disregard of duty with an unjustifiable risk to the bank, (4) has sustained an unexcused pattern of inattention amounting to an abdication of duty, or (5) has violated state banking law. Therefore, unless one of the exceptions above applies, the Bank's recovery from the directors will be limited to one year of each director's compensation. Although Ms. March has alleged that some of the exceptions apply here, the Bank believes that they do not and the directors are defending themselves accordingly. Under Connecticut law, the Bank is required in some cases, and is permitted in others, to "indemnify", or reimburse, its directors from damages and costs incurred by them in connection with litigation brought against them in their official capacities at the Bank. If the director is wholly successful in the suit, the Bank must indemnify him. If the director conducted himself in good faith, and he or she reasonably believed his or her conduct to have been in the best interests of the Bank, then the Bank may indemnify the directors. If the Bank does not choose to indemnify a director, he or she can apply to the court for an order of indemnification. These rules apply whether the suit is finally adjudicated or settled earlier. In addition, the Bank may advance expenses of a director involved in Bank litigation upon certain conditions. In the Stone and March cases, a special committee of non-defendant directors of the Bank has determined that the directors are likely to be entitled to indemnification and that circumstances are appropriate to advance their expenses. In summary, the Stone lawsuit has been dismissed in its entirety except for the count which requests that Mr. Stone be re-seated on the Bank's Board of Directors. No monetary relief is sought in connection with that claim. In the March suit, any damages that the court may order the defendant directors to pay (the Bank believes this to be unlikely and, in any event, limited to one year's compensation from each director) would be paid to the Bank. At that point, the Bank would determine whether or not it can or may reimburse the defendant directors, essentially returning to them, in whole or in part, the damages paid to the Bank. The Bank's principal monetary exposure, therefore, is from the attorney's fees that it and its directors have incurred and will continue to incur until the suits are resolved. Although some of that exposure may be recoverable through insurance coverage, thus far the relevant insurers have claimed that these suits are excluded from their coverage. Through December 1996, the Bank had accrued for all expenses incurred for attorneys' fees and related costs in connection with the suit, including the advancing of such fees for the defendant directors. As of December 1996, preliminary motions have been completed and the parties are engaging 6 in mutual discovery efforts. The timing for trial is unpredictable due to court scheduling uncertainties, but the Bank currently expects that a trial will commence earlier than late 1998. The amount of additional legal fees to be incurred by the Bank will depend upon the scope of the plaintiff's discovery efforts, whether the suits actually go to trial, and other variables. ITEM 4 ------ SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ----------------------------------------------- AND MANAGEMENT -------------- The information required by this item appears in the Bank's Proxy Statement dated April 1, 1997 on pages 2-3 under the captions "Principal Holders" and "Election of Directors" which is incorporated herein by reference. PART II ------- ITEM 5 ------ MARKET FOR THE BANK'S COMMON STOCK AND -------------------------------------- RELATED SECURITY HOLDER MATTERS ------------------------------- (a) At the present time, McConnell, Budd & Downes; Tucker, Anthony, Inc; and Ryan Beck & Co. are market makers for the Bank's Common Stock. On July 18, 1996, the Bank's common stock began trading on the Nasdaq SmallCap Market under the symbol "GLBT." Previously, the Bank's stock was traded on the OTC bulletin board and in the "pink sheets" as indicated by the asterisk ("*"). The following are quoted bid prices for the Bank's stock as reported by Nasdaq where applicable and by Ryan, Beck & Co. where applicable, as of the dates indicated:
Bid ----- Date Low High -------- ----- ------ 3/31/95 * 7.70 7.75 6/30/95 * 7.25 7.625 9/30/95 * 7.25 10.50 12/31/95 * 7.50 9.875 3/31/96 * 8.50 9.25 6/30/96 * 9.125 10.25 9/30/96 10.00 10.875 12/31/96 10.125 13.25
(b) As of March 15, 1997, the Bank had 558 shareholders of its common stock. This does not reflect the number of persons or entities who hold their stock in nominee or "street" name. (c) The Bank declared a $0.07 cash dividend per common share in the second, third, and fourth quarters of 1996 and declared a "special" cash dividend of $0.07 per common share payable on December 15, 1996. No dividends were declared or paid in 1995. As a state capital stock bank subject to Connecticut banking law, the Bank may not declare a cash dividend on its common stock in an amount in excess of its net profits (as defined by state 7 statute) for the year in which the dividend is declared plus its retained net profits from the prior two years. The Bank may not declare or pay a cash dividend or repurchase any of its outstanding shares if the effect thereof would reduce its capital below the capital required by federal and state regulations. 8 ITEM 6 GLASTONBURY BANK & TRUST SELECTED FINANCIAL DATA (IN THOUSANDS EXCEPT PER SHARE AND RATIO DATA)
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 1993 1992 --------- --------- --------- --------- --------- Interest income................................. $ 17,461 $ 16,518 $ 15,453 $ 16,136 $ 17,580 Interest expense................................ 7,742 6,892 5,937 6,392 7,488 -------- -------- -------- -------- -------- Net interest income............................. 9,719 9,626 9,516 9,744 10,092 Provision (benefit) for loan losses............. 675 (213) 1,789 3,847 3,587 -------- -------- -------- -------- -------- Net interest income after provision (benefit) for loan losses..................... 9,044 9,839 7,727 5,897 6,505 Other operating income.......................... 3,197 3,135 4,043 4,045 3,670 Other operating expense......................... 10,473 10,197 11,225 12,606 10,898 (Recovery) loss on National Premium CD Program.. -- (410) 1,370 -- -- Loss on bulk sale of loans...................... -- 2,045 -- -- -- -------- -------- -------- -------- -------- Income (loss) before income taxes and accounting change............................. 1,768 1,142 (825) (2,664) (723) Income tax (benefit) provision.................. (757) (500) 35 65 76 -------- -------- -------- -------- -------- Income (loss) before accounting change.......... 2,525 1,642 (860) (2,729) (799) Cumulative effect of change in accounting for income taxes.................................. -- -- -- 52 -- -------- -------- -------- -------- -------- Net income (loss)............................... $ 2,525 $ 1,642 $ (860) $ (2,677) $ (799) ======== ======== ======== ======== ======== Per share data: Earnings (loss) before accounting change...... $ 1.38 $ 1.22 $ (0.67) $ (2.12) $ (0.62) Cumulative effect of accounting change........ -- -- -- 0.04 -- -------- -------- -------- -------- -------- Earnings (loss) per share....................... $ 1.38 $ 1.22 $ (0.67) $ (2.08) $ (0.62) ======== ======== ======== ======== ======== Dividends....................................... $ 0.28 $ 0.00 $ 0.00 $ 0.05 $ 0.20 Book value per share (as of period end)......... 9.22 8.18 6.23 8.57 10.70 Balance sheet data as of period end: Loans (net of unearned income)................ $148,733 $141,965 $130,790 $147,736 $164,742 Other earning assets.......................... 80,521 70,773 68,654 58,400 44,391 Total assets.................................. 248,598 229,774 218,292 228,981 238,499 Interest-bearing deposits..................... 172,606 157,487 159,460 168,695 185,568 FHLB borrowing................................ 21,000 23,000 13,000 14,000 5,000 Stockholders' equity.......................... 16,869 14,974 8,040 11,054 13,796
9 ITEM 7 ------ MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATION ------------------------ The response to this item is included on pages 3-14 under the caption "Management's Discussion and Analysis and Results of Operations" contained in the Bank's 1996 Annual Report which is incorporated herein by reference. In addition, the Supplemental Statistical Information similar to SEC Guide 3 required by 12 C.F.R. Section 335.312, Item 7, Instruction 7, is included on the following pages. 10
Average Balance Sheets, Net Interest Income and Interest Rates ==================================================================================================================================== The table presents the Bank's daily average balance sheets and the components: net interest income, net interest spread net interest margin and interest rate for the year ended December 31, 1996. Daily average loans outstanding include nonaccruing loans. 1996 1995 1994 Interest Interest Interest Income/ Income/ Income/ Average Expense Yield/ Average Expense Yield/ Average Expense Yield/ Balance (000's Rate Balance (000's Rate Balance (000's Rate omitted) omitted) omitted) ---------------------------- -------------------------- -------------------------- ASSETS Interest bearing balances due from depository institutions $3,795 $210 5.53% $590 $11 1.86% $ - $ - Federal funds sold 1,658 92 5.55% 774 58 7.49% 3,178 119 3.74% Securities: Taxable 67,223 4,257 6.33% 66,139 4,164 6.30% 62,739 3,627 5.78% Tax-Exempt 349 18 5.16% 198 15 7.58% 200 19 9.50% ------------------- ------------------- ------------------- Total 67,572 4,275 6.33% 66,337 4,179 6.30% 62,939 3,646 5.79% ------------------- ------------------- ------------------- Loans (net of unearned income) 145,068 12,884 8.88% 135,361 12,270 9.06% 136,821 11,688 8.54% Total interest-earning assets 218,093 17,461 8.01% 203,062 16,518 8.13% 202,938 15,453 7.61% ------------------- ------------------- ------------------- Cash and non-interest bearing balances due from depository institutions 7,816 7,729 8,963 Loan loss reserve (3,275) (4,628) (4,578) Premises and fixed assets - net 7,552 7,933 8,386 Other real estate owned 321 1,018 3,132 Accrued interest receivable 1,361 1,384 1,535 Other assets 2,313 1,976 2,360 --------- --------- --------- Total $234,181 $218,474 $222,736 ========= ========= =========
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1996 1995 1994 Interest Interest Interest Income/ Income/ Income/ Average Expense Yield/ Average Expense Yield/ Average Expense Yield/ Balance (000's Rate Balance (000's Rate Balance (000's Rate omitted) omitted) omitted) ---------------------------- -------------------------- -------------------------- LIABILITIES Interest-bearing deposits: Savings, NOW, and money market accounts $79,301 $1,797 2.27% $84,211 $1,903 2.26% $96,703 $2,126 2.20% Time deposits 83,830 4,638 5.53% 73,691 3,997 5.42% 69,407 3,069 4.42% ------------------- ------------------- ------------------- Total interest-bearing deposits 163,131 6,435 3.94% 157,902 5,900 3.74% 166,110 5,195 3.13% Other borrowings: Federal Home Loan Bank borrowings 23,356 1,306 5.59% 17,262 899 5.21% 15,167 742 4.89% ------------------- Securities sold under agreements to repurchase 25 1 4.00% 1,512 93 6.15% ------------------- ------------------- Total interest-bearing deposits and other borrowings 186,512 7,742 4.15% 176,676 6,892 3.90% 181,277 5,937 3.28% ------------------- ------------------- ------------------- Demand and noninterest bearing accounts 30,705 29,877 29,388 Dividends payable 33 - - Accrued expenses and other liabilities 1,436 1,682 1,391 --------- --------- --------- Total deposits, other borrowings and other liabilities 218,686 208,235 212,056 --------- --------- --------- Stockholders' equity: Common stock 4,575 3,380 3,225 Capital surplus 6,609 4,677 4,498 Retained earnings 4,799 3,501 3,585 Net unrealized holding loss on securities available for sale (488) (1,319) (628) --------- --------- --------- Total stockholders' equity 15,495 10,239 10,680 --------- --------- --------- Total $234,181 $218,474 $222,736 =================== =================== =================== Net interest income $9,719 $9,626 $9,516 ======== ======== ======== Net interest spread 1 3.86% 4.23% 4.33% ======= ======= ======= Net interest margin 2 4.46% 4.74% 4.69% ======= ======= ======= 1. Net interest spread equals the yield on Total interest earning assets minus the rate on Total interest bearing deposits and other borrowings. 2. Net interest margin equals Interest income on Total interest earning assets minus Interest expense on Total interest bearing deposits and other borrowings divided by Total interest earning assets.
12
Rate\Volume Analysis ==================================================================================================================================== The following table reflects the changes for the year ended December 31, 1996 in net interest income arising from changes in interest rates and from asset and liability volume, including mix. The change in interest attributable to both rate and volume has been allocated to the changes in the rate and the volume on a pro-rated basis. 1996 Increase/ Change Due to: Decrease Rate Volume (000's omitted) -------------------------------------------------------- Interest income change: Interest-bearing deposits $199 $53 $146 Federal funds sold 34 (18) 52 Securities: Taxable 93 24 69 Tax-Exempt 3 (6) 9 -------------------------------------------------------- Total 96 18 78 Loans (net of unearned income) 614 (252) 866 -------------------------------------------------------- Total interest income change $943 ($199) $1,142 ======================================================== Interest expense change: Interest-bearing deposits: Savings, NOW, and money market accounts ($106) $5 ($111) Time deposits 641 81 560 -------------------------------------------------------- Total interest-bearing deposits 535 86 449 Other borrowings: Federal Home Loan Bank borrowings 407 70 337 Securities sold under agreements to repurchase (92) (24) (68) -------------------------------------------------------- Total other borrowings 315 46 269 Total interest expense change 850 132 718 -------------------------------------------------------- Net interest income change $93 ($331) $424 ========================================================
13
Rate\Volume Analysis ================================================================================ The following table reflects the changes for the year ended December 31, 1995 in net interest income arising from changes in interest rates and from asset and liability volume, including mix. The change in interest attributable to both rate and volume has been allocated to the changes in the rate and the volume on a pro-rated basis. 1995 Increase/ Change Due to: Decrease Rate Volume (000's omitted) ---------------------------------------------------------- Interest income change: Interest-bearing deposits $11 $ - $11 Federal funds sold (61) 68 (129) Securities: Taxable 537 334 203 Tax-Exempt (4) (4) - ---------------------------------------------------------- Total 533 330 203 Loans (net of unearned income) 582 708 (126) ---------------------------------------------------------- Total interest income change $1,065 $1,106 ($41) ========================================================== Interest expense change: Interest-bearing deposits: Savings, NOW, and money market accounts ($223) $58 ($281) Time deposits 928 729 199 ---------------------------------------------------------- Total interest-bearing deposits 705 787 (82) Other borrowings: Federal Home Loan Bank borrowings 157 50 107 Securities sold under agreements to repurchase 93 - 93 ---------------------------------------------------------- 250 50 200 Total interest expense change 955 837 118 ---------------------------------------------------------- Net interest income change $110 $269 ($159) ==========================================================
14
Securities Portfolio ==================================================================================================================================== The following table summarizes the carrying amounts of the Bank's securities held to maturity and securities available for sale at December 31, 1996, 1995, and 1994 (in thousands). No investment securities of a single issuer other than in U.S. Government and its agencies and FHLB stock exceeded 10% of stockholders' equity in the years 1996, 1995 and 1994. 1996 1995 1994 -------------------------------------------------------- Securities held to maturity (at amortized cost): - ---------------------------------------------------- US Treasury securities $ - $ - $999 US Government agencies 7,932 5,434 8,235 US Government mortgage-backed 15,077 17,954 26,646 Collateralized mortgage obligations 5,063 5,160 7,789 State and Municipal bonds 185 440 450 Other bonds 215 281 333 -------------------------------------------------------- Total securities held to maturity $28,472 $29,269 $44,452 ======================================================== Securities available for sale (at fair value): - ---------------------------------------------------- US Treasury securities $ - $3,513 $2,939 US Government agencies 1,517 4,314 3,034 US Government mortgage-backed 15,379 16,895 9,548 Collateralized mortgage obligations 14,212 9,057 5,812 State and Municipal bonds 857 - - Money market mutual funds 106 - - -------------------------------------------------------- Total securities available for sale $32,071 $33,779 $21,333 ======================================================== FHLB Stock $2,220 $2,023 $1,544 ======================================================== Trading Securities $458 $ - $ - ========================================================
15
Securities Portfolio ==================================================================================================================================== The following table presents the contractual maturities of securities at December 31, 1996, and the weighted average yields of such securities. The weighted average yields were calculated based on the cost and effective yields to maturity of each security. Securities available for sale are presented seperately. Yields are calculated on a tax equivalent basis. Book Value (in thousands) -------------------------------------------------------------------------------------------- Less After one After five than through through After No one year five years ten years ten years Maturity -------------------------------------------------------------------------------------------- Securities held to maturity: - ---------------------------------------- US Government agencies $ - $2,000 $5,932 $ - $ - US Government mortgage-backed - 6,719 643 7,716 Collateralized mortgage obligations - - 949 4,113 State and Municipal bonds - - - 185 - Other bonds - 70 145 - - FHLB stock 2,220 -------------------------------------------------------------------------------------------- Total/Average weighted yields $ - 0.00% $8,789 5.95% $7,669 7.09% $12,014 7.10% $2,220 6.40% ============================================================================================ Securities available for sale: - ---------------------------------------- US Government agencies $ - $513 $1,005 $ - US Government mortgage-backed 20 1,872 2,633 10,852 Collateralized mortgage obligations - - 5,840 8,373 State and Municipal bonds - - - 857 Total securities available for sale -------------------------------------------------------------------------------------------- (excluding money market mutual funds) $20 9.50% $2,385 6.73% $9,478 6.61% $20,082 6.59% ============================================================================================
16
Loan Portfolio ==================================================================================================================================== Loans at December 31, 1996-1992 were as follows (in thousands): 1996 1995 1994 1993 1992 ----------------------------------------------------------------------------------------- Commercial, financial and agricultural $23,897 $23,541 $23,924 $31,792 $39,792 Real estate-construction 1,717 1,773 2,093 2,754 3,621 Real estate-mortgage 118,707 112,313 101,934 110,132 116,073 Installment and other loans to individuals 4,788 4,634 3,167 3,644 5,973 ----------------------------------------------------------------------------------------- Gross loans 149,109 142,261 131,118 148,322 165,459 ----------------------------------------------------------------------------------------- Less: Unearned income (376) (296) (328) (586) (717) Loan loss reserve (3,352) (3,029) (4,517) (4,742) (4,601) ----------------------------------------------------------------------------------------- Loans-net $145,381 $138,936 $126,273 $142,994 $160,141 =========================================================================================
17
Loan Maturity and Interest Rate Sensitivity ============================================================================================================ Commercial, financial and agricultural loans and real estate construction loans at December 31, 1996 are summarized in the following table by maturity distribution and interest rate sensitivity based upon contractual terms (in thousands). Requests for renewals or extensions are reviewed on an individual basis and granted if deemed appropriate. Such extensions, however, do not materially alter the anticipated maturity schedule as reported. One year After one After or less Thru five five years -------------------------------------------------------- Commercial, financial and agricultural: $5,360 $9,007 $9,530 Real estate-construction: 1,717 - - -------------------------------------------------------- $7,077 $9,007 $9,530 ======================================================== Fixed or Floating or Predetermined Adjustable Rate Rate ------------------------------------ Commercial, financial and agricultural: Due after one year $5,249 $13,288 ====================================
18
Nonaccrual, Past Due and Restructured Loans ==================================================================================================================================== The Bank's nonperforming loans at December 31, 1996-1992 are presented below (in thousands). Had nonaccrual and restructured loans been current in accordance with their original terms, gross interest income on these loans for 1996 would have increased by $150,443. The amount of interest income recognized on restructured loans was $77,172 for the year ended December 31, 1996. There are no commitments to extend additional funds to borrowers who currently have loans on nonaccrual status, 90 days past due and still accruing, or that are troubled debt restructurings. The following table shows the composition of nonaccrual, past due and restructured loans at December 31, 1996-1992: 1996 1995 1994 1993 1992 ---------------------------------------------------------------- Loans accounted for on a nonaccrual basis $1,464 $733 $3,943 $5,484 $2,975 Loans past due 90 days and still accruing - - - 57 376 ---------------------------------------------------------------- Total nonaccrual and past due loans $1,464 $733 $3,943 $5,541 $3,351 ================================================================ Troubled debt restructurings (exclusive of $619,000, $303,000, $1,547,000, $1,938,000 and $1,032,000 of nonaccrual loans included above for the years ended December 31, 1996, 1995, 1994, 1993, and 1992, respectively.) $694 $685 $332 $2,400 $2,836 ================================================================
19
Summary of Loan Loss Experience ==================================================================================================================================== The following table summarizes the activity in the allowance for loan losses on loans for the years ended December 31, 1996-1992 (in thousands.) The allowance is maintained at a level consistent with identified loss potential and the perceived risk in the portfolio. Please see Notes 1 and 4 to the 1996 Annual Report to Shareholders incorporated herein by reference for a discussion regarding the determination of the allowance for loan losses. It is not considered meaningful or practicable to allocate the allowance for loan losses according to industry, type of loan or geographic area. 1996 1995 1994 1993 1992 -------------------------------------------------------------------------------------- Loans charged off: Commercial, financial and agricultural $24 $1,114 $1,408 $2,517 $1,343 Real estate-construction - - - - - Real estate-mortgage 451 481 918 1,253 414 Installment and other loans to individuals 29 17 81 111 198 -------------------------------------------------------------------------------------- 504 1,612 2,407 3,881 1,955 -------------------------------------------------------------------------------------- Recoveries on loans charged off: Commercial, financial and agricultural 128 190 216 101 114 Real estate-construction - - - - - Real estate-mortgage 7 138 118 2 - Installment and other loans to individuals 17 9 59 72 54 -------------------------------------------------------------------------------------- 152 337 393 175 168 -------------------------------------------------------------------------------------- Net loans charged off 352 1,275 2,014 3,706 1,787 (Benefit) Provision charged to income 675 (213) 1,789 3,847 3,587 Balance at beginning of year 3,029 4,517 4,742 4,601 2,801 -------------------------------------------------------------------------------------- Balance at end of year $3,352 $3,029 $4,517 $4,742 $4,601 ====================================================================================== Ratio of net charge-offs during the year to average loans outstanding during the year 0.24% 0.94% 1.47% 2.30% 1.06% ======================================================================================
20
Deposits ==================================================================================================================================== The following table summarizes average daily deposits and average rates of the Bank for the years ended December 31, 1996, 1995 and 1994 (in thousands.) 1996 1995 1994 Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate -------------------------------------------------------------------------------------- Demand: Noninterest bearing $30,705 $29,877 $29,388 ============== ============ =========== Interest-bearing $21,682 1.61% $21,069 1.69% $22,952 1.78% Interest-bearing deposits: Savings and money market accounts 57,619 2.51% 63,142 2.45% 73,751 2.34% Time deposits 83,830 5.53% 73,691 5.42% 69,407 4.42% -------------- ------------ ----------- Total interest-bearing deposits $163,131 3.94% $157,902 3.74% $166,110 3.13% ======================================================================================
21 Certificates of Deposit ================================================================================ Time certificates of deposit in amounts of $100,000 or more at December 31, 1996 (in thousands) are scheduled to mature as follows: Three months or less $3,787 Over three through twelve months 3,773 Over one year through five years 2,962 Over five years 214 ----------------- Total $10,736 ================= 22
Return on Equity and Assets ==================================================================================================================================== The table below presents selected ratios of the Bank for 1996, 1995, and 1994. 1996 1995 1994 -------------------------------------------------------- Return on Average Total Assets 1.08% 0.75% -0.39% Return on Average Stockholders' Equity 16.29% 16.04% -8.05% Dividend Payout Ratio 20.29% 0.00% 0.00% Average Stockholders' Equity to Average Total Assets Ratio 6.62% 4.68% 4.79%
23 ITEM 8 ------ FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- The information required by this item is contained in the Bank's 1996 Annual Report on pages 15-37 under the captions "Consolidated Balance Sheets, December 31, 1996 and 1995", "Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994", "Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994", "Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994", "Notes to Consolidated Financial Statements", and the "Independent Auditors' Report" from Shatswell, MacLeod & Company, P.C., the Bank's independent auditors, all of which are incorporated herein by reference. PART III -------- ITEM 9 ------ DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK -------------------------------------------- (a) The information required by this sub-item is found in the Bank's Proxy Statement dated April 1, 1997 on pages 2-3 under the caption "Election of Directors" which is incorporated herein by reference. (b) The principal officers of the Bank are: (1) J. Gilbert Soucie, (age 59), serves as President, Chief Executive Officer and is a Director. Mr. Soucie joined the Bank in April 1994. Prior to joining Glastonbury Bank & Trust, Mr. Soucie was a Senior Vice President/Senior Loan Officer with Mechanics Savings Bank of Hartford, Connecticut. (2) Charles Balocca, (age 51) serves as Senior Vice President and Senior Credit Officer. Mr. Balocca joined the Bank in October, 1994. Prior to joining Glastonbury Bank & Trust, Mr. Balocca was Senior Commercial Lending Officer with Great Country Bank of Ansonia, Connecticut. (3) Wayne F. Patenaude, CFA (age 36) serves as Senior Vice President, Treasurer and Chief Financial Officer. Mr. Patenaude joined the Bank in May, 1991 and has served in these capacities since April of 1993 and previously served as Vice President and Manager of Financial Services. Mr. Patenaude is a Chartered Financial Analyst. (4) David B. Rowley, (age 49) serves as Senior Vice President of Administration. Mr. Rowley joined the Bank in December 1995 as Vice President and Credit Policy Officer. Prior to joining Glastonbury Bank & Trust, Mr. Rowley was Vice President and Senior Loan Workout Officer with Fleet Bank, N.A. (c) The Bank employs no persons, such as special consultants, who are not Principal Officers but who make significant contributions to the business of the Bank. (d) None of the Directors or Principal officers have any family relationships to the other, nor is any Director or Principal Officer a Director of any other corporation registered under Section 12 of the Securities Exchange Act of 1934, as amended. There are no material legal proceedings to be reported. ITEM 10 ------- MANAGEMENT COMPENSATION AND TRANSACTIONS ---------------------------------------- The information required by this item may be found in the Bank's Proxy Statement dated April 1, 1997 on pages 4-6 under the captions "Summary Officer Compensation", "Retirement Plan", "401(k) Plan", "Deferred Compensation Plans/Change of Control Agreements", and "Transactions with and Indebtedness 24 of Management and Others", which are incorporated herein by reference. PART IV ------- ITEM 11 ------- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM F-3 ---------------------------------------------------------------- (a) Financial Statements (1) The following financial statements are contained on pages 15-37 in the Bank's 1996 Annual Report and are incorporated herein as Exhibit 3: 1. Consolidated Balance Sheets as of December 31, 1996 and 1995. 2. Consolidated Statements of Operations and Cash Flows for the years ended December 31, 1996, 1995, and 1994. 3. Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994. 4. Notes to Consolidated Financial Statements. 5. Independent Auditors' Report. (2) The following Independent Auditors' Report and the supporting financial schedules appear in Exhibit I. 1. Schedule II: Loans to Officers, Directors, Principal Security Holders, and any Associates of Foregoing Persons. 2. Schedule IV: Bank Premises and Equipment. 3. Schedule V: Investments in, Income From Dividends, and Equity in Earnings or Losses of Subsidiaries and Associated companies. 4. Independent Auditors' Report. (2a) The following Schedules are incorporated herein by reference to the Bank's 1996 Annual Report: I. Schedule I: Securities The information for this Schedule appears in the Notes to the Consolidated Financial Statements, Note I under "Securities" and Note 3 "Securities". 2. Schedule III: Loans and Lease Financing Receivables. The information for this Schedule appears in the Notes to the Consolidated Financial Statements', Note 1 under "Loans and Allowance for Loan Losses," and Note 4 "Loans". 3. Schedule VI: Allowance for Possible Loan Losses. The information for this schedule 25 appears in the Notes to the Consolidated Financial Statements, Note 1 under "Loans and Allowance for Loan Losses" and under Note 4 "Loans". (b) The Bank did not file a Form F-3 in the last quarter of 1996. (c) Exhibits: (1) Financial Schedules appear as Exhibit 1. (2) Articles of Incorporation and Bylaws: The Certificate of Authority, Certificate of Organization, Bylaws and Approval of the Commissioner appear as Exhibit 2. (3) The Bank's 1996 Annual Report appears as Exhibit 3. (4) Instruments defining the rights of security holders, including indentures: A specimen stock certificate was previously filed as Exhibit 2 to Form F-1 dated April 29, 1992, and is hereby incorporated by reference. (5) Material Contracts: (i) (A-C), (ii) The Bank was not engaged in any contracts considered by management to be material as defined in this section, either related to personnel, fixed property, or otherwise. (6) Statement Re Computation of per share earnings (loss): A statement concerning the computation of per share loss is found in the Notes to Consolidated Financial Statements on page 22 under the caption "Earnings (Loss) per share." (7) Statements Re Computation of ratios: Not applicable. (8) Letter Re Change in Accounting Principles: Not applicable. (9) Previously Unfilled Documents: Not applicable. (10) The following are subsidiaries of the Bank: The subsidiaries of the Bank are attached hereto as Exhibit 4. 26 Pursuant to the requirements of 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. /s/ J. Gilbert Soucie - ------------------------------- J. Gilbert Soucie, President and Chief Executive Officer Dated: March 27, 1997 ----------------- /s/ Wayne F. Patenaude - -------------------------- Wayne F. Patenaude, Senior Vice President & Treasurer Dated: March 27, 1997 ----------------- Pursuant to the requirements of section 13 of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures Date Title /s/ Alden A. Ives March 27, 1997 Chairman, - ------------------------- -------------- Director Alden A. Ives /s/ J. Gilbert Soucie March 27, 1997 President, Chief - ------------------------- -------------- Executive Officer, Director J. Gilbert Soucie /s/ Loren J. Andreo March 27, 1997 Director - ------------------------- -------------- Loren J. Andreo /s/ Ronald E. Bourbeau March 27, 1997 Director - ------------------------- -------------- Ronald E. Bourbeau /s/ Camille S. Bushnell March 27, 1997 Director - ------------------------- -------------- Camille S. Bushnell /s/ John J. Carson March 27, 1997 Director - ------------------------- -------------- John J. Carson /s/ Harvey A. Katz March 27, 1997 Director - ------------------------- -------------- Harvey A. Katz Director - ------------------------- -------------- Grace C. Nome /s/ Mark A. Sheptoff March 27, 1997 Director - ------------------------- -------------- Mark A. Sheptoff /s/ James Uccello March 27, 1997 Director - ------------------------- -------------- James Uccello
27 EXHIBIT 4 PARENTS AND SUBSIDIARIES The Glastonbury Bank & Trust Company (Parent) GBT Insurance Group, Inc. (100% owned) GBT Insurance Group, Inc. is an insurance agency subsidiary organized under Connecticut law and is consolidated for financial reporting purposes. 28 EX-13.2 6 REPORT OF GLASTONBURY BANK FOR QUARTER ENDED 3-31-97 Exhibit 13.2 FORM F-4 QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 for QUARTER ENDED, MARCH 31, 1997 FDIC CERTIFICATE NO. #19702-5 THE GLASTONBURY BANK & TRUST COMPANY Connecticut IRS EMPLOYER IDENTIFICATION NO. 06-0363160 2461 Main Street, Glastonbury, Connecticut 06033 (860) 633-4695 Indicate by check mark whether the bank (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- -------- Common Stock Par Value $2.50 Per Share 1,829,920 Shares Outstanding (as of March 31, 1997) THE GLASTONBURY BANK & TRUST COMPANY Notes to Consolidated Financial Statements NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of The Glastonbury Bank & Trust Company ("The Bank") and its subsidiary, The GBT Insurance Group, Inc. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form F-4. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair representation have been included. Operating results are not necessarily indicative of the results that may be expected for year end December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Bank's annual report filed in form F-2 for the year ended December 31, 1996. NOTE B - RECLASSIFICATION Certain prior year amounts have been reclassified to conform with the current year presentation. 2 Management's Discussion and Analysis Of Financial Condition and Results of Operations FINANCIAL CONDITION ------------------- At March 31, 1997, total assets increased $3,912,000 or 1.6% to $252,510,000 from December 31, 1996. The increase was concentrated in an increase of $20,099,000 or 62.7% in the securities available for sale portfolio, while loan growth was flat, growing less than 1%. Securities available for sale were funded in part by a decrease of $17,300,000 in interest bearing deposits in depository institutions. Security purchases were primarily in Collateralized Mortgage Obligations ("CMOs") with average lives of less than two years, money market preferred stock, and tax-exempt municipal bonds that are non-calleable for 10 years. The shorter term CMOs are "defensive" in that they are expected to outperform other alternative securities in a rising interest rate environment and perform equally well if interest rates should decline. The money market preferred stock reprice every 49 days and their dividends are 70% exempt from federal income taxes, providing attractive yields over the bank's cost of funds. The tax-exempt municipal bonds that were purchased are "offensive" in that they are expected to perform well in a declining interest rate environment. Given the level of interest rates and the interest rate spread differential between shorter term and longer term investments, as reflected in U.S. Treasury rates, the bank's investment strategy for the first quarter of 1997 was to invest approximately 80% in securities with average lives of two years or less and the remaining 20% in tax-exempt municipal bonds. If interest rates should rise from levels existing at March 31, 1997, the bank's strategy is to extend the shorter term maturity range from two years or less to two through five years and to increase the percentage of tax-exempt municipal bonds purchased. Deposits at March 31, 1997 were basically unchanged as compared to December 31, 1996, as a seasonal decline in demand and non-interest bearing deposits was partially offset by primarily an increase in savings and NOW deposits. Federal Home Loan Bank ("FHLB") borrowings increased $3,691,000 from the year ended December 31, 1996, consisting primarily of borrowings maturing in less than three months. Cash and cash equivalents increased to $10,088,000 at March 31, 1997, an increase of $1,245,000 from December 31, 1996. This temporary increase was primarily due to interchange cash flows from the merchant processing business line that can occur the last day of a quarter. The increase of $203,000 in deferred income taxes from December 31, 1996 was primarily due to tax effecting the increase in the net unrealized loss on available for sale securities. The decrease of $816,000 in other assets was primarily the result of a decrease in accrued merchant processing income. Accrued income for merchant processing activity is typically higher at the fourth quarter end than at any other quarter end. 3 Accrued expenses and other liabilities increased $281,000 primarily due to an accrual for income taxes, as the bank is expected to be in a taxable position for 1997. CAPITAL RESOURCES - ----------------- At March 31, 1997, the Bank's Tier 1 leverage capital ratio was 7.22% as compared to 7.07% at December 31, 1996. At March 31, 1997, the Bank's Tier 1 risk-based capital ratio was 12.00% and its Total risk-based capital ratio was 13.34% as compared to 12.16% and 13.42%, respectively, at December 31, 1996. The board of directors of the bank declared a quarterly cash dividend of $0.07 per share payable on February 15, 1997. In April 1997, the board of directors declared a $0.09 per share cash dividend, an increase of 29% in the quarterly cash dividend, payable on May 15, 1997 to shareholders of record on April 30, 1997. Total stockholders' equity increased $88,000 to $16,957,000 at March 31, 1997 from $16,869,000 at December 31, 1996. The increase was due to net income of $510,000 in the current quarter, partially offset by the quarterly dividend of $128,000 and a tax effected increase of $294,000 in the net unrealized holding loss on available for sale securities. The increase in the net holding loss on available for sale securities was attributed to an increase of approximately 55 basis points in the general level of interest rates. NONPERFORMING ASSETS AND THE ALLOWANCE FOR LOAN LOSSES - ------------------------------------------------------ Information concerning the Bank's nonperforming assets for the periods ended March 31, 1997 and December 31, 1996 are summarized below:
March 31, 1997 December 31, 1996 -------------- ------------------ (000's omitted) Nonaccrual Loans $1,510 $1,464 Loans Past Due in excess of 90 Days and still accruing interest 0 0 ------ ------ Total Nonperforming Loans 1,510 1,464 Other Real Estate Owned 1,040 1,159 ------ ------ Total Nonperforming Assets $2,550 $2,623 ====== ====== Allowance for Loan Losses $3,443 $3,352 ====== ======
During the current three month period ended March 31, 1997, nonperforming assets decreased $73,000. The decrease resulted from a decrease of $119,000 in other real estate owned ("OREO"), resulting from the sale of three properties, partially offset by an increase of $46,000 resulting primarily from the addition of one loan relationship. The 4 OREO properties that were sold produced a recovery, and the remaining properties were principally from a relationship with a single borrower. These two properties currently provide cash flow to the bank in the form of rental payments and recent appraisals indicate values that exceed current book value. All OREO has been written down to current appraised values, less anticipated selling costs, and are being actively marketed by the bank. At March 31, 1997, the ratio of the allowance for loan losses to nonperforming loans was 228%, the percentage of loans delinquent was less than 2%, and the ratio of nonperforming assets to total assets was at 1%. The bank had recoveries of 31,000 and provided a provision of $60,000 in the quarter ended March 31, 1997. The adequacy of the allowance for loan losses is reviewed by management monthly and was considered to be adequate as of March 31, 1997. Management's methodology in evaluating the adequacy of the allowance for loan losses considers specific credit reviews, recommendations made by external auditors and examiners, results from independent loan reviews, current local, state and national economic conditions and trends, past loan loss and delinquency experience and the volume, growth and composition of the loan portfolio. In addition, a portion of the allowance for loan losses is maintained for losses which may be inherent within the loan portfolio. 5 LIQUIDITY AND ASSET/LIABILITY MANAGEMENT - ---------------------------------------- Liquidity - --------- As of March 31, 1997, the Bank's liquidity was determined to be sufficient to meet the borrowing needs of its customers and to meet unexpected deposit withdrawals. On a daily basis, management monitors the Bank's liquidity position by analyzing the cash flows from loan and deposit activity, the amount of investment securities available for repurchase agreements, and the amount the Bank is allowed to borrow from the FHLB. Additionally, management determines an estimate of the expected level of cash flows from maturing loans and the expected prepayments on loans and securities. Asset/Liability Management - -------------------------- Management's objective is to minimize the Bank's exposure to changing interest rates, while maintaining the flexibility to take advantage of opportunities resulting from those changes. The Bank's exposure to interest rate risk, or changes in interest rates, is managed by strategically matching the rate sensitivity or repricing characteristics of loans and securities with those of interest-bearing liabilities. With regard to measuring the Bank's interest rate risk exposure, the Bank's one year GAP as of March 31, 1997 was .79, indicating that the Bank was liability sensitive over a cumulative one year time frame. Within 90 days, the Bank was slightly asset sensitive, and as a result, the Bank's net interest margin has benefited from the rise in interest rates in the current quarter. Additionally, the current increase of 25 basis points in the prime rate is expected to provide an additional benefit to the net interest margin. At the current level of interest rates, the bank's strategy has been to fund the bank with shorter term borrowings of less than three months and with retail CDs of 18 months or less. In addition, the bank has had success in raising the level of core deposits (defined as demand and savings deposits), which are a lower cost source of funds than either FHLB borrowings or retail CDs. These core deposits are largely considered long term funding as the interest rates paid on savings accounts typically lag, sometimes significantly, the movement in the general level of interest rates. Demand deposits, which pay no interest, have proven to have a low sensitivity to interest rate changes and therefore are considered longer term sources of funds. If interest rates should continue to increase through the end of 1997, the Bank's liability sensitive position in one year indicates that the net interest margin could decline beginning approximately in the third quarter of 1997. A decline in the bank's net interest margin could result as the Bank's cost of funds would be expected to increase in a higher interest rate environment, while the yields on earning assets would not be expected to increase as rapidly. If interest rates should increase and then begin to decline by the third or fourth quarter of this year, the bank's net interest margin would be expected to stabilize at higher levels. Additionally, the Bank's ability to continue to generate or purchase quality earning assets at adequate spreads over the bank's incremental cost of funds will provide for 6 stability and possibly growth in the margin. Moreover, mitigating any rise in the bank's cost of funds will depend largely on the bank's continued success at raising the level of its core deposits. Management measures the impact of various interest rate scenarios on the bank's net interest margin to determine which scenario(s) present the greatest risk and opportunities to the bank. Strategies are formulated based on management's assessment of the risk, whereby opportunities can be identified and taken advantage of, while excessive risk levels can be mitigated. 7 RESULTS OF OPERATIONS For the three month period ended March 31, 1997, the Bank had a net income of 510,000 or $0.28 per share as compared to $486,000 or $0.27 per share for the same period last year. (The average number of shares outstanding was 1,829,920 in both periods.) The increase of 24,000 or 4.9% was primarily due to a reduction of $165,000 in the provision for loan losses, a decline of $229,000 in other operating expenses, partially offset by primarily an income tax provision of $320,000 as compared to no provision for the first quarter of 1996. The bank's 38.6% effective tax rate in the current quarter is expected to prevail throughout 1997 as the bank is now in a taxable position, having reduced nearly all of the valuation allowance that had been reserved in prior years against net operating loss carryforwards. NET INTEREST INCOME - ------------------- The Bank's net interest income increased $29,000 or 1.2% in the quarter ended March 31, 1997 as compared to the same period last year. The increase resulted from an increase of $246,000 in interest income, partially offset by an increase of $217,000 in interest expense. The increase in interest income was primarily due to an increase of $18,577000 or 8.9% in the average daily earning assets to $227,209,000 in the current quarter as compared to the same period last year, partially offset by a decline of 20 basis points in the average daily yield on earning assets to 7.92% in the current quarter as compared to 8.12% in the same period last year. The increase in interest expense was primarily attributed to an increase in higher costs CDs and FHLB borrowings. The average daily rate on interest-bearing liabilities increased to 4.26% in the current quarter as compared to 4.06% in the same period last year. PROVISION FOR LOAN LOSSES - ------------------------- The provision for loan losses was reduced by $165,000 to $60,000 in the current quarter as compared to the same period last year. The reduction was justified based on improvement in credit quality, while the ratio of the allowance for loan losses to nonperforming loans increased to 228% at March 31, 1997 from 181% at March 31, 1996. OTHER OPERATING INCOME - ---------------------- Other operating income, excluding net security losses, amounted to $656,000 in the quarter ended March 31, 1997, a decrease of 9.4% from the quarter ended March 31, 1996. The decrease was due primarily to a decline in service charges on deposit accounts and a decline in rental income from equipment that was rented by customers of the bank's merchant processing business line. The decline in service charges resulted from a reduction in certain deposit account fees as part of a strategy to increase core deposits. Rental income declined as more merchant customers decided to purchase equipment rather than rent. 8 OTHER OPERATING EXPENSES - ------------------------ Total other operating expenses amounted to $2,205,000 in the current quarter, a decline of $229,000 or 9.4% as compared to the same period last year. The decline was primarily attributed to a reduction in legal fees, resulting from legal fees recorded in the first quarter of 1996 related to a former director's lawsuit and an elimination of expenses associated with the bank's Cease and Desist Order (the "Order") which was terminated by the FDIC in May 1996. Additionally, occupancy and equipment and related costs declined a total of $48,000 or 8.9% due to lower snow removal costs and lower depreciation expense in the current quarter as compared to the same period last year. The increase of $30,000 in the benefit on other real estate owned and related expenses was primarily the result of a gain on the sale of three properties, partially offset by expenses associated with the sale of these properties and maintenance cost on existing OREO properties. The increase of $52,000 or 25.1% in pensions, other employee benefits and related expenses was primarily due to an increase in 401K and pension benefits, including expenses associated with a supplemental retirement program for executive officers. FDIC assessment declined $39,000 or 84.8% as a result of an improvement in the bank's financial condition, particular credit quality and an increase in capital levels. Other operating expenses declined $186,000 or 24.9% largely due to a decline in legal fees and in expenses related to the termination of the Order, as discussed. Additionally, the bank experienced significant declines in its blanket bond insurance and director and officer liability coverage largely as a result of the termination of the Order. INCOME TAXES - ------------ The income tax provision was $320,000 for the quarter ended March 31, 1997 as compared to no provision for taxes in the quarter ended March 31, 1996. The bank expects to be in a taxable position for 1997, having reduced nearly all of the valuation allowance established in prior years against net operating carryforward losses. 9
Glastonbury Bank & Trust Company Consolidated Balance Sheets (Unaudited) (in thousands) March 31, December 31, Assets 1997 1996 ========= ============= Cash and cash equivalents $ 10,088 $ 8,843 Interest bearing deposits in depository institutions -- 17,300 --------- --------- Total cash and cash equivalents 10,088 26,143 Federal funds sold -- 0 Investment securities: Taxable 27,664 28,287 Tax-exempt 185 185 --------- --------- Total (fair value: 1997 - $27,447; 1996 - $28,294) 27,849 28,472 Federal Home Loan Bank stock 2,220 2,220 Securities available for sale: Taxable 47,574 31,214 Tax-exempt 4,596 857 --------- --------- Total 52,170 32,071 Assets held in trading 468 458 Loans (net of allowance for loan losses: 1997 - $3,443; 1996 - $3,352) 146,303 145,381 Premises and fixed assets - net 7,543 7,441 Other real estate owned 1,040 1,159 Accrued interest receivable 1,624 1,435 Deferred income taxes 1,809 1,606 Income tax receivable -- -- Other assets 1,396 2,212 --------- --------- TOTAL $ 252,510 $ 248,598 ========= ========= Liabilities and Stockholders' Equity Deposits: Demand and non-interest bearing $ 34,309 $ 35,814 Savings and NOW deposits 82,843 81,903 Time deposits 90,920 90,703 --------- --------- Total deposits 208,072 208,420 Other liabilities: Federal Home Loan Bank borrowings 24,691 21,000 Securities sold under agreements to repurchase 550 350 Accrued expenses and other liabilities 2,240 1,959 --------- --------- Total deposits and other liabilities 235,553 231,729 --------- --------- Stockholders' equity: Capital Stock - par value $2.50; 2,000,000 shares authorized 1,829,920 issued and outstanding 4,575 4,575 Capital surplus 6,609 6,609 Retained earnings 6,509 6,127 Net unrealized loss on available for sale securities (736) (442) --------- --------- Total Stockholders' Equity 16,957 16,869 --------- --------- TOTAL $ 252,510 $ 248,598 ========= =========
10
Glastonbury Bank & Trust Company Consolidated Statements of Operations (Unaudited) (in thousands, except per share data) For the three months ended March 31 March 31, 1997 1996 ======= ========= Interest income: Interest and fees on loans $ 3,294 $ 3,179 Interest and dividends on securities: Taxable: U.S. Treasury securities -- 55 U.S. Government agencies 967 944 Dividend income 74 32 Non-agency collateralized mortgage obligations 41 -- Corporate debt 2 3 Other securities 4 5 Tax-exempt - state and municipal obligations 43 4 Interest on deposits 64 7 Interest on federal funds sold 2 16 ------- ------- Total interest income 4,491 4,245 ------- ------- Interest expense: Interest on deposits: Time deposits of $100,000 or more 136 119 Savings and time deposits under $100,000 1,583 1,400 Interest on securities sold under agreements to repurchase 5 -- Interest on Federal Home Loan Bank borrowing 317 305 ------- ------- Total interest expense 2,041 1,824 ------- ------- Net interest income 2,450 2,421 Provision (benefit) for loan losses 60 225 ------- ------- Net interest income after provision (benefit) for loan losses 2,390 2,196 ------- ------- Other operating income: Trust department income 5 4 Service charges on deposit accounts 133 157 Gains on assets held in trading - net (11) -- Gain (loss) on securities available for sale - net -- -- Merchant income 367 399 Other 151 164 ------- ------- Total other operating income 645 724 ------- ------- Other operating expenses: Salaries 936 914 Occupancy, including depreciation on Bank premises 224 254 Equipment, including maintenance, rent and depreciation 265 283 Provision for losses on other real estate and related costs (46) (16) Pensions, other employee benefits and related expenses 259 207 FDIC assessment 7 46 Other 560 746 ------- ------- Total other operating expenses 2,205 2,434 ------- ------- Income before income taxes 830 486 Income tax benefit 320 -- ------- ------- Net income (loss) $ 510 $ 486 ======= ======= Earnings (loss) per share: Per share data based on 1,829,920 average shares outstanding for 1996 and 1995 $ 0.28 $ 0.27 ======= =======
11
Glastonbury Bank & Trust Company Consolidated Statements of Changes in Stockholders' Equity (Unaudited) (in thousands, except per share data) Net Unrealized Holding Total Three months ended Capital Capital Retained Gain (Loss) on Securities Stockholders' March 31, 1997 Stock Surplus Earnings Available for Sale Equity - ------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1997 $ 4,575 $ 6,609 $ 6,127 ($442) $16,869 Net income 510 510 Stock dividend declared on common stock ($0.07 on January 8, 1997) (128) (128) Net change in unrealized holding loss on securities available for sale (294) (294) ------------------------------------------------------------------------------------- Balance March 31, 1997 $ 4,575 $ 6,609 $ 6,509 ($736) $16,957 ===================================================================================== Three months ended March 31, 1996 - -------------------------------------- Balance, January 1, 1996 $4,575 $6,609 $4,114 ($324) $14,974 Net income 486 486 Net change in unrealized holding loss on securities available for sale (214) (214) ------------------------------------------------------------------------------------- Balance March 31, 1996 $4,575 $6,609 $4,600 ($538) $15,246 =====================================================================================
See notes to consolidated financial statements 12
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1997 and 1996 (Unaudited) (in thousands) 3/31/97 3/31/96 ======== ======== Cash flows from operating activities: Net income $ 510 $ 486 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 60 225 Provision for losses on other real estate owned 0 10 Provision for income taxes 320 -- Depreciation 241 257 Net amortization on securities held to maturity 19 18 Net amortization on securities available for sale 92 14 (increase) decrease in net deferred loan fees and costs (17) -- Increase in trading securities (10) (422) Loss (gain) on sale of securities available for sale -- -- Gain on disposition of real estate and equipment (86) (60) Decrease (Increase) in accrued interest receivable (189) (149) Decrease in other assets 830 495 (Decrease) Increase in accrued expenses and other liabilities (40) 116 -------- -------- Net cash provided by operating activities 1,730 990 -------- -------- Cash flows from investing activities: Net increase in Federal funds sold -- 4,350 Proceeds from maturities of securities held to maturity 634 757 Proceeds from sales of securities available for sale -- -- Proceeds from maturities of securities available for sale 1,437 1,500 Purchases of securities held to maturity -- (2,025) Purchases of securities available for sale (22,169) (3,264) Purchases of Federal Home Loan Bank Stock -- Net (increase) in loans (965) (445) Proceeds from the sale of real estate and equipment 209 98 Purchase of fixed assets (346) (70) -------- -------- Net cash provided by investing activities (21,200) 901 -------- -------- Cash flows from financing activities: Net increase in Federal Home Loan Bank borrowings short-term 4,691 2,000 Net decrease in Federal Home Loan Bank borrowings long-term (1,000) -- Net increase in securities sold under agreements to repurchase 200 -- Net decrease in demand deposits, money market and savings accounts (565) (5,793) Net increase in time deposits 217 3,737 Dividends paid (128) -- -------- -------- Net cash used in financing activities 3,415 (56) -------- -------- Net increase (decrease) in cash and cash equivalents (16,055) 1,835 Cash and cash equivalents beginning of period 26,143 8,435 -------- -------- Cash and cash equivalents end of period $ 10,088 $ 10,270 ======== ========
13 SIGNATURES Pursuant to the requirements 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. THE GLASTONBURY BANK & TRUST COMPANY Date: 5/14/97 /s/ J. Gilbert Soucie ------------------ -------------------------------------------------- J. Gilbert Soucie, President & Chief Executive Officer Date: 5/14/97 /s/ Wayne F. Patenaude ------------------ -------------------------------------------------- Wayne F. Patenaude, Senior Vice President, Treasurer & Chief Financial Officer 14 EX-13.3 7 REPORT OF GLASTONBURY BANK FOR QUARTER ENDED 6-30-97 Exhibit 13.3 FORM F-4 QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 for QUARTER ENDED, JUNE 30, 1997 FDIC CERTIFICATE NO. #19702-5 THE GLASTONBURY BANK & TRUST COMPANY Connecticut IRS EMPLOYER IDENTIFICATION NO. 06-0363160 2461 Main Street, Glastonbury, Connecticut 06033 (860) 633-4695 Indicate by check mark whether the bank (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------ Common Stock Par Value $2.50 Per Share 1,829,920 Shares Outstanding (as of June 30, 1997) THE GLASTONBURY BANK & TRUST COMPANY Notes to Consolidated Financial Statements NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of The Glastonbury Bank & Trust Company ("The Bank") and its subsidiary, The GBT Insurance Group, Inc. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form F-4. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair representation have been included. Operating results are not necessarily indicative of the results that may be expected for year end December 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Bank's annual report filed in form F-2 for the year ended December 31, 1996. NOTE B - RECLASSIFICATION Certain prior year amounts have been reclassified to conform with the current year presentation. 2 Management's Discussion and Analysis Of Financial Condition and Results of Operations FINANCIAL CONDITION ------------------- At June 30, 1997, total assets increased $12,700,000 or 5.1% to $261,298,000 from December 31, 1996. The increase was concentrated in an increase of $22,220,000 or 69.3% in the securities available for sale portfolio, with most of that increase occurring in the first quarter of 1997, and loans which increased $7,657,000 or 5.2%. Securities available for sale were funded in part by a decrease of $17,300,000 in interest bearing deposits in depository institutions. Security purchases were primarily in Collateralized Mortgage Obligations ("CMOs") with average lives of less than two years, money market preferred stock, and tax-exempt municipal bonds that are non-calleable for 10 years. The shorter term CMOs are "defensive" in that they are expected to outperform other alternative securities in a rising interest rate environment and perform equally well if interest rates should decline. The money market preferred stock reprice every 49 days and their dividends are 70% exempt from federal income taxes, providing attractive yields over the bank's cost of funds. The tax-exempt municipal bonds that were purchased are "offensive" in that they are expected to perform well in a declining interest rate environment. Loan growth was essentially flat during first quarter of 1997 as compared to loans at December 31, 1996. In the second quarter of 1997, loan growth began to accelerate with growth evenly distributed between consumer and commercial loans. Consumer loans, which include residential mortgages, home equity loans and installment loans, increased $3,676,000 or 5.1% from December 31, 1996. Commercial loans, which include commercial mortgages, construction loans to builders, revolving lines of credit and term loans, increased $3,982,000 or 5.1% from December 31, 1996. Deposits grew $8,174,000 or 3.9% from December 31, 1996, which included an increase of $3,974,000 or 11.1% in demand ("DDA") and non-interest bearing accounts and an increase of $3,754,000 or 4.1% in time deposits ("CDs"). Federal Home Loan Bank ("FHLB") borrowings decreased $1,700,000 from the year ended December 31, 1996, while securities sold under agreements to repurchase ("repos") increased $4,455,000 from $350,000 at December 31, 1996. The repos were primarily with major broker/dealers and were a lower cost source of funds for short-term funding needs as compared to FHLB borrowings. Cash and cash equivalents increased to $11,251,000 at June 30, 1997, an increase of $2,408,000 from December 31, 1996. This temporary increase was primarily due to interchange cash flows from the merchant processing business line that can occur the last day of a quarter. The decrease of $93,000 in deferred income taxes from December 31, 1996 was primarily due to the reduction in the deferred tax asset associated with tax effecting the net unrealized loss on available for sale securities. 3 The decrease of $519,000 in other assets was primarily the result of a decrease in accrued merchant processing income. Accrued income for merchant processing activity is typically higher at the fourth quarter end than at any other quarter end. Accrued expenses and other liabilities increased $677,000 primarily due to an accrual for income taxes, as the bank is expected to be in a taxable position for GAAP purposes in 1997. CAPITAL RESOURCES - ----------------- At June 30, 1997, the bank's Tier 1 leverage capital ratio was 7.22% as compared to 7.07% at December 31, 1996. At June 30, 1997, the bank's Tier 1 risk-based capital ratio was 11.78% and its Total risk-based capital ratio was 13.05% as compared to 12.16% and 13.42%, respectively, at December 31, 1996. The board of directors of the bank declared a quarterly cash dividend of $0.09 per share payable on May 15, 1997, representing a 29% increase from the quarterly cash dividend paid in the first quarter of 1997. Total stockholders' equity increased $1,094,000 to $17,963,000 at June 30, 1997 from $16,869,000 at December 31, 1996. The increase was due to net income of $1,235,000 for the first six months of 1997 and a decrease of $152,000 in the net unrealized holding loss on available for sale securities, partially offset by the first and second quarter dividends totaling $293,000. The increase in the net holding loss on available for sale securities was attributed to a decrease of approximately 15-20 basis points in the general level of interest rates. 4 NONPERFORMING ASSETS AND THE ALLOWANCE FOR LOAN LOSSES - ------------------------------------------------------ Information concerning the bank's nonperforming assets for the periods ended June 30, 1997 and December 31, 1996 are summarized below:
June 30, 1997 December 31, 1996 ------------- ------------------ (000's omitted) Nonaccrual Loans $1,561 $1,464 Loans Past Due in excess of 90 Days and still accruing interest 186 0 ------ ------ Total Nonperforming Loans 1,747 1,464 Other Real Estate Owned 969 1,159 ------ ------ Total Nonperforming Assets $2,716 $2,623 ====== ====== Allowance for Loan Losses $3,448 $3,352 ====== ======
During the current six month period ended June 30, 1997, nonperforming assets increased $93,000. The increase resulted from an increase of $186,000 in loans past due in excess of 90 days and still accruing interest and an increase of $97,000 in nonaccrual loans, partially offset by a decrease of $190,000 in other real estate owned ("OREO"). The increase in loans 90 days past due consisted of two loans that are paying in accordance with their contractual terms and are well secured. The increase in nonaccural loans resulted from two loans that management expects to resolve with no material costs to the bank. The decrease in OREO resulted from the sale of four properties. The OREO properties that were sold produced a recovery, and the remaining properties were principally from a relationship with a single borrower. These two properties currently provide cash flow to the bank in the form of rental payments and recent appraisals indicate values that exceed current book value. All OREO has been written down to current appraised values, less anticipated selling costs, and are being actively marketed by the bank. At June 30, 1997, the ratio of the allowance for loan losses to nonperforming loans was 197%, the percentage of loans delinquent was less than 2%, and the ratio of nonperforming assets to total assets was at 1.04%. The bank had net charge-offs of 24,000 and provided a provision of $120,000 in the first six months of 1997. The adequacy of the allowance for loan losses is reviewed by management monthly and was considered to be adequate as of June 30, 1997. Management's methodology in evaluating the adequacy of the allowance for loan losses considers specific credit reviews, recommendations made by external auditors and examiners, results from independent loan reviews, current local, state and national economic conditions and trends, past loan loss 5 and delinquency experience and the volume, growth and composition of the loan portfolio. In addition, a portion of the allowance for loan losses is maintained for losses which may be inherent within the loan portfolio. LIQUIDITY AND ASSET/LIABILITY MANAGEMENT - ---------------------------------------- Liquidity - --------- As of June 30, 1997, the bank's liquidity was determined to be sufficient to meet the borrowing needs of its customers and to meet unexpected deposit withdrawals. On a daily basis, management monitors the bank's liquidity position by analyzing the cash flows from loan and deposit activity, the amount of investment securities available for repurchase agreements, and the amount the bank is allowed to borrow from the FHLB. Additionally, management determines an estimate of the expected level of cash flows from maturing loans and the expected prepayments on loans and securities. Asset/Liability Management - -------------------------- Management's objective is to minimize the bank's exposure to changing interest rates, while maintaining the flexibility to take advantage of opportunities resulting from those changes. The bank's exposure to interest rate risk, or changes in interest rates, is managed by strategically matching the rate sensitivity or repricing characteristics of loans and securities with those of interest-bearing liabilities. With regard to measuring the bank's interest rate risk exposure, the bank's one year GAP as of June 30, 1997 was .71, indicating that the bank was liability sensitive over a cumulative one year time frame. Within 90 days, the bank was slightly asset sensitive, and as a result, the bank's net interest margin had benefited from the rise in interest rates in the first half of 1997, particularly a 25 basis point rise in the prime rate which occurred in the first quarter of 1997. At the current level of interest rates, the bank's strategy has been to fund the bank with shorter term borrowings of less than three months and with retail CDs of 18 months or less. The higher interest rate sensitivity that is typical of CDs is expected to be offset by relatively less interest rate sensitive core deposits (defined as demand and savings accounts). The bank has had success in raising the level of core deposits, which are a lower cost source of funds than either FHLB borrowings or retail CDs. These core deposits are largely considered long term funding as the interest rates paid on savings accounts typically lag, sometimes significantly, the movement in the general level of interest rates. Demand deposits, which pay no interest, have proven to have a low sensitivity to interest rate changes and therefore are considered longer term sources of funds. If interest rates should increase through the end of 1997, the bank's liability sensitive position in one year indicates that the net interest margin could decline beginning approximately in the fourth quarter of 1997. A decline in the bank's net interest margin could result as the bank's cost of funds would be expected to increase in a higher interest rate environment, while the yields on earning assets would not be expected to increase as rapidly. If interest rates should remain basically the same or increase and then begin to 6 decline by the fourth quarter of this year or the first quarter of 1998, the bank's net interest margin in those future periods would be expected to stabilize at higher levels. Management is continually evaluating and implementing strategies to take advantage of or at least mitigate the effects of an ever changing interest rate environment. Management has demonstrated an ability to generate or purchase quality earning assets at adequate spreads over the bank's incremental cost of funds, providing for growth in the margin. Management measures the impact of various interest rate scenarios on the bank's net interest margin to determine which scenario(s) present the greatest risk and opportunities to the bank. Strategies are formulated based on management's assessment of the risk, whereby opportunities can be identified and taken advantage of, while excessive risk levels can be mitigated. 7 RESULTS OF OPERATIONS For the three and six month periods ended June 30, 1997, the bank had a net income of $725,000 or $0.40 per share and $1,235,000 or $0.68 per share, respectively, as compared to $593,000 or $0.32 per share and $1,079,000 or $0.59 per share in the same periods last year. (The average number of shares outstanding was 1,829,920 in both periods.) The increase of 132,000 or 22.3% in the current three month period was primarily due to an increase of $162,000 or 19.7% in other operating income, a reduction of $207,000 or 8.3% in other operating expenses, and a reduction of $90,000 or 60% in the provision for loan losses, partially offset by an income tax provision of $435,000 as compared to no provision for the second quarter of 1996. The increase of $156,000 or 14.5% in net income in the current six month period was due to an increase of $137,000 or 2.8% in net interest income, an increase of $83,000 or 5.4% in other operating income, and reductions of $436,000 or 8.8% in other operating expenses and $255,000 or 68.0% in provision for loan losses. These increases to net income were partially offset by an income tax provision of $755,000. The bank's 38% effective tax rate through the first half of 1997 is expected to prevail throughout 1997 as the bank is now in a taxable position. In fourth quarter of 1996, the bank had reduced nearly all of the valuation allowance that had been reserved in prior years against net operating loss carryforwards. NET INTEREST INCOME - ------------------- The increase in the bank's net interest income in the current three month period as compared to the same period last year was the result of an increase of $340,000 or 7.9% in interest income, partially offset by an increase of $232,000 or 12.4% in interest expense. The increase in net interest income in the current six month period was the result of an increase of $586,000 or 6.9% in interest income, partially offset by an increase of $449,000 or 12.1% in interest expense. The increase in net interest income in both periods was attributed to an increase in earning assets, partially offset by an increase in the bank's cost of funds, resulting in a decline in the bank's net interest margin (fully tax equivalent) to 4.40% from 4.55%. PROVISION FOR LOAN LOSSES - ------------------------- The reductions in the provision for loan losses in the three and six month periods ended June 30, 1997 were considered appropriate by management given the consistent, relatively low level of nonperforming assets to assets and loans delinquent as percentage of total loans, and the maintenance of a strong reserve coverage of nonperforming loans. At June 30, 1997, the ratio of nonperforming loans to loans was 1.12% as compared to 1.63% at June 30, 1996. The percentage of loans delinquent was at 1.29% at June 30, 1997 as compared to 2.39% at June 30, 1996, and the ratio of the allowance for loan losses to nonperforming loans was at 197% at June 30, 1997 as compared to 144% at June 30, 1996. 8 OTHER OPERATING INCOME - ---------------------- The increase in other operating income excluding net gains on the sale of available for sale securities amounted to $113,000 or 13.9% in the current three month period as compared to the same period last year. For the current six month period, other operating income, excluding net security gains on the sale of available securities, increased $34,000 or 2.2% as compared to the same period last year. The increase in the current quarter resulted from an increase of $60,000 or 12.5% in merchant income due to increasing sales volume and an increasing customer base, net gains of $28,000 on trading account assets, and a $43,000 increase in other income. Offsetting these increases was a decline of $20,000 in service charges on deposit accounts, approximately $15,000 of which was a reclassification of commissions earned on the sale of customer checks. Management expects service charge income on deposit accounts to continue to improve as core deposits continue to grow. The increase in other operating income in the current six month period was primarily due to an increase of $28,000 or 3.2% in merchant income. The increase of $60,000 in merchant income in the current three month period more than offset a decline in the first quarter of 1997 as compared to the first quarter of 1996. Rental income from the rental of merchant equipment was lower in the first quarter of 1997 as compared to the first quarter of 1996. In the second quarter of 1997, rental income stabilized and transaction volume began to accelerate. Net gains on assets held in trading increased $17,000. The trading strategy of investing in equal share amounts in the 20 stocks that make up the major market index and hedging the position with index call and put options has produced an 8.0% return since the inception of the strategy in March of 1996. Other income increase $30,000 in the current six month period primarily due to an increase of $14,000 or 21.2% in the sale of nondeposit investment products and the reclassification of checking commission as discussed. OTHER OPERATING EXPENSES - ------------------------ The decrease of $207,000 in other operating expenses in the current three month period as compared to the same period last year resulted from a reduction in nearly all expense categories except salaries which were flat. The decrease of $436,000 in other operating expenses in the current six month period resulted from decreases in most expense categories with the exception of salaries which increase $22,000 or 1.2% and an increase of $25,000 or 5.4% in pensions, other employee benefits and related costs. Management expects that salaries will grow modestly in the second half of 1997 as compared to the second half of 1996 primarily due to increases in staff in the bank's wholly-owned insurance agency subsidiary, GBT Insurance Group, Inc., and in the bank's retail investment sales unit. The increase in pensions, other employee benefits and related costs resulted primarily from expenses associated with 401K and pension benefits, including expenses associated with a supplemental retirement program for executive officers. 9 Occupancy, including depreciation on bank premises and equipment expenses declined a total of $34,000 or 6.4% and $82,000 or 7.7%, respectively, in the current three and six month periods ended June 30, 1997 as compared to the same periods last year. The reduction in both periods were attributed to lower snow plowing costs, lower maintenance costs for equipment due to improved equipment maintenance contracts, and lower depreciation costs as items purchased in the late 1980s for the main office building are becoming fully depreciated. Provision for losses on other real estate and related costs reflected net revenue to the bank in the three and six month periods ended June 30, 1997 and in the same periods last year. The revenue in 1997 was primarily due to gains on the sale of foreclosed properties and, to lesser extent, rental income from foreclosed properties. FDIC assessment declined $40,000 or 87.0% in the current three month period and $79,000 or 85.9% in the current six month period as compared to the same periods last year. The decrease in both periods resulted from an improvement in the bank's financial condition, particular credit quality and an increase in capital levels. Other expenses declined $112,000 or 15.7% in the current three month period and $298,000 or 20.4% in the current six month period as compared to the same periods last year. The decline in the both periods was primarily attributed to a reduction in legal fees, resulting from legal fees recorded in the first quarter of 1996 related to a former director's lawsuit and an elimination of expenses associated with the bank's Cease and Desist Order (the "Order") which was terminated by the FDIC in May 1996. INCOME TAXES - ------------ The income tax provision was $435,000 in the current quarter and $755,000 through the first six months of 1997 as compared to no provision for taxes in the same periods last year. The bank expects to be in a taxable position for 1997, having reduced nearly all of the valuation allowance established in prior years against net operating carryforward losses. 10
Glastonbury Bank & Trust Company Consolidated Balance Sheets (Unaudited) (in thousands) June 30, December 31, Assets 1997 1996 - ------------------------------------------------------------------------------------------- Cash and cash equivalents $ 11,251 $ 8,843 Interest bearing deposits in depository institutions -- 17,300 --------- --------- Total cash and cash equivalents 11,251 26,143 Federal funds sold -- -- Investment securities: Taxable 26,557 28,287 Tax-exempt 185 185 --------- --------- Total (fair value: 1997 - $26,559; 1996 - $28,294) 26,742 28,472 Federal Home Loan Bank stock 2,111 2,220 Securities available for sale: Taxable 47,720 31,214 Tax-exempt 6,571 857 --------- --------- Total 54,291 32,071 Assets held in trading 549 458 Loans (net of allowance for loan losses: 1997 - $3,448; 1996 - $3,352) 152,942 145,381 Premises and fixed assets - net 7,577 7,441 Other real estate owned 969 1,159 Accrued interest receivable 1,660 1,435 Deferred income taxes 1,513 1,606 Income tax receivable -- -- Other assets 1,693 2,212 --------- --------- TOTAL $ 261,298 $ 248,598 ========= ========= Liabilities and Stockholders' Equity - ------------------------------------ Deposits: Demand and non-interest bearing $ 39,788 $ 35,814 Savings and NOW deposits 82,349 81,903 Time deposits 94,457 90,703 --------- --------- Total deposits 216,594 208,420 Other liabilities: Federal Home Loan Bank borrowings 19,300 21,000 Securities sold under agreements to repurchase 4,805 350 Accrued expenses and other liabilities 2,636 1,959 --------- --------- Total deposits and other liabilities 243,335 231,729 --------- --------- Stockholders' equity: Capital Stock - par value $2.50; 2,000,000 shares authorized 1,829,920 issued and outstanding 4,575 4,575 Capital surplus 6,609 6,609 Retained earnings 7,069 6,127 Net unrealized loss on available for sale securities (290) (442) --------- --------- Total Stockholders' Equity 17,963 16,869 --------- --------- TOTAL $ 261,298 $ 248,598 ========= =========
11
Glastonbury Bank & Trust Company Consolidated Statements of Operations For the three months ended For the six months ended (Unaudited) (in thousands, except per share data) June 30, June 30, June 30, June 30, 1997 1996 1997 1996 - ---------------------------------------------------------------------------------------- ------------------------- Interest income: Interest and fees on loans 3,378 3,172 6,672 6,351 Interest and dividends on securities: Taxable: U.S. Treasury securities 32 81 32 136 U.S. Government agencies 1,021 982 1,988 1,926 Dividend income 84 35 158 67 Non-agency collateralized mortgage obligations 48 -- 89 -- Corporate debt 2 3 4 6 Other securities 2 4 6 9 Tax-exempt - state and municipal obligations 74 3 117 7 Interest on deposits -- 3 64 10 Interest on federal funds sold 4 22 6 38 ------- ------- ------- ------- Total interest income 4,645 4,305 9,136 8,550 ------- ------- ------- ------- Interest expense: Interest on deposits: Time deposits of $100,000 or more 144 126 280 245 Savings and time deposits under $100,000 1,608 1,420 3,191 2,820 Interest on securities sold under agreements to repurchase 45 -- 50 -- Interest on Federal Home Loan Bank borrowing 313 332 630 637 ------- ------- ------- ------- Total interest expense 2,110 1,878 4,151 3,702 ------- ------- ------- ------- Net interest income 2,535 2,427 4,985 4,848 Provision for loan losses 60 150 120 375 ------- ------- ------- ------- Net interest income after provision for loan losses 2,475 2,277 4,865 4,473 ------- ------- ------- ------- Other operating income: Trust department income 5 3 10 7 Service charges on deposit accounts 130 150 263 307 Gains on assets held in trading - net 30 2 19 2 Gain (loss) on securities available for sale - net 49 -- 49 -- Merchant income 542 482 909 881 Other 228 185 379 349 ------- ------- ------- ------- Total other operating income 984 822 1,629 1,546 ------- ------- ------- ------- Other operating expenses: Salaries 971 971 1,907 1,885 Occupancy, including depreciation on Bank premises 232 254 456 508 Equipment, including maintenance, rent and depreciation 267 279 532 562 Provision for losses on other real estate and related costs (7) (13) (53) (29) Pensions, other employee benefits and related expenses 229 256 488 463 FDIC assessment 6 46 13 92 Other 601 713 1,161 1,459 ------- ------- ------- ------- Total other operating expenses 2,299 2,506 4,504 4,940 ------- ------- ------- ------- Income before income taxes 1,160 593 1,990 1,079 Income tax provision 435 -- 755 ------- ------- ------- ------- Net income $ 725 $ 593 $ 1,235 $ 1,079 ======= ======= ======= ======= Earnings per share: Per share data based on 1,829,920 average shares outstanding for 1997 and 1996 $0.40 $0.59 $0.68 $0.59 ======= ======= ======= =======
12
Glastonbury Bank & Trust Company Consolidated Statements of Changes in Stockholders' Equity (Unaudited) (in thousands, except per share data) Net Unrealized Holding Total Six months ended Capital Capital Retained Gain (Loss) on Securities Stockholders' June 30, 1997 Stock Surplus Earnings Available for Sale Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1997 $4,575 $6,609 $6,127 ($442) $16,869 Net income 1,235 1,235 Stock dividends declared on common stock ($0.07 on January 8, 1997) (128) (128) ($0.09 on April 9, 1997) (165) (165) Net change in unrealized holding loss on securities available for sale 152 152 ------------------------------------------------------------------------------- Balance June 30, 1997 $4,575 $6,609 $7,069 ($290) $17,963 =============================================================================== Six months ended June 30, 1996 - ---------------------------------------------------- Balance, January 1, 1996 $4,575 $6,609 $4,114 ($324) $14,974 Net income 1,079 1,079 Stock dividends declared on common stock ($0.07 on May 8, 1997) (128) (128) Net change in unrealized holding loss on securities available for sale (266) (266) ------------------------------------------------------------------------------- Balance June 30, 1996 $4,575 $6,609 $5,065 ($590) $15,659 ===============================================================================
See notes to consolidated financial statements 13
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996 (Unaudited) (in thousands) 6/30/97 6/30/96 =================================================================================================================== Cash flows from operating activities: Net income $1,235 $1,079 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 120 375 Provision for losses on other real estate owned 0 10 Provision for income taxes 755 - Depreciation 481 513 Net amortization on securities held to maturity 37 36 Net amortization on securities available for sale 208 27 (increase) decrease in net deferred loan fees and costs (33) - Increase in trading securities (91) - Gain on sale of securities available for sale (49) - Gain on disposition of real estate and equipment (145) (107) Increase in accrued interest receivable (225) (163) Decrease in other assets 519 398 (Decrease) Increase in accrued expenses and other liabilities (29) 216 ---------------------------------- Net cash provided by operating activities 2,783 2,384 ---------------------------------- Cash flows from investing activities: Net increase in Federal funds sold - 350 Proceeds from maturities of securities held to maturity 2,789 1,792 Proceeds from sales of securities available for sale 3,465 27 Proceeds from maturities of securities available for sale 3,085 2,597 Purchases of securities held to maturity (1,037) (3,025) Purchases of securities available for sale (28,792) (7,875) Redemption of Federal Home Loan Bank Stock 109 - Net increase in loans (7,648) (3,109) Proceeds from the sale of real estate and equipment 353 375 Purchase of fixed assets (635) (184) ---------------------------------- Net cash used in investing activities (28,311) (9,052) ---------------------------------- Cash flows from financing activities: Net increase in Federal Home Loan Bank borrowings short-term 300 2,000 Net decrease in Federal Home Loan Bank borrowings long-term (2,000) - Net increase in securities sold under agreements to repurchase 4,455 - Net increase (decrease) in demand deposits, money market and savings accounts 4,420 (3,212) Net increase in time deposits 3,754 7,439 Dividends paid (293) (128) ---------------------------------- Net cash provided by financing activities 10,636 6,099 ---------------------------------- Net increase (decrease) in cash and cash equivalents (14,892) (569) Cash and cash equivalents beginning of period 26,143 8,435 ---------------------------------- Cash and cash equivalents end of period $11,251 $7,866 ==================================
14 SIGNATURES Pursuant to the requirements 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. THE GLASTONBURY BANK & TRUST COMPANY Date: 8/13/97 /s/ J. Gilbert Soucie ------------------ -------------------------------------------------- J. Gilbert Soucie, President & Chief Executive Officer Date: 8/13/97 /s/ Wayne F. Patenaude ------------------ -------------------------------------------------- Wayne F. Patenaude, Senior Vice President, Treasurer & Chief Financial Officer 15 EX-13.4 8 GBT 1996 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13.4 Letter to Our Shareholders Dear Shareholder, In 1996 resources were dedicated to redesigning existing or introducing new products and services, enhancing customer service, and becoming a more market- driven financial institution. Together, with the initiatives taken in 1995, notably the successful Rights Offering of $3,500,000 and the bulk sale of nonperforming assets and certain classified loans, financial performance continued to improve, with net income and earnings per share increasing 54% and 13%, respectively, in 1996 as compared to 1995. At the annual meeting held on May 10, 1996, I had the pleasure to announce that the FDIC terminated the Cease and Desist Order, which was in effect since September 1993, and the board of directors reinstated a quarterly cash dividend, which was suspended in the second quarter of 1993. In addition to the quarterly cash dividend of $0.07 per share paid in the second, third and fourth quarters of 1996, a "special" cash dividend of $0.07 was paid on December 15, 1996. On July 18, 1996, the Bank's stock commenced trading on the Nasdaq SmallCap Market under the symbol "GLBT", exposing the Bank to a larger base of potential investors, resulting in improvement in the marketability of the stock. On December 31, 1996, the per share closing price was $12.75, representing a 29% increase in market value when compared to a December 31, 1995 per share closing price of $9.875. In November 1996 the Bank formed a strategic residential mortgage alliance with Mortgage Service Center of New England, a division of Chittenden Corporation, Burlington, Vermont. This alliance has enabled the Bank to offer a complete array of residential mortgage products, while avoiding nearly all of the costs of developing a full-scale residential mortgage operation. GBT Insurance Group, Inc. (formerly The Glastonbury Company) is presently the only bank-owned insurance agency licensed to sell all lines of insurance in the State of Connecticut. After exploring many expansion options, the agency entered into a management agreement with the Louis Levine Agency, Inc., Waterford, Connecticut, to manage the property and casualty operation of the agency, including providing state-of-the-art automation, appointment of insurance carriers, and personnel management. Additionally, the agency is targeting mid- 1997 to introduce life and health products under a similar management arrangement. We fully expect our insurance operation to provide a viable source of fee based income, and we continue to explore other strategic options to strengthen and diversify sources of income. The Bank's return to financial health could not have been accomplished without the dedication and effort of our employees. At the Bank's annual awards banquet, I was proud to present awards to those employees who demonstrated a consistently high level of service to their customers. For those of you who are customers, I am sure you are experiencing this quality service, and I encourage those of you who are in the area to visit one of our locations, I am confident you will like what you see. On behalf of your board of directors, I wish to thank you for your patience, understanding and support. We look forward to seeing you at the 1997 Annual Meeting to be held on May 14, 1997. Very truly yours, J. Gilbert Soucie President Selected Financial data (In Thousands, except per share and ratio data)
Year ended December 31, --------------------------------------------------------- 1996 1995 1994 1993 1992 Interest income.................................. $ 17,461 $ 16,518 $ 15,453 $ 16,136 $ 17,580 Interest expense................................. 7,742 6,892 5,937 6,392 7,488 Net interest income.............................. 9,719 9,626 9,516 9,744 10,092 Provision (benefit) for loan losses.............. 675 (213) 1,789 3,847 3,587 Net interest income after provision (benefit) for loan losses............................... 9,044 9,839 7,727 5,897 6,505 Other operating income........................... 3,197 3,135 4,043 4,045 3,670 Other operating expense.......................... 10,473 10,197 11,225 12,606 10,898 (Recovery) loss on National Premium CD Program.................................... - (410) 1,370 - - Loss on bulk sale of loans....................... - 2,045 - - - Income (loss) before income taxes and accounting change.............................. 1,768 1,142 (825) (2,664) (723) Income tax (benefit) provision................... (757) (500) 35 65 76 Cumulative effect of change in accounting for income taxes.................................. - - - 52 - Net income (loss)................................ $ 2,525 $ 1,642 $ (860) $ (2,677) $ (799) Per Share Data: Earnings(loss) before accounting change........ $ 1.38 $ 1.22 $ (0.67) $ (2.12) $ (0.62) Cumulative effect of accounting change......... - - - (0.04) - Earnings (loss) per share........................ $ 1.38 $ 1.22 $ (0.67) $ (2.08) $ (0.62) Dividends........................................ $ 0.28 $ 0.00 $ 0.00 $ 0.05 $ 0.20 Book value per share (as of period end).......... 9.22 8.18 6.23 8.57 10.70 Balance sheet data as of period end: Loans (net of unearned income)................ $148,733 $141,965 $130,790 $147,736 $164,742 Other earning assets.......................... 80,521 70,773 68,654 58,400 44,391 Total assets.................................. 248,598 229,774 218,292 228,981 238,499 Interest-bearing deposits..................... 172,606 157,487 159,460 168,695 185,568 FHLB borrowing................................ 21,000 23,000 13,000 14,000 5,000 Stockholders' equity.......................... 16,869 14,974 8,040 11,054 13,796
Management's Discussion and Analysis and Results of Operations SUMMARY The Bank had net income of $2,525,000 for the year ended December 31, 1996 as compared to net income of $1,642,000 for the year ended December 31, 1995. Earnings per share for 1996 was $1.38 (based on shares outstanding of 1,829,920 for the entire year) as compared to earnings per share of $1.22 for 1995 (based on weighted daily average shares outstanding for the year of 1,352,057, reflecting a Rights Offering of 540,000 shares in the fourth quarter of 1995). In the second quarter of 1996, the Bank's Cease and Desist Order (the "Order"), which had been in effect since September 1993, was terminated by the FDIC and the Bank commenced paying a cash dividend at $0.07 per share, declaring a dividend for the first time since dividends were suspended in March 1993. The termination of the Order was largely attributed to the Bank meeting the terms of the Order, including attaining a Tier 1 leverage capital ratio above 6.00%, and an overall improvement in the Bank's financial condition. As of December 31, 1996, the Bank's Tier 1 leverage capital ratio was at 7.07%, and the ratio of nonperforming assets (nonperforming loans and foreclosed real estate) to total assets was just over 1% at 1.06%, while the ratio of the allowance for loan losses to nonperforming loans was at 229%. In the fourth quarter of 1996, the Bank recorded $70,000 of net security losses and $746,000 of non-recurring expenses resulting primarily from: contingent legal fees largely related to a lawsuit brought in 1995 by a former director and his wife; restructuring expenses associated with Bank premises and equipment; and marketing and advertising expenses resulting from market and product research costs, including the expenses attributed to a change in the Bank's corporate logo. To enhance future performance in the Bank's investment portfolio, the Bank took advantage of a decline in interest rates during the fourth quarter of 1996 to sell approximately $14.3 million in securities available for sale, resulting in the net loss of $70,000. The Bank also recorded a tax benefit of $757,000 in the fourth quarter of 1996. In the fourth quarter of 1995, the Bank had $2,417,000 of non-recurring expenses and one-time charges related to the bulk sale of $4,841,000 of nonperforming assets and $2,838,000 of loans that were classified as substandard and had demonstrated a deterioration in credit worthiness. These non-recurring expenses and one-time charges were largely offset by a reduction of $1,546,000 in the provision for loan losses and a tax benefit of $500,000. Additionally, the Bank had a recovery of $410,000 on the sale or redemption of certificates of deposit acquired when the Bank discontinued its "National Premium CD Program" in January 1995. For the purpose of comparison, the following table summarizes the impact of excluding the non-recurring expenses, one-time charges, tax benefits, and net security losses from both 1996 and 1995 financial results:
After After Actual Excl. Excl. 1996 Excl. 1996 1995 Excl. 1995 Net interest income................... $ 9,719 $ - $9,719 9,626 $ - $9,626 Provision (benefit) for loan losses... 675 - 675 (213) 1,546 1,333 Net interest income after provision (benefit) for loan losses........... 9,044 - 9,044 9,839 (1,546) 8,293 Other operating income................ 3,197 70 3,135 - 3,135 Other operating expense............... 10,473 (746) 10,197 (372) 9,825 (Recovery) loss on National Premium CD Program......................... - - - (410) 410 - Loss on bulk sale of loans............ - - - 2,045 (2,045) - Income (loss) before income taxes..... 1,768 816 2,584 1,142 461 1,603 Income tax benefit.................... (757) 757 - (500) 500 - Net income (loss)..................... $ 2,525 $ 59 $2,584 $ 1,642 $ 59 $1,603
Excluding the non-recurring expenses, one-time charges, net security losses, and tax benefits from both 1996 and 1995, net income for 1996 increased $981,000 or 61.2% to $2,584,000 as compared to $1,603,000 in 1995. Comparing the "After Excl. 1996" column with the "After Excl. 1995" column, the increase in net income was primarily due to lower provision for loan losses and, to a lesser extent, higher net interest income and other operating income and lower other operating expenses. Total assets were $248,598,000 at December 31, 1996, increasing 8.2% from December 31, 1995. The increase was due in part to an increase in loans, which rose to $148,733,000 (net of unearned income) or an increase of 4.8% from December 31, 1995. Most of the increase was in residential real estate loans, including home equity loans. Deposits were $208,420,000 at December 31, 1996, an increase of 9.5% from December 31, 1995. The increase in deposits resulted primarily from an increase of $15,850,000 in time deposits and $2,986,000 in demand deposits. Management's Discussion and Analysis of Financial Condition and Results of Operations is based on the Bank's Consolidated Balance Sheets, and the related Consolidated Statements of Operations, Changes in Stockholders' Equity, and Cash Flows, and on notes to these Consolidated Financial Statements. These statements, including the Independent Auditors' Report, are included in the Annual Report and should be read along with Management's Discussion and Analysis of Financial Condition and Results of Operations. FINANCIAL CONDITION Securities Activity In the fourth quarter of 1996, the Bank sold $14.3 million in securities, taking advantage of a decline in interest rates to restructure the available for sale investment portfolio. As of December 31, 1996, the Bank had reinvested $12 million of the proceeds in securities with better expected total returns than the securities that were sold. The sold securities consisted of relatively low yielding U. S. Treasury notes, callable agency notes, and floating rate collateralized mortgage obligations ("CMOs") and adjustable rate mortgage-backed securities with relatively low interest rate caps. The underperformance in a rising interest rate environment expected on the CMOs and adjustable rate securities is attributed to the effect that interest rate caps and average life extension can have on the value of these securities as interest rates rise. The purchased securities consisted primarily of fixed rate CMOs that are "defensive" in that they are expected to outperform the securities that were sold in an unchanged or rising interest rate environment and perform equally well in a declining interest rate environment. To adequately balance the defensive nature of the CMOs, the Bank began purchasing longer term municipal bonds, which are expected to perform well in a declining interest rate environment. Under SFAS No. 115, the Bank's securities held to maturity can only be sold under very restrictive conditions and are carried on the Bank's consolidated balance sheet at amortized cost. The Bank would not consider them for sale in response to changes in interest rates or in implementing asset/liability strategies. These securities are held for the production of income. The amortized cost of securities held to maturity totaled $28,472,000 at December 31, 1996, with a market value of $28,294,000. The reduction of $797,000 in amortized cost from December 31, 1995 was due to approximately $4.0 million in securities maturing or being called and prepayments on mortgage-backed securities, partially offset by $3.1 million of purchases. The following table depicts information regarding the Bank's securities held to maturity at December 31, 1996:
Average Tax Life or Amortized Equivalent Maturity Cost Yield in Years U.S. Agency notes............................ $ 7,932,000 6.35% 5.8 Fixed rate U.S. Agency mortgage-backed pass-through securities................... 15,077,000 6.35% 2.3 Fixed rate CMOs.............................. 2,065,000 5.67% 2.2 State and Municipal bonds.................... 185,000 10.68% 10.8 Total fixed rate......................... 25,259,000 6.33% 3.5 Floating rate CMOs........................... 2,998,000 6.26% 6.2 Other investment securities.................. 215,000 7.04% 5.9 Total securities held to maturity............ $28,472,000 6.32% 3.8
Securities available for sale are marked to market on a quarterly basis and any net unrealized holding gains or losses, net of effective taxes, are recorded as an adjustment to stockholders' equity. Securities available for sale are integral to the implementation of the Bank's asset/liability strategies to achieve interest rate risk management, liquidity, and earnings objectives. The amortized cost of securities available for sale at December 31, 1996 was $32,436,000, with a market value of $32,071,000. The following table depicts information regarding the Bank's securities available for sale portfolio at December 31, 1996:
Average Tax Life or Amortized Equivalent Maturity Cost Yield in Years U.S. Agency notes............................ $ 1,557,000 6.22% 5.3 Fixed rate U.S. Agency mortgage-backed pass-through securities..... 11,122,000 6.91% 3.5 Fixed rate CMOs.............................. 13,372,000 6.44% 4.0 State and Municipal bonds.................... 855,000 7.91% 10.9 Total fixed rate......................... 26,906,000 6.67% 4.1 Floating rate U.S. Agency mortgage-backed pass-through securities.................... 4,424,000 6.82% 16.3 Floating rate CMOs........................... 1,000,000 5.75% 6.9 Total floating rate...................... 5,424,000 6.62% 14.6 Total securities available for sale (excluding money market mutual funds)...... $32,330,000 6.66% 5.9
The Bank's strategy for investing in mortgage-backed securities is to maintain a portfolio of assets that has acceptable returns over U.S. Government securities, provides monthly cash flow and can be used as collateral for borrowed funds. The Bank invests in U.S. Agency mortgage-backed, pass-through certificate securities ("PCs") that are issued or guaranteed by the Government National Mortgage Association ("GNMA"), the Federal National Mortgage Association ("FNMA"), or the Federal Home Loan Mortgage Corporation ("FHLMC"). The Bank also invests in CMOs that are issued by FNMA , FHLMC and private corporations and represent interests in trusts that are backed by PCs issued by GNMA, FNMA and FHLMC. The Bank primarily invests in fixed rate PCs or CMOs that have expected average lives of two through seven years and floating rate PCs or CMOs that have interest rates that adjust annually or more frequently. Investment in fixed rate CMOs consists primarily of Planned Amortization Classes ("PACs"), which are tranches of structured mortgage derivative securities with planned principal repayments during a specified period based on planned ranges of mortgage prepayment rates. Investment in floating rate CMOs consists of securities with interest rates that change monthly based on fixed margins over various indexes. The Bank monitors the security portfolios monthly and periodically analyzes the expected performance of the portfolios under different interest rate environments, particularly the sensitivity of the securities available for sale portfolio to average life extension or contraction risk. In addition, prior to making a purchase, the Bank analyzes the effect of a range of prepayment assumptions on the average life and yield of each security. The Bank examines the total return (which is the market value changes of a security plus interest income) or performance of a security under different interest rate scenarios over a certain investment horizon, typically 1 to 3 years. This extensive pre- purchase analysis reflects how a security may perform under various interest rate environments and how it will affect the portfolios' composition. As of December 31, 1996, management believes that the Bank's securities available for sale and held to maturity portfolios were positioned to achieve their stated objectives. Trading securities of $458,000 represent an equity trading strategy established by the Bank in March 1996. The strategy was initiated by purchasing the twenty stocks in equal share amounts that comprise the Major Market stock index. The risk and return is managed by the use of put and call options on the index, not by selling the stocks. Federal Home Loan Bank ("FHLB") stock increased $197,000 to $2,220,000 at December 31, 1996 from $2,023,000 at December 31, 1995. The required amount of FHLB stock is based on the level of outstanding FHLB borrowings. The stock does not trade on a public exchange and is only bought and sold through the FHLB at the stated per share value of $100. The stock has earned quarterly dividends as declared and paid by the FHLB consistently for at least the past ten years. Lending Activity Loans increased to $148,733,000 (net of unearned income) at December 31, 1996, increasing $6,768,000 or 4.8% from $141,965,000 (net of unearned income) at December 31, 1995. In 1996 the growth was concentrated primarily in residential 1-4 family mortgage loans, home equity loans, and commercial loans. The Bank's residential real estate loans include residential 1-4 family mortgage loans, which represent over 80% of residential real estate loans, home equity loans, and construction loans for the purpose of financing the construction of 1-4 family homes. Residential 1-4 family mortgage loans include primarily first lien 1-4 family mortgages. Home equity loans are primarily second mortgages on residential property, consisting mainly of lines of credit and closed-end loans such as home improvement or amortizing loans. While single family mortgage loans may be originated anywhere in the State of Connecticut, the primary target market for residential real estate loans is generally considered to be the towns in which the Bank has branch locations and surrounding communities. The Bank strives to maintain a product line in keeping with current market conditions and demands. To enhance the Bank's residential lending products and service, the Bank, in November 1996, entered into an agreement with the Mortgage Service Center of New England ("MSCNE"), a division of Chittenden Corporation of Burlington, Vermont. MSCNE will originate, process, and service residential 1-4 family mortgage loans on behalf of the Bank, including FHA, VA, CHFA loans as well as other loan programs to meet the credit needs of consumers in the Bank's market area. Products include, but are not limited to, fixed rate, adjustable rate, first- time homebuyer, construction-to-permanent and other federal, state or municipal market offerings as made available to the Bank. The Bank has the option of purchasing for its own portfolio those loan types that meet its balance sheet management objectives, as MSCNE's underwriting guidelines are consistent with those of the Bank. MSCNE principally follows the underwriting requirements of the Federal Home Loan Mortgage Corporation. Through originations and purchases, first lien residential mortgage loans increased to $52,481,000 (net of unearned income) at December 31, 1996, an increase of $3,800,000 or 7.8% from year-end 1995. Home equity loans increased to $14,029,000 at December 31, 1996, an increase of $1,457,000 or 11.6% from year-end 1995. The Bank originates consumer loans for a variety of family or household purposes, including loans secured by liens on real estate; chattel liens secured by automobiles, mobile homes or other personal property; and student loans. Loans may be granted on an unsecured basis only when risk factors warrant. The Bank relies substantially on factors such as the general credit standing and the borrowers' repayment ability as the primary security for the loan. Consumer loans increased to $4,689,000 (net of unearned income) at December 31, 1996, an increase of $268,000 or 6.1% from year-end 1995. Commercial loans are those which are arranged for the activities of businesses. They do not include loans for the acquisition and holding of real estate; however, real estate may secure commercial loans in addition to business assets such as receivables, inventory and equipment. Generally, the policy of the Bank is that commercial loans will be secured. Other commercial loans subject to the Bank's lending limits to a single obligor would include the following types of loans: short term working capital loans, term loans, revolving loans, interim loans, long term working capital loans and lines of credit. Commercial loans increased to $23,945,000 (net of unearned income) at year-end 1996 from $23,600,000 (net of unearned income) at year-end 1995. The increase of $345,000 was primarily due to an increase in Small Business Administration ("SBA") loans. The Bank's SBA lending unit considers commercial loans that do not meet the Bank's customary underwriting requirements. Through a Federal SBA or State guarantee, the risk of loss to the Bank can be substantially reduced. SBA loans, net of SBA loans sold, increased to $8,916,000 at year-end 1996 from $7,996,000 at year-end 1995. Commercial mortgage loans are those that are secured by a mortgage on real estate, which from its use or intended sale will produce income to the borrower. This income will usually be derived from rental proceeds, sales proceeds or owner occupied properties by commercial enterprises. Typically, commercial mortgage loans consist of the following types of loans: loans secured by land, land development loans, construction loans for commercial, multi-family and residential construction and improved property. The following types of loans are considered acceptable investments under the Bank's commercial real estate lending program: Loans for the construction of individual 1-4 family residential dwellings, land development loans in conjunction with the construction of single-family residential dwellings by builders, construction and/or permanent financing for owner occupied commercial properties, long term permanent financing of existing commercial properties with a history of stable tenancy. The Bank has adopted a number of guidelines relating to loan-to-value ratios and maximum dollar amount of loans that will be considered along with written underwriting guidelines. Commercial mortgage loans increased to $53,302,000 at December 31, 1996, an increase of $1,162,000 or 2.2% from year-end 1995. Other Balance Sheet Activity-Assets Cash increased $1,060,000 or 13.6% from the year ended December 31, 1995 primarily due to seasonal factors that typically occur at year-end, particularly the last day of the year. The daily average of cash was $7,816,000 in 1996 as compared to $7,728,000 in 1995. Interest-bearing deposits in depository institutions increased $16,648,000 from the year ended December 31, 1995. This increase represents investment in overnight deposits at the FHLB. The increase is due in part to a seasonal increase in deposits that typically occurs at year-end and the restructuring of the available for sale investment portfolio, whereby approximately $2.3 million of the $14.3 million of securities sold was awaiting re-investment as of December 31, 1996. Premises and fixed assets declined $384,000 or 4.9% in 1996 from year-end 1995, continuing a steady decline since year-end 1989 when premises and fixed assets peaked at $10,811,000. This decline in 1996 (as in prior years) resulted from amortizing the cost of capital expenditures made predominantly in 1988 and 1989. These expenditures were associated with the building of the Bank's headquarters and the opening of certain branch locations. Despite this decline in premises and fixed assets, the Bank continues to invest in maintaining its facilities and operational systems; in particular technology that will enhance the Bank's ability to deliver products and service to its customers. Included in premises and fixed assets was $542,000, net of depreciation, of merchant processing equipment. The Bank sells or rents this equipment to merchants, contributing to the profitability of the Bank's electronic draft capture or merchant processing business line. The net deferred tax asset was $1,606,000 at December 31, 1996 as compared to $731,000 at December 31, 1995. The increase of $875,000 was primarily the result of a combination of a reduction of $1,510,000 in the valuation allowance on the gross deferred tax asset and a reduction of $920,000 in the net operating loss carryforward (a component of the gross deferred tax asset). In accordance with SFAS No. 109, a valuation allowance was recorded in prior years as a reserve against the gross deferred tax asset. The valuation allowance was reduced in 1996 to reflect improvement in the Bank's financial condition, including growth in taxable earnings. Management believes that it is more likely than not that the net deferred tax asset is realizable. The increase of $278,000 in other assets as compared to year-end 1995 was primarily attributed to an increase in accrued revenue from the Bank's merchant processing business line. Deposit Activity At December 31, 1996, deposits were $208,420,000, an increase of $18,105,000 or 9.5% from $190,315,000 at December 31, 1995. The increase was concentrated in time deposits (CDs), which increased $15,850,000 or 21.2%, and demand deposits, which increased $2,986,000 or 9.1%. Most of the increase in time deposits was in maturities greater than one year, as the Bank's interest rate risk management strategy was to position the Bank to be less liability sensitive in a one year time frame. Being less liability sensitive in one year will assist in mitigating the negative impact on the Bank's net interest margin should interest rates rise. The increase in demand deposits was attributed to the Bank's efforts in offering new and redesigned products to its market area and, to a lesser extent, seasonal factors at year-end. The average daily balance in demand deposits was $32,884,000 and $30,705,000 in the fourth quarter and entire year of 1996, respectively, as compared to $30,878,000 and $29,877,000, respectively, in the same periods last year. Savings and NOW deposits amounted to $81,903,000, declining $731,000 or less than 1% from year-end 1995. The Bank re-designed its Corporate Advantage Account, which is a premium rate business savings account paying a 4.50% annual percentage yield as of December 31, 1996 for balances of $25,000 or more. This account increased from $1.6 million in June 1996 to over $5.0 million in December 1996. The increase in the Corporate Advantage Account partially offset the decline in other savings accounts. Federal Home Loan Bank Borrowing Federal Home Loan Bank borrowing was $21,000,000 at December 31, 1996 compared to $23,000,000 at December 31, 1995, a net decrease of $2,000,000. In the first quarter of 1996, the Bank borrowed $8 million when interest rates were at their low point for the year. These borrowings had a weighted average rate of 5.34% and weighted average maturity of 1.9 years. Additionally, the Bank borrowed periodically throughout 1996 when interest rates declined and borrowings could be obtained at attractive spreads over treasury securities. FHLB borrowings are an attractive low cost source of funds that the Bank uses to execute asset/liability strategies and for short-term funding needs. Accrued Expenses and Other Liabilities The increase of $474,000 in accrued expenses and other liabilities was primarily associated with the non-recurring expenses of $746,000. Capital Resources Total stockholders' equity was $16,869,000 at December 31, 1996, increasing $1,895,000 from $14,974,000 at year-end 1995. The increase resulted from net income of $2,525,000, partially offset by the payment of $512,000 in dividends and an increase of $118,000 in the net unrealized loss on available for sale securities (net of taxes). The Bank's successful Rights Offering of $3.5 million in the fourth quarter of 1995 and improvement in the Bank's financial condition resulted in the FDIC terminating the Bank's Cease and Desist Order in May 1996, at which time the Bank declared a dividend for the first time since dividends were suspended in March 1993. The Bank's Tier 1 leverage capital ratio increased to 7.07% at December 31, 1996 from 6.77% at December 31, 1995. The Bank's Total risk-based capital ratio was 13.42% at December 31, 1996 as compared to 12.83% at December 31, 1995. At December 31, 1996 and 1995, the leverage and risk-based capital ratios were at levels that placed the Bank in a "well capitalized" category as defined by the prompt corrective action regulation of the FDIC. The FDIC defines banks that are at or above a 6% Tier 1 leverage capital ratio and at or above a 10% Total risk- based capital ratio as "well capitalized." NONPERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES Information concerning the Bank's nonperforming assets at December 31, 1996, 1995, and 1994 is summarized below:
1996 1995 1994 (000's omitted) Nonaccrual loans $ 1,464 $ 733 $ 3,943 Loans past due 90 days and still accruing Total nonperforming loans 1,464 733 3,943 OREO 1,159 318 1,758 Total nonperforming assets 2,623 1,051 5,701 Allowance for loan losses $ 3,352 $ 3,029 $ 4,517 Ratio of nonperforming assets to total assets 1.06% 0.46% 2.61% Ratio of allowance for loan losses to loans and OREO 1.75% 0.74% 4.30% Ratio of allowance for loan losses to total loans 2.25% 2.13% 3.45% Ratio of allowance for loan losses to nonperforming loans 228.96% 413.23% 114.56% Ratio of nonperforming assets total stockholders' equity 15.55% 7.02% 70.91%
The $1,464,000 in nonperforming loans at December 31, 1996 consisted of ten loan relationships, with no one relationship considered to be a substantial concentration. All nonperforming loans are in the process of collection and as of December 31, 1996, have adequate collateral and reserves to protect the Bank against material, future losses. The $1,159,000 in OREO (or foreclosed real estate) at December 31, 1996 consisted of six properties. Two of these properties totaled $913,000 and were from a relationship with a single borrower. These two properties currently provide cash flow to the Bank in the form of rental payments, and 1996 appraisals indicate values that exceed current book value. All OREO has been written down to current appraised values, less anticipated selling costs, and are being actively marketed by the Bank. The allowance for loan losses increased $323,000 from year-end 1995 due to a loan loss provision of $675,000, partially offset by net loan charge-offs of $352,000. The adequacy of the allowance for loan losses is reviewed by management monthly and was considered to be adequate as of December 31, 1996. Management's methodology in evaluating the adequacy of the allowance for loan losses considers specific credit reviews, recommendations made by external auditors and examiners, results from independent loan reviews, current local, state and national economic conditions and trends, past loan loss and delinquency experience and the volume, growth and composition of the loan portfolio. In addition, a portion of the allowance for loan losses is maintained for losses which may be inherent within the loan portfolio. LIQUIDITY AND ASSET/LIABILITY MANAGEMENT Liquidity On a daily basis, the Bank manages the need to fund deposit withdrawals, the drawdown of loan commitments, and new loan originations by managing overnight invested funds, the flow of new deposits, FHLB borrowing and other sources of borrowed funds, and principal payments on loans and securities. The Bank also has federal funds borrowing lines with its correspondent banks and repurchase agreements with certain broker/dealers that are used primarily for short-term funding needs. The Bank measures the adequacy of liquidity within the next 90 day period by estimating net deposit flows, funding commitments for and originations of loans, the expected level of cash flows from maturing or sold loans, and the expected prepayments on loans and securities. The Bank also monitors the amount of securities available for repurchase agreements and collateral available for FHLB borrowing. At December 31, 1996, the Bank's liquidity was determined to be sufficient to meet the borrowing needs of its customers and meet unexpected deposit withdrawals. Asset/Liability Management Management's objective is to minimize the Bank's earnings exposure to changing interest rates while maintaining the flexibility to take advantage of opportunities resulting from those changes. The Bank's exposure to interest rate risk, or changes in interest rates, is managed by strategically matching the rate sensitivity or repricing characteristics of loans and securities with those of interest-bearing liabilities. Management monitors the Bank's exposure to interest rate risk on a monthly basis via a GAP report (see a summarized GAP report in the table below) and semi- annually by use of a computer modeling system that examines the impact on the Bank's net interest income and net interest margin over a two-year horizon if interest rates should rise 300 basis points or decline 200 basis points. The Bank's GAP position at one year at December 31, 1996 was .90. This indicates that within the next twelve months the Bank has more of its interest rate sensitive liabilities repricing than its interest rate sensitive assets, indicating that falling interest rates are expected to result in growth or stability in the Bank's net interest margin and net interest income, while rising interest rates could result in declines. If the Bank were asset sensitive, rising interest rates would be expected to result in growth or stability in the Bank's net interest income and margin, while falling interest rates could result in declines. The magnitude of the increase or decrease in the net interest income and margin will depend, in part, on both the degree to which the Bank is asset or liability sensitive, and the accuracy of the assumptions inherent in GAP analysis and the modeling system. Both GAP analysis and modeling require management to make assumptions regarding future interest rate changes, the timing of cash flows, the timing of yield and rate changes on both assets and liabilities, and the degree to which changes in the general level of interest rates impact both cash flows and yield and rate changes. If the actual timing and magnitude of cash flows and yield and rate changes are markedly different from management's assumptions, the impact on net interest income and margin can be different from what these measurement systems indicate. For example, key assumptions are made regarding the interest rate sensitivity of savings and NOW accounts. Historically, the rates paid on these deposits have lagged the movements in the general level of interest rates, particularly when interest rates rise. To reflect this industry-wide pattern, as well as the Bank's own experience, 40%-60% of these deposits were classified in the Bank's GAP analysis and modeling system to reflect the interest rate sensitivity of deposits maturing beyond one year. These necessary assumptions result in certain shortcomings inherent in modeling and GAP analysis. Therefore, management does not rely on any one technique for monitoring interest rate risk, but believes that these tools, properly used and recognizing their limitations, are effective at measuring and managing interest rate risk. The following table shows interest sensitivity gaps for six different time intervals at December 31, 1996:
INTEREST RATE SENSITIVITY GAPS 0-30 31-90 91-180 181-360 1-5 Over 5 Days Days Days Days Years Years Interest-Earning Assets $58.8 $10.0 $16.3 $17.0 $85.7 $42.2 Interest-Bearing Liabilities 15.9 26.1 33.1 38.3 78.0 2.3 Interest-Sensitivity GAP 42.9 (16.1) (16.8) (21.3) 7.7 39.9 Cumulative Rate-Sensitivity GAP $42.9 $26.8 $10.0 $(11.3) $(3.6) $36.3 RSA/RSL* 3.70 1.64 1.13 0.90 0.98 1.19
*Rate-sensitive assets (RSA) divided by rate-sensitive liabilities (RSL) is computed by dividing the cumulative total of interest-earning assets by the cumulative total of interest-bearing liabilities. A result less than 1.00 indicates the Bank is liability sensitive in that time-frame and could be exposed to rising interest rates. A result greater than 1.00 indicates the Bank is asset sensitive and could be exposed to a decrease in interest rates. RESULTS OF OPERATIONS Comparison of Years Ended December 31, 1996 and 1995 Overview The Bank had net income of $2,525,000 for the year ended December 31, 1996 as compared to net income of $1,642,000 for the year ended December 31, 1995. In the fourth quarter of 1996, the Bank recorded $746,000 in non-recurring expenses, a net loss of $70,000 on the sale of securities available for sale, and a tax benefit of $757,000. In the fourth quarter of 1995, the bulk sale of nonperforming and other problem assets resulted in a loss on bulk sale of $2,045,000, a loss of $332,000 from the foreclosed real estate portion of the bulk sale, bulk sale related expenses of $40,000, and a reduction of $1,546,000 in the provision for loan losses. Additionally in 1995, the Bank recorded a tax benefit of $500,000 and a recovery of $410,000 on the National Premium CD Program. As depicted in the Table in the Summary, excluding these non-recurring expenses and one-time charges, the increase in net income in 1996 as compared to 1995 would have been attributed to a reduction in provision for loan losses, and, to a lesser extent, higher net interest income and other operating income, and lower other operating expenses. Net Interest Income The Bank's net interest income for the year ended December 31, 1996 was $9,719,000 as compared to $9,626,000 for the year ended December 31, 1995. The increase in net interest income of $93,000 or 1.0% was due to an increase of $943,000 in interest income, partially offset by an increase of $850,000 in interest expense. The 1996 increase in interest income resulted primarily from an increase to $215,138,000 in average daily earning assets from $204,260,000 in 1995, while the annual effective yield on earning assets increased to 8.12% in 1996 from 8.09% in 1995. The 1996 increase in interest expense resulted primarily from an increase to $186,512,000 in average daily interest-bearing liabilities from $176,676,000 in 1995 and, to a lesser extent, an increase in the annual effective rate on interest-bearing liabilities to 4.15% in 1996 from 3.90% in 1995. The increase in net interest income in 1996 was primarily due to an increase in average daily earning assets, which more than offset an increase in the average daily balance in CDs and FHLB borrowings. In 1996, the higher level of average daily balances in CDs and FHLB borrowings and the lower average daily balances in savings and NOW accounts as compared to 1995 effected a rise in the Bank's cost of funds. Provision for Loan Losses The Bank provided $675,000 in provision for loan losses in 1996 as compared to a negative provision or benefit of $213,000 in 1995. Through November 1995, the Bank had provided $1,333,000 in provision for loan losses, and in December 1995, concurrently with recording the losses attributed to the bulk sale, reduced the provision for loan loses by $1,546,000. Net charge-offs were $352,000 in 1996, $1,275,000 in 1995, and $2,014,000 in 1994. Other Operating Income Total other operating income for the year ended December 31, 1996 was $3,197,000 as compared to $3,135,000 for the year ended December 31, 1995. The increase of $62,000 or 2.0% resulted primarily from an increase of $204,000 or 12.1% in merchant income, partially offset by declines of $44,000 or 68.8% in trust department income, $54,000 or 8.3% in service charges on deposit accounts, and a net loss of $63,000 on the sale of securities available for sale. The increase in merchant income was due to continued growth in the customer base, resulting in an increase in the dollar volume of activity. The decline in trust department income was the result of a May 1995 agreement with Peoples Savings Bank of New Britain whereby the Bank agreed to sell its remaining trust relationships and to receive compensation for referring future trust business. Although the sale of these relationships resulted in lower revenue in 1996 as compared to 1995, profitability improved since there were virtually no expenses associated with the trust business line in 1996. The decrease in service charges on deposit accounts was anticipated by the Bank as the result of a strategy to raise the level of core deposits (defined as demand, savings and NOW accounts). The loss on the sale of securities available for sale resulted principally from the sale of $14.3 million in securities in the fourth quarter of 1996, as discussed. Gains on trading securities of $15,000 represent the net gain on the equity trading strategy, excluding dividends the Bank earned on the underlying stocks. Other Operating Expenses Total other operating expenses for the year ended December 31, 1996 were $10,473,000 as compared to $10,197,000 for the year ended December 31, 1995. Excluding the non-recurring expenses totaling $746,000 in 1996 and the bulk sale loss of $332,000 on the sale of foreclosed real estate and $40,000 of related expenses recorded in 1995, other operating expenses would have been $9,727,000 in 1996 and $9,825,000 in 1995. The following table depicts other operating expense categories as they appear in the Consolidated Statements of Operations and as they would appear excluding the non-recurring expenses recorded in 1996 and the bulk sale loss and related expenses recorded in 1995:
After After Actual Excl. Excl. 1996 Excl. 1996 1995 Excl. 1995 Other operating expenses: Salaries....................... $ 3,933 $(102) $3,831 $ 3,588 $ -- $3,588 Occupancy...................... 1,017 (74) 943 851 -- 851 Equipment...................... 1,193 (54) 1,139 1,285 -- 1,285 Provision for losses on OREO... 9 -- 9 837 (332) 505
After After Actual Excl. Excl. 1996 Excl. 1996 1995 Excl. 1995 Pensions, other empl. benefits. 937 -- 937 618 -- 618 FDIC assessment................ 120 -- 120 539 -- 539 Other.......................... 3,264 (516) 2,748 2,479 (40) 2,439 $10,473 $(746) $9,727 $10,197 $(372) $9,825
The decrease in operating expenses in 1996 as compared to 1995, excluding the non-recurring expenses, bulk sale loss and related expenses, was primarily due to a reduction of $419,000 or 77.7% in FDIC assessments and a reduction of $496,000 or 98.2% in provision for losses on other real estate and related costs. Salaries, net of the exclusion of $102,000, increased $243,000 in 1996 as compared to 1995. The increase was attributed to general salary increases and to staff increases in the branch network and commercial lending division. The $102,000 represents an operating accrual for bonuses paid to all officers of the Bank in lieu of merit salary increases in 1997. Occupancy expense, net of the exclusion of $74,000, increased $92,000 in 1996 as compared to 1995. The increase was primarily due to snow removal costs and general facilities repairs. The $74,000 represents primarily the cost of new signage as a result of the Bank changing its corporate logo and the cost of installing energy efficient lighting in the Bank's main office headquarters. Equipment expense, net of the exclusion of $54,000, declined $146,000 in 1996 as compared to 1995. The decline was primarily attributed to no leasing expense in 1996 for the Bank's mainframe computer system. The Bank decided to purchase instead of lease a new computer system in 1995. The new system is being depreciated over a three year period at a third of the cost of the previous leasing arrangement. Pension and other employee benefits increased $319,000 in 1996 as compared to 1995. The increase was primarily associated with an increase in full-time equivalent employees, an increase in 401K and pension benefits, including the expense associated with a supplemental retirement program for executive officers. Other expenses, net of the exclusion of $516,000, increased $309,000 in 1996 as compared to 1995. The increase was primarily the result of the Bank's 1996 marketing strategy, justifying an increased investment in advertising and marketing expense given the size of the Bank and the scope of its market area. The $516,000 represents primarily expenses associated with marketing research costs, non-recurring advertising production costs, severance expense of a former executive officer, and contingent legal fees related to a lawsuit brought in 1995 by a former director and his wife. This lawsuit is described in the Notes to the Consolidated Financial Statements contained elsewhere herein. (Recovery) Loss on the National Premium CD Program In 1995 the Bank was able to recover $410,000 of the $1,370,000 1994 fourth quarter charge. Certain CDs were sold at higher market values as a result of declining interest rates in 1995, and certain other CDs, rather than being sold, were redeemed to the issuing Bank since redemption values for those CDs were higher than market value. Loss on Bulk Sale of Loans In 1995 the loss on the bulk sale of $2,045,000 resulted from the loss on the sale of nonperforming loans and other problem loans of $7,033,000. Income Taxes The Bank recorded a net benefit of $757,000 in 1996 as compared to a net benefit of $500,000 in 1995. In 1996 the Bank continued to reduce the valuation allowance on the deferred tax asset in accordance with SFAS No. 109 due to increased taxable earnings over 1995 and continued improvement in the Bank's financial condition. RESULTS OF OPERATIONS Comparison of Years Ended December 31, 1995 and 1994 Overview The Bank had net income of $1,642,000 for the year ended December 31, 1995 as compared to a net loss of $860,000 for the year ended December 31, 1994. In 1995 the Bank returned to profitability after three consecutive years of net losses; a pivotal year for the Bank in terms of strengthening its financial condition and prospects for future earnings growth. The net income in 1995 as compared to the net loss in 1994 resulted primarily from a reduction in the provision for loan losses, a recovery on the sale or redemption of "National Premium CDs", a tax benefit recorded in 1995, and a significant decline in other operating expenses. These were partially offset by the loss on the bulk sale of nonperforming assets and other problem loans and a decline in other operating income. Net Interest Income The Bank's net interest income for the year ended December 31, 1995 was $9,626,000 as compared to $9,516,000 for the year ended December 31, 1994. The increase in net interest income of $110,000 or 1.2% was due to an increase of $1,065,000 in interest income, partially offset by an increase of $955,000 in interest expense. The increase in interest income resulted primarily from an increase in the annual effective yield on earning assets to 8.09% in 1995 from 7.59% in 1994. The increase in interest expense resulted primarily from an increase in the annual effective rate on interest-bearing liabilities to 3.90% in 1995 from 3.28% in 1994. The significant rise in interest rates in 1994 continued to affect a rise in the yield on earning assets and the rate on interest-bearing liabilities in 1995. More specifically, the increase in net interest income resulted from certain loans and securities repricing to higher yields in 1995, partially offset by a rise in the volume of and the rates paid on CDs and the impact of a decline in lower cost interest-bearing core deposits (defined as savings and NOW accounts). Provision for Loan Losses Through November 1995, the Bank had provided $1,333,000 in provision for loan losses to adequately reserve against nonperforming and other problem loans while management analyzed the benefits of a bulk sale of certain of these loans. In December 1995, the Bank executed the bulk sale, recorded a loss on sale of $2,045,000 (the total loss was $2,377,000, $332,000 of which was recorded in the provision for losses on other real estate and related costs), and concurrently, reduced the provision for loan losses by $1,546,000. The reduction in the provision resulted in a negative provision or benefit of $213,000 for 1995 as compared to a provision of $1,789,000 for 1994. Net charge-offs were at $1,275,000 in 1995, as compared to $2,014,000 in 1994 and $3,706,000 in 1993. Other Operating Income Total other operating income for the year ended December 31, 1995 was $3,135,000 as compared to $4,043,000 for the year ended December 31, 1994. The decrease of $908,000 or 22.5% resulted primarily from no gains on the sale of securities and loans in 1995 as compared to gains totaling $490,000 in 1994, a decline of $304,000 or 29.4% in other income, resulting primarily from a decrease in one- time income items and a decline in INVEST commission revenue, a reduction of $154,000 or 70.6% in trust department income, and a decline of $101,000 or 13.4% in service charges on deposit accounts. These were partially offset by an increase of $141,000 or 9.1% in merchant income. The increase in merchant income was due to continued growth in the customer base, resulting in an increase in the dollar volume of activity, partially offset by a reduction in the average ticket size of items processed. The one-time income items associated with the decrease in other income were primarily due to a decrease of approximately $160,000 or 66.4% in recovered interest income and other income on certain problem assets. In addition, INVEST commission revenue declined $98,000 or 38.9% primarily attributed to the reduction in annuity sales. After a rise in CD rates, CDs became more competitive with annuities. The decline in trust department income was the result of discontinuing the "National Premium CD Program" in January 1995 and, to a lesser extent, a restructuring of the entire trust business line. In 1995, after years of unacceptable financial performance, the Bank executed an agreement with Peoples Savings Bank of New Britain to sell its remaining trust relationships and receive compensation for referring future trust business. The decrease in service charges on deposit accounts resulted primarily from a decline in transaction oriented deposit accounts; namely, demand, NOW, and certain savings accounts. Other Operating Expenses Total other operating expenses for the year ended December 31, 1995 were $10,197,000 as compared to $11,225,000 for the year ended December 31, 1994. Excluding the bulk sale loss of $332,000 on the sale of foreclosed real estate, the decrease in other operating expenses was $1,360,000 or 12.1%. This follows a decline of 11.0% in other operating expenses in 1994. The decrease in 1995 was primarily due to a reduction in the cost of managing and resolving problem assets, primarily a decline in the provision for losses on other real estate and related expenses, and a decline in other expenses largely attributed to certain non-recurring expenses incurred in 1994. Salary expense declined $96,000 or 2.6% in 1995 as compared to 1994, while pension, other employee benefits, and related expenses increased $30,000 or 5.1%. The decline in salary expense resulted from lower salary expense in the first half of 1995 as compared to the first half of 1994, partially offset by higher salary expense in the second half of 1995 as compared to the second half of 1994. The increase in the second half of 1995 over the same period in 1994 resulted primarily from additions to staff to enhance credit quality management and strengthen the Bank's ability to obtain quality lending relationships. The increase in pension, other employee benefits, and related expenses was attributed to an increase in pension expense, which is primarily an accrual for future contributions, following a significant one-time reduction in 1994. The reduction in 1994 was due to a reduction in staffing, particularly higher salaried officers and in personnel, mostly through attrition, who were not vested. The decline of $452,000 or 35.1% in the provision for losses on other real estate and related costs was primarily due to a decline of $329,000 or 34.4% in writedowns and valuation adjustments and a reduction of $119,000 or 10.6% in expenses associated with maintaining OREO properties. Excluding the loss on the bulk sale of foreclosed real estate of $332,000, the provision for losses on other real estate and related costs would have declined 60.8%. The decrease totaling $73,000 or 3.3% in occupancy, including depreciation on bank premises; and equipment, including maintenance, rent and depreciation was primarily attributed to lower snow removal costs in 1995 as compared to 1994 and rental income from leasing one floor in the Bank's main office beginning in May 1994. These were partially offset by increases in lease payments on certain branch facilities. FDIC assessment for insuring the Bank's deposits declined $46,000 or 7.9% in 1995 as compared to 1994. The decline was due to a decline in the Bank's deposits and a reduction in the rate premiums on FDIC insurance effective retroactively to May 1995. The rate premium reduction for all commercial banks resulted in a drop in the Bank's rate from $3.10 per $1,000 in deposits to $2.80 per $1,000. In the fourth quarter of 1995, the Bank received notice from the FDIC that its rate would drop to $1.00 per $1,000 in deposits for the first six months of 1996. This rate reduction was attributed to the improvement in the Bank's financial condition, as determined by the FDIC, based primarily on their examination of the Bank in the 1995 second quarter. Additional improvement in the Bank's financial condition is likely to lead to a further reduction in assessments. The decrease of $391,000 or 13.6% in other expenses was largely attributed to non-recurring expenses incurred in 1994 totaling $372,000 and a decline in problem asset related expenses. Income Taxes The Bank recorded a net benefit of $500,000 in 1995 as compared to a provision of $35,000 in 1994. The net benefit in 1995 reflects the improvement in the Bank's financial performance and prospects and was in accordance with SFAS No. 109. In 1994, the modest provision of $35,000 was consistent with the Bank being in a taxable loss position. CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995 (In Thousands, except per share data) Assets 1996 1995 ---- ---- Cash............................................ $ 8,843 $ 7,783 Interest bearing deposits in depository institutions................................. 17,300 652 -------- -------- Total cash and cash equivalents.............. 26,143 8,435 -------- -------- Federal funds sold.............................. -- 5,050 Securities held to maturity: Taxable...................................... 28,287 29,079 Tax-exempt................................... 185 190 -------- -------- Total (fair value: 1996 -- $28,294; 1995 -- $29,643)................ 28,472 29,269 -------- -------- Securities available for sale: Taxable...................................... 31,214 33,779 Tax-exempt\.................................. 857 -- -------- -------- Total..................................... 32,071 33,779 -------- -------- Federal Home Loan Bank stock, at cost........... 2,220 2,023 Trading securities.............................. 458 -- Loans (net of allowance for loan losses: 1996 -- $3,352; 1995 -- $3,029).............. 145,381 138,936 Premises and fixed assets -- net................ 7,441 7,825 Other real estate owned......................... 1,159 318 Accrued interest receivable..................... 1,435 1,474 Net deferred income taxes....................... 1,606 731 Other assets.................................... 2,212 1,934 -------- -------- TOTAL..................................... $248,598 $229,774 ======== ======== Liabilities and Stockholders' Equity Deposits: Demand deposits.............................. $ 35,814 $ 32,828 Savings and NOW accounts..................... 81,903 82,634 Time deposits................................ 90,703 74,853 -------- -------- Total deposits............................ 208,420 190,315 Other liabilities: Federal Home Loan Bank borrowing............. 21,000 23,000 Securities sold under agreements to repurchase.................................. 350 -- Accrued expenses and other liabilities....... 1,959 1,485 -------- -------- Total deposits and other liabilities...... 231,729 214,800 -------- -------- Stockholders' equity: Capital stock -- par value $2.50; 2,000,000 shares authorized, 1,829,920 issued and outstanding...................... 4,575 4,575 Capital surplus.............................. 6,610 6,610 Retained earnings............................ 6,126 4,113 Net unrealized holding loss on securities available for sale............... (442) (324) -------- -------- Total stockholders' equity................ 16,869 14,974 -------- -------- TOTAL..................................... $248,598 $229,774 ======== ========
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1996, 1995, and 1994 (In Thousands, except per share data)
1996 1995 1994 ---- ---- ---- Interest income: Interest and fees on loans............. $12,884 $12,270 $11,688 Interest and dividends on securities: Taxable: U.S. Treasury securities......... 274 201 126 U.S. Government agencies......... 3,800 3,806 3,338 Dividend income.................. 143 123 119 Non-agency collateralized mortgage obligations............ 18 - - Corporate debt................... 11 14 24 Other securities................. 11 20 20 Tax-exempt -- state and municipal obligations.............. 18 15 19 Interest on deposits in................ 210 11 - depository institutions Interest on federal funds sold......... 92 58 119 ------- ------- ------- Total interest income..................... 17,461 16,518 15,453 ------- ------- ------- Interest expense: Interest on deposits: Time deposits of $100,000 or more.... 555 399 345 Savings and time deposits under $100,000...................... 5,880 5,501 4,850 Interest on securities sold under agreements to repurchase........ 1 93 - Interest on Federal Home Loan Bank borrowing........................ 1,306 899 742 ------- ------- ------- Total interest expense.................... 7,742 6,892 5,937 ------- ------- ------- Net interest income....................... 9,719 9,626 9,516 Provision (benefit) for loan losses....... 675 (213) 1,789 ------- ------- ------- Net interest income after provision (benefit) for loan losses................ 9,044 9,839 7,727 ------- ------- ------- Other operating income: Trust income........................... 20 64 218 Service charges on deposit accounts.............................. 598 652 753 (Losses) gains on securities available for sale -- net............. (63) - 358 Gains on trading securities -- net..... 15 - - Gains on the sale of loans............. - - 132 Merchant income........................ 1,894 1,690 1,549 Other.................................. 733 729 1,033 ------- ------- ------- Total other operating income.............. 3,197 3,135 4,043 ------- ------- ------- Other operating expenses: Salaries............................... 3,933 3,588 3,684 Occupancy, including depreciation on bank premises......... 1,017 851 883 Equipment, including maintenance, rent and depreciation................. 1,193 1,285 1,326 Provision for losses on other real estate and related costs -- net.. 9 837 1,289 Pensions, other employee benefits and related expenses......... 937 618 588 FDIC assessment........................ 120 539 585 Other.................................. 3,264 2,479 2,870 ------- ------- ------- Total other operating expense............. 10,473 10,197 11,225 ------- ------- ------- (Recovery) loss on National Premium CD Program............................... - (410) 1,370 Loss on bulk sale of loans................ - 2,045 - ------- ------- ------- Income (loss) before (benefit) provision for income taxes............... 1,768 1,142 (825) (Benefit) provision for income taxes...... (757) (500) 35 ------- ------- ------- Net income (loss)......................... $ 2,525 $ 1,642 $ (860) ======= ======= ======= Net earnings (loss) per share............. $ 1.38 $ 1.22 $ (0.67) ======= ======= =======
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Years Ended December 31, 1996, 1995, and 1994 (In Thousands, except per share data)
Net Unrealized Holding Gain (Loss) Total Capital Capital Retained on Securities Stockholder's Stock Surplus Earnings Available for Sale Equity ----- ------- -------- --------- --- ---- ------ Balance, January 1, 1994.......................... $3,225 $4,498 $3,331 $ $11,054 Net loss.......................................... (860) (860) Net unrealized holding gain on adoption of SFAS No. 115 as of January 1, 1994 (Note 1)......... 528 528 Net change in unrealized holding gain on securities available for sale.................. (2,682) (2,682) ------ ------ Balance, December 31, 1994........................ 3,225 4,498 2,471 (2,154) 8,040 Net income........................................ 1,642 1,642 Issuance of 540,000 shares of capital stock....... 1,350 2,112 3,462 Net change in unrealized holding loss on securities available for sale.................. 1,830 1,830 ----- ----- Balance, December 31, 1995........................ 4,575 6,610 4,113 (324) 14,974 Net income........................................ 2,525 2,525 Dividends declared ($0.28 per share).............. (512) (512) Net change in unrealized holding loss on securities available for sale.................. (118) (118) ---- ---- Balance, December 31, 1996........................ $4,575 $6,610 $6,126 $(442) $16,869 ====== ====== ====== ===== =======
See notes to consolidated financial statements. 17 CONSOLIDATED STATEMENT OF CASH FLOWS For the Years Ended December 31, 1996, 1995, and 1994 (In Thousands)
Increase (Decrease) in Cash and Cash Equivalents 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net income (loss)........................................................ $ 2,525 $ 1,642 $ (860) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Provision (benefit) for loan losses.................................. 675 (213) 1,789 Provision for losses on other real estate owned...................... 9 783 996 Depreciation......................................................... 1,030 1,047 1,038 Net amortization on securities held to maturity...................... 70 87 78 Net amortization on securities available for sale.................... 75 66 173 Increase (decrease) in net deferred loan fees and costs.............. 120 (19) 59 Loss (gain) on sales of securities available for sale................ 63 - (358) Increase in assets held in trading................................... (458) - - Gain on disposition of real estate and equipment..................... (142) (115) (143) Loss on bulk sale of loans........................................... - 2,045 - Decrease (increase) in accrued interest receivable................... 39 (142) (48) Decrease in income tax receivable.................................... - - 733 Deferred income taxes benefit........................................ (794) (500) - Increase in other assets............................................. (278) (263) (386) (Decrease) increase in accrued liability National Premium CD Program. - (1,370) 1,370 Increase (decrease) in accrued expenses and other liabilities........ 474 (13) (37) --- --- --- Net cash provided by operating activities................................ 3,408 3,035 4,404 ----- ----- ----- Cash flows from investing activities: Net decrease (increase) in federal funds sold........................ 5,050 (3,725) 2,243 Proceeds from maturities of securities held to maturity.............. 4,025 5,476 1,868 Proceeds from sales of securities available for sale................. 15,244 1,495 14,486 Proceeds from maturities of securities available for sale............ 5,300 1,573 7,530 Purchases of securities held to maturity............................. (3,124) - (27,846) Purchases of securities available for sale........................... (19,349) (4,274) (11,148) Purchases of Federal Home Loan Bank stock............................ (197) - - Proceeds from bulk sale of loans..................................... - 4,957 - Net (increase) decrease in loans..................................... (8,394) (19,628) 14,694 Proceeds from the sale of real estate and equipment.................. 471 1,065 1,789 Purchases of fixed assets............................................ (669) (845) (518) ---- ---- ---- Net cash (used in) provided by investing activities...................... (1,643) (13,906) 3,098 ------ ------- -----
18 Cash flows from financing activities: Net (decrease) increase in Federal Home Loan Bank borrowing.......... (2,000) 10,000 (1,000) Net increase in securities sold under agreements to repurchase....... 350 - - Net increase (decrease) in demand deposits, savings and NOW deposits. 2,255 (11,924) (7,799) Net increase (decrease) in time deposits............................. 15,850 7,855 (209) Dividends paid....................................................... (512) - - Proceeds from the issuance of capital stock.......................... - 3,462 - Net cash provided by (used in) financing activities..................... 15,943 9,393 (9,008) ------ ----- ------ Net increase (decrease) in cash and cash equivalents.................... 17,708 (1,478) (1,506) Cash and cash equivalents beginning of the year......................... 8,435 9,913 11,419 ----- ----- ------ Cash and cash equivalents end of the year............................... $26,143 $ 8,435 $ 9,913 ======= ======= =======
See notes to consolidated financial statements. 19 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations The Glastonbury Bank & Trust Company (the "Bank") operates under a charter granted by the State of Connecticut. The Bank is subject to regulation by the state and by the Federal Deposit Insurance Corporation. Bank services are provided at 8 branch offices servicing portions of 3 counties in Connecticut: eastern Hartford County, northern Middlesex County, and western New London County. The Bank is engaged primarily in the business of attracting deposits from the general public and investing those deposits in residential and commercial real estate loans, and in consumer and small business loans. Significant Accounting Policies The accounting policies of the Bank conform with generally accepted accounting principles and predominant practices within the banking industry. The following is a description of the more significant policies: Consolidation Policy The Bank owns an insurance subsidiary, GBT Insurance Group, Inc. (formerly The Glastonbury Company), which is consolidated for financial reporting purposes. All intercompany accounts are eliminated. GBT Realty, a real estate management subsidiary, was dissolved during 1996. Consolidated Statements of Cash Flows For purposes of presenting the consolidated statements of cash flows, cash and cash equivalents include cash on hand, deposits in depository institutions which have an original maturity of three months or less, and cash items in the process of collection. Basis of Financial Statement Presentation In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, the valuation of other real estate owned and the valuation allowance for deferred tax assets. In connection with the determination of the allowance for loan losses and the valuation of other real estate owned, management obtains independent appraisals for significant properties. While management uses available information to recognize losses on loans, and other real estate owned, future additions to the allowances may be necessary based on changes in economic conditions, particularly in Connecticut. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and valuation of other real estate owned. Such agencies may require the Bank to recognize additions to the allowance and writedowns of other real estate owned based on their judgments of information available to them at the time of their examination. 20 Securities Investments in debt securities are adjusted for accumulated amortization of premiums and accretion of discounts. The determination to include debt securities as securities held to maturity or securities available for sale is made at the time of purchase and is based on such factors as overall interest rate sensitivity of the Bank, projected liquidity needs and the Bank's long-term investment strategies. When sales occur, gains or losses are recognized using the specific identification method. The Bank has the positive intent and ability to hold those securities that were designated held to maturity to maturity. Trading securities represent short term investments held for sale. These securities are carried at market value. Unrealized gains and losses are included in other income. When sales occur, gains or losses are recognized using market prices at the time of the sale. Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," (SFAS No. 115), which was adopted by the Bank as of January 1, 1994, requires that securities classified as available for sale be reported at fair value, with unrealized holding gains and losses excluded from earnings, and reported as a separate component of stockholders' equity (less expected tax). At December 31, 1993, the Bank accounted for the classification of debt and equity securities in accordance with the guidance in SFAS No. 115, however, the effect on stockholders' equity was not recorded until January 1, 1994 as follows: Addition to stockholders' equity: Net unrealized gain (before income taxes) on available for sale securities...................... $527,766
Loans and Allowance for Loan Losses Interest income on loans is recognized based on rates applied to principal amounts outstanding. Loans held for sale are stated at cost which approximates market value. Loan origination and commitment fees, net of certain loan origination costs, are deferred and the net amount is amortized as an adjustment to the loan yield. The allowance for loan losses is established through charges to earnings. Loans or portions of loans that are determined to be uncollectible are charged against this allowance and subsequent recoveries are credited to the allowance. The amount charged to earnings is based on several factors that include, but are not limited to, analytical reviews of loan loss experience in relation to loans outstanding, evaluation of the credit worthiness and ability to pay of borrowers, appraisals of collateral values, a continual review of problem loans and overall portfolio quality, regular examinations and appraisals of loan portfolios conducted by the Bank's loan officers, supervisory authorities and independent loan review, and management's judgment with respect to current economic conditions and their impact on the existing loan portfolio. Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," (SFAS No. 114), as amended by SFAS No. 118, which was adopted by the Bank as of January 1, 1995, requires that impaired loans that are within its scope be measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The Statement is applicable to all loans, except large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, loans 21 that are measured at fair value or at the lower of cost or fair value, leases, and convertible or nonconvertible debentures and bonds and other debt securities. The Bank considers its residential real estate loans and consumer loans that are not individually significant to be large groups of smaller balance homogeneous loans. Factors considered by management in determining impairment include payment status, net worth and collateral value. An insignificant payment delay or an insignificant shortfall in payment does not in itself result in the review of a loan for impairment. The Bank applies SFAS No. 114 on a loan-by-loan basis. The Bank does not apply SFAS No. 114 to aggregations of loans that have risk characteristics in common with other impaired loans. Interest on a loan is not generally accrued when the loan becomes ninety or more days overdue. The Bank may place a loan on nonaccrual status but not classify it as impaired, if (i) it is probable that the Bank will collect all amounts due in accordance with the contractual terms of the loan or (ii) the loan is an individually insignificant residential mortgage loan or consumer loan in terms of its size relative to the size of the loan portfolio. Impaired loans are charged-off when management believes that the collectibility of the loan's principal is remote. Substantially all of the Bank's loans that have been identified as impaired have been measured by the fair value of existing collateral. Cash receipts of interest income on impaired loans are credited to principal to the extent necessary to eliminate doubt as to the collectibility of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans are recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge- offs until the charge-offs are fully recovered. SFAS No. 114 states that a loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The adoption of SFAS No. 114 had no material impact on the Bank's financial statements. Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights," (SFAS No. 122), applies to mortgage loans which are originated for sale and are sold with the related servicing rights retained. SFAS No. 122 applies to the Bank's consolidated financial statements for the year ended December 31, 1996. Under SFAS No. 122, the Bank would record the related servicing rights as an asset at fair value, less recognized impairment. The Bank sold no loans during the year ended December 31, 1996 and as a result there was no impact from the adoption of SFAS No. 122. Premises and Fixed Assets Premises and fixed assets are stated at cost plus capitalized interest for qualifying additions less accumulated depreciation. Depreciation and amortization are computed using the straight line method over the useful lives of the respective assets as follows: Buildings 20 - 40 years Furniture, fixtures and equipment 5 - 10 years Automobiles 3 - 4 years
22 Other Real Estate Owned Property acquired from defaulted loans is comprised of foreclosed properties where the Bank has received title and from insubstance foreclosures. As of January 1, 1995 in accordance with SFAS No. 114, loans are classified as insubstance foreclosure when the Bank receives physical possession of the borrower's assets regardless of whether formal foreclosure proceedings take place. Such properties are carried at the lower of cost or the estimated fair value less anticipated selling costs. The fair value of such assets is determined based on independent appraisals and other relevant factors. Prior to January 1, 1995 loans were classified as insubstance foreclosures when the borrower has: (a) formally or informally abandoned control of the collateral, or (b) retained control of the collateral but the economic prospects for the borrower and/or the collateral make it doubtful that the borrower will be able to rebuild equity in the collateral, or otherwise repay the loan other than through the sale of the collateral. Provisions for losses subsequent to acquisition, operating expenses and gains or losses from the sale of acquired properties are charged or credited to expense as incurred. Costs relating to development and improvement of foreclosed property are capitalized, but not in excess of fair value. Gains on the sale of other real estate owned financed by the Bank are not recognized until the Bank has received an adequate down payment from the purchaser. Unearned Income Unearned income arising from installment loans and certain commercial loans is recognized as income using the interest method over the term of the related loans. Merchant Income Merchant income arising from the sales and processing of merchant card services is recognized as other operating income. Income Taxes The Bank accounts for certain items differently in its consolidated financial statements than it does for income tax purposes and makes appropriate provision for deferred income taxes in recognition of the differences. Under SFAS No. 109, the Bank computes deferred income taxes using the asset and liability approach. Pension Plan The Bank maintains a noncontributory defined benefit pension plan that is funded as required by the Employee Retirement Income Security Act. Earnings (Loss) Per Share Earnings (loss) per share is determined by dividing the net income (loss) by the weighted average number of shares outstanding during the year. The weighted average number of shares outstanding was 1,829,920, 1,352,057 and 1,289,920 for 1996, 1995 and 1994, respectively. 23 Reclassifications Certain amounts in the prior years have been reclassified to be consistent with the current year's statement presentation. 2. Regulatory Matters And Current Operating Environment In March 1993, representatives from the Federal Deposit Insurance Corporation ("FDIC") commenced a periodic safety and soundness examination of the Bank. As a result of this examination, the FDIC and the State of Connecticut Department of Banking (collectively, the "Regulatory Agencies") initiated formal regulatory action including the issuance by the FDIC of an order to Cease and Desist, (the "Order"). The Bank agreed to the Order on September 8, 1993 and it became effective on September 27, 1993. The Order superseded a Memorandum of Understanding. The Order required the Bank, among other things, to: Increase the allowance for loan losses by $1,400,000. Submit written plans regarding: . the Bank's management, staffing and composition of the Board of Directors, . the Bank's profit plan and related budgets, . the reduction of classified and nonperforming assets, including a specific plan to lessen the Bank's risk position with any adversely classified borrower whose balance(s) equals or exceeds $300,000 and . the reduction of identified loan concentrations to less than 25% of the Bank's Tier 1 leverage capital ratio. Maintain its Tier 1 leverage capital ratio at or above 6%. Review and revise the Bank's loan policy to address regulatory comments. Cease paying dividends without the Regulatory Agencies' prior approval. Submit quarterly progress reports to the Regulatory Agencies. During 1994 and 1993 the Bank incurred net losses of $860,000 and $2,677,000, respectively. As a result, capital declined significantly. Continued weakening of the local business climate and deteriorating real estate values led to provisions for loan losses of approximately $1.8 million and $3.8 million for the years ended December 31, 1994 and 1993, respectively. Provisions for losses on other real estate owned and related costs had also been at high levels. In 1993, management implemented certain changes to the methodology for determining the allowance for loan losses as recommended by the FDIC. In 1994, management developed a capital plan for 1995 to increase the Bank's Tier 1 leverage capital ratio above 6.0% by December 31, 1995. In October of 1995, the Bank issued a Rights Offering (the "Offering') of up to 540,000 shares of common stock at a subscription price of $6.50 per share on a priority basis to holders of record of its common stock at the close of business on September 15, 1995. The Offering was fully subscribed and was closed as scheduled on November 17, 1995. The amount of proceeds received from the Offering, net of offering expenses, was $3,462,000. The proceeds received from the Offering together with the 1995 earnings produced a Tier 1 leverage capital ratio of 6.77%, which was above the 6.0 minimum required by the Order. 24 Also during 1995, the Bank sold in bulk approximately $4,841,000 of nonperforming assets and $2,838,000 of loans that were classified as substandard and had demonstrated a deterioration in credit worthiness. Nonperforming assets include both nonperforming loans and foreclosed real estate. The sale resulted in a reduction of $4,650,000 in nonperforming assets to $1,051,000 at December 31, 1995 from $5,701,000 at December 31, 1994. Reducing the level of nonperforming assets, along with achieving a Tier 1 leverage capital ratio above 6.0%, placed the Bank in full compliance with the terms of the Order. In May of 1996, the FDIC in conjunction with the State of Connecticut Department of Banking terminated the order to Cease and Desist and the Bank is no longer bound by any of the Order's terms and conditions. 3. SECURITIES The carrying amount and approximate fair value of securities are summarized in the following table. Also summarized are gross unrealized holding gains and losses. No investment in securities of a single issuer, other than in U.S. Government and its agencies and FHLB stock, in 1996 and 1995 exceeded 10% of stockholders' equity.
(In Thousands) Gross Unrealized Holding Amortized ----- ---------- ------- Approximate December 31, 1996 Cost Basis Gains Losses Fair Value - -------- --- ---- ---- ----- ----- ------ ---- ----- Securities Held to Maturity Taxable: U.S. Government agencies......................... $28,072 $235 $415 $27,892 Corporate debt................................... 130 2 - 132 Other securities................................. 85 - - 85 Total......................................... 28,287 237 415 28,109 Tax-exempt obligations of state and political subdivisions........................... 185 - - 185 Total securities held to maturity............. $28,472 $237 $415 $28,294 Securities Available for Sale Taxable: U.S. Government agencies......................... $28,423 $ 65 $440 $28,048 Money market mutual funds........................ 106 - - 106 Non-agency collateralized mortgage obligations.................................... 3,052 14 6 3,060 Total.......................................... 31,581 79 446 31,214 Tax-exempt obligations of state and political subdivisions........................... 855 3 1 857 Total securities available for sale........... $32,436 $ 82 $447 $32,071 Securities Held to Maturity
25 Taxable: U.S. Government agencies..................... $28,548 $527 $152 $28,923 Corporate debt............................... 186 4 - 190 Other securities............................. 345 - 5 340 --- - - --- Total..................................... 29,079 531 157 29,453 Tax-exempt obligations of state and political subdivisions....................... 190 - - 190 Total securities held to maturity......... $29,269 $531 $157 $29,643 Securities Available for Sale U.S. Treasury securities........................ $ 3,490 $ 29 $ 6 $ 3,513 U.S. Government agencies........................ 30,327 182 243 30,266 Total securities available for sale....... $33,817 $211 $249 $33,779
In 1995, the Bank transferred at fair value $10,437,037 of securities from securities classified as held to maturity to securities classified as available for sale. The unrealized holding loss of $18,225 ($31,202 less tax effect of 42%) at the date of transfer has been recognized as a separate component of stockholders' equity. The transfer was a result of a reassessment of the appropriateness of the classification of all securities held at December 31, 1995. In accordance with a Special Report of the Financial Accounting Standards Board regarding SFAS No. 115, this transfer will not call into question the intent of the Bank to hold other debt securities to maturity in the future. During 1996 and 1995, there were no sales of securities held to maturity. During 1994, securities with an amortized cost basis of $15,635,743 were transferred from available for sale to held to maturity. These transfers were made at the fair value at the time of the transfer, and resulted in the recognition of an unrealized loss. This unrealized loss is continuing to be reported in the separate component of stockholders' equity and is being amortized over the remaining lives of the securities as an adjustment of yield. This amortization offsets, or mitigates, the effect on investment income of the amortization of the discount for the securities arising from the transfer. At December 31, 1994 this unrealized loss, net of tax effect, amounted to $797,303. As of December 31, 1996, the remaining unrealized loss was $227,317. Proceeds from the sale of securities available for sale were $15,244,148, $1,495,781 and $14,486,027 during 1996, 1995 and 1994. Gross gains of $42,081, $297 and $354,253 and losses of $106,160, $1,964 and $455 were recognized on those sales during 1996, 1995 and 1994, respectively. As of December 31, 1996, the carrying amount and approximate fair value of securities, excluding FHLB stock and money market mutual funds, by contractual maturities are presented below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
(In Thousands) Amortized Cost Basis Fair Value Available Held to Available Held to for Sale Maturity for Sale Maturity --------- -------- --------- -------- Debt Securities Other Than Mortgage--Backed Securities:
26 Less than 1 year............... $ - $ - $ - $ - After 1 but within 5 years..... 520 2,070 512 2,042 After 5 but within 10 years.... 1,037 6,077 1,005 6,002 After 10 years................. 855 185 857 185 Mortgage--Backed Securities......... 29,918 20,140 29,591 20,065 ------- ------- ------- ------- Total....................... $32,330 $28,472 $31,965 $28,294 ======= ======= ======= =======
At December 31, 1996 and 1995 securities with an amortized cost basis of approximately $7,547,150 and $37,022,566, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase, and for other purposes as required or permitted by law. In 1996, gains on trading securities, net consisted of unrealized holding gains of $59,093, gross gains of $1,974, and $45,685 of losses on put and call options. Proceeds from sales of trading securities were $28,463. 4. Loans Major classifications of loans at December 31 are as follows:
(In Thousands) 1996 1995 ---- ---- Residential real estate.......... $ 67,122 $ 61,946 Commercial real estate........... 53,302 52,140 Commercial time and demand....... 23,897 23,541 Installment and consumer......... 4,711 4,480 Other............................ 77 154 Total.................. 149,109 142,261 Unearned income.................. (376) (296) Allowance for loan losses........ (3,352) (3,029) Loans--net............... $145,381 $138,936
There were no loans for which the terms were restructured as defined in Statement of Financial Accounting Standards No. 15, "Troubled Debt Restructurings," (SFAS No. 15), prior to January 1, 1995, the effective date of SFASNo. 114, that are not impaired based on the terms specified by the restructuring agreement. Loans for which the terms were restructured as defined in SFASNo. 15 prior to January 1, 1995 that are not impaired based on the terms specified by the restructuring agreement amounted to approximately $988,469 at December 31, 1995, inclusive of $302,938 of nonaccrual loans. If these loans had been paid according to their original terms, interest income would have increased by $20,728 for the year ended December 31, 1995. Interest income recognized on these loans was $122,900 for the year ended December 31, 1995. Total loans determined to be impaired as defined in Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," amounted to approximately $1,401,439 and $1,220,142 at December 31, 1996 and 1995, respectively. Impaired loans for which an allowance for credit loss has been provided for amounted to $1,401,439 and $1,207,029 at December 31, 1996 and 1995, respectively. The allowance for credit loss provided for impaired loans, included in the total allowance for loan losses was $210,313 and $181,054 at December 31, 1996 and 1995, respectively. Impaired loans for which no allowance has been provided totalled $13,113 at December 31, 1995. 27 The average recorded investment in impaired loans was $1,579,280 and $3,777,924 for the years ended December 31, 1996 and 1995, respectively. Interest income recognized on impaired loans was $14,862 and $1,706 for the years ended December 31, 1996 and 1995, respectively. There was no interest income recognized from impaired loans using a cash-basis methodology for the years ended December 31, 1996 and 1995, respectively. Changes in the allowance for the loan losses are as follows:
(In Thousands) 1996 1995 1994 ----------------------------------- Balance at beginning of year........... $3,029 $ 4,517 $ 4,742 Provision (benefit) for loan losses 675 (213) 1,789 Loans charged off...................... (504) (1,612) (2,407) Loan recoveries........................ 152 337 393 ----------------------------------- Balance at end of year................. $3,352 $ 3,029 $ 4,527 ===================================
Substantially all of the Bank's lending activities, including lines of credit and other commitments, were with customers located in Hartford County, Connecticut. Although lending activities were diversified, a substantial portion of many Bank customers' net worth is dependent on Hartford County real estate values. The Bank has established credit policies applicable to each type of lending activity in which it engages, evaluates the credit worthiness of each customer and, as a policy, discourages the extension of credit on commercial loans having no collateral to secure the loan. While collateral provides a secondary source of repayment, the Bank ordinarily requires the borrower's ability to generate continuing cash flows as the primary source of repayment. 5. Premises and Fixed Assets The components of premises and fixed assets are summarized as follows:
(In Thousands) 1996 1995 --------------------------- Land...................................... $ 48 $ 48 Buildings................................. 8,683 8,680 Furniture, fixtures and equipment......... 7,010 6,954 --------------------------- 15,741 15,682 Accumulated depreciation and amortization (8,300) (7,857) Total................................. $7,441 $7,825 ===========================
6. Other Real Estate Owned Changes in the other real estate owned balance during fiscal year 1996 and 1995 are as follows:
(In Thousands) 1996 1995 Beginning balance..................... $ 318 $ 1,578 Transfers in.......................... 1,157 692 Capitalized costs..................... -- 14
28 Sales................................. (306) (1,363) Writedowns............................ (10) (783) ------------------------ Ending balance........................ $ 1,159 $ 318
Changes in the valuation allowance for other real estate owned are as follows :
(In Thousands) 1996 1995 1994 Beginning balance..................... $ -- $ -- $ 584 Provision............................. 10 783 996 Writedowns--net (See Note 21)......... (10) (783) (1,580) -------------------------------- Ending balance........................ $ -- $ -- $ -- ================================
During the years ended December 31, 1996, 1995 and 1994 the Bank expensed costs relating to holding foreclosed property of $96,571, $262,859 and $478,904, respectively, and realized net gains of $80,823, $163,909 and $100,000, respectively, from the sale of foreclosed property. Rental income received from other real estate owned totaled approximately $16,460, $25,644 and $97,000 for 1996, 1995 and 1994, respectively. 7. Deposits The aggregate amount of time deposit accounts (including CDs), each with a minimum denomination of $100,000, was approximately $10,736,000 and $8,181,000 as of December 31, 1996 and 1995, respectively. For time deposits as of December 31, 1996, the aggregate amount of maturities for each of the following five years ended December 31, and thereafter are:
(In Thousands) 1997 $62,923 1998 9,648 1999 14,698 2000 2,260 2001 428 2002 and thereafter 746 --------- $90,703 =========
8. Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase generally mature within one to fourteen days from the transaction date. Information concerning securities sold under agreements to repurchase is summarized as follows for the year ended December 31, 1996: Average balance during the year............................ $ 25,410 Average interest rate during the year...................... 4.37% Maximum month-end balance during the year.................. $350,000 US Agency securities underlying the agreements at year-end: Carrying value.......................................... $368,432
29 Estimated fair value................................... $367,023
The securities underlying the agreements at December 31, 1996 were under the control of the Bank. 9. Lease Commitments The Bank leases certain of its branches under operating leases. Terms of the real estate leases require the Bank to pay substantially all costs associated with the property, including real estate taxes, utilities, maintenance and insurance. Also, the Bank has the option to renew certain of its leases for a 5 to 10 year term. Future minimum rental payments under operating leases in effect at December 31, 1996, having an initial or remaining term in excess of one year, are as follows:
Year ending December 31, Minimum Rental Payments ------------------------------------------------------------- 1997 $229,197 1998 169,970 1999 147,831 2000 69,584 2001 65,186 2002 and thereafter 192,362 ---------------------------------------------------- Total $874,130 =============================================================
Rental expense under operating leases was $270,538, $347,939 and $366,541 in 1996, 1995 and 1994, respectively. 10. Pension Plan The Bank has a noncontributory defined benefit pension plan which covers substantially all of its employees. Net pension costs as determined under Statement of Financial Accounting Standards No. 87, "Employer's Accounting for Pensions," in 1996, 1995 and 1994 are summarized as follows (Measurement dates were September 30, 1996, 1995 and 1994):
1996 1995 1994 ----------------------------------- Service cost................................. $116,432 $ 68,599 $ 139,292 Interest cost................................ 76,760 72,260 115,323 Return on plan assets: Actual return.............................. (46,382) (87,251) 4,769 Loss....................................... 4,795 -- -- Deferred (loss) gain....................... (37,383) 13,119 (118,691) ----------------------------------- Net recognized............................... (78,970) (74,132) (113,922) Amortization of unrecognized net asset....... (12,647) (12,647) (21,177)
30 Amortization of unrecognized prior service cost (2,241) (2,241) (2,241) ----------------------------------------- Net pension cost............................... $ 99,334 $ 51,839 $ 117,275 =========================================
In 1994 the Bank settled its pension obligations to two former employees. As a result of the settlement, the Bank recognized a gain of $115,357 in 1994. Employees who have completed six months of service and have attained the age of 18 are eligible to participate in the Bank's defined contribution savings and investment plan (401(k) plan). Eligible employees may contribute up to 10% of their base compensation. The Bank may make matching contributions of up to 50% of the first 4% of the participants' base compensation. Contributions by the Bank for the year ended December 31, 1996 totaled $34,937. The Bank did not participate in matching contributions for the years ended December 31, 1995 and 1994. 11. Income Taxes (BENEFIT) The major components of the tax (benefit) provision are as follows:
1996 1995 1994 -------------------------------------------- Currently payable: Federal ........................... $ 36,600 $ -- $ -- State ............................. -- -- 35,000 Deferred provision (credit): Federal ........................... 510,331 298,714 (461,759) State ............................. 206,561 131,703 (258,568) Change in valuation allowance ....... (1,510,034) (930,417) 720,327 -------------------------------------------- Total ............................. $(756,542) $(500,000) $35,000 ============================================
The currently payable income taxes for 1996 have been reduced $919,918 by the utilization of net operating loss carryforwards. A reconciliation of the provision (benefit) for income taxes computed by applying the Federal statutory rate (34%) to income (loss) before income taxes to the actual (benefit) provision for income taxes follows:
1996 1995 1994 ------------------------------------------- Expense (benefit) for income taxes at the statutory .................... $601,221 $388,441 $(280,502) State income tax deduction .......... 136,330 86,924 23,100 Tax exempt bond income .............. (6,070) (9,741) (6,371) Dividend exclusion .................. (1,457) -- -- Net unutilized tax losses ........... -- -- (398,810)
31 Alternative minimum tax ............. -- -- (13,275) Other ............................... 23,468 (35,207) (12,469) Change in valuation allowance ...... (1,510,034) (930,417) 720,327 --------------------------------------------- Total ............................ $(756,542) $(500,000) $35,000 =============================================
The components of the net deferred tax asset are as follows as of December 31:
1996 1995 ----------------------------------- Deferred tax assets: Interest on nonperforming loans ........... $ 17,441 $ -- Loan loss reserve ......................... 499,058 354,517 Deferred loan fees--net ................... 179,780 148,393 Unrealized losses on securities ........... 288,160 230,659 Valuation of other real estate owned ...... -- 95,238 Merchant loss reserve ..................... 249,623 248,335 Alternative minimum tax credits ........... 133,255 96,655 Accrued deferred compensation ............. 37,497 -- Net operating loss carryforward ........... 729,459 1,649,377 ------------------------------------ Gross deferred tax assets .................. 2,134,273 2,823,174 Valuation allowance ........................ (80,701) (1,590,735) ------------------------------------ 2,053,572 1,232,439 ------------------------------------ Deferred tax liabilities: Depreciation .............................. (344,374) (389,888) Prepaids .................................. (103,612) (111,892) ------------------------------------ Total deferred tax liabilities ............. (447,986) (501,780) ------------------------------------ Net deferred tax assets..................... $1,605,586 $ 730,659 ====================================
At December 31, 1996 the Bank had available federal and state net operating loss carryforwards of approximately $1,328,000 and $3,547,000, respectively, for income tax purposes, which expire in the year 2010 for federal, and 1999 for state. The valuation allowance indicated in the above table partially reserves the gross deferred tax assets at December 31, 1996 and 1995 in accordance with SFAS No. 109, with the exception of the deferred tax asset relating to unrealized holding losses on securities which were transferred from available for sale to held to maturity. This is a temporary difference which will reverse. 32 12. Lines of Credit and Other Commitments It is the Bank's policy, in the normal course of conducting its commercial banking activities, to establish lines of credit in varying amounts for creditworthy customers. Loans made under lines of credit are typically for short-term working capital purposes and interest rates on loans are typically quoted in terms of the Bank's floating base lending rate or an increment over that rate. At December 31, 1996, commitments to extend credit, including guaranteed letters of credit of $673,659 and equity reserve lines of credit of $9,587,227 totaled $22,837,204. Management does not expect any material losses as a result of these commitments. 13. Related Party Transactions The Bank grants loans to executive officers, directors and members of their immediate families, as defined, and to entities in which these individuals have more than a 10% equity ownership. Deletions of loans outstanding to related parties during 1996 refers to directors who resigned from the Board, and an associate of a director who is no longer a related party. Changes in loans outstanding to such related parties during 1996 are as follows: Loans outstanding December 31, 1995 1996 activity:............................. $1,280,235 Additional loans.......................... 335,625 Loans repaid.............................. (467,534) Deletions................................. (264,375) --------------- Loans outstanding December 31, 1996........ $ 883,951 ===============
14. Additional Cash Flow Information The Bank paid interest of $7,648,572, $6,777,618 and $5,973,896 in 1996, 1995 and 1994, respectively. No income taxes were paid in 1996. Income taxes of $9,645 and $467,732 were paid in 1995 and 1994, respectively. Income taxes of $1,079,730 were refunded in 1994. Transfers to other real estate owned from loans receivable were $1,157,000, $692,000 and $1,469,000 during 1996, 1995 and 1994, respectively. There were no sales of other real estate owned financed by the Bank during 1996. Sales of other real estate owned financed by the Bank and thus transferred to loans were $484,000 and $1,300,000 for 1995 and 1994, respectively. 15. Compensating Balances The Bank maintains compensating balances at correspondent banks under informal agreements in connection with banking services received by the Bank. During 1996, average balances of $325,635 were maintained to meet Federal Reserve requirements. 16. Federal Home Loan Bank Borrowing The Bank is a member of the Federal Home Loan Bank of Boston (the "FHLB") system which allows the Bank access to the FHLB's various borrowing programs. As a member of the FHLB and in accordance with an agreement with them, the Bank is required to maintain qualified collateral. At December 31, 1996, the Bank had approximately $50,633,267 of available borrowing under these programs. 33 The Bank has a line of credit available with the FHLB. The line is limited to 2% of the Bank's assets and is payable on demand with interest adjusted daily. There were no advances outstanding under this line of credit at December 31, 1996. The Bank's availability under this credit line is $4,759,000 at December 31, 1996. The maturities of the advances from the FHLB at December 31, 1996 are summarized as follows:
Weighted Average Interest Rate (In Thousands) 1997 5.43% $ 6,000 1998 5.86% 12,000 1999 6.58% 2,000 2000 6.11% 1,000 ----------- $21,000 ===========
17. Minimum Capital Standards The capital requirements described below were developed to be responsive to credit risks, interest rate fluctuations, liquidity needs and investment risk. The Bank 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 Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank 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 Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk- weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the Federal Deposit Insurance Corporation 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. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual capital amounts and ratios are also presented in the table.
To be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions: Amount Ratio Amount Ratio Amount Ratio amounts in Thousands
34 As of December 31, 1996: Total Capital (to Risk Weighted Assets) $19,110 13.42% $11,391 (greater than or equal to) 8.0% Tier 1 Capital (to Risk Weighted Assets) $17,311 12.16% $ 5,695 (greater than or equal to) 4.0% Tier 1 Capital (to Average Assets) $17,311 7.07% $ 9,975 (greater than or equal to) 4.0% As of December 31, 1995: Total Capital (to Risk Weighted Assets) $16,968 12.83% $10,582 (greater than or equal to) 8.0% Tier 1 Capital (to Risk Weighted Assets) $15,298 11.56% $ 5,921 (greater than or equal to) 4.0% Tier 1 Capital (to Average Assets) $15,298 6.77% $ 9,034 (greater than or equal to) 4.0%
As of December 31, 1996: Total Capital (to Risk Weighted Assets) $14,238 (greater than or equal to) 10.0% Tier 1 Capital (to Risk Weighted Assets) $ 8,543 (greater than or equal to) 6.0% Tier 1 Capital (to Average Assets) $12,243 (greater than or equal to) 5.0% As of December 31, 1995: Total Capital (to Risk Weighted Assets) $13,228 (greater than or equal to) 10.0% Tier 1 Capital (to Risk Weighted Assets) $ 7,937 (greater than or equal to) 6.0% Tier 1 Capital (to Average Assets) $11,292 (greater than or equal to) 5.0%
18. Fair Value of Financial Instruments The following disclosure is made in accordance with Statement of Financial Accounting Standards No. 107, "Disclosure about Fair Value of Financial Instruments," which requires the Bank to disclose estimated fair values for its financial instruments. Fair value estimates are determined at a specific point in time, based on relevant market information and information about the financial instrument. Because no market exists for a significant portion of the Bank's financial instruments, fair value estimates are based on subjective assumptions regarding: future expected losses, current economic conditions and other risk factors associated with financial instruments. These estimates involve uncertainties and require subjective judgment and therefore cannot be determined with precision.
December 31, 1996 (in December 31, 1995 (in millions) millions) ------------------------------------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------------------------- -------------------------- Assets: Cash and equivalents.............. $ 26.1 $ 26.1 $ 8.4 $ 8.4 Federal funds sold................ -- -- 5.1 5.1 Securities........................ 62.8 62.6 65.4 65.1 Trading assets.................... 0.5 0.5 -- -- Loans............................. 145.4 145.8 138.9 140.7 Accrued interest receivable....... 1.4 1.4 1.5 1.5 Liabilities: Deposits.......................... 208.4 209.0 190.3 190.9 Securities sold under agreements to purchase........... 0.4 0.4 -- -- Federal Home Loan Bank borrowing........................ 21.0 21.0 23.0 23.0
The carrying amounts of financial instruments in the above table are the same as the carrying amounts on the balance sheets except that the caption "securities" in the table includes held to maturity securities, Federal Home Loan Bank stock and securities available for sale. Off-balance sheet financial instrument liabilities consisting of commitments to extend credit are disclosed in Note 12. 35 The Bank has no material derivative financial instruments subject to the provisions of Statement of Financial Accounting Standards No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments." Cash and Cash Equivalents and Federal Funds Sold: The carrying amount for these short-term instruments approximates the fair value, as the interest rate earned adjusts to market. Securities: Estimated fair values were based on quoted market prices, dealer quotes, or quotes from automated pricing services. Loans: Fair values are estimated by aggregating portions of the portfolios having homogeneous financial characteristics. Fair values for fixed rate loans were determined utilizing quoted market prices when available or by discounting scheduled cash flows through the average maturity using current rates at which similar loans would be made to borrowers with similar remaining maturities. Fair values for variable rate loans with repricing terms of one year or less were deemed to approximate carrying value. Such computations also consider prepayments. The amount derived by performing the above procedures was reduced by the current allowance for loan losses to estimate fair value. Deposits: For demand deposits, the carrying amount was a reasonable estimate of fair value. For time deposits, the fair value was based on the discounted value of contractual cash flows. The discount rate was estimated using the rates currently offered for deposits. Securities Sold Under Agreements to Repurchase: The carrying amount of securities sold under agreements to repurchase approximate their fair value. Federal Home Loan Bank Borrowing: The fair value of these borrowings was based on the discounted value of contractual cash flows. Commitments to Extend Credit and Standby Letters of Credit: The stated value of commitments to extend credit approximated fair value as the current fees charged for similar commitments did not differ significantly from quoted fees. For fixed-rate loan commitments, fair value also considered the difference between current levels of interest rates and the committed rates. Such differences are not considered significant. 19. National Premium CD Program The Bank recorded a contingent liability of $1,370,000 at December 31, 1994. This liability represents an estimated loss resulting from an interest rate risk exposure in the Bank's "National Premium CD Program." The program, which has been discontinued, offered customers primarily high-yielding, short-term certificate of deposits (CDs) issued by selected banking institutions throughout the country. Through this program, the Bank, acting as agent for its customer and charging a fee, purchased these CDs through an independent broker. In 1992, the program was altered; instead of purchasing CDs matching the customer's desired maturity date, CDs 36 with longer maturity dates were purchased, imposing interest rate risk on the program. Due to the rise in interest rates during 1994, these CDs could not be re-marketed at sufficient value to cover the principal and interest owed the customers. The Bank exercised its right to pay customers their principal and interest owed through March 31, 1995. As a result, the Bank recognized a charge to earnings in the 4th quarter of 1994 to reserve against current and future obligations to its customers. This charge was determined as of December 31, 1994 from market values received from a broker dealer specializing in the sale of this type of CD product. This charge was subject to an increase or decrease in the future primarily depending on interest rate movements and the market's demand for this type of CD product. The Bank believed these market values fairly represented the value of all of the CDs as of December 31, 1994. The amount of principal and interest owed the customers as of March 31, 1995 was $6,130,000. The fair value of the CDs was $4,760,000 as of December 31, 1994. The total maturity value of the CDs was $10,505,000, of which $4,469,000 were zero coupon CDs, while the remainder pay interest at maturity. The maturities on all of the CDs ranged from October 2000 to July 2016. In March of 1995, the Bank acquired $6,130,000 in "National Premium CDs" for either sale or redemption and recorded the CDs net of the $1,370,000 charge recognized in the fourth quarter of 1994. These CDs were then either sold or redeemed at their current market price or redemption value resulting in a recovery of $410,000. 20. Litigation The Bank was also subject to claims and lawsuits which arise primarily in the ordinary course of business. Based on information presently available and advice received from legal counsel representing the Bank in connection with such claims and lawsuits, it was the opinion of management that the disposition or ultimate determination of such claims and lawsuits will not have a material adverse effect on the consolidated financial position of the Bank. Management's opinion extends to a lawsuit brought against the Bank and seven directors on or about November 1, 1995 by a former director of the Bank, Henry J. Stone, Jr., and contemporaneously, by Mr. Stone's wife, Merriam March. Both suits allege misconduct by the directors in connection with a proposed acquisition offer received by the Bank in 1994. Mr. Stone's suit sought damages directly from the Bank and the directors to be paid to Mr. Stone. Mr. Stone also sought to be returned to the Bank's Board of Directors despite his resignation in May of 1995. The damages portion of the suit was dismissed by the Connecticut Superior Court, and Mr. Stone has not taken an appeal from that dismissal. His action to be returned to the Board remains, and the Bank intends to continue to vigorously oppose Mr. Stone. Among other things, the Bank's Board is elected annually, and Mr. Stone was neither nominated as a director nor did he seek election at the shareholders meeting in 1996, a year after his resignation and the shareholders meeting at which he should have been seated on the Board. Ms. March's suit does not seek damages from the Bank and the directors to be paid to Ms. March herself. Rather, it is a "derivative suit" in which she, as a shareholder, has sued the directors of the Bank on behalf of the Bank for damages they have allegedly caused to the Bank. Because the suit is "derivative", any monetary judgment obtained by Ms. March would be paid by the directors to the Bank. Thus, although the Bank considers her suit without merit, the Bank would nonetheless be benefitted in the event Ms. March's suit were to succeed. The derivative action by Ms. March seeks approximately $11.7 million in money damages from the directors. However, the Bank's Certificate of Incorporation, which tracks the language of Connecticut banking law, limits the personal liability of directors to the Bank and its shareholders to an amount equal to one year of the director's compensation. This limitation is inoperative only when the director (1) has committed a knowing and culpable violation of the law, (2) has obtained improper personal economic gain, (3) has shown a lack of good faith and a conscious disregard of duty with an unjustifiable risk to the bank, (4) has sustained an unexcused pattern of inattention amounting to an abdication of duty, or (5) has violated state banking law. Therefore, unless one of the exceptions above applies, the Bank's recovery from the directors will be limited to one year of each director's compensation. Although Ms. March has alleged that some of the exceptions apply here, the Bank believes that they do not and the directors are defending themselves accordingly. 37 Under Connecticut law, the Bank is required in some cases, and is permitted in others, to "indemnify", or reimburse, its directors from damages and costs incurred by them in connection with litigation brought against them in their official capacities at the Bank. If the director is wholly successful in the suit, the Bank must indemnify him. If the director conducted himself in good faith, and he or she reasonably believed his or her conduct to have been in the best interests of the Bank, then the Bank may indemnify the directors. If the Bank does not choose to indemnify a director, he or she can apply to the court for an order of indemnification. These rules apply whether the suit is finally adjudicated or settled earlier. In addition, the Bank may advance expenses of a director involved in Bank litigation upon certain conditions. In the Stone and March cases, a special committee of non-defendant directors of the Bank has determined that the directors are likely to be entitled to indemnification and that circumstances are appropriate to advance their expenses. In summary, the Stone lawsuit has been dismissed in its entirety except for the count which requests that Mr. Stone be re-seated on the Bank's Board of Directors. No monetary relief is sought in connection with that claim. In the March suit, any damages that the court may order the defendant directors to pay (the Bank believes this to be unlikely and, in any event, limited to one year's compensation from each director) would be paid to the Bank. At that point, the Bank would determine whether or not it can or may reimburse the defendant directors, essentially returning to them, in whole or in part, the damages paid to the Bank. The Bank's principal monetary exposure, therefore, is from the attorney's fees that it and its directors have incurred. and will continue to incur until the suits are resolved. Although some of that exposure may be recoverable through insurance coverage, thus far the relevant insurers have claimed that these suits are excluded from their coverage. Through December 1996, the Bank had accrued for all expenses incurred for attorneys' fees and related costs in connection with the suit, including the advancing of such fees for the defendant directors. As of December 1996, preliminary motions have been completed and the parties are engaging in mutual discovery efforts. The timing for trial is unpredictable due to court scheduling uncertainties, but the Bank currently expects that a trial will commence earlier than late 1998. The amount of additional legal fees to be incurred by the Bank will depend upon the scope of the plaintiff's discovery efforts, whether the suits actually go to trial, and other variables. 21. Bulk Sale of Assets In December 1995, the Bank sold in bulk $4,841,000 in nonperforming assets and $2,838,000 of loans which had demonstrated a deterioration in credit worthiness. Nonperforming assets included $4,195,000 of nonperforming loans and $646,000 of other real estate owned. Total loss on the sale of $2,376,759 included $2,044,861 relating to the loss on the loans sold and $331,898 relating to the loss on other real estate owned. 38 INDEPENDENT AUDITORS' REPORT SHATSWELL, MacLEOD & COMPANY, P.C. CERTIFIED PUBLIC ACCOUNTANTS 83 PINE STREET WEST PEABODY, MASSACHUSETTS 01960-3635 TELEPHONE (508) 535-0206 FACSIMILE (508) 535-9908 To the Board of Directors The Glastonbury Bank & Trust Company Glastonbury, Connecticut INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated balance sheets of The Glastonbury Bank & Trust Company and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Glastonbury Bank & Trust Company and Subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in note 1 of the notes to the consolidated financial statements, the Bank adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" as of January 1, 1994. /s/ Shatswell, MacLeod & Company, P.C. SHATSWELL, MacLEOD & COMPANY, P.C. January 23, 1997 39 MARKET FOR THE BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS On July 18, 1996, the Bank's common stock began trading on the Nasdaq SmallCap Market under the symbol "GLBT." Previously, the Bank's stock was traded on the OTC bulletin board and in the "pink sheets" as indicated by the asterisk. The following are quoted bid prices except where indicated for the Bank's stock as reported by Nasdaq. As of March 15, 1997, the Bank had 558 shareholders of its common stock.
Bid Ask --- --- 1997 March 3, 1997 $17.00 $17.50 1996 Low High Dividend - ---- --- ---- -------- First Quarter* $ 8.50 $ 9.25 $ - Second Quarter* 9.125 10.25 .07 Third Quarter 10.00 10.875 .07 Fourth Quarter 10.125 13.25 .14** 1995 Low High Dividend - ---- --- ---- -------- First Quarter* $ 7.70 $ 7.75 - Second Quarter* 7.25 7.625 - Third Quarter* 7.25 10.50 - Fourth Quarter* 7.50 9.875 -
**The Bank declared a special dividend of $0.07 per share. Corporate Headquarters 2461 Main Street Glastonbury, CT 06033 (860) 633-4695 Independent Auditors Shatswell, MacLEOD & Company, P.C. 83 Pine Street West Peabody, MA 01960 Transfer Agent Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 Shareowner Information 1-800-525-7686 Annual Report (Form F-2) The Bank's Annual Report (Form F-2) as filed with the Federal Deposit Insurance Corporation may be obtained by writing: Glastonbury Bank & Trust, Manager, Financial Services, 2461 Main Street Glastonbury, CT 06033 Stock Trading The common stock of The Glastonbury Bank & Trust is listed on the Nasdaq SmallCap Market under the symbol "GLBT." Member FDIC Member Federal Home Loan Bank of Boston Equal Opportunity Lender 40 EX-21 9 SUBSIDIARIES OF SIS EXHIBIT 21 21. SUBSIDIARIES OF THE REGISTRANT 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) Colebrook-Westor, Inc. (5) Overlook, Inc. The Company also owns 100% of the capital stock of SIS Interim Bank, a Connecticut bank, which was organized for the purpose of merging into and which will, upon consummation of the transaction, merge with and into Glastonbury Bank & Trust Company. 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) Newgate Corporation Hillman Associates Partnership #4 50% general partnership Wiljon Partnership 50% general partnership (2) Colebrook/Westor Corporation Westor Corporation 50% stockholder Westor Partnership 1% general partnership (98% limited partnership owned by Westor Corporation) (3) Overlook, Inc. Chester Commons 99% limited partnership (4) Sherman Street Corporation Van Der Hayden 1% general partnership
EX-22.1 10 FORM OF PROXY FOR GBT Exhibit 22.1 GLASTONBURY BANK & TRUST COMPANY ("GBT") PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD DECEMBER 4, 1997 The undersigned hereby appoints __________________ and __________________, and each of them, with full power of substitution, the proxies of the undersigned to vote all the shares of Common Stock of Glastonbury Bank & Trust Company held of record by the undersigned on October 10, 1997 at the Special Meeting of Shareholders, to be held at GBT's main office, 2461 Main Street, Glastonbury, Connecticut, on December 4, 1997 at 4:30 p.m., or any adjournment thereof. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSAL 1. THE PROXIES ARE ALSO AUTHORIZED TO VOTE UPON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING, AS DIRECTED BY A MAJORITY OF GBT'S BOARD OF DIRECTORS. THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL MEETING OF SHAREHOLDERS AND THE RELATED JOINT PROXY STATEMENT-PROSPECTUS. (PLEASE VOTE, SIGN AND DATE ON THE REVERSE SIDE) THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR ITEM 1: 1. To approve and adopt the Agreement and Plan of Reorganization, dated as of August 18, 1997 (the "Merger Agreement"), by and between GBT and SIS Bancorp, Inc. ("SIS") and the related Agreement and Plan of Merger, dated as of September 12, 1997 (the "Plan of Merger"), by and among GBT, SIS and SIS Interim Bank, an "interim" bank that has been organized as a wholly owned subsidiary of SIS, and each of the transactions contemplated thereby, including the merger of SIS Interim Bank with and into GBT, upon the terms and subject to the conditions set forth in the Merger Agreement and Plan of Merger, as more fully described in the accompanying Joint Proxy Statement- Prospectus. [ ] FOR [ ] AGAINST [ ] ABSTAIN PLEASE SIGN EXACTLY AS YOUR NAME APPEARS BELOW. WHEN SHARES ARE HELD BY JOINT TENANTS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER AUTHORIZED OFFICER. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AN AUTHORIZED PERSON. -------------------------------------- Signature ------------------------------------- Signature if held jointly Dated: _______________ , 1997 Please mark, sign, date and return the proxy card promptly using the enclosed envelope EX-22.2 11 FORM OF PROXY FOR SIS Exhibit 22.2 SIS BANCORP, INC. PROXY FOR SPECIAL MEETING THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF SIS BANCORP, INC. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED. IF NO DIRECTION IS GIVEN, THIS PROXY, IF OTHERWISE PROPERLY EXECUTED, WILL BE VOTED FOR PROPOSAL 1. The undersigned, a stockholder of SIS Bancorp, Inc. (the "Company"), revoking all prior proxies, hereby appoints F. William Marshall, Jr., John M. Naughton and Michael E. Tucker and each of them with full power of substitution, the attorneys, agents and proxies of the undersigned to represent and vote all shares of stock of the Company which the undersigned would be entitled to vote if personally present at the Special Meeting of stockholders of the Company and any adjournments thereof, to be held at the Headquarters of the Company on the 12th floor, SIS Bancorp, 1441 Main Street, Springfield, Massachusetts on Thursday, December 4, 1997 at 10:00 a.m. local time, as specified herein as to each proposal. (REVERSE) PROXY FOR SPECIAL MEETING ON DECEMBER 4, 1997 FOR SIS BANCORP, INC. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSAL 1. [ ] Please mark your votes this way. ________________________ common - -------------------------------------------------------------------------------- PROPOSAL 1: To approve and adopt the [ ] FOR [ ] AGAINST [ ] ABSTAIN Agreement and Plan of Reorganization, dated as of August 18, 1997 (the "defined terms Merger Agreement"), by and between the Company and Glastonbury Bank and Trust Company ("defined terms GBT"), and each of the transactions contemplated thereby, including the issuance by the Company of shares of its common stock to the shareholders of GBT, upon the terms and subject to the conditions set forth in the Merger Agreement, as more fully described in the accompanying Joint Proxy Statement- Prospectus. IN THEIR DISCRETION, THE PROXIES NAMED HEREIN ARE AUTHORIZED TO VOTE ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENTS OR POSTPONEMENTS THEREOF. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER MATTERS TO BE BROUGHT BEFORE THE MEETING. - -------------------------------------------------------------------------------- Please date and sign exactly as name appears herein and return in the enclosed envelope. When shares are held as joint owners, both should sign. Executors, administrators, trustees or others signing in a representative capacity should give their full title as such. If a corporation, please sign in full corporate name by president or other authorized officer. If a partnership, please sign in partnership name by an authorized person. Dated: ____________ , 1997 - --------------------------- Signature - --------------------------- Signature EX-23.1 12 CONSENT OF PRICE WATERHOUSE EXHIBIT 23.1 [LETTERHEAD OF PRICE WATERHOUSE LLP APPEARS HERE] CONSENT OF INDEPENDENT ACCOUNTANTS ---------------------------------- We hereby consent to the incorporation by reference in the Joint Proxy Statement-Prospectus constituting part of this Registration Statement on Form S- 4 of SIS Bancorp, Inc. of our report dated January 23, 1997 appearing on page 67 of SIS Bancorp Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996. We also consent to the reference to us under the heading "Experts" in such Joint Proxy Statement-Prospectus. /s/Price Waterhouse LLP Boston, Massachusetts October 24, 1997 EX-23.2 13 CONSENT OF SHATSWELL, MACLEOD & CO., P.C. EXHIBIT 23.2 [LETTERHEAD OF SHATSWELL, MACLEOD & COMPANY, P.C. APPEARS HERE] CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- We consent to the incorporation by reference of our report dated January 23, 1997, on the consolidated financial statements of The Glastonbury Banki & Trust Company in the Proxy Statement - Prospectus contained in the Registration Statement on Form S-4 of SIS Bancorp, Inc. We also consent to the reference to our firm under the heading "Experts" in the Proxy Statement - Prospectus. /s/ Shatswell, MacLeod & Company, P.C. SHATSWELL, MacLEOD & COMPANY, P.C. West Peabody, Massachusetts October 24, 1997 EX-23.5 14 CONSENT OF MCCONNELL, BUDD & DOWNERS, INC. EXHIBIT 23.5 MCCONNELL, BUDD & DOWNES, INC. 365 SOUTH STREET MORRISTOWN, NEW JERSEY 07960 201-538-7800 FAX: 201-538-0522 CONSENT OF FINANCIAL ADVISOR We hereby consent to the inclusion of the Opinion of McConnell, Budd & Downes, Inc. on the Form S-4 Registration Statement of SIS Bancorp, Inc. ("SIS") to be filed with the Securities and Exchange Commission in connection with the proposed merger of SIS Interim Bank, a subsidiary of SIS, with Glastonbury Bank & Trust Company ("GBT"), and to the references to our firm as Financial Advisor to GBT in the text of the related Joint Proxy Statement-Prospectus. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933 or the rules and regulations of the Securities and Exchange Commission. McConnell, Budd & Downes, Inc. October 24, 1997 By: /s/David A. Budd --------------------------------- David A. Budd Managing Director EX-23.6 15 CONSENT OF OPPENHEIMER & CO., INC. EXHIBIT 23.6 Oppenheimer Tower Oppenheimer & Co., Inc. World Financial Center New York, New York 10281 (212) 667-7000 Investment Banking Group We hereby consent to the inclusion of our opinion letter to the Board of Directors of SIS Bancorp, Inc. as an Annex to the Proxy Statement/Prospectus which forms a part of the Registration Statement on Form S-4 relating to the proposed transactions among SIS Bancorp, Inc. and Glastonbury Bank & Trust Company; and to the references to such opinion in such Proxy Statement/Prospectus under the captions "Summary--Our Reasons for the Merger," "Summary--Opinions of Financial Advisers," "The Merger--Background of the Merger," "The Merger--Recommendation of the SIS Board and Reasons for the Merger" and "The Merger--Opinions of Financial Advisers." In giving such consent, we do not admit (i) that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended (the "Securities Act"), or the rules and regulations of the Securities and Exchange Commission promulgated thereunder, or (ii) that we are experts with respect to any part of such Registration Statement within the meaning of the term "experts" as used in the Securities Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Oppenheimer & Co., Inc. By: /s/Mary Anne Callahan --------------------------------- Mary Anne Callahan New York, New York October 24, 1997 EX-99 16 CONSENT OF DIRECTOR NOMINEE CONSENT OF DIRECTOR NOMINEE I hereby consent to the use in the "Summary-Management and Operations after the Merger" and "The Merger-Management and Operations after the Merger" sections of the Prospectus constituting part of the Registration Statement on Form S-4 of SIS Bancorp, Inc. of my name as a nominee to be a director of SIS Bancorp, Inc. after the completion of the merger. /s/Ronald E. Bourbeau - --------------------- Ronald E. Bourbeau October 24, 1997 -----END PRIVACY-ENHANCED MESSAGE-----