FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended 03/31/98
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 000-20809
SIS BANCORP, INC.
(Exact Name of Issuer as Specified in its Charter)
Massachusetts 04-3303264
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SIS BANCORP, INC.
1441 Main Street
Springfield, Massachusetts 01102
(Address of Principal Executive Offices) (Zip Code)
(413) 748-8000
(Issuers Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__
Indicate the number of shares outstanding of the registrant's common
stock, as of the latest practicable date: 6,973,584 shares as of May 7,1998.
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report contains certain "forward-looking statements" including statements
concerning plans, objectives, future events or performance and assumptions and
other statements which are other than statements of historical fact. SIS
Bancorp, Inc. and its subsidiaries (the "Company") wishes to caution readers
that the following important factors, among others, may have affected and could
in the future affect the Company's actual results and could cause the Company's
actual results for subsequent periods to differ materially from those expressed
in any forward-looking statement made by or on behalf of the Company herein: (i)
the effect of changes in laws and regulations, including federal and state
banking laws and regulations, with which the Company must comply, and the
associated costs of compliance with such laws and regulations either currently
or in the future as applicable; (ii) the effect of changes in accounting
policies and practices, as may be adopted by the regulatory agencies as well as
by the Financial Accounting Standards Board; (iii) the effect on the Company's
competitive position within its market area of the increasing consolidation
within the banking and financial services industries, including the increased
competition from larger regional and out-of-state banking organizations as well
as nonbank providers of various financial services; (iv) the effect of changes
in interest rates; (v) the effect of changes in the business cycle and downturns
in the local, regional or national economies; (vi) the effect of the "year 2000"
issue (i.e. that current computer programs use only two digits to identify a
year in the date field and cannot reflect a change in the century) on the
Company's financial condition or results of operations; and (vii) the impact of
pending litigation on the Company's financial condition or results of
operations.
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SIS BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet
at March 31, 1998 and December 31, 1997 1
Condensed Consolidated Statement of Operations for the
three months ended March 31, 1998 and 1997 2
Condensed Consolidated Statement of Cash Flows for the
three months ended March 31, 1998 and 1997 3
Condensed Consolidated Statement of Changes in Stockholders' Equity
for the three months ended March 31, 1998 and 1997 5
Notes to the Unaudited Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Default upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 26
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<TABLE>
<CAPTION>
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
(Unaudited)
March 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 48,885 $ 50,297
Federal funds sold and short term investments 54,458 17,317
Investment securities available for sale 568,853 576,108
Investment securities held to maturity (fair value: $213,861 at March 31,
1998 and $193,396 at December 31, 1997) 213,508 193,007
Loans receivable, net of allowance for possible losses
($23,239 at March 31, 1998 and $22,724 at December 31, 1997) 837,336 828,761
Accrued interest and dividends receivable 11,168 10,749
Investments in real estate and real estate partnerships 2,879 2,903
Foreclosed real estate, net 817 1,209
Bank premises, furniture and fixtures, net 37,036 35,843
Other assets 19,028 17,424
----------- -----------
Total assets $ 1,793,968 $ 1,733,618
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,309,402 $ 1,267,298
Federal Home Loan Bank advances 173,446 184,121
Securities sold under agreements to repurchase 134,023 113,299
Loans payable 2,474 2,492
Mortgage escrow deposits 7,662 5,642
Accrued expenses and other liabilities 38,776 35,294
----------- -----------
Total liabilities 1,665,783 1,608,146
----------- -----------
Commitments and contingent liabilities -- --
Stockholders' equity:
Preferred stock ($.01 par value; 5,000,000 shares
authorized: no shares issued and outstanding) -- --
Common stock ($.01 par value; 25,000,000 shares authorized; shares
issued: 7,081,184 at March 31, 1998 and 7,081,187 at December 31, 1997;
shares outstanding: 6,969,984 at March 31, 1998 and 6,947,787 at
December 31, 1997) 71 71
Unearned compensation (3,388) (3,123)
Additional paid-in capital 55,068 54,755
Retained earnings 78,163 75,153
Accumulated other comprehensive income -
net unrealized gain on investment securities available for sale 1,203 2,133
Treasury stock, at cost (111,200 and 133,400 shares at March 31, 1998 and
December 31, 1997, respectively) (2,932) (3,517)
----------- -----------
Total stockholders' equity 128,185 125,472
----------- -----------
Total liabilities and stockholders' equity $ 1,793,968 $ 1,733,618
=========== ===========
See accompanying Notes to the Unaudited Financial Statements
</TABLE>
1
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<TABLE>
<CAPTION>
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars In Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended
---------------------------
March 31, March 31,
1998 1997
------------ -----------
<S> <C> <C>
Interest and dividend income:
Loans $ 17,901 $ 16,248
Investment securities available for sale 8,517 8,502
Investment securities held to maturity 3,472 3,778
Investment securities held for trading -- 2
Federal funds sold and short term investments 561 295
----------- -----------
Total interest and dividend income 30,451 28,825
----------- -----------
Interest expense:
Deposits 10,577 10,056
Borrowings 4,475 3,856
----------- -----------
Total interest expense 15,052 13,912
----------- -----------
Net interest and dividend income 15,399 14,913
Less: Provision for possible loan losses 251 500
----------- -----------
Net interest and dividend income after provision
for possible loan losses 15,148 14,413
Noninterest income:
Net gain on sale of loans 255 106
Net loss on sale of securities held for trading -- (11)
Fees and other income 3,721 3,298
----------- -----------
Total noninterest income 3,976 3,393
----------- -----------
Noninterest expense:
Operating expenses:
Salaries and employee benefits 6,221 5,914
Occupancy expense of bank premises, net 1,220 1,200
Furniture and equipment expense 963 773
Other operating expenses 4,081 4,201
----------- -----------
Total operating expenses 12,485 12,088
----------- -----------
Foreclosed real estate expense (income) 68 (74)
Net (income) expense of real estate operations (13) 421
----------- -----------
Total noninterest expense 12,540 12,435
Income before income tax expense 6,584 5,371
Income tax expense 2,508 2,091
----------- -----------
Net income $ 4,076 $ 3,280
=========== ===========
Earnings per share:
Basic $ 0.61 $ 0.50
Diluted $ 0.58 $ 0.48
Weighted average shares outstanding:
Basic 6,638,457 6,576,684
Diluted 7,004,057 6,851,596
See accompanying Notes to the Unaudited Financial Statements
</TABLE>
2
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<TABLE>
<CAPTION>
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------
1998 1997
--------- --------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 4,076 $ 3,280
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for possible loan losses 251 500
Depreciation 1,081 958
Amortization of premium on investment securities, net 1,044 644
ESOP and restricted stock expenses 507 348
Increase in assets held for trading -- (10)
Income from equity investment in partnerships -- (1)
Gain on sale of loans (255) (106)
Disbursements for mortgage loans held for sale (30,355) (15,101)
Receipts from mortgage loans held for sale 30,610 15,207
Gain on sale of fixed assets and real estate -- (86)
Changes in assets and liabilities:
(Increase) decrease in other assets, net (1,298) 1,355
Decrease in accrued expenses and other liabilities 3,482 2,290
-------- --------
Net cash provided by operating activities 9,143 9,278
-------- --------
Cash Flows From Investing Activities
Proceeds from maturities and principal payments received
on investment securities available for sale 76,685 33,653
Purchase of investment securities available for sale (72,005) (87,096)
Proceeds from maturities and principal payments received
on investment securities held to maturity 15,996 11,347
Purchase of investment securities held to maturity (36,621) (7,264)
Net increase in investments in real estate (6) --
Net increase in loans receivable (8,882) (7,354)
Net decrease in foreclosed real estate 448 225
Proceeds from sale of loans -- 89
Proceeds from sale of fixed assets -- 21
Purchase of fixed assets (2,244) (1,282)
-------- --------
Net cash used for investing activities (26,629) (57,661)
-------- --------
See accompanying Notes to the Unaudited Financial Statements
3
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<CAPTION>
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(Dollars In Thousands)
(Unaudited)
Three Months Ended
March 31,
----------------------
1998 1997
--------- ----------
<S> <C> <C>
Cash Flows from Financing Activities
Net increase in deposits 42,104 37,034
Net increase in borrowings 10,031 18,106
Net increase in mortgagors' escrow deposits 2,020 2,117
Net proceeds from exercise of stock options 126 175
Repurchase/retirement of common stock -- (2,095)
Cash dividends paid (1,066) (776)
--------- ---------
Net cash provided by financing activities 53,215 54,561
--------- ---------
Increase in cash and cash equivalents 35,729 6,178
Cash and cash equivalents, beginning of year 67,614 68,090
--------- ---------
Cash and cash equivalents, end of year $ 103,343 $ 74,268
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest to depositors
and interest on debt $ 14,710 $ 13,777
Income taxes paid $ 1,144 $ 841
Non-cash investing activities:
Transfers to foreclosed real estate, net $ 56 $ --
See accompanying Notes to the Consolidated Financial Statements
</TABLE>
4
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<TABLE>
<CAPTION>
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The Three Months Ended March 31, 1998 and 1997
(Dollars In Thousands)
Net unrealized
gain (loss)
on investment
Additional securities Treasury
Common Unearned Paid-In Retained available Stock
Stock Compensation Capital Earnings for sale at Cost Total
------- ------------ ---------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 71 $(3,123) $54,755 $75,153 $ 2,133 $(3,517) $125,472
Net income -- -- -- 4,076 -- -- 4,076
Cash dividends declared -- -- -- (1,066) -- -- (1,066)
Issuance of common stock in connection with employee
and non-employee directors benefit programs -- (459) -- -- -- 585 126
Decrease in unearned compensation -- 194 313 -- -- -- 507
Change in unrealized gain on investment
securities available for sale -- -- -- -- (930) -- (930)
------ ------- ------- ------- ------- ------- --------
Balance at March 31, 1998 $ 71 $(3,388) $55,068 $78,163 $ 1,203 $(2,932) $128,185
====== ======= ======= ======= ======= ======= ========
Balance at December 31, 1996 $ 71 $(3,693) $53,836 $67,119 $ 1,453 $ -- $118,786
Net income -- -- -- 3,280 -- -- 3,280
Cash dividends declared -- -- -- (775) -- -- (775)
Issuance of common stock in connection with employee
and non-employee directors benefit programs -- (98) 44 -- -- 228 174
Decrease in unearned compensation -- 167 181 -- -- -- 348
Change in unrealized gain on investment
securities available for sale -- -- -- -- (1,441) -- (1,441)
Treasury stock purchased -- -- -- -- -- (2,095) (2,095)
------ ------- ------- ------- ------- ------- --------
Balance at March 31, 1997 $ 71 $(3,624) $54,061 $69,624 $ 12 $(1,867) $118,277
====== ======= ======= ======= ======= ======= ========
See accompanying Notes to the Unaudited Financial Statements
</TABLE>
5
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
1. Acquisition of Glastonbury Bank & Trust Company
On August 18, 1997, the Company and Glastonbury Bank & Trust Company ("GBT")
signed an Agreement and Plan of Reorganization, under which the Company acquired
all of the outstanding shares of GBT (the "Merger"). The Merger was completed on
December 17, 1997. As a result of the Merger, GBT became a wholly-owned
subsidiary of the Company. The Merger resulted in the exchange of 0.74 of a
share of the Company's common stock for each of GBT's 1,829,920 shares of common
stock and was treated as a pooling of interests for accounting purposes.
Accordingly, the Company's historical financial statements have been restated to
reflect the combination with GBT.
2. Condensed Consolidated Financial Statements
The Condensed Consolidated Financial Statements of the Company included herein
are unaudited, and in the opinion of management all adjustments, consisting only
of normal recurring adjustments necessary for a fair presentation of the
financial condition, results of operations and cash flows, as of and for the
periods covered herein, have been made. Certain information and note disclosures
normally included in Condensed Consolidated Financial Statements have been
omitted as they are included in the most recent Securities and Exchange
Commission ("SEC") Form 10-K and accompanying Notes to the Financial Statements
(the "Form 10-K") filed by the Company for the year ended December 31, 1997.
Management believes that the disclosures contained herein are adequate to make a
fair presentation.
These unaudited condensed consolidated financial statements should be read in
conjunction with the Form 10-K.
The results for the three month interim period covered hereby are not
necessarily indicative of the operating results for a full year.
3. New Accounting Pronouncements
In June 1997, the FASB issued SFAS 130 "Reporting Comprehensive Income" which
establishes standards for disclosure of comprehensive income. Comprehensive
income represents net income for a period plus the change in equity of a
business during a period from non-shareholder sources. Excluding net income, the
Company's only other source of comprehensive income is its unrealized gain
(loss) on investment securities available for sale, net of tax. SFAS 130
requires the restatement of prior periods for comparative purposes. The Company
adopted SFAS 130 on January 1, 1998. Adoption of this Statement did not have a
material impact on the Company's financial position or results of operations.
Total comprehensive income for the three months ended March 31, 1998 and 1997
was $4.1 and $2.5 million, respectively.
In June 1997, the FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for the way that
public business enterprises report financial and descriptive information about
operating segments. SFAS 131 defines an operating segment as components of an
enterprise about which separate financial information is available that is
evaluated by management in deciding how to allocate resources and in assessing
performance. The Company adopted SFAS 131 on January 1, 1998. Adoption of this
Statement did not have a material impact on the Company's financial position or
results of operations.
In February 1998, the FASB issued SFAS 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits - an amendment of FASB Statements No.
87, 88 and 106" (SFAS 132) which revises employers' disclosures about pension
and other postretirement benefit plans, though it does not change the
measurement or recognition of those plans. The Company adopted SFAS 132
effective January 1, 1998. Adoption of this Statement did not have a material
impact on the Company's financial position or results of operations.
6
<PAGE>
4. Earnings Per Share
Basic and diluted net income per share and weighted average shares outstanding
follow (dollars in thousands, except per share amounts):
(Unaudited)
Three months ended
--------------------------------
March 31, March 31,
1998 1997
----------- ----------
Net income
$ 4,076 $ 3,280
Weighted average shares outstanding:
Basic 6,638,457 6,576,684
Effect of dilutive securities:
Stock options 336,651 235,127
Restricted stock 28,949 39,785
---------- ----------
Diluted 7,004,057 6,851,596
========== ==========
Net income per share:
Basic $ 0.61 $ 0.50
Diluted $ 0.58 $ 0.48
5. Dividend Policy
The Company paid cash dividends in the amount of $0.16 per share on February 23,
1998. On April 22, 1998 the Company declared a dividend of $0.16 per share
payable on May 26, 1998 to shareholders of record as of the close of business on
May 4, 1998.
6. Divestment Related Charges
The Company has certain subsidiaries that are engaged in various real estate
investments, directly or in joint ventures with unaffiliated partners. In
accordance with the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the Company has terminated its real estate development
activities and is in the process of selling its remaining real estate
investments. In the first quarter of 1997, the Company established a reserve of
$1.0 million relating to the divestment of its real estate investment and
brokerage subsidiaries, Colebrook Inc. and subsidiaries ("Colebrook"). The $1.0
million reserve consists of $0.7 million in severance and benefit accruals and
$0.3 million for other expenses. As of March 31, 1998, approximately $0.1
million of expenses have been paid relating to the divestiture. This divestment
is scheduled to be completed by June 30, 1998.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
Overview
SIS Bancorp, Inc. (the "Company") is a Massachusetts corporation formed in 1996
and serves as the bank holding company for Springfield Institution for Savings
("SIS Bank"), and Glastonbury Bank & Trust Company ("GBT"). The Company was
formed for the purpose of reorganizing SIS Bank into a holding company structure
("the Reorganization"). Upon the effectiveness of the Reorganization, SIS Bank
became a wholly-owned subsidiary of the Company and SIS Bank's former
stockholders became stockholders of the Company. The Company acquired GBT on
December 17, 1997.
Established in 1827, SIS Bank is a Massachusetts chartered stock savings bank
headquartered in Springfield, Massachusetts. GBT, with its headquarters located
in Glastonbury, Connecticut, is a Connecticut chartered commercial bank founded
in 1919. Substantially all of the Company's operations are conducted through its
subsidiary banks.
The Company provides a wide variety of financial services through both SIS Bank
and GBT (the "Banks"), including retail and commercial banking, residential
mortgage origination and servicing, commercial and consumer lending, merchant
processing and insurance sales. The Banks serve the consumers and businesses
located in western Massachusetts and central Connecticut through a network of 33
full service branches.
The Company's revenues are derived principally from dividend payments received
from the Banks, which in turn derive their revenues principally from interest
payments on their loan portfolios and mortgage-backed and other investment
securities. The Banks' primary sources of funds are deposits, borrowings and
principal and interest payments on loans and mortgage-backed securities.
Year 2000
During 1997, the Company conducted a review of its computer systems to identify
those areas that could be affected by the Year 2000 issue. The Company is
addressing this issue in accordance with the guidance set forth in various
statements that have been issued by the Federal Financial Institutions
Examination Counsel. The Company has completed the remedial phases associated
with awareness and assessment.
The Company has developed an implementation plan to resolve its Year 2000
issues. A timely resolution of the Year 2000 issues depends largely upon the
expertise and advice of outside vendors retained by the Company to both modify
the Company's existing software and develop new software to address current
internal systems deficiencies. All of the Company's third party vendors with
non-compliant systems have also been identified and notified. The Company is
also preparing plans to test all modifications to critical internal systems and
verify that critical third party vendors have adequately addressed their own
systems issues. Test plans are scheduled to be completed by June 30, 1998 with
the Company's internal systems testing to be completed by December 31, 1998 and
external testing of third party vendor systems to be completed by March 31,
1999. Additionally, the Company is currently assessing the potential impact of
Year 2000 on its larger commercial borrowers. The Company is presently unaware
of any situation where any vendor will not be able to modify its products and
systems in a timely manner. The Company is also monitored in its Year 2000
efforts by reports to, and examinations by, various regulators, including the
Federal Deposit Insurance Corporation, the Federal Reserve Board, and the
Massachusetts and Connecticut Commissioners of Banks.
The primary costs associated with the Year 2000 issue consist of expenses for
the replacement or upgrade of third party systems, and the replacement of
personal computers. The Company is not aware of any obstacles or issues that are
presently anticipated in connection with the resolution of Year 2000 issues that
are likely to cause significant operational problems or are otherwise expected
to have a material adverse effect on the Company's financial condition or
results of operations.
Results of Operations for the Three Months Ended March 31, 1998 and March 31,
1997
The Company reported net income of $4.1 million, or $0.58 per diluted share for
the three months ended March 31, 1998 as compared to net income of $3.3 million,
or $0.48 per diluted share for the same period last year. The Company
8
<PAGE>
experienced an increase in pre-tax operating earnings primarily attributable to
increased net interest income and noninterest income as well as lower provisions
for possible loan losses.
Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income is
affected by the mix and volume of assets and liabilities, and the movement and
level of interest rates. The Company invests in certain assets that have
preferential tax treatment. In order to present yields on a comparable basis,
net interest income is presented on a fully taxable equivalent basis for
purposes of yield and margin analysis.
The following table sets forth, for the period indicated, average balances,
interest income and expense, and yields earned or rates paid on the major
categories of assets and liabilities. Non-accrual loans have been included in
the appropriate average balance loan category, but unpaid interest on
non-accrual loans has not been included for purposes of determining interest
income. In addition, investment securities available for sale are reflected at
amortized cost.
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------------------------------------------------------
1998 1997
---------------------------------------- --------------------------------------
Average Average Average Average
Balance (3) Interest (1) Yield/Cost (1) Balance Interest (1) Yield/Cost(1)
------------- ------------- -------------- ------------ ------------ -------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Fed funds sold and short-term
investments $ 43,617 $ 615 5.64% $ 26,498 $ 295 4.45%
Investment securities held to maturity 203,385 3,472 6.83% 221,176 3,778 6.83%
Investment securities available for sale 552,713 8,660 6.27% 498,938 8,626 6.92%
Investment securites held for trading -- -- -- 479 2 1.67%
Residential real estate loans 272,174 5,415 7.96% 291,103 5,757 7.91%
Commercial real estate loans 188,598 4,223 8.96% 168,419 3,832 9.10%
Commercial loans 217,274 4,644 8.55% 188,598 4,076 8.64%
Home equity loans 159,455 3,326 8.46% 119,950 2,373 8.02%
Consumer loans 12,443 293 9.42% 9,124 245 10.74%
---------- ---------- ----- ---------- ---------- -----
Total interest-earning assets 1,649,659 30,648 7.43% 1,524,285 28,984 7.61%
Allowance for loan losses (23,036) (19,884)
Non-interest-earning assets 120,672 111,427
---------- ----------
$1,747,295 $ 30,648 $1,615,828 $ 28,984
========== ========== ========== ==========
Interest-bearing liabilities:
Deposits
Savings accounts $ 239,392 $ 1,234 2.09% $ 257,140 $ 1,478 2.33%
NOW accounts (2) 40,027 152 1.54% 79,725 229 1.16%
Money manager accounts (2) 48,663 143 1.19% -- -- --
Money market accounts 235,772 1,938 3.33% 205,236 1,677 3.31%
Time deposit accounts 539,236 7,110 5.35% 513,258 6,672 5.27%
---------- ---------- ----- ---------- ---------- -----
Total interest-bearing deposits 1,103,090 10,577 3.89% 1,055,359 10,056 3.86%
Borrowed funds 310,483 4,475 5.77% 279,007 3,856 5.53%
---------- ---------- ----- ---------- ---------- -----
Total interest-bearing liabilities 1,413,573 15,052 4.32% 1,334,366 13,912 4.23%
Non-interest-bearing liabilities 209,507 163,409
---------- ----------
Total liabilities 1,623,080 1,497,775
Total stockholders' equity 124,215 118,053
---------- ----------
Total liabilities and stockholders'equity $1,747,295 $ 15,052 $1,615,828 $ 13,912
========== ========== ========== ==========
Net interest income/spread $ 15,596 3.11% $ 15,072 3.38%
========== ===== ========== =====
Net interest margin as a % of interest-
earning assets 3.78% 3.96%
====== =====
Tax equivalent adjustment
$ 197 $ 159
---------- ----------
Net interest income/spread per Condensed Consolidated
Statement of Operations $ 15,399 $ 14,913
========== ==========
<FN>
(1) On a fully taxable equivalent basis. Calculated using a Federal income tax rate of 34% for 1998 and 1997.
(2) During July 1997, the Company implemented a program which converted certain NOW accounts to money manager accounts. This
program has no effect on the Company's depositors, but has provided additional investable funds to the Company by substantially
reducing the reserve balances required to be maintained at the Federal Reserve Bank of Boston.
(3) A reclassification of some savings accounts to money market accounts affecting average balance outstanding was made in
connection with the GBT acquisition.
</FN>
</TABLE>
9
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Net interest income on a fully taxable equivalent basis for the three months
ended March 31, 1998 was $15.6 million compared to $15.1 million for the three
months ended March 31, 1997, an increase of $0.5 million or 3.5%. This increase
was the result of a $125.4 million increase in interest-earning assets partially
offset by an 18 basis point decrease in the net interest margin.
Total interest income was $30.6 million on a fully taxable equivalent basis for
the three months ended March 31, 1998, an increase of $1.7 million or 5.7% from
the same period last year. This increase is attributable to higher levels of
interest-earning assets, partially offset by lower yields on interest-earning
assets. Average interest-earning assets totaled $1.6 billion in the first
quarter of 1998 compared to $1.5 billion in the first quarter of 1997, an
increase of $125.4 million or 8.2%. Average investments increased $35.5 million
or 4.9% and were funded by higher deposit levels and borrowed funds. Average
loans increased $72.8 million as the Company continued to focus on the
commercial and home equity market segments, which grew by $28.7 million or 15.2%
and $39.5 million or 32.9%, respectively. Commercial real estate loans increased
$20.2 million or 12.0% reflecting growth in commercial construction lending.
Residential real estate loan balances declined $18.9 million or 6.5% for the
three months ended March 31, 1998, reflecting amortization and prepayments of
the existing loan portfolio. Yields on interest-earning assets declined 18 basis
points from the first quarter of 1997 primarily reflecting lower level of
interest rates as well as accelerated amortization and prepayments of
mortgage-backed securities and residential real estate loans. Accelerated
prepayment speeds were the result of lower long-term interest rates which
significantly increased refinancing activity.
Total interest expense was $15.1 million for the three months ended March 31,
1998 compared to $13.9 million during the same period in 1997, an increase of
$1.1 million or 8.2%. This increase is attributable to increases in
interest-bearing deposits and borrowed funds. Average interest-bearing deposits
increased $47.7 million or 4.5%. This growth occurred primarily in time deposits
which increased $26.0 million or 5.1% largely due to growth in time deposits
with local municipalities. Borrowed funds averaged $310.5 million for the three
months ended March 31, 1998 compared to $279.0 million for the same period in
1997. These borrowings were used to match fund fixed rate assets and to extend
the maturity of the Company's liabilities.
The following table presents the changes in net interest income (on a fully
taxable equivalent basis) resulting from changes in interest rates or changes in
the volume of interest-earning assets and interest-bearing liabilities during
the periods indicated. Changes which are attributable to both rate and volume
have been allocated evenly between the change in rate and volume components.
10
<PAGE>
Three months ended March 31,
1998 versus 1997
---------------------------------
Increase (Decrease) Due to
---------------------------------
Volume Rate Net
-------- ---------- ---------
(Dollars In Thousands)
Interest-earning assets:
Federal funds sold and
interest bearing deposits $ 222 $ 80 $ 302
Investment securities held to maturity (304) (2) (306)
Investment securities available for sale 885 (833) 52
Investment securities held for trading
(2) -- (2)
Residential real estate loans (375) 33 (342)
Commercial real estate loans 455 (64) 391
Commercial loans 616 (48) 568
Home equity loans 803 150 953
Consumer loans 84 (36) 48
------- ------- -------
Total interest-earning assets 2,384 (720) 1,664
------- ------- -------
Interest-bearing liabilities:
Deposits:
Savings accounts (97) (147) (244)
NOW accounts (132) 55 (77)
Money manager account 72 71 143
Money market accounts 250 11 261
Time deposit accounts 340 98 438
------- ------- -------
Total deposits 433 88 521
Borrowed funds 444 175 619
------- ------- -------
Total interest-bearing liabilities 877 263 1,140
------- ------- -------
Change in net interest income $ 1,507 $ (983) $ 524
======= ======= =======
Provision for Possible Loan Losses
The Company's provision for possible loan losses was $0.3 million for the first
quarter of 1998 compared to $0.5 million in the first quarter of 1997. The
provision for possible loan losses is based upon management's judgment of the
amount necessary to maintain the allowance for possible loan losses at a level
which is considered adequate.
11
<PAGE>
Non-interest Income
Non-interest income is composed of fee income for bank services and gains or
losses from the sale of assets. The components of non-interest income for the
periods presented are as follows:
Three months ended
March 31,
------------------------
1998 1997
-------- -------
(Dollars in Thousands)
Net gain on sale of loans $ 255 $ 106
Net loss on securities held for trading -- (11)
Loan charges and fees 745 745
Deposit related fees 1,889 1,763
Merchant processing fees 438 367
Other charges and fees 649 423
------- -------
$ 3,976 $ 3,393
======= =======
Non-interest income totaled $4.0 million for the first quarter of 1998 compared
to $3.4 million for the same period in 1997, an increase of $0.6 million or
17.2%. Other charges and fees are up $0.2 million due to increases in brokerage
service fees as well as fees associated with Business Manager, a commercial cash
management product introduced by the Company in 1997, which involves the funding
and management of accounts receivable for small-to-medium-sized business
customers. Net gain on sale of loans increased $0.1 million due to an increase
in mortgage production and the sale of loans to the secondary market. Deposit
service charges and fees increased $0.1 million due to fees associated with the
Company's larger non-interest bearing deposit base. Merchant processing fees
increased $0.1 million reflecting increased merchant activity.
Non-interest Expense
Salaries and Benefits Expense
Salaries and benefits expense totaled $6.2 million for the first quarter of 1998
compared to $5.9 million for the same period in 1997, an increase of $0.3
million reflecting standard wage increases as well as increased staffing related
to new branch openings and branch-related support.
Furniture and Equipment Expense
Furniture and equipment expense increased $0.2 million reflecting new branch
openings as well as investments in new technology.
Other Operating Expense
The components of other operating expense for the periods presented are as
follows:
Three months ended
March 31,
------------------------------
1998 1997
--------- ---------
(Dollars in Thousands)
Marketing $ 560 $ 640
Insurance 152 189
Professional services 670 856
Outside processing 1,287 1,185
Other 1,412 1,331
------ ------
$4,081 $4,201
====== ======
12
<PAGE>
Other operating expenses totaled $4.1 million for the first quarter of 1998
compared to $4.2 million for the first quarter of 1997, a decrease of $0.1
million. Professional services decreased $0.2 million due to lower levels of
legal and consulting expenses. Both outside processing charges and other
operating expenses increased $0.1 million from the comparable period, reflecting
costs associated with higher transaction and account volume resulting from the
Company's consumer strategy.
Foreclosed Real Estate Expense
Foreclosed real estate expense reflects gains or losses on sales, writedowns and
net operating results of foreclosed properties. Foreclosed real estate expense
was $0.1 million for the first quarter of 1998 compared to income of $0.1
million for the first quarter of 1997. The results in the first quarter of 1997
reflect $0.1 million in gains on the sale of foreclosed properties compared to
losses and writedowns of $0.1 million in foreclosed properties in the first
quarter of 1998.
Net Expense of Real Estate Operations
The Company's real estate investment and brokerage subsidiary, Colebrook engages
in various real estate investments, directly or in joint ventures with
unaffiliated partners. In accordance with FDICIA, the Company has terminated its
real estate development activities and is in the process of selling its
remaining real estate investments. Net expense of real estate operations for the
first quarter of 1998 were zero compared to expense of $0.4 million for the same
period in 1997. In the first quarter of 1997 the Company recognized a $0.6
million gain on the sale of a real estate property which was offset by the
establishment of a reserve of $1.0 million relating to the divestment of
Colebrook. The $1.0 million reserve consists of $0.7 million in severance and
benefit accruals and $0.3 million for other expenses. As of March 31, 1998,
approximately $0.1 million of expenses have been paid relating to the
divestiture. This divestment is scheduled to be completed by June 30, 1998.
Income Taxes
For the three months ended March 31, 1998 the Company recorded income tax
expense of $2.5 million compared to expense of $2.1 million for the three months
ended March 31, 1997. This increase is attributable to a 22.6% increase in
pre-tax earnings.
13
<PAGE>
Balance Sheet Analysis - Comparison Of March 31, 1998 To December 31, 1997
Total assets increased from $1.7 billion at December 31, 1997 to $1.8 billion at
March 31, 1998. This increase primarily reflects growth in investment securities
and loans funded through an increase in deposits and wholesale borrowings.
Investments
The Company's investment portfolio increased $13.2 million from $769.1 million
at December 31, 1997 to $782.4 million at March 31, 1998.
The Company engages in investment activities for both investment and liquidity
purposes. The Company maintains an investment securities portfolio which
consists primarily of U.S. Government and Agency securities, corporate
obligations, asset-backed securities, collateralized mortgage obligations, FHLB
stock, and marketable equity securities. Other short-term investments held by
the Company periodically include interest-bearing deposits and federal funds
sold. The Company also maintains a mortgage-backed securities portfolio
consisting of securities issued and guaranteed by the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and
the Government National Mortgage Association ("GNMA") in addition to publicly
traded mortgage-backed securities issued by private financial intermediaries
which are rated "AA" or higher by rating agencies of national prominence.
Securities which the Company has the intent and ability to hold until maturity
are classified as held-to-maturity and are carried at amortized cost, while
those securities which have been identified as assets that may be sold prior to
maturity or assets for which there is not a positive intent to hold to maturity
are classified as available-for-sale and are carried at fair value, with
unrealized gains and losses excluded from earnings and reported net of tax as
accumulated other comprehensive income as a separate component of stockholders'
equity.
The table below sets forth certain information regarding the amortized cost and
fair value of the Company's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
March 31, 1998
----------------------------------------------------------
Available for Sale Held to Maturity
-------------------------- -------------------------
(Dollars In Thousands)
Amortized Amortized
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
U.S. Government and Agency obligations $ 7,603 $ 7,608 $ 900 $ 897
Collateralized mortgage obligations 46,673 46,745 10,772 10,820
Mortgage-backed securities 466,845 466,972 143,751 143,899
Asset-backed securities -- -- 57,745 57,904
Other bonds and short term obligations 8,967 9,287 340 341
Other securities 36,913 38,241 -- --
-------- -------- -------- --------
Total $567,001 $568,853 $213,508 $213,861
======== ======== ======== ========
<CAPTION>
December 31, 1997
----------------------------------------------------------
Available for Sale Held to Maturity
-------------------------- -------------------------
(Dollars In Thousands)
Amortized Amortized
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
U.S. Government and Agency obligations $ 15,608 $ 15,636 $ 2,400 $ 2,391
Collateralized mortgage obligations 51,273 51,415 2,934 2,953
Mortgage-backed securities 458,659 460,478 141,282 141,563
Asset-backed securities -- -- 46,046 46,143
Other bonds and short term obligations 8,966 9,355 345 346
Other securities 38,128 39,224 -- --
-------- -------- -------- --------
Total $572,634 $576,108 $193,007 $193,396
======== ======== ======== ========
</TABLE>
14
<PAGE>
Loan Portfolio Composition
Gross loans comprised $858.4 million or 47.9% of total assets as of March 31,
1998. The following table sets forth information concerning the Company's loan
portfolio in dollar amounts and percentages, by type of loan at March 31, 1998
and at December 31, 1997.
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
------------------------- -----------------------
Percent of Percent of
Amount Total Amount Total
---------- ----------- ----------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Residential real estate loans $277,226 32.29% $281,457 33.13%
Commercial real estate loans 188,273 21.93% 185,226 21.80%
Commercial loans 221,877 25.85% 212,869 25.06%
Home equity loans 158,971 18.52% 158,753 18.69%
Consumer loans 12,066 1.41% 11,189 1.32%
-------- ------ -------- ------
Total loans receivable, gross 858,413 100.00% 849,494 100.00%
-------- ------ -------- ------
Less:
Unearned income and fees (2,162) (1,991)
Allowance for loan losses 23,239 22,724
-------- --------
Total loans receivable, net $837,336 $828,761
======== ========
</TABLE>
The Company continues to actively originate loans secured by first mortgages on
one to four family residences, and offers a variety of fixed and adjustable rate
mortgage loan products. The Company originates long-term fixed rate mortgages
for sale in the secondary market and generally holds adjustable rate mortgages
in the Company's loan portfolio. During the three months ended March 31, 1998,
the Company experienced an increase in prepayments in its adjustable rate
mortgage portfolio. These prepayments offset new originations and resulted in a
$4.2 million decrease in residential real estate balances between December 31,
1997 and March 31, 1998.
During the three months ended March 31, 1998, commercial loan balances increased
$9.0 million, reflecting the Company's continued focus on lending activities in
the local business market. During this same period commercial real estate loan
balances increased $3.0 million primarily due to new originations, partially
offset by prepayments.
15
<PAGE>
Non-performing Assets
Non-performing assets declined slightly from $8.1 million at December 31, 1997
to $7.7 million at March 31, 1998. The following table sets forth information
regarding the components of non-performing assets for the periods presented:
March 31, December 31,
1998 1997
---------- ------------
(Dollars In Thousands)
Non-accrual loans (1):
Residential real estate loans $1,446 $1,211
Commercial real estate loans 1,539 1,542
Commercial loans 2,391 2,414
Home equity loans 214 181
Consumer loans 15 4
------ ------
Total non-accrual loans 5,605 5,352
------ ------
Loans past due 90 days still accruing (2) 183 431
------ ------
Total non-performing loans 5,788 5,783
Foreclosed real estate (3) 817 1,209
Restructured loans on accrual status (4) 1,120 1,124
------ ------
Total non-performing assets $7,725 $8,116
====== ======
Total non-performing loans to total
gross loans 0.67% 0.68%
Total non-performing assets to total
assets 0.43% 0.47%
Allowance for possible losses to
non-performing loans 401.50% 392.94%
(1) Non-accrual loans are loans that are contractually past due in excess of 90
days, for which the Company has stopped the accrual of interest, or loans which
are not past due but on which the Company has stopped the accrual of interest
based on management's assessment of the circumstances surrounding
these loans.
(2) Accruing loans past due 90 days or more are loans which have not been placed
on non-accrual status as, in management's opinion, the collection of the loan,
in full, is not in doubt.
(3) Foreclosed real estate includes OREO, defined as real estate acquired
through foreclosure or acceptance of a deed in lieu of foreclosure. The Company
carries foreclosed real estate at the lower of cost or net realizable value,
which approximates fair value less estimated selling costs.
(4) Restructured loans are loans for which concessions, including reduction of
interest rates or deferral of interest or principal payments, have been granted
due to the borrower's financial condition. Restructured loans on non-accrual
status are reported in the non-accrual loan category. Restructured loans on
accrual status are those loans that have complied with terms of a restructuring
agreement for a satisfactory period (generally six months).
16
<PAGE>
The principal amount of non-performing loans aggregated $5.8 million at both
March 31, 1998 and December 31, 1997. Interest income that would have been
recorded if the loans had been performing in accordance with their original
terms aggregated $0.2 million and $0.1 million for the three months ended March
31, 1998 and 1997, respectively. Interest income recorded on these loans for the
three months ended March 31, 1998 and 1997 was $0.1 million and $0.1 million,
respectively.
The principal amount of restructured loans aggregated $1.1 million at both March
31, 1998 and December 31, 1997. Interest income that would have been recorded if
the loans had been performing within their original terms aggregated $27
thousand and $62 thousand for the periods ended March 31, 1998 and 1997,
respectively. Interest income recorded on these loans amounted to $38 thousand
and $27 thousand for the three months ended March 31, 1998 and 1997,
respectively.
Watch List Loans
The Company maintains a "watch list" of loans, which represents performing loans
that have potential weaknesses that require Management's attention. These
potential weaknesses may stem from a variety of factors including, among other
things, economic or market conditions, adverse conditions in the obligor's
operations or financial condition weaknesses. Watch list loans totaled $18.2
million and $24.1 million at March 31, 1998 and December 31, 1997, respectively.
Classified Loans
The Company's Credit Grade Policy (the "Policy") provides for the classification
of loans considered to be of lesser quality as "substandard", "doubtful", or
"loss" loans. A loan is considered substandard under the Company's Policy if it
is inadequately protected by the current sound worth and paying capacity of the
obligor or of the collateral pledged, if any. Substandard loans include those
characterized by the "distinct possibility" that the Company will sustain "some
loss" if the deficiencies are not corrected. Loans classified as doubtful, of
which the Company has none, have all of the weaknesses inherent in those
classified as substandard with the added characteristic that the weaknesses
present make "collection or liquidation in full" on the basis of currently
existing facts, conditions and values, "improbable." Loans characterized as
loss, of which the Company has none, are those considered "uncollectible" and of
such little value that their continuance as bankable assets is not warranted.
Classified loans, all of which are categorized substandard, totaled $9.6 million
and $6.2 million at March 31, 1998 and December 31, 1997, respectively. Included
in these amounts are $5.6 million and $5.4 million of loans which have been
reported as non-performing assets at March 31, 1998 and December 31, 1997,
respectively.
Allowance for Possible Loan Losses
The allowance for possible loan losses reflects an amount that, in management's
judgment, is adequate to provide for potential losses in the loan portfolio. In
addition, examinations of the adequacy of the loan loss reserve are conducted
periodically by various regulatory agencies. The allowance for possible loan
losses at March 31, 1998 was $23.2 million, compared to $20.3 million at March
31, 1997. The activity in the allowance for possible loan losses for the three
months ended March 31, 1998 and 1997 was as follows:
17
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1998 1997
---------- ----------
(Dollars In Thousands)
<S> <C> <C>
Balance, beginning of period $ 22,724 $ 19,549
Provision for loan losses 251 500
Charge-offs:
Residential real estate loans (30) (3)
Commercial real estate loans (1) --
Commercial loans (82) (128)
Home equity loans (9) (15)
Consumer loans (67) (44)
Merchant processing (51) (32)
-------- --------
Total charge-offs (240) (222)
Recoveries:
Residential real estate loans -- 1
Commercial real estate loans 443 426
Commercial loans 51 67
Home equity loans 1 5
Consumer loans 9 11
Merchant processing -- --
-------- --------
Total recoveries 504 510
-------- --------
Net recoveries (charge-offs) 264 288
Balance, end of period $ 23,239 $ 20,337
======== ========
Ratio of net loan recoveries (charge-offs) during the period to
average loans outstanding during the period 0.03% 0.04%
Ratio of allowance for possible loan losses to total loans
at the end of the period 2.71% 2.60%
Ratio of allowance for possible loan losses to non-performing
loans at the end of the period 401.50% 275.94%
</TABLE>
At March 31, 1998, the recorded investment in loans that are considered impaired
under SFAS 114 "Accounting by Creditors for Impairment of a Loan" was $9.3
million. Included in this amount is $0.9 million of impaired loans for which the
related SFAS 114 allowance is $0.2 million and $8.4 million of impaired loans
for which the SFAS 114 allowance is zero. The average recorded investment in
impaired loans during the three months ended March 31, 1998 was approximately
$7.6 million. For the three month period ended March 31, 1998, the Company
recognized interest income on these impaired loans of $0.1 million.
18
<PAGE>
The following table shows the allocation of the allowance for possible loan
losses to the various types of loans as well as the percentage of allowance for
possible loan losses in each category to total allowance for possible loan loss.
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
----------------------------- ---------------------------
% of % of
Total Total
Allowance for Allowance for
Amount Loan Losses Amount Loan Losses
---------- --------------- --------- -------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Residential real estate loans $ 3,096 13.32% $ 3,664 16.12%
Commercial real estate loans 6,395 27.52% 5,632 24.78%
Commercial loans 8,265 35.57% 8,328 36.65%
Home equity loans 3,066 13.19% 3,183 14.01%
Consumer loans 1,231 5.30% 1,274 5.61%
Merchant processing 1,186 5.10% 643 2.83%
------- ------ ------- ------
Total allowance for possible loan losses $23,239 100.00% $22,724 100.00%
======= ====== ======= ======
</TABLE>
Deposit Distribution
The principal source of funds for the Company are deposits from local consumers
and businesses. There were no brokered deposits at March 31, 1998 or December
31, 1997. The Company's deposits consist of demand and NOW accounts, money
manager accounts, passbook and statement savings accounts, money market accounts
and time deposits. The following table presents the composition of deposits at
the dates indicated:
March 31, 1998 December 31, 1997
------------------------ ----------------------
Percent Percent
of of
Amount Total Amount Total
----------- --------- ---------- ---------
(Dollars In Thousands)
Demand deposits $ 177,258 13.54% $ 171,343 13.52%
NOW accounts 50,562 3.86% 51,412 4.06%
Money manager accounts (1) 46,230 3.53% 39,447 3.11%
Savings accounts 219,232 16.74% 263,449 20.79%
Money market accounts 259,172 19.79% 211,286 16.67%
Time deposits 556,948 42.54% 530,361 41.85%
---------- ------ ---------- ------
Total deposits $1,309,402 100.00% $1,267,298 100.00%
========== ====== ========== ======
(1) Money manager accounts represent NOW account balances which have been
transferred to money market accounts to provide additional investable funds
to the Company by substantially reducing the reserve balances required to
be maintained at the Federal Reserve Bank of Boston. This program has no
effect on the Company's depositors.
19
<PAGE>
Total deposits were $1.3 billion at both March 31, 1998 and December 31, 1997.
Deposits increased $42.1 million with growth occurring primarily in demand
deposits, money manager accounts and time deposits. The $44.2 million decrease
in savings accounts is offset by a comparable increase in money market accounts,
which is attributable to the conversion of some savings accounts in connection
with the GBT acquisition. Demand deposits increased $5.9 million, as customers
continue to take advantage of free checking accounts offered as a result of the
Company's consumer deposit strategy to attract and retain core deposits, which
provide the Company with a lower cost source of funds. The $26.6 million
increase in time deposits is primarily attributable to growth in deposits with
local municipalities.
Borrowings
Borrowings consist of FHLB advances, securities sold under agreements to
repurchase, and loans payable related to the Company's ESOP. The Company
generally uses borrowings to fund loan growth and to leverage a portion of its
capital position. Borrowings increased $10.0 million from $300.0 million at
December 31, 1997 to $310.0 million at March 31, 1998 reflecting a portion of
the funding for the growth in loans and investments.
Regulatory Capital
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material adverse effect
on the Company's financial statements. Under applicable capital adequacy
requirements the Company must meet specific minimum capital requirements that
involve quantitative measures of the Company's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital to risk-weighted assets and Tier 1
capital to total average assets. Management believes, as of March 31, 1998, that
the Company meets all capital adequacy requirements to which it is subject.
Under the FDIC's regulatory framework for prompt corrective action, both SIS
Bank and GBT are considered well capitalized as of March 31, 1998. To be
categorized as well capitalized the Banks must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table below. As of March 31, 1998 the Company also qualified as well capitalized
under the applicable Federal Reserve Board regulations.
20
<PAGE>
The actual capital amounts and ratios for the Company, SIS Bank and GBT are
presented in the table below, no deductions were made from capital for
interest-rate risk.
<TABLE>
<CAPTION>
Minimum Minimum
Requirements Requirements
For Capital To Qualify As
Actual Adequacy Purposes Well Capitalized
----------------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- --------- ---------- ------- ---------- --------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1998:
Tier I Capital (to Average Assets)
Company $126,978 7.3% $ 69,892 4.0% N/A
SIS Bank $107,134 7.2% $ 59,301 4.0% $ 74,126 5.0%
GBT $ 17,610 6.7% $ 10,570 4.0% $ 13,212 5.0%
Tier I Capital (to Risk Weighted Assets)
Company $126,978 11.5% $ 44,173 4.0% $ 66,259 6.0%
SIS Bank $107,134 11.7% $ 36,495 4.0% $ 54,743 6.0%
GBT $ 17,610 9.2% $ 7,668 4.0% $ 11,502 6.0%
Total Capital (to Risk Weighted Assets)
Company $140,888 12.8% $ 88,346 8.0% $110,432 10.0%
SIS Bank $118,632 13.0% $ 72,991 8.0% $ 91,238 10.0%
GBT $ 20,022 10.4% $ 15,336 8.0% $ 19,170 10.0%
As of December 31, 1997:
Tier I Capital (to Average Assets)
Company $123,340 7.2% $ 68,834 4.0% N/A
SIS Bank $103,780 7.1% $ 58,358 4.0% $ 72,947 5.0%
GBT $ 17,291 6.6% $ 10,422 4.0% $ 13,028 5.0%
Tier I Capital (to Risk Weighted Assets)
Company $123,340 11.9% $ 41,568 4.0% $ 62,352 6.0%
SIS Bank $103,780 11.9% $ 35,044 4.0% $ 52,565 6.0%
GBT $ 17,291 10.6% $ 6,507 4.0% $ 9,761 6.0%
Total Capital (to Risk Weighted Assets)
Company $136,438 13.1% $ 83,137 8.0% $103,921 10.0%
SIS Bank $114,825 13.1% $ 70,087 8.0% $ 87,609 10.0%
GBT $ 19,344 11.9% $ 13,014 8.0% $ 16,268 10.0%
</TABLE>
Interest Rate Risk Management
Using management's estimates of asset prepayments and core deposit decay in its
computation, the Company estimates that its cumulative one-year gap position was
liability sensitive by $62.7 million or 3.49% of total assets at March 31, 1998.
The following table sets forth the amounts of assets and liabilities outstanding
at March 31, 1998, which are anticipated by the Company to mature or reprice in
each of the future time periods shown using certain assumptions based on its
historical experience, the current interest rate environment, and other data
available to management. Management believes that these assumptions approximate
actual experience and considers such assumptions reasonable, however, the
interest rate sensitivity of the Company's assets and liabilities could vary
substantially if different assumptions were used or actual experience differs
from the assumptions used. Management periodically reviews and, when
appropriate, changes the assumptions used in creating this table.
21
<PAGE>
<TABLE>
<CAPTION>
GAP Position
At March 31, 1998
---------------------------------------------------------------------------
More than six
Less than months less
six months than one year 1 - 5 Years Over 5 Yrs TOTAL
------------- --------------- ------------- ------------- --------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Federal funds sold and
interest bearing deposits $ 54,458 $ -- $ -- $ -- $ 54,458
Investment securities 274,982 181,129 269,102 57,148 782,361
Residential real estate loans 86,785 46,597 112,142 30,427 275,951
Commercial real estate loans 51,390 18,634 104,141 12,803 186,968
Commercial loans 90,438 12,468 100,437 16,698 220,041
Home equity loans 119,655 2,388 22,502 15,799 160,344
Consumer loans 6,460 630 4,679 258 12,027
Other assets -- -- -- 101,818 101,818
---------- ---------- ---------- ---------- ----------
Total assets $ 684,168 $ 261,846 $ 613,003 $ 234,951 $1,793,968
========== ========== ========== ========== ==========
Liabilities & stockholders' equity:
Savings accounts $ 32,904 $ 32,904 $ 153,424 $ -- $ 219,232
NOW accounts 14,518 14,518 67,756 -- 96,792
Money market accounts 77,752 77,752 103,668 -- 259,172
Time deposits 302,492 189,293 65,163 -- 556,948
Borrowed funds 161,613 34,120 114,210 -- 309,943
Other liabilities & stockholders' equity 35,418 35,418 106,254 174,791 351,881
---------- ---------- ---------- ---------- ----------
Total liabilities & stockholders' equity $ 624,697 $ 384,005 $ 610,475 $ 174,791 $1,793,968
========== ========== ========== ========== ==========
Period GAP position $ 59,471 $ (122,159) $ 2,528 $ 60,160
Net period GAP as a percentage of total assets 3.32% (6.81%) 0.14% 3.35%
Cumulative GAP $59,471 $ (62,688) $ (60,160) --
Cumulative GAP as a percentage of total
assets 3.32% (3.49%) (3.35%) --
Cumulative GAP as a percentage of total
interest-earning assets 3.51% (3.70%) (3.56%) --
Cumulative interest-earning assets as a
percentage of cumulative interest-bearing
liabilities 116.10% 100.87% 108.11% 117.34%
<FN>
For purposes of the above interest sensitivity analysis:
Residential loans held for sale at March 31, 1998 totaling $15.9 million are in the less than six month interest sensitivity
period.
Fixed rate assets are scheduled by contractual maturity and adjustable rate assets are scheduled by their next repricing date.
In both cases, assets that have prepayment optionality are adjusted for the Company's estimate of prepayments.
Loans do not include non-accrual loans of $5.6 million.
Loans do not include the allowance for loan loss of $23.2 million.
In certain deposit categories where there is no contractual maturity, Management assumed the sensitivity characteristics listed
below based on the current interest rate environment and the Company's historical experience. Management reviews these
assumptions on a quarterly basis and may modify them as circumstances dictate.
- Savings accounts are assumed to decay at an annual rate of 30%.
- NOW accounts are assumed to decay at an annual rate of 30%.
- Money market accounts are assumed to decay at an annual rate of 60%.
- Non-interest bearing accounts of $177.3 million are included in other liabilities and are assumed to decay at an
annual rate of 40%.
</FN>
</TABLE>
22
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, while certain assets and liabilities may have
similar contractual maturities or periods to repricing, they may react in
different ways to changes in market interest rates. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Additionally,
certain assets, such as adjustable rate mortgages, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Finally, the ability of borrowers to service their adjustable rate mortgages may
decrease in the event of an interest rate increase.
The Company also utilizes income simulation modeling in measuring its interest
rate risk and managing its interest rate sensitivity. Income simulation not only
considers the impact of changing market interest rates on forecasted net
interest income, but also takes into consideration other factors such as yield
curve relationships, the volume and mix of assets and liabilities, customer
preferences and general market conditions.
Liquidity
Liquidity measures the ability of the Company to meet its maturing obligations
and existing commitments, to withstand fluctuations in deposit levels, to fund
its operations and to provide for customer credit needs. If the Company requires
funds beyond its ability to generate them internally, it has additional
borrowing capacity with the FHLB and collateral eligible for repurchase
agreements. Because the Company has a stable retail deposit base, management
believes that significant borrowings will not be necessary to maintain its
current liquidity position. Management intends to continue seeking opportunities
for expansion and believes that the Company's liquidity, capital resources and
borrowing capabilities are adequate for its current and intended operations.
Market Risk
As a financial institution, the Company's chief market risk is interest rate
risk. The Company has no exposure to foreign currency or commodity prices. Its
exposure to equity prices is limited to marketable equity securities contained
within its available for sale investment portfolio. At March 31, 1998 the
Company did not have a trading portfolio.
Interest rate risk is the sensitivity of income to variations in interest rates
over defined time horizons. The primary goal of interest rate risk management is
to control this risk within limits and guidelines approved by the Company's
Asset/Liability Committee (ALCO). These limits and guidelines reflect the
Company's tolerance for interest rate risk.
The Company attempts to control interest rate risk by identifying exposures,
quantifying them, and identifying their impact on income. The Company quantifies
its interest rate risk exposures using simulation models as well as gap
analyses. The Company manages its interest rate exposures using a combination of
on-balance sheet instruments, consisting principally of fixed and variable rate
securities, deposit pricing and FHLB borrowings. See the GAP Position analysis
under this Item 2 and the notes to the Consolidated Financial Statements under
Item 8 in the Company's Form 10-K for the year ended December 31, 1997 for
further information regarding market risk of these instruments.
At March 31, 1998 and December 31, 1997, the Company had no outstanding
exposures to off-balance sheet interest rate instruments such as swaps, forwards
or futures. GBT held derivative financial instruments during 1997. However, in
December, 1997 concurrent with the acquisition of GBT, the Company sold its
position in these instruments. At March 31, 1998 and December 31, 1997 the
Company held no derivative financial instruments.
23
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Default upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) On May 7, 1998, the Annual Meeting of the Stockholders of SIS Bancorp,
Inc. was held at the Springfield Sheraton Hotel, Springfield,
Massachusetts.
(b) Directors elected at the Annual Meeting (Term to Expire in 2001)
Charles L. Johnson
Consultant- Associated Energy Managers,
Investment Management Firm
F. William Marshall, Jr.
President and Chief Executive Officer, SIS Bancorp, Inc.
and SIS Bank
Continuing Directors (Term to Expire in 1999)
William B. Hart, Jr.
President, The Dunfey Group
an investment corporation
Thomas O'Brien
Dean, University of Massachusetts
School of Management
Stephen A. Shatz
Attorney, Partner in Shatz, Schwartz & Fentin, P.C.
Continuing Directors: (Term to Expire in 2000)
Sister Mary Caritas, S.P.
Retired; former President and Chief Executive Officer of
Mercy Hospital
John M. Naughton
Retired, former Executive Vice President, Massachusetts
Mutual Life Insurance Co.
Ronald E. Bourbeau
Owner, Yankee Boat Yard & Marina, Inc.; Treasurer, Northeast
Yacht Sales
(c) The matters voted on at the meeting and the results of such voting were
as follows:
1. To elect two Directors for a three-year term ending in the Year
2001 (Proposal 1);
Votes For (shares) Votes Withheld (shares)
Charles L. Johnson 5,974,045 36,704
F. William Marshall, Jr. 5,994,304 16,445
2. To approve and adopt the Amended and Restated SIS Bancorp, Inc.
Stock Option Plan, as more fully described in the Proxy statement
for the meeting
<TABLE>
<CAPTION>
Votes For (shares) Votes Against (shares) Votes Abstained (shares) Broker Non-Votes (shares)
<S> <C> <C> <C>
4,271,816 1,676,902 62,031 --
</TABLE>
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10. Material Contracts
24
<PAGE>
10 (g) SIS Bancorp, Inc. Stock Option Plan amended and restated as of
March 1, 1998- Incorporated by reference to Exhibit A to the definitive
Proxy Statement and Notice of Meeting filed as Schedule 14A with the
SEC on March 31, 1998.
(b) Reports on Form 8-K
On February 13, 1998, the Company filed a Form 8-K for reporting the
results of the combined financial operations for the Company and its
subsidiaries, including Glastonbury Bank & Trust Company, for the month
ended January 31, 1998.
25
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, as amended, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIS BANCORP, INC.
(Registrant)
May 14, 1998 /s/ F. William Marshall, Jr.
Date F. William Marshall, Jr.
President and Chief Executive Officer
May 14, 1998 /s/ John F. Treanor
Date John F. Treanor
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
26
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the March
31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 48,885
<INT-BEARING-DEPOSITS> 21,258
<FED-FUNDS-SOLD> 33,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 568,853
<INVESTMENTS-CARRYING> 213,508
<INVESTMENTS-MARKET> 213,861
<LOANS> 837,336
<ALLOWANCE> 23,239
<TOTAL-ASSETS> 1,793,968
<DEPOSITS> 1,309,402
<SHORT-TERM> 307,469
<LIABILITIES-OTHER> 46,438
<LONG-TERM> 2,474
0
0
<COMMON> 71
<OTHER-SE> 128,114
<TOTAL-LIABILITIES-AND-EQUITY> 1,793,968
<INTEREST-LOAN> 17,901
<INTEREST-INVEST> 11,989
<INTEREST-OTHER> 561
<INTEREST-TOTAL> 30,451
<INTEREST-DEPOSIT> 10,577
<INTEREST-EXPENSE> 15,052
<INTEREST-INCOME-NET> 15,399
<LOAN-LOSSES> 251
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 12,540
<INCOME-PRETAX> 6,584
<INCOME-PRE-EXTRAORDINARY> 4,076
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,076
<EPS-PRIMARY> .61
<EPS-DILUTED> .58
<YIELD-ACTUAL> 7.43
<LOANS-NON> 5,605
<LOANS-PAST> 183
<LOANS-TROUBLED> 1,120
<LOANS-PROBLEM> 18,166
<ALLOWANCE-OPEN> 22,724
<CHARGE-OFFS> 240
<RECOVERIES> 504
<ALLOWANCE-CLOSE> 23,239
<ALLOWANCE-DOMESTIC> 23,239
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
