<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[XAnnual]report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1997 or
[_Transition]report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER: 000-20809
----------------
SIS BANCORP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
MASSACHUSETTS 04-3303264
(I.R.S. EMPLOYER IDENTIFICATION NO.)
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
1441 MAIN STREET 01102
SPRINGFIELD, MASSACHUSETTS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(413) 748-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
TITLE OF EACH CLASS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing sale price of March 6, 1998, as reported by
NASDAQ, was $267,882,500.
Indicate the number of shares outstanding of the registrant's common stock,
as of the latest practicable date: 6,957,987 shares as of March 6, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the SIS Bancorp, Inc. Proxy Statement for the Annual Meeting of
Stockholders to be held on May 7, 1998 are incorporated by reference into Part
III of this Form 10-K.
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<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.
2
<PAGE>
PART I
ITEM 1: BUSINESS
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 and 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 the 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 34 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.
RECENT DEVELOPMENTS
On August 18, 1997, the Company and 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.
INVESTMENT ACTIVITIES
The Company engages in investment activities for both investment and
liquidity purposes. The Company maintains an investment securities portfolio
which consists primarily of U.S. Government and agency securities, corporate
obligations, asset-backed securities, collateralized mortgage obligations,
Federal Home Loan Bank stock, and marketable equity securities. Other short-
term investments held by the Company periodically include interest-bearing
deposits, money market mutual funds and federal funds sold. The Company also
maintains a mortgage-backed securities portfolio consisting of securities
issued and guaranteed by the Federal National Mortgage Association ("FNMA")
and Federal Home Loan Mortgage Corporation ("FHLMC") in addition to publicly
traded and rated mortgage-backed securities issued by private financial
intermediaries which are rated "AA" or higher by rating agencies of national
prominence.
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
115, investment securities which the Company has the intent and ability to
hold until maturity are classified as held to maturity and are carried at
amortized cost, while those securities which have been identified as assets
that may be sold prior to maturity or assets for which there is not a positive
intent to hold to maturity are classified as available for sale and are
carried at fair value, with unrealized gains and losses excluded from earnings
and reported net of tax as a separate component of stockholders' equity.
3
<PAGE>
Securities classified as trading represent short-term investments held for
sale at GBT. These securities are carried at market value. When sales occur,
gains or losses are recognized using market prices at the time of sale.
Concurrent with the merger with GBT, the Company liquidated its trading
portfolio. Accordingly, the Company has zero and $0.5 million of securities
classified as trading at December 31, 1997 and 1996, respectively.
The following table sets forth certain information regarding the amortized
cost and fair value of the Company's investment portfolio at the dates
indicated.
<TABLE>
<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
State and Municipal bonds........... 8,966 9,355 -- --
Other bonds and short term
obligations........................ -- -- 345 346
Federal Home Loan Bank and other
stock.............................. 38,128 39,224 -- --
-------- -------- -------- --------
Total............................. $572,634 $576,108 $193,007 $193,396
======== ======== ======== ========
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------
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........................ $ 31,458 $ 31,460 $ 7,932 $ 7,827
Collateralized mortgage
obligations........................ 43,337 43,220 5,062 5,206
Mortgage-backed securities.......... 387,467 389,597 164,934 164,111
Asset backed securities............. -- -- 42,118 42,165
State and Municipal bonds........... 855 857 185 185
Other bonds and short term
obligations........................ 1,681 1,681 415 417
Federal Home Loan Bank and other
stock.............................. 16,601 16,799 -- --
-------- -------- -------- --------
Total............................. $481,399 $483,614 $220,646 $219,911
======== ======== ======== ========
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------
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........................ $ 15,528 $ 15,527 $ 5,434 $ 5,404
Collateralized mortgage
obligations........................ 9,152 9,057 5,160 5,408
Mortgage-backed securities.......... 239,510 240,995 179,122 179,592
State and Municipal bonds........... -- -- 190 190
Other bonds and short term
obligations........................ 9,300 9,300 12,156 11,979
Federal Home Loan Bank and other
stock.............................. 7,907 7,907 -- --
-------- -------- -------- --------
Total............................. $281,397 $282,786 $202,062 $202,573
======== ======== ======== ========
</TABLE>
The Company's investment portfolio increased $64.8 million from $704.3
million at December 31, 1996 to $769.1 million at December 31, 1997. This
increase in investments was funded through an increase in deposits and
borrowings.
4
<PAGE>
In 1995, the Financial Accounting Standards Board ("FASB") issued a special
report, "Implementation of Statement 115," that provided additional guidance
related to the application of SFAS 115. In connection with the issuance of
this special report, the FASB allowed all organizations to review their
portfolio classifications and make a one-time reclassification of securities
between categories during the period from November 15, 1995 to December 15,
1995. On December 15, 1995, the Company transferred securities with an
amortized cost of $94.7 million and an unrealized loss of $1.1 million from
the held to maturity portfolio to the available for sale portfolio. In
addition, the Company also transferred securities with an estimated fair value
of $47.3 million and an unrealized gain of $0.3 million from the available for
sale portfolio to the held to maturity portfolio. The remaining unrealized
gain of $0.1 million remains as a separate component of stockholders' equity.
Subsequent to the transfer of these securities, the Company sold $82.9 million
of available for sale securities in December, 1995 at a net loss of $0.9
million.
In December, 1997 in connection with the acquisition of GBT, the Company
sold $20.6 million in investments from the held to maturity and available for
sale portfolios in order to maintain its existing interest rate position.
However, the Company generally intends to hold to maturity its debt and equity
securities which are so classified. The Company realized a net loss of $0.3
million related to these sales.
The following table sets forth the contractual maturity distribution of the
carrying value and the weighted average yields of the investment portfolio at
December 31, 1997. Certain of the investments are subject to early repayment
at the option of the issuer. Accordingly, changes in interest rates may affect
actual maturities.
<TABLE>
<CAPTION>
WITHIN ONE YEAR 1--5 YEARS 5--10 YEARS OVER 10 YEARS
------------------ ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AVERAGE
COST YIELD COST YIELD COST YIELD COST YIELD TOTAL YIELD
--------- -------- --------- -------- --------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE
U.S. government and
agency obligations..... $-- -- $ 5,507 6.73% $10,101 6.77% $ -- -- $ 15,608 6.76%
Collateral mortgage
obligations............ -- -- 23,345 6.58% 3,505 6.37% 24,423 6.82% 51,273 6.68%
Mortgage-backed
securities............. -- -- 1,986 8.20% 1,803 7.52% 454,870 7.17% 458,659 7.18%
Asset-backed
securities............. -- -- -- -- -- -- -- -- -- --
State and Municipal
bonds.................. -- -- -- -- -- -- 8,966 5.28% 8,966 5.28%
---- ------- ------- -------- --------
Total.................. $-- -- $30,838 6.71% $15,409 6.77% $488,259 7.12% $534,506 7.09%
Market Value........... $-- $30,962 $15,498 $490,424 $536,884
HELD TO MATURITY
U.S. government and
agency obligations..... $-- -- $ -- -- $ 2,400 6.67% $ -- -- $ 2,400 6.67%
Collateral mortgage
obligations............ -- -- -- -- 850 7.26% 2,084 7.14% 2,934 7.17%
Mortgage-backed
securities............. -- -- 6,493 6.78% 4,218 7.27% 130,571 7.14% 141,282 7.13%
Asset-backed
securities............. -- -- -- -- 3,295 8.12% 42,751 6.86% 46,046 6.95%
State and Municipal
bonds.................. 5 5.50% 65 7.51% 75 6.78% -- -- 145 7.06%
Other bonds and short
term obligations....... 100 5.00% -- -- 100 8.40% -- -- 200 6.70%
---- ------- ------- -------- --------
Total.................. $105 5.02% $ 6,558 6.79% $10,938 7.40% $175,406 7.07% $193,007 7.08%
Market Value........... $105 $ 6,561 $10,972 $175,758 $193,396
</TABLE>
5
<PAGE>
As of December 31, 1997, approximately 95.8% of mortgage-backed securities
available for sale and 67.1% of mortgage-backed securities held to maturity
were adjustable rate.
LENDING ACTIVITIES
Gross loans comprised $849.5 million or 49.0% of total assets at December
31, 1997, compared to $774.1 million or 48.5% of total assets at December 31,
1996. The following table sets forth information concerning the Company's loan
portfolio in dollar amounts and percentages, by type of loan at December 31,
1997, 1996, 1995, 1994, and 1993, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1997 1996 1995
-------------------- -------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate
loans.................. $281,457 33.13% $295,503 38.18% $314,331 43.94%
Commercial real estate
loans.................. 185,226 21.80% 171,744 22.19% 170,145 23.79%
Commercial loans........ 212,869 25.06% 179,705 23.21% 141,215 19.74%
Home equity loans....... 158,753 18.69% 118,235 15.27% 78,823 11.02%
Consumer loans.......... 11,189 1.32% 8,920 1.15% 10,830 1.51%
-------- ------ -------- ------ -------- ------
Total loans
receivable, gross.. 849,494 100.00% 774,107 100.00% 715,344 100.00%
-------- ------ -------- ------ -------- ------
Less:
Unearned income and
fees................. (1,991) (820) (270)
Allowance for loan
losses............... 22,724 19,549 18,612
-------- -------- --------
Total loans
receivable, net.... $828,761 $755,378 $697,002
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1994 1993
------------------- -------------------
PERCENT OF PERCENT OF
AMOUNT TOTAL AMOUNT TOTAL
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential real estate loans........... $296,256 45.96% $305,361 38.71%
Commercial real estate loans............ 179,007 27.77% 288,336 36.55%
Commercial loans........................ 104,220 16.17% 142,422 18.05%
Home equity loans....................... 55,071 8.54% 37,332 4.73%
Consumer loans.......................... 10,050 1.56% 15,445 1.96%
-------- ------ -------- ------
Total loans receivable, gross....... 644,604 100.00% 788,896 100.00%
-------- ------ -------- ------
Less:
Unearned income and fees.............. 388 1,526
Allowance for loan losses............. 20,918 23,488
-------- --------
Total loans receivable, net......... $623,298 $763,882
======== ========
</TABLE>
6
<PAGE>
MATURITY OF LOAN PORTFOLIO
The following table sets forth the Company's loan portfolio, before
allowance for loan losses and unearned discounts, based on contractual
maturities. The table does not consider prepayment assumptions. Principal
amortization is included based on scheduled payments. Demand loans, and loans
having no stated schedule of repayment and no stated maturity are reported as
due within one year. Actual maturities may be significantly shorter due to
changes in interest rates and economic conditions.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
LESS THAN 1 YEAR MORE THAN
1 YEAR TO 5 YEARS 5 YEARS TOTAL
--------- ---------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed rate loans (1):
Residential real estate............... $ 2,067 $ 3,988 $ 63,096 $ 69,151
Commercial real estate................ 5,146 32,705 23,758 61,609
Commercial............................ 4,101 39,216 23,022 66,339
Home equity........................... 106 7,335 27,500 34,941
Consumer.............................. 4,880 3,888 566 9,334
------- -------- -------- --------
Total fixed rate loans.............. 16,300 87,132 137,942 241,374
------- -------- -------- --------
Adjustable rate loans (1):
Residential real estate............... 3,003 1,493 207,810 212,306
Commercial real estate................ 14,025 25,997 83,595 123,617
Commercial............................ 43,748 38,876 63,906 146,530
Home equity........................... 398 2,831 120,583 123,812
Consumer.............................. 128 134 1,593 1,855
------- -------- -------- --------
Total adjustable rate loans......... 61,302 69,331 477,487 608,120
------- -------- -------- --------
Total amounts due................... $77,602 $156,463 $615,429 $849,494
======= ======== ======== ========
</TABLE>
- --------
(1) Includes non-accrual loans.
DELINQUENCY
The following table sets forth a summary of the Company's delinquent loans
at December 31, 1997, 1996, 1995, 1994, and 1993:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------
60-89 DAYS 90 DAYS OR MORE
---------------- ----------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Residential real estate loans............. 12 $ 603 34 $1,698
Commercial real estate loans.............. 2 565 2 397
Commercial loans.......................... 8 1,214 9 1,247
Home equity loans......................... 7 192 5 77
Consumer loans............................ 126 103 79 59
--- ------ --- ------
Total delinquent loans................ 155 $2,677 129 $3,478
=== ====== === ======
Delinquent loans to total gross loans..... 0.32% 0.41%
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------
60-89 DAYS 90 DAYS OR MORE
---------------- ----------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Residential real estate loans............. 39 $1,782 44 $ 2,773
Commercial real estate loans.............. 1 139 5 1,057
Commercial loans.......................... 7 317 13 1,121
Home equity loans......................... 5 140 7 189
Consumer loans............................ 95 89 68 37
--- ------ --- -------
Total delinquent loans................ 147 $2,467 137 $ 5,177
=== ====== === =======
Delinquent loans to total gross loans..... 0.32% 0.67%
<CAPTION>
DECEMBER 31, 1995
---------------------------------
60-89 DAYS 90 DAYS OR MORE
---------------- ----------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Residential real estate loans............. 41 $2,603 77 $ 3,184
Commercial real estate loans.............. 3 250 21 2,246
Commercial loans.......................... 9 593 10 419
Home equity loans......................... 6 177 8 73
Consumer loans............................ 25 17 12 14
--- ------ --- -------
Total delinquent loans................ 84 $3,640 128 $ 5,936
=== ====== === =======
Delinquent loans to total gross loans..... 0.51% 0.83%
<CAPTION>
DECEMBER 31, 1994
---------------------------------
60-89 DAYS 90 DAYS OR MORE
---------------- ----------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Residential real estate loans............. 28 $1,447 70 $ 3,577
Commercial real estate loans.............. 1 129 6 2,150
Commercial loans.......................... 5 368 13 1,577
Home equity loans......................... 10 195 18 419
Consumer loans............................ 45 64 31 65
--- ------ --- -------
Total delinquent loans................ 89 $2,203 138 $ 7,788
=== ====== === =======
Delinquent loans to total gross loans..... 0.34% 1.21%
<CAPTION>
DECEMBER 31, 1993
---------------------------------
60-89 DAYS 90 DAYS OR MORE
---------------- ----------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF BALANCE OF BALANCE
LOANS OF LOANS LOANS OF LOANS
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Residential real estate loans............. 42 $1,655 111 $ 9,611
Commercial real estate loans.............. 5 5,066 8 5,976
Commercial loans.......................... 30 1,386 52 6,893
Home equity loans......................... 9 183 20 571
Consumer loans............................ 82 131 153 167
--- ------ --- -------
Total delinquent loans................ 168 $8,421 344 $23,218
=== ====== === =======
Delinquent loans to total gross loans..... 1.07% 2.94%
</TABLE>
8
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The allowance for possible loan losses reflects an amount that in
management's judgment is adequate to provide for potential losses in the loan
portfolio. In addition, examinations of the adequacy of the loan loss reserve
are conducted periodically by various regulatory agencies.
The Company's loan loss reserve methodology emphasizes an evaluation of non-
performing loans and those loans that have been identified as having a higher
risk of becoming non-performing loans. The overall analysis is a continuing
process that gives consideration to such factors as size and risk
characteristics of the loan portfolio, the risk rating of individual credits,
general economic conditions, historical delinquency and charge-off experience,
the borrowers' financial capabilities and the underlying collateral,
including, when appropriate, independent appraisals of real estate properties.
In addition, management periodically reviews the methodology of allocating
reserves to the various loan categories based on similar factors.
The Company's allowance for possible loan losses is decreased by loan
charge-offs and increased by provisions for possible loan losses and
recoveries on loans previously charged-off. When commercial and residential
real estate loans are foreclosed, the loan balance is compared with the fair
value of the property. If the net carrying value of the loan at the time of
foreclosure exceeds the fair value of the property less estimated selling
costs, the difference is charged to the allowance for possible loan losses and
the fair value of the property becomes the new cost basis of the real estate
owned. The Company has or obtains current appraisals on real estate owned at
the time it obtains possession of the property. Real estate owned is
subsequently carried at the lower of cost or fair value less estimated selling
costs with any further adjustments reflected as a charge against operations.
The Company assesses the value of real estate owned on a periodic basis.
9
<PAGE>
The allowance for possible loan losses at December 31, 1997 was $22.7
million, compared to $19.5 million at December 31, 1996. The activity in the
allowance for possible loan losses for the fiscal years ended December 31,
1997, 1996, 1995, 1994, and 1993 is set forth in the following table:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance, beginning of
period.................... $19,549 $18,612 $20,918 $ 23,488 $ 16,952
Provision for loan losses.. 1,895 3,721 6,262 27,728 19,881
Charge-offs:
Residential real estate
loans................... (427) (915) (710) (4,661) (2,558)
Commercial real estate
loans................... (740) (3,220) (4,875) (21,275) (4,946)
Commercial loans......... (617) (545) (3,864) (7,137) (6,678)
Home equity loans........ (153) (235) (51) (124) (215)
Consumer loans........... (266) (144) (225) (314) (484)
Merchant processing...... (9) (93) (31) (19) (90)
------- ------- ------- -------- --------
Total charge-offs...... (2,212) (5,152) (9,756) (33,530) (14,971)
Recoveries:
Residential real estate
loans................... 21 742 -- 460 242
Commercial real estate
loans................... 2,901 1,119 517 1,317 559
Commercial loans......... 428 349 491 1,274 667
Home equity loans........ 90 106 82 79 47
Consumer loans........... 52 52 98 102 111
Merchant processing...... -- -- -- -- --
------- ------- ------- -------- --------
Total recoveries....... 3,492 2,368 1,188 3,232 1,626
------- ------- ------- -------- --------
Net recoveries (charge-
offs)..................... 1,280 (2,784) (8,568) (30,298) (13,345)
Balance, end of period..... $22,724 $19,549 $18,612 $ 20,918 $ 23,488
======= ======= ======= ======== ========
Ratio of net loan
recoveries (charge-offs)
during the period to
average loans outstanding
during the period......... 0.16% (0.38)% (1.26)% (4.27)% (1.54)%
Ratio of allowance for
possible loan losses to
total loans at the end of
the period................ 2.68% 2.53% 2.60% 3.25% 2.98%
Ratio of allowance for
possible loan losses to
non-performing loans at
the end of the period..... 392.94% 231.65% 179.70% 111.32% 38.47%
</TABLE>
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"). At December 31, 1997, the
recorded investment in loans that are considered impaired under SFAS 114 was
$5.3 million as compared to $8.0 million at December 31, 1996. Included in
this amount as of December 31, 1997 is $2.0 million of impaired loans for
which the related SFAS 114 allowance is $0.4 million and $3.3 million of
impaired loans for which the SFAS 114 allowance is zero. At December 31, 1996
there were $2.9 million of impaired loans for which the related SFAS 114
allowance was $0.2 million and $5.2 million of impaired loans for which the
SFAS 114 allowance was zero. The average recorded investment in impaired loans
during the year ended December 31, 1997 was approximately $9.0 million as
compared to $9.7 million at December 31, 1996. For the years ended December
31, 1997 and 1996, the Company recognized interest income on these impaired
loans of $0.5 million and $0.3 million, respectively.
10
<PAGE>
The following table shows the allocation of the allowance for loan losses to
various types of loans.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995
--------------------- --------------------- ---------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
ALLOWANCE FOR ALLOWANCE FOR ALLOWANCE FOR
AMOUNT LOAN LOSSES AMOUNT LOAN LOSSES AMOUNT LOAN LOSSES
------- ------------- ------- ------------- ------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential real estate
loans.................. $ 3,664 16.12% $ 2,237 11.44% $ 2,499 13.43%
Commercial real estate
loans.................. 5,632 24.78% 7,729 39.54% 8,540 45.88%
Commercial loans........ 8,328 36.65% 7,145 36.55% 5,852 31.44%
Home equity loans....... 3,183 14.01% 1,417 7.25% 863 4.64%
Consumer loans.......... 1,274 5.61% 421 2.15% 261 1.40%
Merchant processing..... 643 2.83% 600 3.07% 597 3.21%
------- ------ ------- ------ ------- ------
Total allowance for
loan losses........... $22,724 100.00% $19,549 100.00% $18,612 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1994 1993
--------------------- ---------------------
% 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....... $ 5,298 25.33% $ 2,916 12.41%
Commercial real estate loans........ 9,860 47.14% 13,317 56.70%
Commercial loans.................... 3,656 17.48% 6,189 26.35%
Home equity loans................... 1,190 5.69% 418 1.78%
Consumer loans...................... 357 1.71% 269 1.15%
Merchant processing................. 557 2.65% 379 1.61%
------- ------ ------- ------
Total allowance for loan losses.... $20,918 100.00% $23,488 100.00%
======= ====== ======= ======
</TABLE>
DEPOSIT DISTRIBUTION
The principal source of funds for the Company are deposits from local
consumers and businesses. There were no brokered deposits at December 31,
1997. The Company's deposits consist of demand and NOW accounts, passbook and
statement savings accounts, money market accounts and time deposit accounts.
Total deposits were $1.3 billion at December 31, 1997 compared to $1.2
billion at December 31, 1996, an increase of $89.7 million. This growth
occurred primarily in demand deposits, savings accounts, and time deposits.
From December 31, 1996 to December 31, 1997, the Company's consumer demand
deposit balances increased by $27.5 million as customers continue to take
advantage of free checking accounts offered as part of the Company's consumer
deposit strategy to attract and retain core deposits, which is intended to
provide the Company with a lower cost source of funds. In addition, the
Company's commercial demand deposit balances increased by $7.9 million from
December 31, 1996 to December 31, 1997 reflecting growth in the Company's
commercial customer base. The Company's savings account balances increased
$10.1 million from December 31, 1996 to December 31, 1997 as a result of the
consumer deposit strategy. From December 31, 1996 to December 31, 1997, the
Company's time deposit balances have increased $33.6 million, largely as the
result of the introduction of new CD products as well as growth in time
deposits with local municipalities.
11
<PAGE>
The following table sets forth the distribution of the Company's deposit
accounts for each of the three years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
---------- ------- ---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Demand deposits......... $ 171,343 13.52% $ 135,965 11.55% $ 104,023 9.67%
NOW accounts (1)........ 51,412 4.06% 81,943 6.96% 79,488 7.39%
Money manager accounts
(1).................... 39,447 3.11% -- 0.00% -- 0.00%
Savings accounts........ 263,449 20.79% 253,358 21.52% 236,724 22.01%
Money market accounts... 211,286 16.67% 209,523 17.79% 212,560 19.77%
Time deposits........... 530,361 41.85% 496,772 42.18% 442,561 41.16%
---------- ------ ---------- ------ ---------- ------
Total deposits......... $1,267,298 100.00% $1,177,561 100.00% $1,075,356 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
- --------
(1) 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.
The Company does not actively solicit Time deposit accounts of $100,000 or
more. The following table sets forth the remaining contractual maturities of
the Company's portfolio of Time deposits in amounts of $100,000 or greater at
December 31, 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Three months or less................................ $53,111
Over three through six months....................... 10,554
Over six through 12 months.......................... 15,782
Over 12 months...................................... 7,966
-------
Total........................................... $87,413
=======
</TABLE>
BORROWINGS
Deposits are the primary source of funds for the Company. However, the
Company is able to borrow from the Federal Home Loan Bank ("FHLB") of Boston
and can enter into repurchase agreements. At December 31, 1997, the Company's
total outstanding FHLB advances were $184.1 million compared to $89.5 million
at December 31, 1996. Repurchase agreements were $113.3 million at December
31, 1997 compared to $176.9 million at December 31, 1996.
COMPETITION
Vigorous competition exists in all areas in which the Company engages in
business. The Company faces intense competition in its market areas from major
banking and financial institutions, including many which have substantially
greater resources or market presence than the Company. Competitors of the
Company include commercial banks, savings banks, mutual funds, insurance
companies, finance companies, credit unions and mortgage companies.
SUPERVISION AND REGULATION
The Company is a Massachusetts corporation and is a bank holding company
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") pursuant to the Bank Holding
Company Act of 1956, as amended, and files with the Federal Reserve Board an
annual
12
<PAGE>
report and such additional reports as the Federal Reserve Board may require.
The Company is also subject to the jurisdiction of the Massachusetts Board of
Bank Incorporation. As a bank holding company, the Company's activities are
limited to the business of banking and activities closely related to or
incidental to banking. The Company may not directly or indirectly acquire the
ownership or control more than 5 percent of any class of voting shares or
substantially all of the assets of any company, including a bank, without the
prior approval of the Federal Reserve Board.
SIS Bank is a Massachusetts chartered stock savings bank subject to
regulation and supervision by the Federal Deposit Insurance Corporation
("FDIC") and the Massachusetts Commissioner of Banks. GBT is a Connecticut
chartered commercial bank, subject to regulation and supervision by the FDIC
and the Connecticut Commissioner of Banks. Further, as a member of the Federal
Home Loan Bank of Boston, the Banks must maintain certain levels of liquidity
and have collateral available to support borrowings, if required.
The Company is also subject to requirements and restrictions under federal
and state law, including requirements to maintain reserves against deposits,
restrictions on the types and amounts of loans that may be granted and the
interest that may be charged thereon, and limitations on the types of
investments that may be made and the types of services that may be offered.
Various federal and state consumer laws and regulations also affect the
operations of the Company.
The federal and state regulatory authorities have broad enforcement powers
over depository institutions, including the power to impose substantial fines
and other civil and criminal penalties, to terminate deposit insurance, and to
appoint a conservator or receiver under a variety of circumstances. The
Federal Reserve Board also has broad enforcement powers over bank holding
companies including the power to impose substantial fines and other civil and
criminal penalties.
REGULATORY RESTRICTIONS ON DIVIDENDS
The Company is a legal entity separate and distinct from SIS Bank and GBT
and its other subsidiaries. The Company's principal source of revenue consists
of dividends from SIS Bank and GBT. The payment of dividends by both SIS Bank
and GBT is subject to various regulatory requirements.
Massachusetts law generally provides that SIS Bank may pay cash dividends to
the Company from its undistributed earnings. SIS Bank cannot declare or pay
any dividend, however, which would reduce its capital below (i) the amount
required to be maintained by federal and state laws and regulations, or (ii)
the amount in the SIS Bank liquidation account established in connection with
SIS Bank's conversion to stockholder owned form in 1995.
Connecticut law generally provides that GBT may pay cash dividends to the
Company without first obtaining approval from the Connecticut Commissioner of
Banks only if the amount of dividends does not exceed GBT's net profits from
that year combined with the retained net profits from the previous two years.
GBT cannot declare or pay any dividend, however, which would reduce its
capital below the amount required to be maintained by federal and state laws
and regulations.
The payment of dividends on common stock and preferred stock by a bank
holding company and its bank subsidiaries may also be limited by other
factors, including applicable regulatory capital requirements and broad
enforcement powers of the federal bank regulatory agencies. The Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") generally
prohibits a depository institution from making any capital distribution
(including the payment of a dividend) or paying any management fee to its
holding company if any subsidiary depository institution would thereafter be
undercapitalized.
CAPITAL REQUIREMENTS
The Company and the Banks are required to maintain regulatory capital as
follows: (i) Tier 1 capital of at least four percent of risk-weighted assets
(including off-balance sheet items); (ii) Total capital of at least eight
13
<PAGE>
percent of risk-weighted assets and (iii) Tier 1 capital of at least four
percent of adjusted quarterly average total assets. The capital ratios for the
Company and the Banks are set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part II Item 7.
Failure to meet applicable capital requirements could subject a bank holding
company or its subsidiary depository institutions to various enforcement
actions, including substantial restrictions on its operations and activities,
dividend limitations, issuance of a directive to increase capital and, for a
depository institution, termination of deposit insurance and the appointment
of a conservator or receiver.
PROMPT CORRECTIVE ACTION
FDICIA requires the federal banking regulators to take prompt supervisory
and regulatory actions against undercapitalized depository institutions.
FDICIA establishes five capital categories: "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized", and
"critically undercapitalized". Under regulations a "well capitalized"
institution has a total capital to total risk-weighted assets ratio of at
least ten percent, a Tier 1 capital to total risk-weighted assets ratio of a
least six percent, a Tier 1 capital to average total assets ("leverage ratio")
of at least five percent and is not subject to any written order, agreement or
directive; an "adequately capitalized" institution has a total capital to
total risk-weighted assets ratio of at least eight percent, a Tier 1 capital
to total risk-weighted assets ratio of at least four percent, and a leverage
ratio of at least four percent (three percent if given the highest regulatory
rating and not experiencing significant growth), but does not qualify as "well
capitalized". An "undercapitalized" institution fails to meet one of the three
minimum capital requirements. A "significantly undercapitalized" institution
has a total capital to total risk-weighted assets ratio of less than six
percent, a Tier 1 capital to total risk-weighted assets ratio of less than
three percent, and a leverage ratio of less than three percent. A "critically
undercapitalized" institution has a ratio of tangible equity to assets of two
percent or less. Under certain circumstances, a "well capitalized",
"adequately capitalized" or "undercapitalized" institution may be required to
comply with supervisory actions as if the institution was in the next lowest
category.
A bank generally must file a written capital restoration plan which meets
specified requirements, as well as a performance guaranty by each company that
controls the bank, with an appropriate federal banking regulator within 45
days of the date that the bank receives notice or is deemed to have notice
that it may become an "undercapitalized" institution. Immediately upon
becoming undercapitalized, a bank would become subject to statutory provisions
which, among other things, set forth various mandatory and discretionary
restrictions on the operations of such bank.
SIS Bank and GBT had capital levels which qualified each as a "well-
capitalized" institution under the applicable FDIC prompt corrective action
regulations at December 31, 1997. The Company also qualified as "well
capitalized" under applicable Federal Reserve Board regulations at December
31, 1997. For more detail as to the capital requirements for the Company,
please see footnote 24 "Regulatory Capital" in the Notes to the Financial
Statements.
EMPLOYEES
As of December 31, 1997, the Company employed 622 persons (full-time
equivalent).
14
<PAGE>
ITEM 2: PROPERTIES
The Company conducts its business from its main offices and other properties
listed below, all of which are considered to be in good condition and adequate
for the purposes for which they are used. The Company also serves customers
through seven (7) off-site SISTEM24 Automated Teller Machines ("ATM") which
are on leased parcels and through its affiliation with the "NYCE"(R) and
CIRRUS(R) ATM networks. The following table sets forth certain information
relating to bank premises owned or used by the Company in conducting its
business:
<TABLE>
<CAPTION>
OWN/LEASE
LOCATION EXPIRATION DATE
-------- ---------------
<S> <C>
SIS BANK BANKING OFFICES
40 Springfield Street, Agawam, MA.......................... Own
11 Amity Street, Amherst, MA............................... Lease/2006
693 Memorial Drive, Chicopee, MA........................... Own
153 Meadow Street, Chicopee, MA............................ Own
465 North Main Street, East Longmeadow, MA................. Lease/2010
1360 Carew Street, East Springfield, MA.................... Lease/2004
50 Holyoke Street, Holyoke, MA............................. Lease/2001
724 Bliss Road, Longmeadow, MA (1)......................... Lease/2002
819 Williams Street, Longmeadow, MA (1).................... Lease/2006
52 East Street, Ludlow, MA................................. Lease/2002
549 Center Street, Ludlow, MA.............................. Own
175 Main Street, Northampton, MA........................... Own
501 Newton Street, South Hadley, MA........................ Lease/2003
412 Boston Road, Springfield, MA........................... Own
1800 Boston Road, Springfield, MA.......................... Own
619 Chestnut Street, Springfield, MA....................... Own
300 Cooley Street, Springfield, MA......................... Lease/2001
441 Cooley Street, Springfield, MA......................... Own
561 Sumner Avenue, Springfield, MA......................... Own
1441 Main Street, Springfield, MA.......................... Own
807 Wilbraham Road, Springfield, MA........................ Lease/1998
958 State Street, Springfield, MA.......................... No Lease
968 Riverdale Road, West Springfield, MA................... Lease/2006
1425 Westfield Street, West Springfield, MA................ Lease/2002
60 Main Street, Westfield, MA.............................. Own
451 East Main Street, Westfield, MA........................ Lease/2002
GBT BANKING OFFICES
64 Norwich Avenue, Colchester, CT.......................... Own
29 Main Street, East Hartford, CT.......................... Lease/2000
730 Hebron Avenue, Glastonbury, CT......................... Lease/2006
2461 Main Street, Glastonbury, CT.......................... Own
255 Main Street, Portland, CT.............................. Lease/1999
38 Town Line Road, Rocky Hill, CT.......................... Lease/2000
901 Main Street, South Glastonbury, CT..................... Lease/1999
171 Silas Deane Highway, Wethersfield, CT.................. Lease/1998
</TABLE>
- --------
(1) The Company is scheduled to open a new full-service branch location in
Longmeadow, Massachusetts in the second quarter of 1998 which would
replace these two smaller locations adjacent to the new Longmeadow
location.
15
<PAGE>
ITEM 3: LEGAL PROCEEDINGS
Except as set forth below, the Company is not involved in any pending
litigation other than routine legal proceedings occurring in the ordinary
course of business. While the legal responsibility and financial impact with
respect to such litigation cannot presently be ascertained, the Company does
not anticipate that any of these matters will result in the payment by the
Company of damages, that, in the aggregate, would be material in relation to
the consolidated financial position or operations of the Company.
A lawsuit was brought against GBT and seven directors of GBT on or about
November 1, 1995 by a former director of GBT, Henry J. Stone, and a second
suit was brought contemporaneously by Mr. Stone's wife, Merriam March. Both
suits allege misconduct by the GBT directors in connection with the rejection
of a proposed acquisition offer received by GBT in 1994. Mr. Stone's suit
sought money damages and to be reinstated as a director of GBT. The damages
portion of Mr. Stone's suit was dismissed and he has not appealed. His action
to be returned to the board of GBT remains, and GBT intends to vigorously
oppose Mr. Stone.
Ms. March's suit is a derivative suit in which she, as a shareholder of GBT,
had sued the directors of GBT on behalf of GBT for damages they allegedly
caused GBT. The derivative action, filed in Connecticut Superior Court, seeks
approximately $11.7 million in money damages from the directors. Because the
suit is a derivative suit, any damages that the court may order the defendants
to pay (GBT believes this to be unlikely and, in any event, limited to one
year's compensation from each director under applicable Connecticut law and
GBT's Certificate of Incorporation) would be paid to GBT. GBT considers Ms.
March's suit to be without merit.
Under Connecticut law, GBT is required in some cases, and is permitted in
others, to "indemnify" or reimburse the GBT directors from damages and costs
incurred by them in connection with litigation brought against them in their
official capacities at GBT. As part of the acquisition of GBT by SIS Bank, SIS
Bank had agreed that GBT would continue to provide this indemnification to
these GBT directors to the extent allowed by law. Through December 31, 1997,
GBT had accrued for all expenses incurred for attorney's fees and related
costs in connection with the suit, including the advancing of such fees for
the defendant directors.
As of December 31, 1997, the parties continue to be engaged in mutual
discovery efforts, and the Stone lawsuit had been dismissed in its entirety
except for the count which requests that Mr. Stone be re-seated on the GBT
Board of Directors. The Stone suit is scheduled for trial in late 1998 and the
March suit in early 1999. The amount of additional legal fees to be incurred
by GBT will depend upon a number of factors, including the scope of the
plaintiff's discovery efforts and whether the suits actually go to trial.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On December 4, 1997, a Special Meeting of the shareholders of SIS
Bancorp, Inc. was held at the headquarters of the Company, 1441 Main Street,
Springfield, Massachusetts, to consider the following matters:
(b) Election of Directors: Not applicable
(c) Other matters voted upon: The shareholders voted upon a proposal to
approve and adopt the Agreement and Plan of Reorganization dated August 18,
1997 relating to the acquisition of Glastonbury Bank & Trust Company and each
of the transactions contemplated thereby, including the issuance of Company
common stock to the shareholders of GBT, upon the terms and conditions set
forth in the Agreement and Plan of Reorganization, all as more fully described
in the Joint Proxy Statement-Prospectus dated October 28, 1997.
<TABLE>
<CAPTION>
VOTES FOR (SHARES) VOTES AGAINST ABSTAIN
------------------ ------------- -------
<S> <C> <C>
3,914,555 90,324 16,821
</TABLE>
16
<PAGE>
PART II
ITEM 5: MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
(a) The market on which the Company's Common Stock is traded is the NASDAQ
National Market System under the symbol "SISB". The following table sets forth
the high and low last sale prices of the Common Stock for the past two fiscal
years, as reported by NASDAQ.
<TABLE>
<CAPTION>
DIVIDEND HIGH LOW
-------- ------ ------
<S> <C> <C> <C>
1996
First Quarter..................................... N/A $18.75 $16.25
Second Quarter (1)................................ N/A $18.63 $16.75
Third Quarter..................................... N/A $23.63 $17.50
Fourth Quarter.................................... N/A $24.25 $22.13
1997
First Quarter (2)................................. $0.12 $27.38 $22.38
Second Quarter.................................... $0.12 $29.63 $23.38
Third Quarter..................................... $0.14 $34.75 $27.63
Fourth Quarter (3)................................ $0.14 $40.25 $32.63
</TABLE>
- --------
(1) On June 21, 1996, the Company acquired 100% of the outstanding shares of
SIS Bank's common stock, par value $1.00 per share, in a 1:1 exchange for
shares of the Company's common stock, par value $0.01 per share (the
"Company's Common Stock"). Upon the effectiveness of such share-for-share
exchange on June 21, 1996, SIS Bank became a wholly-owned subsidiary of
the Company and SIS Bank's former stockholders became stockholders of the
Company.
(2) The Company declared its first quarterly cash dividend of $0.12 per share
to stockholders of record as of February 3, 1997 payable on February 20,
1997. It has subsequently paid a dividend each quarter as reflected above.
(3) The Company acquired 100% of the outstanding shares of GBT as of December
17, 1997 in an exchange whereby shareholders of GBT received 0.74 of a
share of the Company's Common Stock for each share of GBT common stock,
par value $2.50 per share. Upon the effectiveness of the exchange on
December 17, 1997, GBT became a wholly-owned subsidiary of the Company and
GBT's former stockholders became stockholders of the Company. The
transaction was accounted for as a pooling of interests.
(b) As of March 6, 1998, the most recent practicable date, the closing sale
price of the Company's Common Stock, as reported by NASDAQ, was $38.50 per
share and the Company had 1,599 holders of record of the Company's Common
Stock. The figure does not reflect beneficial ownership of shares held in
nominee names.
17
<PAGE>
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The Company's historical financial statements have been restated to reflect
the combination with GBT in accordance with the pooling of interest method of
accounting.
SELECTED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total assets............ $1,733,618 $1,596,610 $1,300,155 $1,138,424 $1,198,506
Investment securities... 769,115 704,718 484,848 386,893 286,397
Loans receivable,
gross.................. 849,494 774,107 715,344 644,604 788,896
Allowance for possible
loan losses............ 22,724 19,549 18,612 20,918 23,488
Investments in real
estate and real estate
partnerships........... 2,903 2,757 6,092 6,699 9,939
Deposits................ 1,267,298 1,177,561 1,075,356 1,047,544 1,076,961
Borrowings.............. 299,912 269,246 101,071 15,392 20,063
Total stockholders'
equity................. 125,472 118,786 96,443 36,543 69,585
Asset Quality:
Non-accruing loans.... 5,352 8,011 9,770 18,415 57,792
Loans past due 90 days
and still accruing... 431 428 587 376 3,262
---------- ---------- ---------- ---------- ----------
Total non-performing
loans.............. 5,783 8,439 10,357 18,791 61,054
Foreclosed real estate,
net.................... 1,209 1,540 1,847 6,709 29,288
Restructured loans on
accrual status (1)..... 1,124 892 3,417 6,446 18,245
---------- ---------- ---------- ---------- ----------
Total non-performing
assets............. $ 8,116 $ 10,871 $ 15,621 $ 31,946 $ 108,587
========== ========== ========== ========== ==========
</TABLE>
- --------
(1) Restructured loans are loans for which concessions, including reduction of
interest rates or deferral of interest or principal payments, have been
granted to acknowledge changes in the borrower's financial condition or
changes in the underlying cash flows of the loan's collateral.
Restructured loans on non-accrual status are reported in the non-accrual
loan category. Restructured loans on accrual status are those that have
complied with the terms of a restructuring agreement for a satisfactory
period (generally six months).
18
<PAGE>
SELECTED OPERATING DATA:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest and dividend in-
come........................ $119,214 $101,599 $86,296 $ 73,189 $ 79,183
Interest expense............. 59,125 48,915 39,448 29,729 33,567
-------- -------- ------- -------- --------
Net interest and dividend in-
come........................ 60,089 52,684 46,848 43,460 45,616
Less: provision for possible
loan losses................. 1,895 3,721 6,262 27,728 19,881
-------- -------- ------- -------- --------
Net interest and dividend in-
come after provision for
possible loan losses........ 58,194 48,963 40,586 15,732 25,735
Noninterest income:
Net gain (loss) on sale of
loans and securities...... 413 812 (643) (63) 3,186
Loan fees.................. 3,212 3,553 3,530 3,583 4,201
Deposit fees............... 7,562 6,834 5,843 4,875 5,212
Merchant income............ 1,904 1,894 1,690 1,549 1,101
Other fees................. 2,751 1,713 1,387 1,286 2,143
-------- -------- ------- -------- --------
Total noninterest in-
come.................. 15,842 14,806 11,807 11,230 15,843
Noninterest expense:
Operating expenses:
Salaries and employee
benefits................ 24,764 22,709 20,167 21,080 21,558
Occupancy expense of bank
premises, net........... 4,826 4,308 4,310 4,344 4,430
Furniture and equipment
expense................. 3,477 3,433 3,228 3,156 3,056
Other operating ex-
penses.................. 16,841 17,487 16,715 18,367 16,765
Merger related costs..... 4,968 -- -- -- --
-------- -------- ------- -------- --------
Total operating ex-
penses................ 54,876 47,937 44,420 46,947 45,809
Foreclosed real estate (in-
come) expenses............ (5) 449 1,358 6,759 13,460
Net expense (income) of
real estate operations.... 352 (272) (227) 988 2,632
-------- -------- ------- -------- --------
Total noninterest ex-
pense ................ 55,223 48,114 45,551 54,694 61,901
-------- -------- ------- -------- --------
Income (loss) before income
taxes and cumulative effect
of change in accounting
principles.................. 18,813 15,655 6,842 (27,732) (20,323)
Income tax (benefit) ex-
pense....................... 7,395 (5,030) (6,259) 35 (3,319)
-------- -------- ------- -------- --------
Income (loss) before
cumulative effect of change
in accounting principle..... 11,418 20,685 13,101 (27,767) (17,004)
Cumulative effect of change
in accounting principle..... -- -- -- -- 52
-------- -------- ------- -------- --------
Net income (loss)...... $ 11,418 $ 20,685 $13,101 $(27,767) $(16,952)
======== ======== ======= ======== ========
Earnings (loss) per share:
Basic...................... $ 1.74 $ 3.14 $ 2.14 $ (4.53) $ (2.77)
Diluted.................... $ 1.65 $ 3.03 $ 2.12 $ (4.53) $ (2.77)
</TABLE>
19
<PAGE>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS: (1)
Return on average assets... 0.68% 1.45% 1.08 % (2.40)% (1.40)%
Return on average equity... 9.51% 20.04% 16.70 % (51.40)% (20.47)%
Net interest income/spread
(2)....................... 3.26% 3.44% 3.68 % 3.83 % 4.12 %
Net interest margin (3)....... 3.83% 3.94% 4.11 % 4.03 % 4.22 %
Efficiency ratio (4)....... 72.67% 71.89% 74.91 % 85.74 % 78.61 %
Operating expenses to
average assets............ 3.28% 3.36% 3.67 % 4.06 % 3.78 %
Ratio of net loan
recoveries (charge-offs)
to average loans
outstanding............... 0.16% (0.38)% (1.26)% (4.27)% (1.54)%
ASSET QUALITY RATIOS:
Non-performing loans to
total gross loans......... 0.68% 1.09% 1.45% 2.92 % 7.74 %
Non-performing assets to
total assets.............. 0.47% 0.68% 1.20% 2.81 % 9.06 %
Allowance for possible loan
losses to non-performing
loans..................... 392.94% 231.65% 179.70% 111.32 % 38.47 %
Allowance for possible loan
losses to total gross
loans..................... 2.68% 2.53% 2.60% 3.25 % 2.98 %
CAPITAL RATIOS:
Equity to total assets..... 7.24% 7.44% 7.42% 3.21 % 5.81 %
Tier 1 leverage capital
ratio..................... 7.17% 7.35% 7.43% 3.67 % 5.77 %
Tier 1 risk-based capital
ratio..................... 11.87% 12.69% 12.36% 6.39 % 8.26 %
Total risk-based capital
ratio..................... 13.13% 13.95% 13.61% 7.68 % 9.53 %
OTHER DATA:
Number of deposit
accounts.................. 290,145 248,716 211,362 174,223 165,636
Residential loan
originations ($000s)...... $ 98,620 $ 95,445 $107,045 $176,355 $380,202
Loans serviced for others
($000s)................... $768,108 $827,267 $921,147 $979,974 $955,153
Number of full time
equivalent employees...... 622 583 529 582 663
FACILITIES:
Full-service customer
service facilities........ 34 31 28 27 27
Mortgage origination
offices................... -- -- -- 2 2
</TABLE>
- --------
(1) With the exception of end of period ratios, all ratios are based on
average daily balances during the indicated periods and are annualized
where appropriate.
(2) Interest spread represents the difference between the weighted average
yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities (which do include non-interest bearing demand
accounts).
(3) Net interest margin represents the net interest income as a percent of
average interest-earning assets, including the average daily balance
amount of non-performing loans.
(4) The efficiency ratio represents operating expenses as a percentage of net
interest income and noninterest income, excluding gains/(losses) on sales
of loans and securities.
20
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, which are included in
Item 8 of this report.
OVERVIEW
The Company reported net income of $11.4 million or $1.65 per share
(diluted) for the year ended December 31, 1997. The 1997 financial results,
along with the results for prior periods, have been restated to reflect the
effect of the acquisition of GBT which was accounted for as a pooling of
interests. Financial results for the year ended December 31, 1997 were
influenced by non-recurring merger related charges totaling $5.2 million.
On January 23, 1997, the Company announced the adoption of a shareholder
rights plan, the authorization of a share repurchase program, and the
declaration of its first quarterly cash dividend payment in the amount of
$0.12 per share. See also Item 5, "Market for Registrant's Common Equity and
Related Stockholder Matters," for additional information regarding the
Company's quarterly dividend payments.
Under the shareholder rights plan each shareholder of record as of the close
of business on February 3, 1997 received one right for each share of common
stock held by such share holder to purchase, upon the occurrence of certain
triggering events, one one-hundredth of a share of Series A junior
Participating Preferred Stock of the Company at a purchase price of $100.00.
Until and unless the rights are triggered, the rights will be evidenced by the
common stock certificates directly, and will transfer automatically with the
transfer of any common stock. The initial issuance of the rights has no
dilutive effect on the outstanding shares of the Company or the Company's
earnings, is not taxable to the Company or the shareholders, and does not
otherwise affect the trading of the Company's shares. If the rights are not
triggered or otherwise redeemed by the Board of Directors, the rights will
expire on January 22, 2007.
Under the share repurchase program, the Board of Directors authorized the
Company to purchase up to 286,180 shares or up to 5% of the common stock
issued and outstanding as of December 31, 1996. On August 17, 1997, in
connection with the proposed acquisition of GBT, the Board of Directors
rescinded its authorization to repurchase stock. During 1997, the Company
repurchased 133,400 shares, net of shares reissued under various benefit plans
and shares reissued in connection with the acquisition of GBT.
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 (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). The Company is
addressing this issue in accordance with the guidelines set forth in the
Federal Financial Institutions Examination Counsel Year 2000 statements dated
May 5, and December 17, 1997. The Company has completed the 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. Management expects that testing will be completed by the
end of first quarter, 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.
21
<PAGE>
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.
FINANCIAL CONDITION
BALANCE SHEET CHANGES
Total assets of $1.7 billion at December 31, 1997 increased $137.0 million
or 8.6% from $1.6 billion at December 31, 1996. This growth in total assets
occurred primarily in commercial and home equity loans and the investment
portfolio and was funded by an increase in deposits and borrowings.
Commercial loans totaled $212.9 million as of December 31, 1997 compared to
$179.7 million as of December 31, 1996, an increase of $33.2 million or 18.5%.
This increase reflects the Company's continued focus on lending activities in
the local business market. Home equity loan balances grew from $118.2 million
as of December 31, 1996 to $158.8 million as of December 31, 1997, an increase
of $40.6 million or 34.3%. This increase is the result of the Company's
consumer strategy and the active promotion of this product. Investments
increased $64.8 million to a total of $769.1 million as of December 31, 1997
from the $704.3 million reported one year earlier.
Total deposits were $1.3 billion as of December 31, 1997 compared to $1.2
billion as of December 31, 1996, an increase of $89.7 million or 7.6%. During
this period, the Company continued to focus on increasing its share of primary
deposit relationships. Demand deposits and savings accounts increased $35.4
million and $10.1 million, respectively, as customers continued to take
advantage of the Company's consumer deposit strategy to attract and retain
core deposits. Time deposit balances increased $33.6 million primarily due to
the introduction of new CD products and growth in time deposits with local
municipalities.
ASSET QUALITY/NON-PERFORMING ASSETS
Non-performing assets declined $2.8 million from $10.9 million at December
31, 1996 to $8.1 million at December 31, 1997. Non-performing asset balances
have declined significantly since December 31, 1993 as a result of the
accelerated disposition program initiated by the Company, as well as an
improvement in economic conditions. The following table sets forth information
regarding the components of non-performing assets for the periods presented.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1997 1996 1995 1994 1993
------ ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans (1):
Residential real estate loans.. $1,211 $ 1,287 $ 2,817 $ 3,292 $ 6,984
Commercial real estate loans... 1,542 4,754 5,824 11,048 34,206
Commercial loans............... 2,414 1,750 1,026 3,643 16,414
Home equity loans.............. 181 210 90 369 --
Consumer loans................. 4 10 13 63 188
------ ------- ------- ------- --------
Total non-accrual loans...... 5,352 8,011 9,770 18,415 57,792
------ ------- ------- ------- --------
Loans past due 90 days still
accruing (2).................... 431 428 587 376 3,262
------ ------- ------- ------- --------
Total non-performing loans... 5,783 8,439 10,357 18,791 61,054
Foreclosed real estate (3)....... 1,209 1,540 1,847 6,709 29,288
Restructured loans on accrual
status (4)...................... 1,124 892 3,417 6,446 18,245
------ ------- ------- ------- --------
Total non-performing assets.. $8,116 $10,871 $15,621 $31,946 $108,587
====== ======= ======= ======= ========
Total non-performing loans to
total gross loans............... 0.68% 1.09% 1.45% 2.92% 7.74%
Total non-performing assets to
total assets.................... 0.47% 0.68% 1.20% 2.81% 9.06%
Allowance for possible loan
losses to non-performing loans.. 392.94% 231.65% 179.70% 111.32% 38.47%
</TABLE>
22
<PAGE>
- --------
(1) Non-accrual loans are loans that are contractually past due in excess of
90 days, for which the Company has stopped the accrual of interest, or
loans which are not past due but on which the Company has stopped the
accrual of interest based on management's assessment of the circumstances
surrounding these loans.
(2) Accruing loans past due 90 days or more are loans which have not been
placed on non-accrual status as, in management's opinion, the collection
of the loan and contractual interest, in full, is not in doubt.
(3) Foreclosed real estate includes OREO, defined as real estate acquired
through foreclosure or acceptance of a deed in lieu of foreclosure. The
Company carries foreclosed real estate at net realized 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).
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 trends in the obligor's
operations or weaknesses in the obligor's balance sheet. Watch list loans
totaled $24.1 million and $33.2 million at December 31, 1997 and 1996,
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 under the Company's Policy 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." Assets characterized as loss are those considered
"uncollectible" and of such little value that their continuance as bankable
assets is not warranted. Substandard classified loans totaled $6.2 million and
$9.4 million at December 31, 1997 and 1996, respectively. Doubtful classified
loans totaled zero and $53 thousand at December 31, 1997 and 1996,
respectively. Included in these amounts are $5.4 million and $8.0 million of
loans which have been reported as non-performing loans at December 31, 1997
and 1996, respectively.
LIQUIDITY
Liquidity measures the ability of the Company to meet its maturing
obligations and existing commitments, to withstand fluctuations in deposit
levels, to fund its operations and to provide for customer credit needs.
The Company's sources of funds are deposits, advances from the FHLB of
Boston, repurchase agreements, repayments and maturities on loans and
securities, proceeds from the sale of securities in the available-for-sale
portfolio, and funds provided by operations. While scheduled loan and security
amortization and maturities are relatively predictable sources of funds,
deposit flows and loan and security prepayments are greatly influenced by
economic conditions and the general level of interest rates and competition.
The Company utilizes particular sources of funds based on comparative costs
and availability. The Company generally manages the pricing of its deposits to
maintain a steady deposit balance, but has from time to time decided not to
pay rates on deposits as high as its competition, and when necessary, will
supplement deposits with longer term and/or less expensive alternative sources
of funds such as advances from the FHLB and repurchase agreements.
Liquidity management is both a daily and long-term responsibility of
management. The Company adjusts its investments in cash and cash equivalents
based upon management's assessment of expected loan demand,
23
<PAGE>
projected security maturities, expected deposit flows, yields available on
interest-bearing deposits, and the objectives of its asset/liability
management program. If the Company requires funds beyond its ability to
generate them internally, it has additional borrowing capacity with the FHLB
and collateral eligible for repurchase agreements. Because the Company has a
stable retail deposit base, management believes that significant borrowings
will not be necessary to maintain its current liquidity position.
The Company's ongoing principal use of capital resources remains the
origination of single-family residential mortgage loans, commercial real
estate loans, commercial loans, and home equity loans secured by residential
real estate as well as the purchase of investment securities. Management
intends to continue seeking opportunities for expansion and believes that the
Company's liquidity, capital resources and borrowing capabilities are adequate
for its current and intended operations.
CAPITAL RESOURCES/REGULATORY CAPITAL
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material adverse effect on the Company's financial statements. Under
applicable capital adequacy guidelines 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 and the Banks to maintain minimum amounts and ratios of
total and Tier 1 capital to risk-weighted assets and Tier 1 capital to total
average assets. As of December 31, 1997, the Company and the Banks exceed all
capital adequacy requirements to which they are subject and qualify as "well
capitalized" under applicable regulations of the Federal Reserve Board and the
FDIC. The Company's current capital position and its regulatory requirements
are discussed in greater detail in footnote 24 "Regulatory Capital" in the
Notes to the Financial Statements.
INTEREST RATE RISK MANAGEMENT
The operations of the Company are subject to the risk of interest rate
fluctuations to the extent that there is a substantial difference in the
amount of the Company's assets and liabilities that reprice or mature within
specific time periods. An asset-sensitive position indicates that there are
more rate-sensitive assets than rate-sensitive liabilities repricing or
maturing within specific time horizons, which would generally imply a
favorable impact on net interest income in periods of rising interest rates
and an unfavorable impact in periods of falling interest rates. A liability-
sensitive position would generally imply an unfavorable impact on net interest
income in periods of rising interest rates and a favorable impact in periods
of falling interest rates.
The objective of the Company's interest rate risk management process is to
identify, manage, and control its interest rate risk within established limits
in order to produce consistent earnings that are not contingent upon favorable
trends in interest rates. This is attained by monitoring the levels of
interest rates, the relationships between the rates earned on assets and the
rates paid on liabilities, the absolute amount of assets and liabilities which
reprice or mature over similar periods, and the effect of all of these factors
on the estimated level of net interest income.
There are a number of industry standards used to measure a financial
institution's interest rate risk position. Most common among these is the one-
year cumulative gap which is the difference between assets and liabilities
that will mature or reprice within one year expressed as a percentage of total
assets. Using management's estimates of asset prepayments and core deposit
decay in its computation, the Company estimates that its one-year cumulative
gap position was liability sensitive by $87.0 million or 5.02% of total assets
at December 31, 1997. 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.
24
<PAGE>
The following table sets forth the amounts of assets and liabilities
outstanding at December 31, 1997, which are anticipated by the Company to
mature or reprice in each of the future time periods shown using certain
assumptions based on its historical experience, the current interest rate
environment, and other data available to management. Management believes that
these assumptions approximate actual experience and considers such assumptions
reasonable; however, the interest rate sensitivity of the Company's assets and
liabilities could vary substantially if different assumptions were used or
actual experience differs from the assumptions used. Management periodically
reviews and, when appropriate, changes assumptions used in evaluating the
Company's interest rate sensitivity.
<TABLE>
<CAPTION>
GAP POSITION
AT DECEMBER 31, 1997
----------------------------------------------------------
MORE THAN SIX
LESS THAN MONTHS LESS 1-
SIX MONTHS THAN ONE YEAR 5 YEARS OVER 5 YRS TOTAL
---------- ------------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Assets:
Federal funds sold and
interest bearing
deposits............. $ 17,317 $ -- $ -- $ -- $ 17,317
Investment
securities........... 301,250 173,454 253,714 40,697 769,115
Residential real
estate loans......... 74,029 53,469 115,622 37,094 280,214
Commercial real estate
loans................ 39,922 24,816 102,336 16,631 183,705
Commercial loans...... 89,408 8,345 97,941 15,272 210,966
Home equity loans..... 115,815 1,879 19,563 22,719 159,976
Consumer loans........ 5,153 62 3,875 2,181 11,271
Other assets.......... -- -- -- 101,054 101,054
-------- -------- -------- -------- ----------
Total assets........ $642,894 $262,025 $593,051 $235,648 $1,733,618
======== ======== ======== ======== ==========
Liabilities &
stockholders' equity:
Savings accounts...... $ 39,515 $ 39,515 $184,419 $ -- $ 263,449
NOW accounts.......... 13,629 13,629 63,601 -- 90,859
Money market
accounts............. 66,902 61,878 82,506 -- 211,286
Time deposits......... 303,217 142,553 83,781 810 530,361
Borrowed funds........ 206,170 36,597 57,145 -- 299,912
Other liabilities &
stockholders'
equity............... 34,156 34,156 102,466 166,973 337,751
-------- -------- -------- -------- ----------
Total liabilities &
stockholders'
equity............. $663,589 $328,328 $573,918 $167,783 $1,733,618
======== ======== ======== ======== ==========
Period GAP position..... $(20,695) $(66,303) $ 19,133 $ 67,865
Net period GAP as a
percentage of total
assets................. (1.19)% (3.82)% 1.10% 3.91%
Cumulative GAP.......... $(20,695) $(86,998) $(67,865) --
Cumulative GAP as a
percentage of total
assets................. (1.19)% (5.02)% (3.91)% --
Cumulative GAP as a
percentage of total
interest-earning
assets................. (1.27)% (5.33)% (4.16)% --
Cumulative interest-
earning assets as a
percentage of
cumulative interest-
bearing liabilities.... 102.14% 97.98% 107.38% 116.96%
</TABLE>
For purposes of the above interest sensitivity analysis:
Residential loans held for sale at December 31, 1997 totaling $8.3
million are in the less than six month interest sensitivity period.
Fixed rate assets are scheduled by contractual maturity and adjustable
rate assets are scheduled by their next repricing date. In both cases,
assets that have prepayment optionality are adjusted for the Company's
estimate of prepayments.
25
<PAGE>
Loans do not include non-accrual loans of $5.4 million.
Loans do not include the allowance for loan loss of $22.7 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 $171.3 million are included in other
liabilities and are assumed to decay at an annual rate of 40%.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, while certain assets and liabilities may have
similar contractual maturities or periods to repricing, they may react in
different ways to changes in market interest rates. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table.
Additionally, certain assets, such as adjustable rate mortgages, have features
which restrict changes in interest rates on a short-term basis and over the
life of the asset. Finally, the ability of borrowers to service their
adjustable rate mortgages may decrease in the event of an interest rate
increase.
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 December 31, 1997 the
Company does 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 7 and the notes to the Consolidated
Financial Statements under Item 8 for further information regarding market
risk of these instruments at December 31, 1997.
At 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 December 31, 1997 the Company held no derivative
financial instruments.
26
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
GENERAL
For the year ended December 31, 1997 the Company reported net income of
$11.4 million, or $1.65 per share (diluted), as compared to net income of
$20.7 million, or $3.03 per share (diluted), for the year ended December 31,
1996. The financial results for 1997 were influenced by non-recurring merger
related charges totaling $5.2 million, including expenses of $4.9 million and
a loss of $0.3 million related to the restructuring of the investment
portfolio at GBT. December 31, 1996 results were favorably affected by non-
recurring tax events totaling $8.8 million. Excluding the effect of
nonrecurring items the Company experienced improved results in core earnings
primarily attributed to increased net interest income and non interest income
as well as lower provisions for possible loan losses, partially offset by
higher operating expenses.
NET INTEREST INCOME
Net interest income represents the difference between income earned on
interest-earning assets and expense incurred 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.
27
<PAGE>
The following table sets forth, for the periods indicated, average balances,
interest income and expense, and yields earned or rates paid on the major
categories of assets and liabilities. Non-accrual loans have been included in
the appropriate average balance loan category, but unpaid interest on non-
accrual loans has not been included for purposes of determining interest
income. In addition, investment securities available for sale are reflected at
amortized cost.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996
--------------------------------------- ---------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE 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............ $ 19,840 $ 1,073 5.33% $ 16,026 $ 871 5.35%
Investment securities
held to maturity....... 210,048 14,416 6.86% 218,078 14,669 6.73%
Investment securities
available for sale..... 541,930 35,962 6.64% 375,297 24,771 6.60%
Investment securities
held for trading....... 465 15 3.23% 345 6 1.74%
Residential real estate
loans.................. 289,800 22,994 7.93% 296,949 23,310 7.85%
Commercial real estate
loans.................. 172,371 15,683 9.10% 171,921 15,190 8.84%
Commercial loans........ 199,763 17,544 8.66% 154,517 13,876 8.83%
Home equity loans....... 137,460 10,981 7.99% 95,838 8,010 8.36%
Consumer loans.......... 9,791 1,069 10.92% 10,548 1,016 9.63%
---------- -------- ----- ---------- -------- ----
Total interest-
earning assets..... 1,581,468 119,737 7.57% 1,339,519 101,719 7.59%
Allowance for loan
losses................. (20,559) (18,666)
Non-interest-earning
assets................. 114,174 105,042
---------- ----------
Total assets........ $1,675,083 $119,737 $1,425,895 $101,719
========== ======== ========== ========
INTEREST-BEARING
LIABILITIES:
Deposits
Savings accounts...... $ 263,148 $ 6,158 2.34% $ 252,212 $ 6,278 2.49%
NOW accounts (2)...... 60,741 749 1.23% 78,305 989 1.26%
Money manager accounts
(2).................. 20,633 223 1.08% -- -- --
Money market
accounts............. 206,929 6,895 3.33% 208,180 6,912 3.32%
Time deposit
accounts............. 521,887 27,695 5.31% 465,472 24,894 5.35%
---------- -------- ----- ---------- -------- ----
Total interest-
bearing deposits... 1,073,338 41,720 3.89% 1,004,169 39,073 3.89%
Borrowed funds.......... 298,212 17,405 5.76% 174,300 9,842 5.55%
---------- -------- ----- ---------- -------- ----
Total interest-bearing
liabilities............ 1,371,550 59,125 4.31% 1,178,469 48,915 4.15%
Non-interest-bearing
liabilities............ 183,517 144,232
---------- ----------
Total liabilities... 1,555,067 1,322,701
Total stockholders'
equity................. 120,016 103,194
---------- ----------
Total liabilities
and stockholders'
equity............. $1,675,083 $ 59,125 $1,425,895 $ 48,915
========== ======== ========== ========
Net interest
income/spread.......... $ 60,612 3.26% $ 52,804 3.44%
======== ===== ======== ====
Net interest margin as a
% of interest-earning
assets................. 3.83% 3.94%
===== ====
Tax equivalent
adjustment............. $ 523 $ 120
-------- --------
Net interest
income/spread per
Condensed Consolidated
Statement of
Operations............. $ 60,089 $ 52,684
======== ========
</TABLE>
- -------
(1) On a fully taxable equivalent basis. Calculated using a Federal income tax
rate of 34% for 1997 and 1996.
(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.
28
<PAGE>
Net interest income increased $7.8 million or 14.8% for the year ended
December 31, 1997 versus the same period last year. This increase was the
result of a $241.9 million increase in interest-earning assets partially
offset by a 11 basis point decrease in net interest margin.
Total interest income was $119.7 million for the year ended December 31,
1997, an increase of $18.0 million or 17.7%. This increase is primarily
attributable to higher levels of interest-earning assets. Average interest-
earning assets totaled $1.6 billion for the year ended December 31, 1997
compared to $1.3 billion for the year ended December 31, 1996, an increase of
$241.9 million or 18.1%. Average investments increased $158.7 million or 26.7%
and were funded by higher deposit levels and borrowed funds. Average loans
increased $79.4 million or 10.9% as the Company continued to focus on the
commercial and home equity market segments, which grew by $45.2 million or
29.3% and $41.6 million or 43.4%, respectively. Residential real estate loan
balances declined $7.1 million or 2.4%, reflecting amortization and
prepayments of the existing portfolio offset in part by adjustable rate
mortgage production. The Company originates long-term fixed rate mortgages for
sale in the secondary market and generally holds adjustable rate mortgages in
the Company's loan portfolio.
Total interest expense was $59.1 million for the year ended December 31,
1997 compared to $48.9 million for the same period in 1996, an increase of
$10.2 million or 20.9%. This increase is primarily attributable to increases
in interest-bearing deposits and the use of borrowed funds. Interest-bearing
deposits totaled $1.1 billion for the year ended December 31, 1997 compared to
$1.0 billion for the same period in 1996, an increase of $69.2 million or
6.9%. This growth occurred primarily in time deposits, which increased $56.4
million as a result of new CD products as well as growth in the municipal CD
portfolio. Borrowed funds averaged $298.2 million during 1997 reflecting the
use of FHLB advances and repurchase agreements to leverage a portion of the
Company's capital as well as the match funding of certain fixed rate
commercial loans.
29
<PAGE>
RATE/VOLUME ANALYSIS
The following table presents the changes in net interest income resulting
from changes in interest rates or changes in the volume of interest-earning
assets and interest-bearing liabilities during the periods indicated. Changes
which are attributable to both rate and volume have been allocated evenly
between the change in rate and volume components.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1997 VERSUS 1996
-----------------------------------
INCREASE (DECREASE) DUE TO
-----------------------------------
VOLUME RATE NET
------------ ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold and short
term investments............ $ 207 $ (5) $ 202
Investment securities held to
maturity.................... (546) 293 (253)
Investment securities avail-
able for sale............... 11,028 163 11,191
Investment securities held
for trading................. 3 6 9
Residential real estate
loans....................... (564) 248 (316)
Commercial real estate
loans....................... 40 453 493
Commercial loans............. 4,018 (350) 3,668
Home equity loans............ 3,402 (431) 2,971
Consumer loans............... (78) 131 53
----------- --------- -----------
Total interest-earning
assets.................. 17,510 508 18,018
----------- --------- -----------
INTEREST-BEARING LIABILITIES:
Deposits:
Savings accounts........... 264 (384) (120)
NOW accounts............... (219) (21) (240)
Money manager accounts..... 112 111 223
Money market accounts...... (42) 25 (17)
Time deposit accounts...... 3,005 (204) 2,801
----------- --------- -----------
Total deposits........... 3,120 (473) 2,647
Borrowed funds............... 7,114 449 7,563
----------- --------- -----------
Total interest-bearing
liabilities............. 10,234 (24) 10,210
----------- --------- -----------
Change in net interest
income.................. $ 7,276 $ 532 $ 7,808
=========== ========= ===========
</TABLE>
PROVISION FOR LOAN LOSSES
The Company recorded a $1.9 million provision for possible loan losses in
1997 compared to $3.7 million in 1996. The provision for possible loan losses
is based upon management's judgment of the amount necessary to maintain the
allowance for possible loan losses at a level which is considered adequate.
For further discussion of this topic please refer to the section titled
"Allowance for Possible Loan Losses" in Item 1 of this document.
30
<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:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net gain on sale of loans........................ $ 539 $ 604
Net (loss) gain on sale of securities............ (183) 193
Net gain on securities held for trading.......... 57 15
Loan charges and fees............................ 3,212 3,521
Deposit related fees............................. 7,562 6,834
Merchant fees.................................... 1,904 1,894
Other charges and fees........................... 2,751 1,745
----------- -----------
$ 15,842 $ 14,806
=========== ===========
</TABLE>
Non-interest income totaled $15.8 million for the year ended December 31,
1997 compared to $14.8 million for the same period in 1996, an increase of
$1.0 million or 7.0%. Other charges and fees increased $1.0 million for the
year ended December 31, 1997 compared to the same period in 1996 primarily due
to a $0.3 million increase in fees associated with Business Manager, a
commercial cash management product introduced by the Company in 1997, a $0.3
million increase in fees earned in sales of non-deposit investment products,
and a recovery of $0.2 million paid in 1997 by a state sponsored small
business investment once held by the Company. Deposit service charges and fees
increased $0.7 million due primarily to fees associated with the Company's
larger non-interest bearing account base. At December 31, 1997 there was a
loss of $0.2 million on sale of securities compared to a gain of $0.2 million
at December 31, 1996. This $0.4 million decrease in income is attributed to a
decline in sale activity combined with a loss of $0.3 million related to the
restructuring of GBT's investment portfolio. Loan charges and fees decreased
$0.3 million due to lower mortgage servicing fees and commercial loan
prepayment fees.
NON-INTEREST EXPENSE
Salaries and Benefits Expense
Salaries and benefits expense totaled $24.8 million for the year ended
December 31, 1997 compared to $22.7 million for the same period in 1996, an
increase of $2.1 million or 9.0% reflecting standard wage increases, higher
ESOP expenses resulting from an increase in the Company's stock price, and
additional staffing relating to new branch openings.
Other Operating Expense
The components of other operating expenses for the periods presented are as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1997 1996
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Marketing.......................................... $ 2,052 $ 2,237
Insurance.......................................... 705 751
Professional services.............................. 2,949 3,998
Outside processing................................. 4,871 4,287
Other.............................................. 6,264 6,214
----------- -----------
$ 16,841 $ 17,487
=========== ===========
</TABLE>
31
<PAGE>
Total other operating expenses declined $0.6 million from December 31, 1996
to December 31, 1997. Professional services expenses decreased $1.0 million
primarily due to lower levels of legal, consulting and audit and accounting
expenses. Outside processing expenses increased $0.6 million due to higher
transaction and account volume associated with increased account activity
resulting from the Company's consumer banking strategy. Marketing expense
decreased $0.2 million due to reduced levels of media production.
Foreclosed Real Estate Expense
Foreclosed real estate expense reflects losses on sales, writedowns and net
operating results of foreclosed properties. These expenses were zero in 1997
compared to $0.4 million in 1996. This $0.4 million decrease reflects
increased gains on the sale of foreclosed properties as well as lower levels
of foreclosed properties.
Net Expenses of Real Estate Operations
SIS Bank has been in the process of divesting its real estate business that
was largely conducted through Colebrook Corporation and SIS Bank's other
wholly-owned real estate investment subsidiaries (collectively the "Real
Estate Subsidiaries"). This divestment is required by FDICIA. SIS Bank's
divestment of all such real estate investment activities pursuant to a
divestiture plan previously approved by the FDIC, was initially scheduled to
be completed by December 31, 1997, and is now scheduled to be completed by
June 30, 1998. The FDIC has been notified of this extension and has granted
its approval.
Net expense of real estate operations reflects the net operating results of
these activities, writedowns on real estate properties and gains/losses on
sales of these properties. Net expense of real estate operations was $0.4
million for the year ended December 31, 1997 an increase of $0.6 million
compared to the same period in 1996. In the first quarter of 1997, the Company
established a reserve of $1.0 million relating to the divestment of Colebrook
which was partially offset by a $0.6 million gain on the sale of real estate
property. The $1.0 million reserve consists of $0.7 million in severance and
benefit accruals and $0.3 million for other expenses. As of December 31, 1997,
no amounts have been paid relating to the divestiture. This divestment is
scheduled to be completed by June 30, 1998.
INCOME TAXES
During 1996 and 1997, management's evaluation of the weight of currently
available evidence resulted in the conclusion that it was more likely than not
that the Company would realize a portion of its net deferred tax asset which
was reserved for at those times. During 1996, management reduced the Company's
valuation allowance from $9.5 million to $0.1 million, while in 1997,
management reduced the Company's allowance of $0.1 million to zero. In both
instances, management's judgment was influenced by factors including changes
in the levels of actual and expected future taxable income and anticipated
reversals of net deductible temporary differences. As a result of these
adjustments the net change in the total valuation allowance for the years
ended December 31, 1997 and 1996 was a net decrease of $0.1 million and $9.4
million, respectively.
At December 31, 1997 the Company had investment tax credit carryforwards of
approximately $1.7 million which expire in years 1998 through 2008. In
addition, the Company had alternative minimum tax credit carryforwards of
approximately $0.4 million which have an indefinite utilization period. At
December 31, 1997, SIS Bank had state net tax operating loss carryforwards of
approximately $1.9 million which will expire in the years 1998 through 2002.
If certain substantial direct or indirect changes in the Company's ownership
should occur, there may be an annual limitation on the amount of carryforwards
(including certain net unrealized built-in losses) which can be utilized for
regular and alternative minimum tax purposes.
IMPACT OF INFLATION
Monetary assets and liabilities are claims to receive or pay a sum of money,
the amount of which is fixed. Most assets and liabilities of a bank are
monetary in nature. In times of inflation, monetary assets lose purchasing
32
<PAGE>
power and monetary liabilities gain purchasing power because the obligations
will be repaid with dollars that have less purchasing power than at the time
the assets and liabilities were recorded.
Since the Company's primary source of earnings is net interest income,
interest rates have a more significant impact on the Company's financial
performance than the general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
IMPACT OF ACCOUNTING CHANGES
In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires
that long-lived assets and certain identifiable intangibles to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 is effective prospectively for fiscal years beginning
after December 15, 1995, and was adopted by the Company effective January 1,
1996. The adoption of this statement did not have a material impact on the
Company's results of operations or financial position.
In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage Service
Rights." SFAS 122 amends certain provisions of SFAS 65, "Accounting for
Certain Mortgage Banking Activities," to eliminate the accounting distinction
between rights to service mortgage loans for others that are acquired through
loan origination activities and those acquired through purchase transactions.
SFAS 122 is effective prospectively for fiscal years beginning after December
15, 1995, and was adopted by the Company effective January 1, 1996. The
adoption of this statement did not have a material impact on the Company's
results of operations or financial position.
In November 1995, the FASB issued SFAS 123, "Accounting for Stock Based
Compensation" which gives companies the option of employing intrinsic value
accounting under the guidelines of Accounting Principles Board (APB) No. 25 or
fair value accounting for stock based compensation. While SFAS 123 does not
require the adoption of fair value accounting, it does require certain
disclosures in the financial statements as if fair value accounting had been
adopted, including pro forma net income and earnings per share. The Company
adopted this accounting standard effective January 1, 1996 for disclosure
purposes only and will continue to apply APB 25 in accounting for stock based
compensation.
In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", that
provides accounting and reporting standards which require that after a
transfer of financial assets, an entity recognizes the financial and servicing
asset it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. In addition to setting requirements regarding the initial
recording and subsequent accounting for assets, liabilities and derivatives
acquired in transfers of financial assets, this Statement requires that
debtors reclassify financial assets pledged as collateral and that secured
parties recognize those assets and their obligation to return them in certain
circumstances in which the secured party has taken control of those assets.
SFAS 125 is effective prospectively for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996
and for collateral related matters on January 1, 1998 and was adopted January
1, 1997. The adoption of this statement did not have a material impact on the
Company's results of operations or financial position.
In June 1997, the FASB issued SFAS 130 "Reporting Comprehensive Income"
which establishes standards for disclosure of comprehensive income.
Comprehensive income represents the change in equity of a business during a
period from transactions and other events and circumstances from non-
shareholder sources. SFAS 130 requires the restatement of prior periods for
comparative purposes. The Company adopted SFAS 130 on January 1, 1998 and
management does not expect the adoption to have a material impact on the
Company's financial position or results of operations.
33
<PAGE>
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 and
management does not expect the adoption to 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 and management does not expect the adoption to have
a material effect on the Company's financial position or results of
operations.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
GENERAL
For the year ended December 31, 1996 the Company reported net income of
$20.7 million, or $3.03 per share (diluted), as compared to net income of
$13.1 million, or $2.12 per share (diluted), for the year ended December 31,
1995. The financial results for 1996 and 1995 were favorably affected by non-
recurring tax events totaling $8.8 million and $6.5 million, respectively. The
Company also experienced improved results in core earnings primarily
attributed to increased net interest income and noninterest income as well as
lower provisions for loan losses, partially offset by higher operating
expenses.
NET INTEREST INCOME
Net interest income represents the difference between income earned on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income is affected by the mix and volume of assets and liabilities,
and the movement and level of interest rates.
34
<PAGE>
The following table sets forth, for the periods indicated, average balances,
interest income and expense, and yields earned or rates paid on the major
categories of assets and liabilities. Non-accrual loans have been included in
the appropriate average balance loan category, but unpaid interest on non-
accrual loans has not been included for purposes of determining interest
income. For purposes of this table, investment securities available for sale
are reflected at amortized cost.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995
--------------------------------------- ---------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE 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............ $ 16,026 $ 871 5.35% $ 23,658 $ 1,385 5.77%
Investment securities
held to maturity....... 218,078 14,669 6.73% 222,474 13,315 5.98%
Investment securities
available for sale..... 375,297 24,771 6.60% 213,342 13,927 6.53%
Investment securities
held for trading....... 345 6 1.74% -- -- --
Residential real estate
loans.................. 296,948 23,310 7.85% 308,695 24,349 7.89%
Commercial real estate
loans.................. 171,921 15,190 8.84% 172,700 14,791 8.56%
Commercial loans........ 154,517 13,876 8.83% 120,572 11,486 9.40%
Home equity loans....... 95,838 8,010 8.36% 66,373 6,149 9.26%
Consumer loans.......... 10,548 1,016 9.63% 10,925 894 8.18%
---------- -------- ---- ---------- ------- ----
Total interest-
earning assets..... 1,339,518 101,719 7.59% 1,138,739 86,296 7.58%
Allowance for loan
losses................. (18,666) (20,974)
Non-interest-earning
assets................. 105,042 91,381
---------- ----------
Total assets........ $1,425,894 $101,719 $1,209,146 $86,296
========== ======== ========== =======
INTEREST-BEARING
LIABILITIES:
Deposits
Savings accounts...... $ 252,212 $ 6,278 2.49% $ 248,318 $ 6,163 2.48%
NOW accounts.......... 78,305 989 1.26% 75,024 1,083 1.44%
Money market
accounts............. 208,180 6,912 3.32% 212,272 6,945 3.27%
Time deposit
accounts............. 465,472 24,894 5.35% 423,641 22,133 5.22%
---------- -------- ---- ---------- ------- ----
Total interest-bearing
deposits............... 1,004,169 39,073 3.89% 959,255 36,324 3.79%
Borrowed funds.......... 174,300 9,842 5.55% 53,231 3,124 5.79%
---------- -------- ---- ---------- ------- ----
Total interest-bearing
liabilities............ 1,178,469 48,915 4.15% 1,012,486 39,448 3.90%
Non-interest-bearing
liabilities............ 144,232 118,191
---------- ----------
Total liabilities....... 1,322,701 1,130,677
Total stockholders'
equity................. 103,194 78,469
---------- ----------
Total liabilities
and stockholders'
equity............. $1,425,895 $ 48,915 $1,209,146 $39,448
========== ======== ========== =======
Net interest
income/spread.......... $ 52,804 3.44% $46,848 3.68%
======== ==== ======= ====
Net interest margin as a
% of interest-earning
assets................. 3.94% 4.11%
==== ====
Tax equivalent
adjustment............. $ 120 $ --
-------- -------
Net interest
income/spread per
Condensed Consolidated
Statement of
Operations............. $ 52,684 $46,848
======== =======
</TABLE>
- -------
(1) On a fully taxable equivalent basis. Calculated using a Federal income tax
rate of 34% for 1996 and 1995.
35
<PAGE>
Net interest income increased $6.0 million or 12.7% for the year ended
December 31, 1996 versus the same period for the prior year. This increase was
the result of a $200.8 million increase in interest-earning assets partially
offset by a 17 basis point decrease in net interest margin.
Total interest income was $101.7 million for the year ended December 31,
1996, an increase of $15.4 million or 17.9%. This increase is attributable to
higher levels of interest-earning assets. Average interest-earning assets
totaled $1.3 billion for the year ended December 31, 1996 compared to $1.1
billion for the year ended December 31, 1995, an increase of $200.8 million or
17.6%. Average investments increased $157.9 million or 36.2% and were funded
by higher deposit levels and borrowed funds. Average loans increased $50.5
million as the Company continued to focus on the commercial and home equity
market segments, which grew by $33.9 million or 28.2% and $29.5 million or
44.4%, respectively. Residential real estate loan balances declined $11.8
million or 3.8%, reflecting refinancing activity to fixed rate products during
the first quarter of 1996, as well as a decline in the production for
adjustable rate mortgage products. The Company originates long-term fixed rate
mortgages for sale in the secondary market and generally holds adjustable rate
mortgages in the Company's loan portfolio.
Total interest expense was $48.9 million for the year ended December 31,
1996 compared to $39.4 million for the same period in 1995, an increase of
$9.5 million or 24.0%. This increase is attributable to increases in interest-
bearing deposits and the use of borrowed funds. Interest-bearing deposits
totaled $1.0 billion for the year ended December 31, 1996 compared to $959.3
million for the same period in 1995, an increase of $44.9 million or 4.7%.
This growth occurred primarily in time deposits, which increased $41.8 million
largely attributable to the introduction of new CD products. Borrowed funds
averaged $174.3 million during 1996 reflecting the use of FHLB advances and
repurchase agreements to leverage a portion of the Company's capital position.
36
<PAGE>
RATE/VOLUME ANALYSIS
The following table presents the changes in net interest income resulting
from changes in interest rates or changes in the volume of interest-earning
assets and interest-bearing liabilities during the periods indicated. Changes
which are attributable to both rate and volume have been allocated evenly
between the change in rate and volume components.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1996 VERSUS 1995
------------------------------------
INCREASE (DECREASE) DUE TO
------------------------------------
VOLUME RATE NET
------------ ---------- -----------
<S> <C> <C> <C>
INTEREST-EARNING ASSETS:
Federal funds sold and interest bearing
deposits............................... $ (431) $ (83) $ (514)
Investment securities held to maturity.. (280) 1,634 1,354
Investment securities available for
sale................................... 10,631 213 10,844
Investment securities held for trading.. 6 -- 6
Residential real estate loans........... (924) (115) (1,039)
Commercial real estate loans............ (68) 467 399
Commercial loans........................ 3,141 (751) 2,390
Home equity loans....................... 2,596 (735) 1,861
Consumer loans.......................... (34) 156 122
----------- ---------- -----------
Total interest-earning assets....... 14,637 786 15,423
----------- ---------- -----------
INTEREST-BEARING LIABILITIES:
Deposits:
Savings accounts...................... 97 18 115
NOW accounts.......................... 44 (138) (94)
Money market accounts................. (135) 102 (33)
Time deposit accounts................. 2,211 550 2,761
----------- ---------- -----------
Total deposits...................... 2,217 532 2,749
Borrowed funds.......................... 6,971 (253) 6,718
----------- ---------- -----------
Total interest-bearing liabilities.. 9,188 279 9,467
----------- ---------- -----------
Change in net interest income....... $ 5,449 $ 507 $ 5,956
=========== ========== ===========
</TABLE>
PROVISION FOR LOAN LOSSES
The Company recorded a $3.7 million provision for possible loan losses in
1996 compared to $6.3 million in 1995. The provision for possible loan losses
is based upon management's judgment of the amount necessary to maintain the
allowance for possible loan losses at a level which is considered adequate.
For further discussion of this topic please refer to the section titled
"Allowance for Possible Loan Losses" in Item 1 of this document.
37
<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:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net gain on sale of loans......................... $ 604 $ 243
Net gain (loss) on sale of securities............. 193 (886)
Net gain on securities held for trading........... 15 --
Loan charges and fees............................. 3,521 3,507
Deposit related fees.............................. 6,834 5,843
Merchant fees..................................... 1,894 1,690
Other charges and fees............................ 1,745 1,410
----------- -----------
$ 14,806 $ 11,807
=========== ===========
</TABLE>
Non-interest income totaled $14.8 million for the year ended December 31,
1996 compared to $11.8 million for the same period in 1995, an increase of
$3.0 million or 25.4%. Net gain on sale of securities increased $1.1 million
in the year ended December 31, 1996 compared to the same period in 1995. The
$0.2 million gain on sale of securities in 1996 is associated with the sale of
preferred stocks and mortgage-backed securities. The $0.9 million loss
recorded in 1995 is related to the sale of securities in connection with the
restructuring of the investment portfolio. Deposit related fees increased $1.0
million due primarily to fees associated with the Company's larger non-
interest bearing account base. Net gain on sale of loans increased $0.4
million due to an increase in the amount of loans sold on a servicing released
basis. Other charges and fees increase $0.3 million primarily as a result of
an increase in brokerage fee income. Merchant fees increased $0.2 million due
to continued growth in the customer base, resulting in an increase in the
dollar volume of activity.
NON-INTEREST EXPENSE
Salaries and Benefits Expense
Salaries and benefits expense totaled $22.7 million for the year ended
December 31, 1996 compared to $20.2 million for the same period in 1995, an
increase of $2.5 million or 12.6% reflecting increased headcount, standard
wage increases, and higher employee stock ownership plan ("ESOP"), restricted
stock and 401K plan expenses.
Other Operating Expense
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------
1996 1995
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Marketing.......................................... $ 2,237 $ 1,163
Insurance.......................................... 751 3,259
Professional services.............................. 3,998 3,735
Outside processing................................. 4,287 3,079
Other.............................................. 6,214 5,479
----------- -----------
$ 17,487 $ 16,715
=========== ===========
</TABLE>
Other operating expenses totaled $17.5 million for the year ended December
31, 1996 compared to $16.7 million for the same period in 1995, an increase of
$0.8 million or 4.6%. Insurance expense decreased $2.5 million due to a
significant reduction in FDIC premiums. Outside processing expense increased
$1.2 million due
38
<PAGE>
to higher transaction and account volume associated with increased account
activity resulting from the Company's consumer banking strategy, as well as
costs associated with the outsourcing of the Company's item processing
operations in 1996. Marketing expense increased $1.1 million reflecting the
expanded use of television, billboards, radio and print advertising directed
towards the Company's consumer strategy and new branch openings. Other
operating expenses increased $0.7 million reflecting increased supplies and
postage costs associated with the growth in consumer deposit accounts as a
result of the Company's consumer strategy.
Foreclosed Real Estate Expense
Foreclosed real estate expense reflects losses on sales, writedowns and net
operating results of foreclosed properties. These expenses were $0.4 million
in 1996 compared to $1.4 million in 1995. This $1.0 million decrease reflects
lower levels of foreclosed properties.
Net Expenses of Real Estate Operations
The Company has certain subsidiaries that are engaged in various real estate
investments directly or in joint ventures with unaffiliated partners. The
Company has terminated its real estate development activities and plans to
sell its remaining real estate investments. Net expense of real estate
operations reflects the net operating results of these activities, writedowns
on real estate properties and gains/losses on sales of these properties. Net
income of real estate operations was $0.3 million and $0.2 million in 1996 and
1995, respectively.
INCOME TAXES
In accordance with SFAS 109, "Accounting for Income Taxes," management
evaluated the income tax benefits associated with temporary differences, based
on the weight of available evidence, as to whether it is more likely than not
that the income tax benefits would be realized. As a result, a 100% valuation
allowance was established at December 31, 1994. Management reviews the
valuation allowance on a periodic basis, and, based upon all available facts
and circumstances at that time, may adjust the level of the allowance.
During both 1995 and 1996, management's evaluation of the weight of
currently available evidence resulted in the conclusion that it was more
likely than not that the Company would realize a portion of its net deferred
tax asset which was reserved for at those times. In December 1995, management
reduced the Company's valuation allowance from $18.3 million to $9.5 million.
In 1996, management reduced the Company's valuation allowance from $9.5
million to $0.1 million. In both instances management's judgment was
influenced by factors including changes in the levels of actual and expected
future taxable income and anticipated reversals of net deductible temporary
differences.
Also in the third quarter of 1996, pursuant to the enactment of the Small
Business Jobs Protection Act during 1996, the Company was required, for tax
purposes, to change its method of accounting for bad debts. The change
required the Company to change from the reserve method to the specific charge-
off method. The Company recognized a one-time tax benefit of $2.8 million
during the third quarter, representing the tax effects of pre-1988 loan loss
reserves not subject to recapture provisions. As a result of this third
quarter activity, the Company became fully taxable for financial reporting
purposes beginning in the fourth quarter of 1996. Certain future distributions
in excess of the Company's current earnings and profits would require the
recapture of the taxes related to the pre-1988 loan loss reserves that were
not subject to recapture under the Small Business Job Protection Act. The
total tax liability that would be subject to recapture for which no deferred
tax liability has been recorded is $3.0 million.
39
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements and Notes are included
herein.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheet as of December 31, 1997 and 1996.............. 41
Consolidated Statement of Operations for the years ended December 31,
1997, 1996, and 1995.................................................... 42
Consolidated Statement of Changes in Stockholders' Equity for the years
ended December 31, 1997, 1996, and 1995................................. 43
Consolidated Statement of Cash Flows for the years ended December 31,
1997, 1996, and 1995.................................................... 44
Notes to Consolidated Financial Statements............................... 45
Report of Independent Accountants........................................ 76
</TABLE>
All schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes thereto.
40
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and due from banks................................ $ 50,297 $ 58,045
Federal funds sold and short term investments.......... 17,317 10,045
Investment securities available for sale............... 576,108 483,614
Investment securities held to maturity (fair value:
$193,396 at December 31, 1997 and $219,911 at December
31, 1996)............................................. 193,007 220,646
Investment securities held for trading................. -- 458
Loans receivable, net of allowance for possible losses
($22,724 at December 31, 1997 and $19,549 at December
31, 1996)............................................. 828,761 755,378
Accrued interest and dividends receivable.............. 10,749 10,417
Investments in real estate and real estate
partnerships.......................................... 2,903 2,757
Foreclosed real estate, net............................ 1,209 1,540
Bank premises, furniture and fixtures, net............. 35,843 34,547
Other assets........................................... 17,424 19,163
---------- ----------
Total assets....................................... $1,733,618 $1,596,610
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits............................................... $1,267,298 $1,177,561
Federal Home Loan Bank advances........................ 184,121 89,471
Securities sold under agreements to repurchase......... 113,299 176,927
Loans payable.......................................... 2,492 2,848
Mortgage escrow deposits............................... 5,642 4,772
Accrued expenses and other liabilities................. 35,294 26,245
---------- ----------
Total liabilities.................................. 1,608,146 1,477,824
---------- ----------
Commitments and contingent liabilities (See Note 22)... -- --
Stockholders' equity:
Preferred stock ($.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: 7,081,187 at December 31,
1997 and 7,077,741 at December 31, 1996; shares
outstanding: 6,947,787 at December 31, 1997 and
7,077,741 at December 31, 1996)..................... 71 71
Unearned compensation................................ (3,123) (3,693)
Additional paid-in capital........................... 54,755 53,836
Retained earnings.................................... 75,153 67,119
Net unrealized gain on investment securities
available for sale.................................. 2,133 1,453
Treasury stock, at cost (133,400 and 0 shares at
December 31, 1997 and 1996, respectively)........... (3,517) --
---------- ----------
Total stockholders' equity......................... 125,472 118,786
---------- ----------
Total liabilities and stockholders' equity............. $1,733,618 $1,596,610
========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
41
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Interest and dividend income
Loans................................... $ 68,186 $ 61,402 $ 57,668
Investment securities available for
sale................................... 35,527 24,651 13,928
Investment securities held to maturity.. 14,416 14,669 13,315
Investment securities held for trading.. 12 6 --
Federal funds sold and short term
investments............................ 1,073 871 1,385
---------- ---------- ----------
Total interest and dividend income.. 119,214 101,599 86,296
---------- ---------- ----------
Interest expense
Deposits................................ 41,720 39,073 36,324
Borrowings.............................. 17,405 9,842 3,124
---------- ---------- ----------
Total interest expense.............. 59,125 48,915 39,448
---------- ---------- ----------
Net interest and dividend income.......... 60,089 52,684 46,848
Less: Provision for possible loan losses.. 1,895 3,721 6,262
---------- ---------- ----------
Net interest and dividend income after
provision for possible loan losses....... 58,194 48,963 40,586
Noninterest income:
Net gain on sale of loans............... 539 604 243
Net (loss) gain on sale of securities... (183) 193 (886)
Net gain on sale of trading securities.. 57 15 --
Fees and other income................... 15,429 13,994 12,450
---------- ---------- ----------
Total noninterest income............ 15,842 14,806 11,807
---------- ---------- ----------
Noninterest expense:
Operating expenses:
Salaries and employee benefits........ 24,764 22,709 20,167
Occupancy expense of bank premises,
net.................................. 4,826 4,308 4,310
Furniture and equipment expense....... 3,477 3,433 3,228
Other operating expenses.............. 16,841 17,487 16,715
Merger related costs.................. 4,968 -- --
---------- ---------- ----------
Total operating expenses............ 54,876 47,937 44,420
---------- ---------- ----------
Foreclosed real estate (income)
expense................................ (5) 449 1,358
Net expense (income) of real estate
operations............................. 352 (272) (227)
---------- ---------- ----------
Total noninterest expense........... 55,223 48,114 45,551
Income before income tax expense
(benefit)................................ 18,813 15,655 6,842
Income tax expense (benefit).............. 7,395 (5,030) (6,259)
---------- ---------- ----------
Net income.......................... $ 11,418 $ 20,685 $ 13,101
========== ========== ==========
Earnings per share and pro forma earnings
per share: (1)
Basic................................... $ 1.74 $ 3.14 $ 2.14
Diluted................................. $ 1.65 $ 3.03 $ 2.12
Weighted average and pro forma weighted
average shares outstanding: (1)
Basic................................... 6,564,073 6,580,282 6,127,116
Diluted................................. 6,907,192 6,836,634 6,170,077
</TABLE>
- -------
(1) Net income per share for the years ended December 31, 1997 and 1996 is
computed on weighted average shares outstanding for the period. Net income
per share for the year ended December 31, 1995 is computed on a pro forma
basis as if the conversion of SIS Bank from mutual to stock form had been
completed as of the beginning of the period presented.
See accompanying Notes to the Consolidated Financial Statements
42
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
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,
1994................... $10 $ -- $ 7,713 $34,095 $(5,275) $ -- $ 36,543
Net income.............. -- -- -- 13,101 -- -- 13,101
Issuance of common stock
in connection with the
conversion............. 56 -- 39,665 (250) -- -- 39,471
Issuance of common
stock.................. 4 -- 3,458 -- -- -- 3,462
Issuance of common stock
in connection with
employee and non-
employee directors
benefit programs....... 1 (5,375) 1,814 -- -- -- (3,560)
Decrease in unearned
compensation........... -- 438 311 -- -- -- 749
Change in unrealized
gain (loss) on
investment securities
available for sale..... -- -- -- -- 6,677 -- 6,677
--- ------- ------- ------- ------- ------- --------
Balance at December 31,
1995................... $71 $(4,937) $52,961 $46,946 $ 1,402 $ -- $ 96,443
=== ======= ======= ======= ======= ======= ========
Balance at December 31,
1995................... $71 $(4,937) $52,961 $46,946 $ 1,402 $ -- $ 96,443
Net income.............. -- -- -- 20,685 -- -- 20,685
Cash dividends declared
($0.21 per equivalent
share) (1)............. -- -- -- (512) -- -- (512)
Issuance of common stock
in connection with
employee and non-
employee directors
benefit programs....... -- (315) 297 -- -- -- (18)
Decrease in unearned
compensation........... -- 1,559 578 -- -- -- 2,137
Change in unrealized
gain (loss) on
investment securities
available for sale..... -- -- -- -- 51 -- 51
--- ------- ------- ------- ------- ------- --------
Balance at December 31,
1996................... $71 $(3,693) $53,836 $67,119 $ 1,453 $ -- $118,786
=== ======= ======= ======= ======= ======= ========
Balance at December 31,
1996................... $71 $(3,693) $53,836 $67,119 $ 1,453 $ -- $118,786
Net income.............. -- -- -- 11,418 -- -- 11,418
Cash dividends declared
($0.77 per share) (1).. -- -- -- (3,384) -- -- (3,384)
Partial shares and
dissenter shares
canceled (GBT)......... -- -- (5) -- -- -- (5)
Common stock issued from
treasury in connection
with acquisition of
GBT.................... -- -- 90 -- -- 342 432
Issuance of common stock
in connection with
employee and non-
employee directors
benefit programs....... -- (98) (67) -- -- 334 169
Decrease in unearned
compensation........... -- 668 901 -- -- -- 1,569
Change in unrealized
gain (loss) on
investment securities
available for sale..... -- -- -- -- 680 -- 680
Treasury stock
purchased.............. -- -- -- -- -- (4,193) (4,193)
--- ------- ------- ------- ------- ------- --------
Balance at December 31,
1997................... $71 $(3,123) $54,755 $75,153 $ 2,133 $(3,517) $125,472
=== ======= ======= ======= ======= ======= ========
</TABLE>
- --------
(1) Includes $0.21 and $0.25 dividends per equivalent share paid by GBT for
1996 and 1997, respectively.
See accompanying Notes to the Consolidated Financial Statements
43
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................. $ 11,418 $ 20,685 $ 13,101
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for possible loan losses........ 1,895 3,721 6,262
Provision for foreclosed real estate...... 11 10 1,619
Depreciation.............................. 4,159 4,033 4,073
Amortization of premium on investment
securities, net.......................... 3,351 2,216 1,125
ESOP and restricted stock expenses........ 1,569 1,890 749
Investment security (gains) losses........ 126 (208) 886
(Increase) decrease in assets held in
trading.................................. 458 (443) --
(Income) loss from equity investment in
partnerships............................. 7 (48) 133
Gain on sale of loans..................... (539) (604) (243)
Disbursements for mortgage loans held for
sale..................................... (68,170) (79,442) (65,747)
Receipts from mortgage loans held for
sale..................................... 68,709 80,046 65,989
Loss (gain) on sale of fixed assets and
real estate.............................. (150) (131) 494
Changes in assets and liabilities:
(Increase) decrease in other assets,
net..................................... 581 (5,459) (8,934)
Decrease (increase) in accrued expenses
and other liabilities................... 9,187 3,754 (10,469)
---------- ---------- ----------
Net cash provided by operating
activities........................... 32,612 30,020 9,038
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment
securities available for sale............ 21,005 56,980 214,747
Proceeds from maturities and principal
payments received on investment
securities available for sale............ 170,129 121,064 136,649
Purchase of investment securities
available for sale....................... (285,366) (379,577) (350,233)
Proceeds from sales of investment
securities held to maturity.............. 11,751 -- --
Proceeds from maturities and principal
payments received on investment
securities held to maturity.............. 49,611 50,917 38,763
Purchase of investment securities held to
maturity................................. (34,113) (69,964) (132,878)
Net decrease in investments in real
estate................................... 20 475 --
Net increase in loans receivable.......... (75,799) (68,326) (86,492)
Net decrease in foreclosed real estate.... 523 2,132 2,928
Proceeds from sale of loans............... 92 4,064 6,038
Proceeds from sale of fixed assets........ 481 2,799 1,065
Purchase of fixed assets.................. (5,714) (4,503) (6,299)
---------- ---------- ----------
Net cash used for investing
activities........................... (147,380) (283,939) (175,712)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from stock conversion........ -- -- 35,911
Net proceeds from stock issuance.......... -- -- 3,462
Net increase in deposits.................. 89,737 102,205 27,812
Net increase in borrowings................ 30,666 168,175 85,679
Net increase (decrease) in mortgagors'
escrow deposits.......................... 870 234 (1,241)
Reissuance of treasury stock.............. 432 -- --
Net proceeds from exercise of stock
options.................................. 169 -- --
Cash paid for partial and dissenter
shares in connection with the GBT
acquisition.............................. (5)
Repurchase of common stock................ (4,193) -- --
Cash dividends paid....................... (3,384) (512) --
---------- ---------- ----------
Net cash provided by financing
activities........................... 114,292 270,102 151,623
---------- ---------- ----------
Increase (decrease) in cash and cash
equivalents............................... (476) 16,183 (15,051)
Cash and cash equivalents, beginning of
year...................................... 68,090 51,907 66,958
---------- ---------- ----------
Cash and cash equivalents, end of year..... $ 67,614 $ 68,090 $ 51,907
========== ========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the year for interest to
depositors and interest on debt.......... $ 58,754 $ 48,462 $ 39,234
Income taxes paid......................... $ 3,721 $ 447 $ 72
Non-cash investing activities:
Transfers to foreclosed real estate,
net...................................... $ 438 $ 2,141 $ 550
</TABLE>
See accompanying Notes to the Consolidated Financial Statements
44
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
GENERAL
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 34 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.
1. ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with generally
accepted accounting principles. The significant policies are summarized below.
The consolidated financial statements of the Company are dependent on the
use of estimates, particularly with regard to the allowance for possible loan
losses and the value of other real estate. Estimates of loan collectability
and real estate values involve a high degree of judgment and the use of
appraisals and other information. Subsequent changes in general economic
conditions and the financial condition of borrowers may require changes in
such estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany items have
been eliminated. Certain amounts in prior periods have been reclassified to
conform to the current year presentation.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, federal funds sold and interest bearing
deposits. Generally, federal funds are sold on an overnight basis.
INVESTMENT SECURITIES
Investment securities which management has the positive intent and ability
to hold until maturity are classified as held-to-maturity and carried at
amortized cost, adjusted for amortization of premiums and accretion
45
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of discounts into interest income using the level yield method over the
remaining contractual life of the securities, adjusted for estimated
prepayments. Premiums are amortized to the earlier of the call or maturity
date and discounts are accreted to the maturity date. Investment securities
which have been identified as assets which may be sold prior to maturity or
for which there is not a positive intent to hold until maturity, based on
foreseeable conditions, including all marketable equity securities, are
classified as available-for-sale. Available-for-sale securities are reported
at fair value with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity, net of tax. Short-
term investment securities held for sale are classified as trading and are
carried at market value, with unrealized gains and losses recognized currently
in the statement of operations.
Gains and losses on sales of investment securities are computed under the
specific identification method. Investment securities which have experienced
an other than temporary decline in value are written down to fair value as a
new cost basis with the amount of the writedown included in earnings as a
realized loss. The new cost basis is not increased for subsequent recoveries
in fair value.
INVESTMENTS IN REAL ESTATE AND REAL ESTATE PARTNERSHIPS
Investments in real estate reflect the Company's interest in wholly owned
real estate properties. Investments in real estate properties are carried at
the lower of cost, including cost of improvements incurred subsequent to
acquisition, or fair value less costs to sell. Investments in partnerships
reflect the Company's interest in joint venture real estate developments.
Investments in partnerships which are greater than 20% but less than 50% owned
by the Company are accounted for using the equity method and are carried at
the Company's equity in the underlying net assets.
LOANS
Loans are stated at the principal amount outstanding, net of unearned
income. Interest income on loans is accrued based on rates applied to amounts
outstanding. Unearned income on loans made or purchased on a discounted basis
are recognized in interest income over the lives of the loans using a method
that approximates a level yield. Loans held for sale are carried at the lower
of cost or market value.
Loan origination and commitment fees and certain direct loan origination
costs are deferred and the net amount is amortized as a yield adjustment over
the estimated life of the loans using a method that approximates a level yield
method.
Loans on which the accrual of interest has been discontinued are classified
as nonaccrual loans. Interest accruals on loans are normally discontinued
whenever the payment of interest or principal is more than 90 days past due or
when, in the opinion of management, such action is prudent. When a loan is
placed on nonaccrual status, all interest previously accrued in the current
year but not collected is reversed against current year interest income. Loans
are removed from nonaccrual status when they become current as to principal
and interest and when, in the opinion of management, the loans are estimated
to be fully collectible as to principal and interest. The Company may continue
to accrue interest on loans past due 90 days or more that are well secured and
in the process of collection.
Restructured loans are loans for which concessions, including reduction of
interest rates or deferral of interest or principal payments, have been
granted to acknowledge changes in the borrower's financial condition or
changes in underlying cash flows of the loan's collateral. Interest income on
restructured loans is accrued at the modified rates after a satisfactory
period of performance (generally six months).
46
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company records the allowance for possible loan losses related to
impaired loans based on the present value of expected cash flows discounted at
the loan's effective interest rate or, as a practical expedient, the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. Impaired loans are defined as those loans, where, based
on current information and events, it is probable that the creditor will be
unable to collect all amounts due, both interest and principal, according to
the contractual terms of the loan agreement. Generally, interest income
received on impaired loans either continues to be applied against principal or
is realized as interest income, according to management's judgment as to the
collectability of the principal.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is established through charges
against income. Loans deemed uncollectable are charged against the allowance,
while recoveries of amounts previously charged-off are credited to the
allowance. The allowance represents an amount which, in management's judgment,
will be adequate to absorb probable losses on existing loans that may become
uncollectable. Management's judgment in determining the adequacy of the
allowance is based on various factors influencing the collectability of the
loan. These factors include, but are not limited to, an analysis of the
borrower's ability to meet the repayment terms, the borrower's overall
financial condition, the estimated value of collateral supporting the credit,
the concentration of credit risk in the portfolio and judgments as to the
effect of current and anticipated economic conditions. Management's
determination of the allowance is, by necessity, dependent upon estimates,
appraisals and judgments, which may change because of changing economic
conditions and the Company's perception as to how these factors may affect the
financial condition of the borrowers.
FORECLOSED REAL ESTATE
Real estate acquired through foreclosure is transferred to foreclosed real
estate at the lower of the estimated fair value of the asset acquired or book
value. The excess if any, of the loan over the fair value of the property at
the time of transfer is charged to the allowance for possible loan losses.
Subsequent declines in the value of the property are reflected as a valuation
allowance and charged to operations. Subsequent to transfer, foreclosed real
estate is carried at the lower of cost or the estimated fair value less
expenses to dispose of the asset.
PREMISES, FURNITURE AND FIXTURES
Premises, furniture and fixtures are stated at cost less accumulated
depreciation and amortization. Depreciation is computed by use of the
straight-line method over the estimated useful lives of the related assets,
ranging from 3 to 30 years. Leasehold improvements are amortized over the
shorter of the lease terms or the useful life of the improvement.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The Company follows SFAS 107, "Disclosures about Fair Value of Financial
Instruments," which requires disclosure of fair value information about
financial instruments, whether or not recognized in the statement of financial
position, for which it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of
the instrument. The calculation of fair value estimates is dependent upon
certain subjective assumptions and involves significant uncertainties,
resulting in variability in estimates with changes in assumptions. Potential
taxes and other expenses that would be incurred in an actual sale or
settlement are not reflected in the fair value amounts disclosed. SFAS 107
excludes certain financial instruments and all non-financial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company. In addition,
the fair value
47
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
estimates are not intended to reflect the liquidation value of the financial
instruments. The following methods and assumptions were used by the Company to
estimate the fair value for each class of financial instruments for which it
is practicable to estimate that value.
Cash and short-term investments--The carrying amounts for cash and short-
term investments are reasonable estimates of those assets' fair values.
Investment securities--Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices for similar
securities, adjusted for unique risk characteristics, where appropriate.
Loans receivable, net--For adjustable rate residential loans that reprice
frequently and with no significant change in credit risk, fair values are
based on quoted market prices available in the secondary market. For certain
homogeneous categories of loans, such as some residential fixed rate
mortgages, fair value is estimated using the quoted market price for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities.
Accrued interest and dividends receivable--The carrying amount of interest
and dividends receivable approximates its fair value.
Deposit liabilities--The fair value of demand deposits, savings accounts,
and certain money market deposits is the amount payable on demand at the
reporting date, that is, the carrying value. The fair value of fixed maturity
certificates of deposit is estimated using a discounted cash flow calculation
that applies interest rates currently offered for deposits of similar
remaining maturities on the future cash flows expected to be paid on the
deposits. In estimating the fair value of deposit liabilities, SFAS 107
prohibits financial entities from taking into account the value of its long-
term relationships with depositors, commonly known as core deposit
intangibles.
Federal Home Loan Bank advances--The fair value of advances from the Federal
Home Loan Bank of Boston is based on discounted values of contractual cash
flows using rates currently offered for instruments with similar terms and
maturities or, when available, quoted market prices.
Securities sold under agreements to repurchase--The fair value of securities
sold under agreements to repurchase are based on the discounted value of
contractual cash flows using dealer quoted rates for agreements of similar
terms and maturities.
Loans payable --The fair values of the Company's loans payable are estimated
using discounted cash flow analyses, based on rates currently available to the
Company for debt with similar terms and remaining maturities.
Standby letters of credit--The estimated fair value of financial guarantees,
such as standby letters of credit, are based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the creditworthiness of the counterparties or on the estimated
cost to terminate them or otherwise settle the obligations with the
counterparties.
Commitments to extend credit--The fair value of commitments to extend
credit, which includes unused lines of credit and commitments to fund loans,
is estimated using the fees currently charged to enter into similar agreements
and the present creditworthiness of the counterparties. For fixed rate loan
commitments, fair value also considers the difference between current levels
of interest rates and the committed rates. The commitments to extend credit
have terms that are consistent with current market terms.
48
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The adoption of this
statement did not have a material impact on the Company's results of
operations.
PENSION PLAN AND OTHER EMPLOYEE BENEFIT PLANS
All eligible employees of SIS Bank are covered by a non-contributory defined
benefit pension plan which is administered by the Savings Bank Employees'
Retirement Association. All eligible employees of GBT are covered by a non-
contributory defined benefit pension plan which is administered by CIGNA. The
pension plans are funded in an amount consistent with the funding requirements
of federal laws and regulations.
The Company sponsors postretirement health care and life insurance benefit
plans that provide health care and life insurance benefits for retired
employees that have met certain age and service requirements. Postretirement
health care and life insurance benefits expense is based upon an actuarial
computation of current and future benefits to earnings for employees and
retirees. The Company accounts for its postretirement health care and life
insurance benefits in accordance with SFAS 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
Benefits such as salary continuation, supplemental unemployment benefits,
severance benefits, disability-related benefits (including workers'
compensation), job training and counseling and continuation of such benefits
as health care and life insurance coverage are accounted for under SFAS 112,
"Employers' Accounting for Postemployment Benefits." SFAS 112 requires accrual
of a liability for all types of benefits paid to former or inactive employees
after employment but before retirement.
The Company sponsors a leveraged employee stock ownership plan ("ESOP") that
covers all full-time and part-time employees with more than one year of
service at the Company. The ESOP was formed with the completion of SIS Bank's
conversion from mutual to stock form (the "Conversion") on February 7, 1995
(see Note 3). The Company makes annual contributions to the ESOP equal to the
ESOP's debt service. The ESOP's shares initially were pledged as collateral
for its debt. As the debt is repaid, shares are released from collateral and
allocated to active employees, based on the proportion of debt service paid
during the year in excess of dividends on ESOP stock and other earnings
applied to repayment of the ESOP's debt. The Company accounts for its ESOP in
accordance with the American Institute of Certified Public Accountants'
Statement of Position (SOP) 93-6. Accordingly, the debt of the ESOP is
recorded as long-term debt and the shares pledged as collateral are reported
as unearned compensation in the Company's Consolidated Balance Sheet. As
shares are released from collateral, the Company records compensation expense
equal to the current market price of the shares, and the shares are treated as
outstanding for purposes of calculating earnings per share.
The Financial Accounting Standards Board has issued SFAS 123, "Accounting
for Stock Based Compensation" which gives companies the option of employing
intrinsic value accounting under the guidelines of Accounting Principles Board
Opinion No. 25 (APB 25) or fair value accounting for stock based compensation.
While SFAS 123 does not require the adoption of fair value accounting, it does
require certain disclosures in the financial statements as if fair value
accounting had been adopted, including pro forma net income and earnings per
share. The Company adopted this accounting standard effective January 1, 1996
for disclosure purposes only and will continue to apply APB 25 in accounting
for stock based compensation.
49
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's Management and Directors Stock Option Plans (the "Stock Option
Plans") were approved by SIS Bank's stockholders on May 31, 1995 and were
assumed by the Company upon the completion of the Reorganization. The Stock
Option Plans provide for the granting of incentive and nonqualified stock
options to certain employees and non-employee directors of the Company and its
wholly-owned subsidiaries for the purchase of the Company's common stock at
100 percent of the fair market value at the date of grant. The maximum option
term is 10 years. Options granted to non-employee Directors of the Company or
Banks under the Stock Option Plans are exercisable in installments of 20% per
year commencing on the first anniversary of the date of grant. Options granted
to employees of the Company and its subsidiaries under the Stock Option Plans
will vest in accordance with the terms set by the Company's Compensation
Committee with the ratification of the Company's Board of Directors. Under the
terms of the Stock Option Plans, 806,250 shares of authorized but unissued
common stock were reserved for issuance under the Stock Option Plans. At
December 31, 1997 and 1996, 104,350 and 211,950 stock options were available
for grant under the Stock Option Plans, respectively.
The Company's Management and Directors Restricted Stock Plans (the
"Restricted Stock Plans") were approved by SIS Bank's stockholders on May 31,
1995 and were assumed by the Company upon completion of the Reorganization.
The Restricted Stock Plans provide for the awarding of restricted stock to
certain employees and non-employee directors of the Company and its wholly-
owned subsidiaries. The restricted stock vests over a period of time provided
that the awardee continues to be employed by or serves as a director of the
Company. Under the terms of the Restricted Stock Plans, 222,500 shares of
restricted stock were reserved for awarding under the Restricted Stock Plans.
Each award of restricted stock to non-employee Directors of the Company or
Banks under the Restricted Stock Plans vests in installments of 20% per year
commencing on the first anniversary of the date of grant. Each award of
restricted stock to employees of the Company and its subsidiaries under the
Restricted Stock Plans vests in accordance with the terms set by the Company's
Compensation Committee with ratification of the Company's Board of Directors.
At December 31, 1997 and 1996, 58,400 and 61,400 shares of restricted stock
were available for grant under the Restricted Stock Plans.
The Company sponsors a defined contribution profit sharing plan (the
"Plan"), with cash or deferral arrangements permitted by Internal Revenue Code
subsection 401(k). The Plan was formed by the Company in 1995. Substantially
all employees are eligible to participate after satisfaction of the one year
service requirement under the Plan. Under the savings aspect of the Plan,
employees may contribute 1% to 12% of base compensation with up to 6% being
eligible for matching contributions, at 25%, from the Company. Contributions
to the Plan by the Company were $141 for the year ended December 31, 1997 as
compared to $120 for the year ended December 31, 1996.
MORTGAGE BANKING ACTIVITIES
Fees paid for the right to service mortgage loans are capitalized and
amortized in proportion to, and over the period of, estimated net servicing
income. Amortization is adjusted prospectively to reflect increases or
decreases in prepayment experience. Purchased mortgage servicing rights of
$936 and $412 at December 31, 1997 and 1996, respectively, are included in
other assets.
Servicing income represents fees earned for servicing real estate mortgage
loans owned by outside investors. The fees are calculated on the outstanding
principal balances of the loans serviced and are recorded as income when
earned. The mortgage loans being serviced for outside investors are not
included in the consolidated financial statements because they are not assets
of the Company. The Company maintained a servicing portfolio for other
investors of $768,108 and $827,267 at December 31, 1997 and 1996,
respectively.
Effective January 1, 1996, the Company adopted SFAS 122, "Accounting for
Mortgage Service Rights." SFAS 122 amends certain provisions of SFAS 65,
"Accounting for Certain Mortgage Banking Activities," to eliminate the
accounting distinction between rights to service mortgage loans for others
that are acquired through
50
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
loan origination activities and those acquired through purchase transactions.
The adoption of this statement did not have a material impact on the Company's
results of operations or financial position.
Effective January 1, 1997, the Company adopted SFAS 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." SFAS 125 supersedes SFAS 122 and provides accounting and
reporting standards which require that after a transfer of financial assets,
an entity recognizes the financial and servicing asset it controls and the
liabilities it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. In addition,
this statement provides guidance on the accounting for initial capitalization
and subsequent carrying amounts for mortgage servicing rights. The adoption of
this Statement did not have a material impact on the Company's results of
operations or financial position.
MERCHANT PROCESSING
The Company recognizes fees arising from the sales and processing of
merchant card services as merchant income. In addition, the Company includes
$643 and $600 at December 31, 1997 and 1996, respectively, in its allowance
for possible loan losses for potential losses related to its merchant
processing business. Such amounts are determined based on an historical loss
analysis of the Company's merchant processing business.
INCOME TAXES
The Company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income taxes are
recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be recovered or settled. The
effect on deferred taxes of a change in tax rates is recognized in income in
the period that includes the enactment date.
EARNINGS PER SHARE
SFAS No. 128, "Earnings per Share" is effective for periods ending after
December 15, 1997. SFAS No. 128 simplifies the standards of computing earnings
per share (EPS) previously found in APB Opinion No. 15. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15.
The Company has computed and presented basic and diluted EPS for the years
ended December 31, 1997, 1996 and 1995 in accordance with SFAS No. 128 (see
Note 18).
Both basic and diluted net income per share for the year ended December 31,
1995 are computed on a pro forma basis as if the stock issued in the
Conversion (as defined below) had been issued as of the beginning of 1995 and
is adjusted for common stock equivalents as appropriate.
51
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS 130 "Reporting Comprehensive Income"
which establishes standards for disclosure of comprehensive income.
Comprehensive income represents the change in equity of a business during a
period from transactions and other events and circumstances from non-
shareholder sources. SFAS 130 requires the restatement of prior periods for
comparative purposes. The Company adopted SFAS 130 on January 1, 1998 and
management does not expect the adoption to have a material impact on the
Company's financial position or results of operations.
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 and
management does not expect the adoption to 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 and management does not expect the adoption to have
a material effect on the Company's financial position or results of
operations.
52
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITION OF GLASTONBURY BANK & TRUST COMPANY
On December 17, 1997 the Company acquired GBT by issuing 1,354,141 shares of
the Company's common stock in exchange for all the outstanding shares of GBT.
The transaction was accounted for as a pooling of interests. Accordingly, the
Company's historical financial statements have been restated to reflect the
combination with GBT.
Combined and separate results of the Company and GBT during the periods
preceding the merger were as follows (certain reclassifications have been made
to conform to presentation):
<TABLE>
<CAPTION>
SIS GBT TOTAL
------- ------ -------
<S> <C> <C> <C>
YEAR ENDING DECEMBER 31, 1995
Net interest and dividend income after
provision for possible loan losses............ $33,001 $7,585 $40,586
Non interest income............................ $ 8,124 $3,683 $11,807
Net income..................................... $11,459 $1,642 $13,101
Other changes in stockholders' equity, net..... $41,507 $5,292 $46,799
YEAR ENDING DECEMBER 31, 1996
Net interest and dividend income after
provision for possible loan losses............ $40,154 $8,809 $48,963
Non interest income............................ $11,470 $3,336 $14,806
Net income..................................... $18,160 $2,525 $20,685
Other changes in stockholders' equity, net..... $ 2,288 $ (630) $ 1,658
YEAR ENDING DECEMBER 31, 1997(1)
Net interest and dividend income after
provision for possible loan losses............ $48,485 $9,709 $58,194
Non interest income............................ $12,474 $3,368 $15,842
Net income..................................... $10,815 $ 603 $11,418
Other changes in stockholders' equity, net..... $(4,831) $ 99 $(4,732)
</TABLE>
- --------
(1) Period ending most recent to the date of acquisition.
The company incurred merger related expenses of $5,228 in the fourth quarter
of 1997, including expenses of $4,968 and a loss of $260 related to the
restructuring of GBT's investment portfolio (see Note 5).
3. CONVERSION AND REGULATORY MATTERS
SIS Bank completed its conversion from a mutual to a stockholder-owned bank
on February 7, 1995 (the "Conversion"). The Conversion resulted in a net
increase to capital of $35.9 million and a classification of SIS Bank as
"well-capitalized" under applicable regulatory definitions.
During 1995 GBT had been under a Cease & Desist Order dated September
27,1993 with the FDIC (the "GBT Order"), which required GBT to, among other
things, reduce its levels of classified assets and maintain a Tier 1 leverage
capital ratio of 6%. GBT raised additional capital through a rights offering
in the fourth quarter of 1995, and conducted a bulk sale of nonperforming
assets in late 1995. In May, 1996, the FDIC unconditionally terminated the GBT
Order in recognition of GBT's improvement to capital, reduced nonperforming
asset levels, and satisfactory resolution of all other regulatory concerns.
SIS Bank has been in the process of divesting its real estate business that
was largely conducted through Colebrook Corporation and SIS Bank's other
wholly-owned real estate investment subsidiaries (collectively the
53
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
"Real Estate Subsidiaries"). This divestment is required by FDICIA. SIS Bank's
divestment of all such real estate investment activities pursuant to a
divestiture plan previously approved by the FDIC, was initially scheduled to
be completed by December 31, 1997, and now is scheduled to be completed in
June 30, 1998. The FDIC has been notified of this extension and has granted
its approval.
4. CASH AND DUE FROM BANKS
Under provisions of the Federal Reserve Act, depository institutions are
required to maintain certain average balances in the form of cash or non-
interest bearing balances with a Federal Reserve Bank. Reserve balances of
$4,881 and $5,670 at December 31, 1997 and 1996, respectively, were maintained
in accordance with these requirements.
5. INVESTMENT SECURITIES
The amortized cost, unrealized gains and losses and approximate fair values
of investment securities were as follows:
Securities Available for Sale
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Government and agency
obligations..................... $ 15,608 $ 35 $ (7) $ 15,636
Collateralized mortgage
obligations..................... 51,273 218 (76) 51,415
Mortgage-backed securities....... 458,659 2,855 (1,036) 460,478
State and Municipal bonds........ 8,966 389 -- 9,355
Federal Home Loan Bank and other
stock........................... 38,128 1,096 -- 39,224
-------- ------ ------- --------
Total........................ $572,634 $4,593 $(1,119) $576,108
======== ====== ======= ========
</TABLE>
Securities Held to Maturity
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Government and agency
obligations..................... $ 2,400 $ -- $ (9) $ 2,391
Collateralized mortgage
obligations..................... 2,934 44 (25) 2,953
Mortgage-backed securities....... 141,282 699 (418) 141,563
Asset-backed securities.......... 46,046 241 (144) 46,143
Other bonds and short-term
obligations..................... 345 1 -- 346
Federal Home Loan Bank and other
stock........................... -- -- -- --
-------- ---- ----- --------
Total........................ $193,007 $985 $(596) $193,396
======== ==== ===== ========
</TABLE>
54
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Securities Available for Sale
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Government and agency
obligations..................... $ 31,458 $ 58 $ (56) $ 31,460
Collateralized mortgage
obligations..................... 43,337 128 (245) 43,220
Mortgage-backed securities....... 387,467 2,739 (609) 389,597
State and Municipal bonds........ 855 3 (1) 857
Other bonds and short-term
obligations..................... 1,681 -- -- 1,681
Federal Home Loan Bank and other
stock........................... 16,601 199 (1) 16,799
-------- ------ ----- --------
Total........................ $481,399 $3,127 $(912) $483,614
======== ====== ===== ========
</TABLE>
Securities Held to Maturity
<TABLE>
<CAPTION>
DECEMBER 31, 1996
----------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
U.S. Government and agency
obligations..................... $ 7,932 $ -- $ (105) $ 7,827
Collateralized mortgage
obligations..................... 5,062 151 (7) 5,206
Mortgage-backed securities....... 164,934 647 (1,470) 164,111
Asset-backed securities.......... 42,118 118 (71) 42,165
State and Municipal bonds........ 185 -- -- 185
Other bonds and short-term
obligations..................... 415 2 -- 417
-------- ---- ------- --------
Total........................ $220,646 $918 $(1,653) $219,911
======== ==== ======= ========
</TABLE>
At December 31, 1997, the net unrealized gain, net of tax effect, on
available for sale securities that was included as a separate component of
stockholders' equity was $2,133. At December 31, 1996, the net unrealized
gain, net of tax effect, on available for sale securities was $1,453.
Proceeds from the sale of available for sale investment securities were
$21,005 and $56,980 during 1997 and 1996, respectively. Gross realized gains
on sales of available for sale investment securities were $78 in 1997 and $313
in 1996, while gross realized losses were $98 in 1997 and $121 in 1996.
Trading securities were held at GBT during 1997 and 1996, however, the
Company liquidated GBT's trading portfolio effective with the merger. In 1997,
net gains on trading securities included a decrease of $59 in unrealized
holding gains, gross realized gains of $172, and net realized losses on put
and call options of $78. In 1996, net gains on trading securities included an
increase of $59 in unrealized holding gains, gross realized gains of $2 and
net realized losses on put and call options of $46.
In 1995, the Financial Accounting Standards Board ("FASB") issued a special
report, "Implementation of Statement 115," that provided additional guidance
related to the application of SFAS 115. In connection with the issuance of
this special report, the FASB allowed all organizations to review their
portfolio classifications and make a one-time reclassification of securities
between categories during the period from November 15, 1995 to December 15,
1995. On December 15, 1995, the Company transferred securities with an
amortized cost of $94,736 and an unrealized loss of $1,195 from the held to
maturity portfolio to the available for sale portfolio. In addition, the
Company also transferred securities with an estimated fair value of $47,280
and an unrealized gain of $299 from the available for sale portfolio to the
held to maturity portfolio. Subsequent to the transfer of these securities,
the Company sold $82,900 of available for sale securities in December 1995 at
a net loss of $899.
55
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December, 1997 in connection with the acquisition of GBT, the Company
sold $20,560 in investments from the held to maturity and available for sale
portfolios in order to maintain its existing interest rate risk position.
However, the Company intends to hold to maturity its debt and equity
securities which are so classified. The company realized a net loss of $260
related to these sales.
At December 31, 1997, investment securities having a carrying value of
$141,894 and an estimated fair value of $141,953 were pledged to collateralize
securities sold under agreements to repurchase and other items.
The amortized cost and estimated fair value of debt securities are shown
below by contractual maturity. Actual maturities may differ from contractual
maturities because borrowers have the right to call or prepay obligations with
or without call or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------
SECURITIES AVAILABLE SECURITIES HELD
FOR SALE TO MATURITY
---------------------- ------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------- --------- --------
<S> <C> <C> <C> <C>
Within 1 year..................... $ -- $ -- $ 105 $ 105
1-5 years......................... 30,838 30,962 6,558 6,561
5-10 years........................ 15,409 15,498 10,938 10,972
over ten years.................... 488,259 490,424 175,406 175,758
---------- ---------- -------- --------
Total......................... $ 534,506 $ 536,884 $193,007 $193,396
========== ========== ======== ========
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------
SECURITIES AVAILABLE SECURITIES HELD
FOR SALE TO MATURITY
---------------------- ------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------- --------- --------
<S> <C> <C> <C> <C>
Within 1 year..................... $ 8,202 $ 8,213 $ 6,404 $ 6,392
1-5 years......................... 61,103 61,209 14,010 13,866
5-10 years........................ 10,889 10,773 11,166 11,158
over ten years.................... 384,604 386,620 189,066 188,495
---------- ---------- -------- --------
Total......................... $ 464,798 $ 466,815 $220,646 $219,911
========== ========== ======== ========
</TABLE>
As of December 31, 1997, approximately 97.1% of mortgage-backed securities
available for sale and 67.1% of mortgage-backed securities held to maturity
were adjustable rate.
6. INVESTMENTS IN REAL ESTATE AND REAL ESTATE PARTNERSHIPS
The Company has certain subsidiaries that are engaged in various real estate
activities individually or in joint ventures with unaffiliated partners.
Investments in real estate and real estate partnerships are composed of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1996
------ ------
<S> <C> <C>
Operating properties
Land...................................................... $ 946 $ 688
Buildings and improvements, net of accumulated
depreciation of $2,946 and $2,832, respectively.......... 1,957 2,042
------ ------
Total investments in real estate............................ 2,903 2,730
Investments in real estate partnerships..................... -- 27
------ ------
Investments in real estate and real estate
partnerships........................................... $2,903 $2,757
====== ======
</TABLE>
56
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net (income) expense of real estate operations is summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C> <C>
Net (income) expenses of operating
real estate....................... $ (47) $ (26) $ (3)
Writedowns on real estate.......... 10 447 6
Net (gain)/loss on sale of real
estate............................ (611) (693) (230)
Divestment reserve................. 1,000 -- --
--------- -------- --------
Net (income) expenses of real
estate operations............. $ 352 $ (272) $ (227)
========= ======== ========
</TABLE>
Depreciation expense of $113 in 1997, $299 in 1996, and $381 in 1995 is
included in net expense of real estate operations. Losses recorded from the
real estate partnerships under the equity method were $7, $110 and $69 for the
same three year period and are also included in net expense of real estate
operations. Loans to these partnerships at December 31, 1997 and 1996 amounted
to zero and $150, respectively.
The Company plans to complete its divestment of its real estate business by
June 30, 1998. Accordingly, during 1997, the Company established a reserve of
$1,000 for severance and other expenses related to the divestment. At December
31, 1997, no amounts have been paid relating to the divestiture and the entire
reserve is included as a component of investments in real estate and real
estate partnerships.
7. LOANS RECEIVABLE, NET
Loans receivable, net, is composed of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
Residential real estate loans.......................... $281,457 $295,503
Commercial real estate loans........................... 185,226 171,744
Commercial loans....................................... 212,869 179,705
Home equity loans...................................... 158,753 118,235
Consumer loans......................................... 11,189 8,920
-------- --------
Total loans receivable................................. 849,494 774,107
Less:
Unearned discounts..................................... (1,991) (820)
Allowance for possible losses.......................... 22,724 19,549
-------- --------
Loans receivable, net.................................. $828,761 $755,378
======== ========
</TABLE>
At December 31, 1997 and December 31, 1996, residential real estate loans
included loans held for sale of $8,252 and $5,171, respectively, which were
carried at the lower of cost or market.
RISK ELEMENTS
The Company grants commercial and residential loans to customers primarily
in New England. Although the Company has a diversified portfolio, its debtors'
ability to honor their contracts is substantially dependent upon the general
economic conditions of the region. The Company manages its loan portfolio to
avoid concentration by industry or loan size to minimize its credit exposure.
Commercial loans may be collateralized by the assets underlying the borrowers'
business such as accounts receivable, equipment, inventory and real property.
Residential mortgage and home equity loans are generally secured by the real
property financed. Commercial real estate loans are generally secured by the
underlying real property and lease agreements.
57
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table shows the components of non-performing assets:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1996
------ -------
<S> <C> <C>
Non-accruing loans......................................... $5,352 $ 8,011
Loans past due 90 days and still accruing.................. 431 428
------ -------
Total non-performing loans................................. 5,783 8,439
Foreclosed real estate, net................................ 1,209 1,540
Restructured loans on accrual status....................... 1,124 892
------ -------
Total non-performing assets............................ $8,116 $10,871
====== =======
</TABLE>
The principal amount of non-performing loans, excluding non-performing
restructured loans, aggregated approximately $5,223 and $7,820 at December 31,
1997 and 1996, respectively. Interest income that would have been recorded if
the loans had been performing in accordance with their original terms
aggregated $530, $1,035 and $1,251 for the years ended December 31, 1997, 1996
and 1995, respectively. Interest income recorded on these loans during the
three years ended December 31, 1997, 1996 and 1995 was $373, $830 and $1,014,
respectively.
The principal amount of restructured loans aggregated $1,666 at December 31,
1997, and $1,511 at December 31, 1996. Interest income that would have been
recorded if the loans had been performing in accordance with their original
terms aggregated $246, $238 and $522 for the years ended December 31, 1997,
1996 and 1995, respectively. Interest income recorded on these loans amounted
to $107, $79 and $243 for the years ended December 31, 1997, 1996 and 1995,
respectively.
WATCH LIST LOANS
The Company maintains a "watch list" of loans, which represents performing
loans that have potential weaknesses that require management's attention.
These potential weaknesses may stem from a variety of factors including, among
other things, economic or market conditions, adverse terms in the obligor's
operations or balance sheet weaknesses. Watch list loans totaled $24,082 and
$33,190 at December 31, 1997 and 1996, respectively.
CLASSIFIED LOANS
The Company's Credit Grade Policy (the "Policy") provides for the
classification of loans considered to be lesser quality as "substandard",
"doubtful", or "loss" loans. A loan is considered substandard under the
Company's Policy if it is inadequately protected by the current sound worth
and paying capacity of the obligor or of the collateral pledged, if any.
Substandard loans include those characterized by the "distinct possibility"
that the Company will sustain "some loss" if the deficiencies are not
corrected. Loans classified as doubtful under the Company's Policy have all 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." Assets characterized as loss are those considered
"uncollectible" and of such little value that their continuance as bankable
assets is not warranted. Substandard classified loans totaled $6,244 and
$9,374 at December 31, 1997 and 1996, respectively. Doubtful classified loans
totaled zero and $53 thousand at December 31, 1997 and 1996, respectively.
Included in classified loans are $5,352 and $8,011 of loans which have been
reported as non-performing loans at December 31, 1997 and 1996, respectively.
LOANS TO RELATED PARTIES
At December 31, 1997, and 1996, the amount of loans outstanding to
directors, officers and other related parties (including real estate
partnerships) was approximately $4,261 and $8,212, respectively. There were no
58
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
non-accrual loans included in the loans to related parties at December 31,
1997 and 1996. During 1997 and 1996, new loans aggregating $1,388 and $1,416,
respectively, were made or added and deductions and repayments totaled $5,339
and $4,338, respectively. There were no charge-offs made against these loans
in 1997 and 1996. Changes in the composition of the related parties resulted
in additions to or deductions from loans outstanding to related parties. Loans
made to insiders are on substantially the same terms as available to the
general public.
8. ALLOWANCE FOR POSSIBLE LOAN LOSSES
Changes in the allowance for possible loan losses are summarized as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year........... $ 19,549 $ 18,612 $ 20,918
Provision charged to operating
expense............................. 1,895 3,721 6,262
Loan charge-offs..................... (2,212) (5,152) (9,756)
Loan recoveries...................... 3,492 2,368 1,188
---------- ---------- ----------
Balance, end of year............. $ 22,724 $ 19,549 $ 18,612
========== ========== ==========
</TABLE>
As discussed in Note 1, the Company adopted SFAS 114 effective January 1,
1995. The SFAS 114 analysis is applied only to the commercial and commercial
real estate loan portfolios. Because of their homogeneous nature, the
Company's residential mortgage, home equity and consumer portfolios are
evaluated collectively for impairment and a reserve requirement is developed
under the historical loss method.
Impaired loans are those loans for which, based on current information, it
is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. All commercial and
commercial real estate non-accrual loans are considered impaired loans,
however the impaired classification may also include other loans which in
Management's judgment meet the criteria described above.
At December 31, 1997, the recorded investment in loans that are considered
impaired under SFAS 114 was $5,271 as compared to $8,001 at December 31, 1996.
Included in this amount as of December 31, 1997 is $2,037 of impaired loans
for which the related SFAS 114 allowance is $431 and $3,234 of impaired loans
for which the SFAS 114 allowance is zero. At December 31, 1996 there were
$2,850 of impaired loans for which the related SFAS 114 allowance was $243 and
$5,151 of impaired loans for which the SFAS 114 allowance was zero. The
average recorded investment in impaired loans during the year ended December
31, 1997 was approximately $8,950 as compared to $9,736 at December 31, 1996.
For the years ended December 31, 1997 and 1996, the Company recognized
interest income on these impaired loans of $512 and $328, respectively.
9. FORECLOSED REAL ESTATE, NET
Foreclosed real estate, net consists of the following:
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED
DECEMBER 31,
-------------
1997 1996
------ ------
<S> <C> <C>
Residential................................................. $ 296 $ 684
Commercial.................................................. 913 913
------ ------
1,209 1,597
Less valuation allowance.................................... -- 57
------ ------
Foreclosed real estate, net................................. $1,209 $1,540
====== ======
</TABLE>
59
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Changes in the allowance for foreclosed real estate are summarized as
follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---------- ---------- ------------
<S> <C> <C> <C>
Balance, beginning of year.......... $ 57 $ 775 $ 542
Provision charged to expense........ 11 10 1,619
Dispositions, net................... (68) (728) (1,386)
--------- ---------- ------------
Balance, end of year............ $ -- $ 57 $ 775
========= ========== ============
Foreclosed real estate expense is summarized as follows:
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---------- ---------- ------------
<S> <C> <C> <C>
Net expense (income) of operating
foreclosed real estate............. $ 86 $ 228 $ 26
Writedowns and (income) loss on
foreclosed real estate, net........ (91) 221 1,332
--------- ---------- ------------
Foreclosed real estate expense.. $ (5) $ 449 $ 1,358
========= ========== ============
</TABLE>
10. BANK PREMISES, FURNITURE AND FIXTURES, NET
Major categories of fixed assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
<S> <C> <C>
Buildings and improvements.............................. $36,701 $36,033
Leasehold improvements.................................. 11,257 9,633
Furniture and fixtures.................................. 23,466 22,360
------- -------
71,424 68,026
Less accumulated depreciation........................... 35,581 33,479
------- -------
Bank premises, furniture and fixtures, net.............. $35,843 $34,547
======= =======
</TABLE>
Depreciation expense aggregated $4,046, $3,724 and $3,693 for the years
ended December 31, 1997, 1996 and 1995, respectively, and is included in
occupancy expense and furniture and equipment expense. Rental income of
$1,508, $1,584 and $1,419 for the years ended December 31, 1997, 1996, and
1995, respectively, is included in occupancy expense.
60
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. DEPOSITS
Deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Demand deposits..................................... $ 171,343 $ 135,965
NOW accounts (1).................................... 51,412 81,943
Money manager accounts (1).......................... 39,447 --
Savings accounts.................................... 263,449 253,358
Money market accounts............................... 211,286 209,523
Time deposits.......................................
Time deposits under $100............................ 442,948 433,473
Time deposits of $100 or more....................... 87,413 63,299
---------- ----------
Total deposits.................................... $1,267,298 $1,177,561
========== ==========
</TABLE>
- --------
(1) 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.
12. FEDERAL HOME LOAN BANK ADVANCES
Pursuant to a blanket pledge agreement with the Federal Home Loan Bank
("FHLB") of Boston, advances are secured by the Company's stock in the FHLB,
certain qualifying first mortgage loans, mortgage-backed and mortgage-related
securities, and other securities not otherwise pledged.
Advances from the FHLB at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1997 1996
----------------- ----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
YEAR OF MATURITY AMOUNT RATE AMOUNT RATE
---------------- -------- -------- ------- --------
<S> <C> <C> <C> <C>
1997.................................... $ -- -- $66,000 5.54%
1998.................................... 155,800 5.76% 12,000 5.86%
1999.................................... 2,000 6.58% 2,000 6.58%
2000.................................... 1,000 6.11% 1,000 6.11%
2001.................................... 1,074 6.23% 1,100 6.23%
2002.................................... 10,434 6.74% -- --
2004.................................... 1,235 6.31% -- --
2006.................................... 1,119 6.39% 1,200 6.39%
2007.................................... 3,660 6.45% -- --
2009.................................... 686 6.97% -- --
2011.................................... 1,622 6.97% 1,690 6.97%
2012.................................... 1,073 5.55% -- --
2015.................................... 1,466 6.23% 1,484 6.23%
2016.................................... 2,952 7.18% 2,997 7.18%
-------- ---- ------- ----
$184,121 5.89% $89,471 5.73%
======== ==== ======= ====
</TABLE>
61
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The FHLB advances above which mature in the year 2001 and beyond are
amortizing borrowings. The outstanding balances for each amortizing advance at
December 31, 1997 and 1996 are listed above by their contractual maturities.
At December 31, 1997 there was a commitment for a Community Investment
Program Plus advance from the FHLB for $2,500 at 7.02% for settlement on March
16, 1998. At December 31, 1996 there was a commitment for a Community
Investment Program Plus advance from the FHLB for $1,880 at 6.38% for
settlement on January 15, 1997.
13. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
At December 31, 1997 and December 31, 1996, securities sold under agreements
to repurchase totaled $113,299 and $176,927 respectively. These agreements are
treated as financings, and the obligations to repurchase securities sold are
reflected as a liability in the Consolidated Balance Sheet.
An analysis of securities sold under agreements to repurchase identical
securities for the years ended December 31, 1997, 1996 and 1995 is summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Maximum month-end balance during the period... $189,133 $176,927 $39,552
Average balance during the period............. $153,938 $101,098 $19,297
Weighted average interest rate during the
period....................................... 5.67% 5.47% 5.87%
Weighted average interest rate at end of
period....................................... 5.67% 5.49% 5.49%
</TABLE>
At December 31, 1997, securities sold under agreements to repurchase had
maturity ranges from January 1998 to May 2000 with a weighted average maturity
at December 31, 1997 of 306 days.
At December 31, 1997, mortgage-backed securities with carrying values
totaling $119,242 and estimated fair values totaling $119,144 and U.S. agency
obligations with carrying values of $158 and estimated fair values totaling
$158 were pledged as collateral for securities sold under agreements to
repurchase. It is the Company's policy to enter into repurchase agreements
only with major brokerage firms that are primary dealers in government
securities.
14. LOANS PAYABLE
Loans payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1996
------ ------
<S> <C> <C>
Note issued by the Company's Employee Stock Ownership Plan
("ESOP"), and guaranteed by the Company. This note is subject
to mandatory redemption through the operation of a sinking
fund commencing on the last business day of June 1995 and
continuing on the last business day of each June and December
thereafter. The note bears interest at a variable rate per
annum equal to the Prime Rate as published from time to time
in the Wall Street Journal. The interest rate at December 31,
1997 was 8.50%. The proceeds for the issuance of the note were
used by the Company's ESOP solely for the purpose of
purchasing 445,000 shares of the Company's common stock....... 2,492 2,848
------ ------
$2,492 $2,848
====== ======
</TABLE>
62
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate required principal payments on the loans payable at December 31,
1997 for the next five years and thereafter are as follows:
<TABLE>
<S> <C>
1998.............................. $ 356
1999.............................. 356
2000.............................. 356
2001.............................. 356
2002.............................. 356
2003 and thereafter............... 712
------
$2,492
======
</TABLE>
At December 31, 1997, investment securities having a carrying value of
$4,107 and an estimated fair value of $4,131 were pledged to collateralize a
letter of credit supporting the ESOP note, which honors demands for payment by
the Note Trustee presented in accordance with the terms of the letter of
credit.
At December 31, 1997, the Company had an available, but unused, line of
credit in the amount of $22,000 with the FHLB of Boston through its Ideal Way
program. At December 31, 1997 asset-backed securities having a carrying value
of $10,617 and an estimated fair value of $10,687 were pledged to secure an
available, but unused, line of credit in the amount of $10,000 with another
financial institution.
15. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The following table presents the Company's assets, liabilities, and
unrecognized financial instruments at both their respective carrying or
notional amounts and fair values.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks...... $ 50,297 $ 50,297 $ 58,045 $ 58,045
Federal funds sold and
interest-bearing deposits... 17,317 17,317 10,045 10,045
Investment securities........ 769,115 769,504 704,260 703,525
Trading assets............... -- -- 458 458
Loans receivable, net........ 828,761 853,026 755,378 771,712
Accrued interest and
dividends receivable........ 10,749 10,749 10,417 10,417
Financial Liabilities:
Deposits..................... $1,267,298 $1,268,324 $1,177,561 $1,178,614
Federal Home Loan Bank
advances.................... 184,121 184,484 89,471 89,602
Securities sold under
agreements to repurchase.... 113,299 113,440 176,927 176,894
Loans payable................ 2,492 2,492 2,848 2,848
<CAPTION>
NOTIONAL FAIR NOTIONAL FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Unrecognized Financial
Instruments:
Standby letters of credit.... $ 9,678 $ 97 $ 4,906 $ 49
Commitments to extend
credit...................... 265,487 -- 206,402 --
</TABLE>
63
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Certain assets, which are not financial instruments and, accordingly, are
not included in the above fair values, contribute substantial value to the
Company in excess of the related amounts recognized in the balance sheet.
These include the core deposit intangibles and the related retail banking
network, and mortgage servicing rights.
A discussion of the methodologies and assumptions used by the Company in
determining these fair values is included in Note 1 under the subheading "Fair
Values of Financial Instruments."
16. PENSION PLAN AND OTHER EMPLOYEE BENEFIT PLANS
The Company's subsidiary banks, SIS Bank and GBT, have separate pension
plans covering their respective employees. The Company's ESOP plan is shared
by both SIS Bank and GBT employees.
The SIS Bank pension plan covers all SIS Bank employees who meet certain age
and service requirements. Vested benefits, paid at retirement, are computed
based upon a formula considering length of service and average compensation.
Plan assets consist of marketable equity securities and United States
Government and agency obligations. Net periodic pension cost for 1997, 1996
and 1995 included the following components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Service cost--current period......... $ 712 $ 786 $ 631
Interest cost on projected benefit
obligation.......................... 635 712 725
Actual return on assets.............. (1,262) (1,330) (1,549)
Net amortization and deferral........ 429 532 799
---------- ---------- ----------
Net periodic pension cost............ $ 514 $ 700 $ 606
========== ========== ==========
</TABLE>
Assumptions used in the accounting for pension cost in 1997, 1996, and 1995
were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Discount rate........................... 7.25% 7.50% 7.00%
Average remaining service............... 27 years 28 years 28 years
Expected long-term rate of return on
plan assets............................ 8.0% 8.0% 8.0%
</TABLE>
The discount rate is the estimated rate at which the obligation for pension
benefits could effectively be settled. The average wage increase assumption of
5% reflects the Company's best estimate of the future compensation levels of
the individual employees covered by the plan. The expected long-term rate of
return on plan assets reflects the average rate of earnings that the Company
estimates will be generated on the assets of the plan.
64
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the plan for its most recent fiscal years is as
follows:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Accumulated benefit obligation
Vested benefits........................................ $ 5,451 $ 5,027
Nonvested benefits..................................... 470 336
------- -------
Accumulated benefit obligation........................... $ 5,921 $ 5,363
======= =======
Projected benefit obligation............................. $(9,841) $(8,464)
Plan assets at fair value................................ 9,556 8,357
------- -------
Projected benefit obligation in excess of plan assets.... (285) (107)
Unrecognized net gain.................................... (4,431) (4,076)
Unrecognized net transition asset being recognized over
25 years................................................ (279) (297)
------- -------
Accrued pension cost..................................... $(4,995) $(4,480)
======= =======
</TABLE>
The GBT pension plan covers all GBT employees who meet certain age and
service requirements. Vested benefits, paid at retirement, are computed based
upon a formula considering length of service and average compensation. Plan
assets consist of marketable equity securities and United States Government
and agency obligations. Net periodic pension cost for 1997, 1996 and 1995
included the following components:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Service cost--current period......... $ 120 $ 116 $ 69
Interest cost on projected benefit
obligation.......................... 85 77 72
Actual return on assets.............. (82) (79) (74)
Net amortization and deferral........ (15) (15) (15)
---------- ---------- ----------
Net periodic pension cost............ $ 108 $ 99 $ 52
========== ========== ==========
</TABLE>
Assumptions used in the accounting for pension cost in 1997, 1996, and 1995
were as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Discount rate......................... 7.50% 7.50% 7.00%
Average remaining service............. 10 years 10 years 8 years
Expected long-term rate of return on
plan assets.......................... 8.0% 8.0% 8.0%
</TABLE>
The discount rate is the estimated rate at which the obligation for pension
benefits could effectively be settled. The average wage increase assumption of
4% reflects the Company's best estimate of the future compensation levels of
the individual employees covered by the plan. The expected long-term rate of
return on plan assets reflects the average rate of earnings that the Company
estimates will be generated on the assets of the plan.
65
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the plan for its most recent fiscal years is as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1997 1996
------- -------
<S> <C> <C>
Accumulated benefit obligation
Vested benefits........................................ $ 966 $ 898
Nonvested benefits..................................... 120 96
------- -------
Accumulated benefit obligation........................... $ 1,086 $ 994
======= =======
Projected benefit obligation............................. $(1,310) $(1,203)
Plan assets at fair value................................ 1,323 1,060
------- -------
Projected benefit obligation in excess of plan assets.... 13 (143)
Unrecognized net gain.................................... 77 170
Unrecognized net transition asset being recognized over
25 years................................................ (63) (78)
------- -------
Accrued pension cost..................................... $ 27 $ (51)
======= =======
</TABLE>
As discussed in Note 1, the Company formed an ESOP with the completion of
the Conversion in February, 1995. ESOP compensation expense for the year ended
December 31, 1997 was $1,216 as compared to expense of $1,065 for the year
ended December 31, 1996. The ESOP shares as of December 31, 1997 and 1996 were
as follows (dollars in thousands except share amounts):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
1997 1996
--------- ---------
<S> <C> <C>
Allocated shares, net................................... 104,714 53,549
Shares released for allocation.......................... 42,045 53,829
Unreleased shares....................................... 294,314 336,359
--------- ---------
Total ESOP shares..................................... 441,073 443,737
========= =========
Fair value of unreleased shares, at December 31,...... $ 11,828 $ 7,694
========= =========
</TABLE>
17. STOCK PLANS
As discussed in Note 1, the Company has four stock-based compensation plans,
which are described below. The Company applies APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plan. Had compensation cost for
the Company's Stock Option Plan been determined based on the fair value at the
grant dates for awards under that plan consistent with the method of SFAS 123,
the Company's net income and earnings per share would have changed to the pro
forma amounts indicated below (dollars in thousands except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C> <C>
Net income.............................. As reported $11,418 $20,685 $13,101
Pro forma $10,892 $20,092 $12,953
Basic earnings per share................ As reported $ 1.74 $ 3.14 $ 2.14
Pro forma $ 1.66 $ 3.05 $ 2.14
Diluted earnings per share.............. As reported $ 1.65 $ 3.03 $ 2.12
Pro forma $ 1.59 $ 2.97 $ 2.12
</TABLE>
66
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK OPTION PLAN
Under the Company's Management and Directors Stock Option Plans, the Company
may grant stock options to certain employees and non-employee directors of the
Company for the purchase of the Company's common stock. Under these plans, the
exercise price of each option equals the market price of the Company's stock
on the date of grant and the maximum term of the option is 10 years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995, respectively: dividend
yield of 2.0%, 2.5% and 2.5%; expected volatility of 23%, 24% and 25%; risk-
free interest rates of 6.30%, 6.42% and 5.57%; and expected lives of 5 years
for all periods.
A summary of the status of the Company's Stock Option Plans as of December
31, 1997, 1996 and 1995 and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------
1997 1996 1995
------------------ ------------------ -----------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year...... 594,300 $14 415,600 $12 -- $--
Granted............... 108,600 24 194,700 18 415,600 12
Exercised............. (18,200) 12 -- -- -- --
Cancelled............. (1,000) 24 (16,000) 12 -- --
------- ------- -------
Options outstanding,
end of year........ 683,700 $16 594,300 $14 415,600 $ 12
======= ======= =======
Options exercisable at
year-end............... 282,200 187,280 --
Weighted-average fair
value of options
granted during the
year................... $6.41 $4.50 $3.06
</TABLE>
The following table summarizes information regarding stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ---------------------
WEIGHTED- WEIGHTED-
NUMBER WEIGHTED-AVERAGE AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING AT REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES 12/31/97 CONTRACTUAL LIFE PRICE AT 12/31/97 PRICE
--------------- -------------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$10 to $15.............. 381,400 7.4 years $12 214,560 $12
$16 to $23.............. 194,700 8.2 years $18 67,640 $18
$24 to $27.............. 107,600 9.1 years $24 -- --
------- -------
$10 to $27.............. 683,700 7.9 years $16 282,200 $14
======= =======
</TABLE>
RESTRICTED STOCK PLAN
The Company's Management and Directors Restricted Stock Plans provide for
the granting of restricted stock to certain employee and non-employee
directors of the Company. The fair market value of the stock allocations,
based on the market price at date of grant, is recorded as unearned
compensation. Unearned compensation is amortized over the periods to be
benefited. The Company recorded compensation cost related to the Restricted
Stock Plans of $438, $848 and $230 for 1997, 1996 and 1995, respectively.
67
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the Company's Restricted Stock Plans as of December 31, 1997,
1996 and 1995 and changes during the years ending on those dates is presented
below:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year........................ 161,100 148,200 --
Granted......................................... 3,000 18,900 148,200
Cancelled....................................... -- (6,000) --
------- ------- -------
Balance, end of year.............................. 164,100 161,100 148,200
======= ======= =======
Weighted-average fair value of restricted shares
granted during the year.......................... $25 $18 $12
</TABLE>
18. EARNINGS PER SHARE
Basic and diluted net income per share and weighted average shares
outstanding follow (dollars in thousands except per share amounts):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net Income................................. $ 11,418 $ 20,685 $ 13,101
Weighted average shares outstanding:
Basic.................................... 6,564,073 6,580,282 6,127,116
Effect of dilutive securities:
Stock options........................ 289,238 138,821 24,692
Restricted stock..................... 53,881 117,531 18,269
---------- ---------- ----------
Diluted.................................. 6,907,192 6,836,634 6,170,077
========== ========== ==========
Net income per share:
Basic.................................... $1.74 $3.14 $2.14
Diluted.................................. $1.65 $3.03 $2.12
</TABLE>
19. FEES AND OTHER INCOME
Fees and other income are composed of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Loan charges and fees...................... $ 3,212 $ 3,521 $ 3,507
Deposit related fees....................... 7,562 6,834 5,843
Merchant fees.............................. 1,904 1,894 1,690
Other charges and fees..................... 2,751 1,745 1,410
---------- ---------- ----------
$ 15,429 $ 13,994 $ 12,450
========== ========== ==========
</TABLE>
68
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. OTHER OPERATING EXPENSES
Other operating expenses are composed of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Marketing................................... $ 2,052 $ 2,237 $ 1,163
Insurance................................... 705 751 3,259
Professional services....................... 2,949 3,998 3,735
Outside processing.......................... 4,871 4,287 3,079
Other....................................... 6,264 6,214 5,479
---------- ---------- ----------
$ 16,841 $ 17,487 $ 16,715
========== ========== ==========
</TABLE>
21. INCOME TAXES
The components of the income tax expense (benefit) for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Current
Federal............................... $ 1,722 $ 371 $ 136
State................................. 1,261 896 99
Deferred
Federal............................... 4,369 (7,324) (6,995)
State................................. 43 1,026 501
---------- ----------- -----------
$ 7,395 $ (5,031) $ (6,259)
========== =========== ===========
</TABLE>
A reconciliation of the statutory income tax rate to the consolidated
effective income tax rate as well as a reconciliation of expected income tax
expense (benefit), computed at the applicable statutory rate, to the actual
income tax expense (benefit) for the three years ended December 31, 1997,
1996, and 1995 follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1997 1996 1995
------------------ ------------------- -------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF PRETAX OF PRETAX OF PRETAX
AMOUNT INCOME AMOUNT INCOME AMOUNT INCOME
------ ---------- ------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Federal income tax at
statutory rate......... $6,396 34.00 % $ 5,323 34.00 % $ 2,326 34.00 %
Change in valuation
allowance.............. (81) (0.43)% (9,377) (59.90)% (8,932) (130.55)%
State income taxes, net
of federal benefit..... 987 5.25 % 1,269 8.11 % 396 5.79 %
Tax bad debt recapture.. -- -- (2,790) (17.82)% -- --
Employee stock ownership
plan................... 311 1.65 % 207 1.32 % -- --
Merger costs............ 445 2.37 % -- -- -- --
Other................... (663) (3.52)% 337 2.15% (49) (0.72)%
------ ----- ------- ------ ------- -------
$7,395 39.32 % $(5,031) (32.14)% $(6,259) (91.48)%
====== ===== ======= ====== ======= =======
</TABLE>
69
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses.............................. $ 4,465 $ 4,282
Accrued pension........................................ 2,321 2,023
Employee stock awards.................................. 213 190
Net operating loss carryforwards, state................ 120 6,180
Alternative minimum tax credit carryforwards........... 430 563
Investment tax credit carryforwards.................... 1,721 1,721
Other.................................................. 2,282 1,417
------- -------
Total gross deferred tax assets...................... 11,552 16,376
------- -------
Deferred tax liabilities:
Investment in real estate and bank premises............ (2,099) (3,202)
Other.................................................. (1,334) (578)
------- -------
Total gross deferred tax liabilities................. (3,433) (3,780)
------- -------
Net deferred tax asset prior to valuation allowance...... 8,119 12,596
Valuation allowance...................................... -- (81)
------- -------
Net deferred tax asset after valuation allowance......... $ 8,119 $12,515
======= =======
</TABLE>
This valuation allowance indicated in the above table partially reserved the
gross deferred tax assets at December 31, 1996 in accordance with SFAS 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.
During the third quarter of 1996, and the fourth quarter of 1997,
management's evaluation of the weight of currently available evidence resulted
in the conclusion that it was more likely than not that the Company would
realize a portion of its net deferred tax asset which was reserved for at
those times. During the third quarter of 1996, management reduced the
Company's valuation allowance from $9,458 to $81, while at the fourth quarter
of 1997, management reduced the Company's allowance of $81 to zero. In both
instances, management's judgment was influenced by factors including changes
in the levels of actual and expected future taxable income and anticipated
reversals of net deductible temporary differences. As a result of these
adjustments the net change in the total valuation allowance for the years
ended December 31, 1997 and 1996 was a net decrease of $81 and $9,377,
respectively.
At December 31, 1997, the Company had investment tax credit carryforwards of
approximately $1,721 which expire in years from 1998 through 2008. In
addition, the Company had alternative minimum tax credit carryforwards of
approximately $430 which have an indefinite utilization period. At December
31, 1997, SIS Bank had state net tax operating loss carryforwards of
approximately $1,920 which will expire in the years 1998 through 2002.
If certain substantial direct or indirect changes in the Company's ownership
should occur, there may be an annual limitation on the amount of carryforwards
(including certain net unrealized built-in losses) which can be utilized for
regular and alternative minimum tax purposes.
70
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
22. COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK
OFF-BALANCE SHEET INSTRUMENTS
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk which are not reflected in the Balance Sheet.
The contract or notional amounts of these instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company uses the same credit policies in making commitments and standby
letters of credit as it does for on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary upon extension of credit, is based on
Management's credit evaluation of the counterparty. The Company's commitments
to extend credit, which includes unused lines of credit and commitments to
fund loans, were approximately $265,487 and $206,402 at December 31, 1997 and
1996, respectively.
Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Company's commitments under
standby letters of credit were $9,678 and $4,906 at December 31, 1997 and
1996, respectively.
Commitments to sell loans are contracts for delayed delivery of loans in
which the Company agrees to make delivery at a specific future date of a
specified instrument, at a specific price or yield. Risks arise from the
possible inability to meet the terms of the contracts and from movements in
interest rates. The Company had commitments to sell $23,597 and $11,603 of
loans at December 31, 1997 and 1996, respectively.
LEASES
The Company leases certain of its branch office facilities and equipment
under nonfinancing leases having various maturities to 2010. Certain of the
leases require payment of real estate taxes, insurance and maintenance. The
future minimum rental payments required under these leases are approximately
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1998.............................. $ 916
1999.............................. 879
2000.............................. 819
2001.............................. 728
2002.............................. 596
2003--2010........................ 1,894
------
$5,832
======
</TABLE>
Total rental expense for 1997, 1996, and 1995 amounted to approximately
$974, $746, and $779, respectively.
71
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
LITIGATION
Except as set forth below, the Company is not involved in any pending
litigation other than routine legal proceedings occurring in the ordinary
course of business. While the legal responsibility and financial impact with
respect to such litigation cannot presently be ascertained, the Company does
not anticipate that any of these matters will result in the payment by the
Company of damages, that, in the aggregate, would be material in relation to
the consolidated financial position or operations of the Company.
A lawsuit was brought against GBT and seven directors of GBT on or about
November 1, 1995 by a former director of GBT, Henry J. Stone, and a second
suit was brought contemporaneously by Mr. Stone's wife, Merriam March. Both
suits allege misconduct by the GBT directors in connection with the rejection
of a proposed acquisition offer received by GBT in 1994. Mr. Stone's suit
sought money damages and to be reinstated as a director of GBT. The damages
portion of Mr. Stone's suit was dismissed and he has not appealed. His action
to be returned to the board of GBT remains, and GBT intends to vigorously
oppose Mr. Stone.
Ms. March's suit is a derivative suit in which she, as a shareholder of GBT,
had sued the directors of GBT on behalf of GBT for damages they allegedly
caused GBT. The derivative action, filed in Connecticut Superior Court, seeks
approximately $11.7 million in money damages from the directors. Because the
suit is a derivative suit, any damages that the court may order the defendants
to pay (GBT believes this to be unlikely and, in any event, limited to one
year's compensation from each director under applicable Connecticut law and
GBT's Certificate of Incorporation) would be paid to GBT. GBT considers Ms.
March's suit to be without merit.
Under Connecticut law, GBT is required in some cases, and is permitted in
others, to "indemnify" or reimburse the GBT directors from damages and costs
incurred by them in connection with litigation brought against them in their
official capacities at GBT. As part of the acquisition of GBT by SIS Bank, SIS
Bank had agreed that GBT would continue to provide this indemnification to
these GBT directors to the extent allowed by law. Through December 31, 1997,
GBT had accrued for all expenses incurred for attorney's fees and related
costs in connection with the suit, including the advancing of such fees for
the defendant directors.
As of December 31, 1997, the parties continue to be engaged in mutual
discovery efforts, and the Stone lawsuit had been dismissed in its entirety
except for the count which requests that Mr. Stone be re-seated on the GBT
Board of Directors. The Stone suit is scheduled for trial in late 1998 and the
March suit in early 1999. The amount of additional legal fees to be incurred
by GBT will depend upon a number of factors, including the scope of the
plaintiff's discovery efforts and whether the suits actually go to trial.
23. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
Following is the quarterly financial information of the Company for 1997 and
1996:
<TABLE>
<CAPTION>
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
---------------- --------------- --------------- ----------------
1997 1996 1997 1996 1997 1996 1997 1996
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest and
dividend income........ $14,913 $11,956 $15,063 $12,855 $15,028 $13,635 $15,085 $14,238
Provision for possible
loan losses............ 500 942 465 905 466 904 464 970
Net gain (loss) on sale
of loans............... 106 270 86 162 136 105 211 67
Net gain (loss) on sale
of securities.......... -- 2 60 -- 17 69 (260) 122
Net gain (loss) on sale
of securities held for
trading................ (11) -- 30 2 24 1 14 12
Fees and other income... 3,298 3,069 3,697 3,424 4,042 3,637 4,392 3,864
Noninterest expense..... 12,435 11,253 12,307 11,623 12,624 12,047 17,857 13,191
Income tax expense
(benefit).............. 2,091 212 2,449 278 2,327 (6,421) 528 901
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 3,280 $ 2,890 $ 3,715 $ 3,637 $ 3,830 $10,917 $ 593 $ 3,241
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share
Basic................... $ 0.50 $ 0.44 $ 0.56 $ 0.56 $ 0.59 $ 1.66 $ 0.09 $ 0.49
Diluted................. $ 0.48 $ 0.43 $ 0.53 $ 0.54 $ 0.56 $ 1.60 $ 0.09 $ 0.47
</TABLE>
72
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
24. REGULATORY CAPITAL
The Company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under 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 December 31, 1997,
that the Company meets all capital adequacy requirements to which it is
subject.
Under the regulatory framework for prompt corrective action, both SIS Bank
and GBT are considered well capitalized as of December 31, 1997. 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 December 31, 1997 the Company also qualified as well capitalized
under the applicable Federal Reserve Board regulations.
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
-------- ----- ------------------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
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%
AS OF DECEMBER 31, 1996:
Tier I Capital (to Average
Assets)
Company.................. $113,628 7.4% $ 61,802 4.0% N/A
SIS Bank................. $ 95,816 7.4% $ 51,999 4.0% $ 64,999 5.0%
GBT...................... $ 17,311 7.1% $ 9,795 4.0% $ 12,243 5.0%
Tier I Capital (to Risk
Weighted Assets)
Company.................. $113,628 12.7% $ 35,813 4.0% $ 53,720 6.0%
SIS Bank................. $ 95,816 12.7% $ 30,110 4.0% $ 45,165 6.0%
GBT...................... $ 17,311 12.2% $ 5,695 4.0% $ 8,543 6.0%
Total Capital (to Risk
Weighted Assets)
Company.................. $124,914 14.0% $ 71,627 8.0% $ 89,533 10.0%
SIS Bank................. $105,300 14.0% $ 60,220 8.0% $ 75,275 10.0%
GBT...................... $ 19,110 13.4% $ 11,391 8.0% $ 14,238 10.0%
</TABLE>
73
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
25. PARENT COMPANY FINANCIAL INFORMATION
The following condensed balance sheet, condensed statements of operations
and of cash flows for SIS Bancorp, Inc. (parent company only) reflect the
Company's investment in its wholly owned subsidiaries using the equity method
of accounting. The parent company formation occurred June 21, 1996. There were
no results prior to this date.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
CONDENSED BALANCE SHEET 1997 1996
----------------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks........................... $ 1 $ --
Investment securities available for sale.......... 1,627 206
Due from subsidiaries............................. 1,184 398
Investment in subsidiaries........................ 123,204 118,285
Other assets...................................... 383 --
-------- --------
Total assets.................................... $126,399 $118,889
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Borrowings from subsidiaries...................... $ -- $ --
Other liabilities................................. 927 103
-------- --------
Total liabilities............................... 927 103
Stockholders' equity.............................. 125,472 118,786
-------- --------
Total liabilities and stockholders' equity...... $126,399 $118,889
======== ========
</TABLE>
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE YEAR ENDED JUNE 21, 1996 TO
CONDENSED STATEMENT OF INCOME DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------- ------------------ -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revenues
Interest income on investments
available for sale............... $ 78 $ 7
Other income...................... -- --
------- -------
Total income.................... 78 7
Expenses
Interest expense.................. -- --
Other expenses.................... 1,128 155
------- -------
Total expenses.................. 1,128 155
Income before income taxes and
equity in undistributed income of
subsidiaries....................... (1,050) (148)
Income taxes...................... (366) --
------- -------
Loss before equity in undistributed
income of subsidiaries............. (684) (148)
Equity in undistributed income of
subsidiaries....................... 12,102 20,833
------- -------
Net income.......................... $11,418 $20,685
======= =======
</TABLE>
74
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
FOR THE PERIOD FROM
FOR THE YEAR ENDED JUNE 21, 1996 TO
CONDENSED STATEMENT OF CASH FLOWS DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------- ------------------ -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................. $ 11,418 $ 20,685
Equity in undistributed earnings of
subsidiaries.......................... (12,102) (20,833)
Other, net............................. (362) --
-------- --------
Net cash used in operating
activities.......................... (1,046) (148)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in subsidiaries............. -- (86,297)
Purchases of investment securities..... (8,830) (257)
Sale of investment securities.......... 7,409 51
Other, net............................. 8,615 512
-------- --------
Net cash provided by (used in)
investing activities................ 7,194 (85,991)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common
stock................................. 607 86,547
Payments to repurchase common stock.... (4,193) --
Advances from subsidiaries............. 1,128 155
Repayments of advances from
subsidiaries.......................... (305) (51)
Dividends paid......................... (3,384) (512)
Other, net............................. -- --
-------- --------
Net cash (used in) provided by
financing activities................ (6,147) 86,139
-------- --------
Net Increase in cash and due from banks.. 1 --
Beginning balance: cash and due from
banks................................... -- --
-------- --------
Ending balance: cash and due from banks.. $ 1 $ --
======== ========
</TABLE>
26. SUBSEQUENT EVENTS
On January 21, 1998, the Company announced a 14% increase in its quarterly
cash divided to $0.16 per share payable on February 23, 1998 to shareholders
of record as of the close of business on February 2, 1998.
75
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of SIS Bancorp, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, changes in stockholders' equity, and of
cash flows present fairly, in all material respects, the financial position of
SIS Bancorp, Inc. and its subsidiaries (the "Company") at December 31, 1997
and 1996, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse
Price Waterhouse LLP
Boston, Massachusetts
January 22, 1998
76
<PAGE>
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) INFORMATION REGARDING DIRECTORS AND NOMINEES: The Directors of the
Registrant are listed below. The other information required by the response to
this Item regarding those persons who are directors of the Company is
contained in the discussion under the caption "Directors and Nominees"
contained on page 4 of the Proxy Statement, which is incorporated by reference
herein.
<TABLE>
<CAPTION>
NAME & PRINCIPAL OCCUPATION POSITION HELD WITH COMPANY
--------------------------- --------------------------
<S> <C>
Ronald E. Bourbeau Director
Owner, Yankee Boat Yard & Marina,
Inc.;
Treasurer, Northeast Yacht Sales
Director, Chairman of the Board GBT
Sr. Mary Caritas (Geary), S.P. Director
Retired, former President & CEO of
Mercy Hospital
John M. Naughton Chairman of the Board of Directors
Retired, former Executive Vice
President,
Massachusetts Mutual Life Insurance
Co.
Charles L. Johnson Director
Consultant--Associated Energy
Managers,
an investment management firm
F. William Marshall, Jr. Director, President and Chief
President & CEO, SIS Bancorp, Inc. Executive Officer
and SIS Bank
Thomas O'Brien Director
Dean, School of Management
University of Massachusetts
William B. Hart, Jr. Director
President, the Dunfey Group
Stephen A. Shatz Director
Attorney, partner in Shatz, Schwartz
& Fentin, P.C.
</TABLE>
(b) EXECUTIVE OFFICERS OF THE COMPANY: The following table sets forth
certain information regarding the Executive Officers of the Company. The other
information required by the response to this Item regarding those persons who
are Executive Officers of the Company is contained in the discussion under the
caption "Executive Officers of SIS Bancorp, Inc." contained on page 7 of the
Proxy Statement, which is incorporated by reference herein.
<TABLE>
<CAPTION>
NAME POSITION AND OFFICE WITH THE COMPANY
---- ------------------------------------
<C> <S>
F. William Marshall, Jr. President & Chief Executive Officer, Director--SIS Bancorp, Inc.
and SIS Bank
J. Gilbert Soucie Vice Chairman, SIS Bancorp, Inc.; President & CEO--Glastonbury Bank
& Trust Company
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
NAME POSITION AND OFFICE WITH THE COMPANY
---- ------------------------------------
<C> <S>
Frank W. Barrett Executive Vice President/Credit & Commercial Lending Group--SIS
Bancorp, Inc.
John F. Treanor Executive Vice President, Treasurer, Chief Operating Officer &
Chief Financial Officer--SIS Bancorp, Inc.
Gilbert F. Ehmke Senior Vice President & Chief Investment Officer--SIS Bancorp,
Inc.
Henry J. McWhinnie Senior Vice President/Human Resources Group--SIS Bancorp, Inc.
Jeanne Rinaldo Senior Vice President/Residential Mortgage Group--SIS Bancorp,
Inc.
Christopher A. Sinton Senior Vice President/Retail Banking Group--SIS Bancorp, Inc.
Michael E. Tucker Senior Vice President, General Counsel & Clerk--SIS Bancorp,
Inc.
Ting Chang Vice President, Investor Relations & Corporate Planning--SIS
Bancorp, Inc.
Laura Sotir Katz Vice President & Controller--SIS Bancorp, Inc.
Patricia Train Jatkevicius Vice President/Marketing--SIS Bancorp, Inc.
Brian Schwartz Vice President & Director of Internal Auditing--SIS Bancorp,
Inc.
</TABLE>
(c) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT: The information
required by the response to this Item is contained in the discussion under the
caption "Section 16(a) Compliance" contained on page 23 of the Proxy
Statement, which is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
The response to this Item is contained in the discussion under the captions
"Executive Compensation", "Employment Agreements", "Benefits Under Plans",
contained on Pages 8 through 17 of the Proxy Statement, which is incorporated
by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this Item is incorporated by reference from the discussion
under the headings "Security Ownership of Management and Directors" on Page 5
of the Proxy Statement, which is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this Item is contained in the discussion under the captions
"Transactions with Certain Related Persons" and "Certain Business
Relationships" contained on Page 18 of the Proxy Statement, which is
incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
(a) CONTENTS:
(1) FINANCIAL STATEMENTS: All Financial Statements are included as Part
II, Item 8 of this Report. The index is on page 40 of this Report.
(2) FINANCIAL STATEMENT SCHEDULES: All Financial Statement Schedules are
included as Part II, Item 8 of this Report. The index is on page 40 of this
Report.
78
<PAGE>
(b) REPORTS ON FORM 8-K: During the fourth quarter of 1997, the following
Form 8-K's were filed:
. Form 8-K filed on October 22, 1997 relating to the press release
issued on October 22, 1997 containing unaudited financial information
and announcing a cash dividend for the quarter ended September 30,
1997 and containing information relating to the previously announced
acquisition of GBT and the acceleration of systems conversions and
full "back office" integration of GBT with the Company.
. Form 8-K filed on December 31, 1997 announcing the completion on
December 17, 1997 of the acquisition of GBT by the Company pursuant
to the Agreement and Plan of Reorganization dated August 18, 1997.
(c) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT LOCATION
----------- ------- --------
<C> <S> <C>
(3)(a). Articles of Organization of SIS Bancorp, Inc. (1)
(3)(b). By-laws of SIS Bancorp, Inc. (1)
4(a). Specimen Common Stock Certificate (4)
10. Material Contracts
(a) Employment agreements for Messrs. F. William
Marshall, Jr., Frank W. Barrett, B. John Dill, John
F. Treanor, Henry J. McWhinnie, Ms. Jeanne Rinaldo,
Mr. Michael E. Tucker (1)
(b) Employment agreements for Messrs. Gilbert F. Ehmke
and Christopher A. Sinton. (2)
(c) Employment agreement for Mr. J. Gilbert Soucie
(d) Director and Management Stock Option Plan, as
amended. (4)
(e) Director and Management Restricted Stock Plan, as
amended. (4)
(f) Rights Agreement, dated January 22, 1997 by and
between the Company and ChaseMellon Shareholder
Services, as Rights Agent (3)
21. Subsidiaries of the Registrant
23. Consent of Price Waterhouse, LLP.
</TABLE>
- --------
Locations of Exhibits if not attached hereto:
(1) Exhibit is incorporated by reference to the Form 8-A Registration
Statement filed by the Company with the Securities and Exchange Commission
("SEC") on June 21, 1996.
(2) Exhibit is incorporated by reference to the Form 10-Q for the quarter
ending June 30, 1996.
(3) Exhibit is incorporated by reference to the Form 8-A Registration
Statement filed by the Company with the SEC on January 23, 1997.
(4) Exhibit is incorporated by reference to the Form 10-K filed for the year
ended December 31, 1996.
79
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934, THE BANK HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
March 30, 1998
Springfield Institution for Savings
/s/ F. William Marshall, Jr.
By: _________________________________
F. William Marshall, Jr.,
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY
AND IN THE CAPACITIES ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ F. William Marshall, Jr. President, Chief 03-30-98
By: ____________________________ Executive Officer and
F. William Marshall, Jr. Director
/s/ John F. Treanor Executive Vice 03-30-98
By: ____________________________ President, Chief
John F. Treanor Financial Officer,
Chief Operating Officer
and Treasurer
/s/ Laura Sotir Katz Vice President, 03-30-98
By: ____________________________ Controller (Chief
Laura Sotir Katz Accounting Officer)
/s/ John M. Naughton Director, Chairman of 03-30-98
By: ____________________________ the Board
John M. Naughton
/s/ Sister Mary Caritas Director 03-30-98
Geary, S.P.
By: ____________________________
Sister Mary Caritas Geary,
S.P.
/s/ Charles L. Johnson Director 03-30-98
By: ____________________________
Charles L. Johnson
/s/ Stephen A. Shatz Director 03-30-98
By: ____________________________
Stephen A. Shatz
/s/ Thomas O'Brien Director 03-30-98
By: ____________________________
Thomas O'Brien
/s/ William B. Hart, Jr. Director 03-30-98
By: ____________________________
William B. Hart, Jr.
/s/ Ronald E. Bourbeau Director 03-30-98
By: ____________________________
Ronald E. Bourbeau
80
<PAGE>
Exhibit 10.(c)
AGREEMENT REGARDING AMENDMENT TO
EMPLOYMENT AGREEMENT AND RELATED MATTERS
Dated as of December 15, 1997
Reference is made to that certain Employment Agreement dated August 15,
1997, effective as of October 11, 1995, between Glastonbury Bank & Trust Company
("GBT") and J. Gilbert Soucie ("Employee") (the "Employment Agreement"), that
certain Executive Deferred Compensation Plan, effective as of December 1, 1995
(the "Plan"), that certain Participation Agreement dated August 15, 1997,
entered into by and between GBT and Employee in connection with the Plan, and
that certain Trust Under Glastonbury Bank & Trust Company, Inc. Executive
Deferred Compensation Plan and Other Arrangements dated August 15, 1997 (the
"Trust").
This agreement (referred to herein as this "Amendment") is intended to
amend certain provisions contained in the Employment Agreement and address
certain related matters pertaining to the Plan and the Trust, and is being
entered into as of the date set forth above by and among GBT, Employee and SIS
Bancorp, Inc. ("SIS"), in connection with, and subject to, the consummation of
the acquisition of GBT by SIS (the "Acquisition"), pursuant to that certain
Agreement and Plan of Reorganization dated August 18, 1997 by and between SIS
and GBT (the "Acquisition Agreement"). The Employment Agreement, as and to the
extent amended by this Amendment, is and shall continue to be in full force and
effect and shall not be affected by this Amendment except and only to the extent
specified herein. If, and to the extent that, the Acquisition Agreement is
terminated in accordance with its terms, and the Acquisition consequently is not
consummated as contemplated by the parties hereto, then this Amendment shall
become null and void, and shall have no further force or effect, as of the date
upon which such termination of the Acquisition Agreement occurs.
In consideration of the premises and mutual premises and covenants
contained herein, and other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereby agree as follows:
1. The last sentence of Article III (Compensation) of the Employment
Agreement shall be and hereby is amended and restated in its entirety to read as
follows: "Said salary shall be payable in equal monthly installments commencing
the first of the month following the effective date or in accordance with such
other schedule as may be utilized by SIS Bancorp, Inc. ("SIS") generally for the
payment of annual salary to its salaried employees."
2. The last sentence of Article IV (Duties) of the Employment Agreement
shall be and hereby is amended and restated in its entirety to read as follows:
"Employee's duties, responsibilities and job location during the term of this
Agreement shall be substantially the same as they were during the twelve (12)
month period prior to the effective date of a change of control, taking into
account that Employer shall conduct its business and operations following the
date on which Employer is acquired by SIS (the "Acquisition") as a wholly owned
subsidiary of SIS and that Employee's duties, responsibilities and job location
may be subject to change as a result of Employer's having become a part of SIS's
consolidated business organization."
3. Article V (Benefits) shall be and hereby is amended and restated in
its entirety to read as follows:
During the term of this Agreement, Employee shall be entitled to and
shall receive all
<PAGE>
benefits and conditions of employment available generally to employees
of Employer at the same level and responsibility pursuant to Employer
plans and policies then in effect during the twelve (12) month period
prior to the effective date of the change of control or as such
benefits and conditions may be amended or modified following the
completion of the Acquisition in accordance with the terms of Section
5.23(a) of the Agreement and Plan of Reorganization dated August 18,
1997 by and between SIS and Employer. The employment benefits and
conditions shall include by way of illustration, but not of
limitation, medical and hospital insurance, life insurance, pension,
profit sharing or retirement income plans, annual vacation, holidays,
and disability insurance; provided, however; notwithstanding any other
provision in this Agreement to the contrary, that Employee shall not,
after his termination of employment, be entitled to additional
benefits, including contributions, benefit accruals and additional
service credit for any purpose, under any plans of the Employer or
SIS, as the case may be, that are intended to comply with Section 401
of the Internal Revenue Code of 1986, as amended, except as such plans
shall otherwise provide.
4. The first paragraph of Article VII (Severance Pay/Benefits) shall be
and hereby is amended and restated in its entirety to read as follows:
If at any time during the term of this Agreement, Employee's
employment is terminated upon the initiative of Employer at any time prior
to an SIS Change of Control (as such term is defined herein) for any reason
other than for cause, and such employment is not otherwise continued by SIS
or any of its affiliates on terms at least as favorable to Employee in the
aggregate as those in effect immediately prior to such termination, then
Employee shall receive the following pay and benefits:
A. A total payment equal to 1/365 of the base amount (i.e., not including
any annual bonus) of Employee's annual salary as in effect immediately
prior to the date of termination multiplied by the number of calendar
days remaining in the period commencing on the first calendar day
following the day on which such termination of employment occurs and
ending on the second anniversary of the date on which the Acquisition
is completed.
B. Continuation of Employee in all medical and hospital insurance, life
insurance, disability insurance, pension, profit sharing or retirement
income plans, and deferred compensation plans at Employer's expense
for the period commencing on the first calendar day following the date
on which such termination occurs and ending on the second anniversary
of the date on which the Acquisition is completed; provided, however,
that the Employee shall not, after his termination of employment, be
entitled to additional benefits, including contributions, benefit
accruals and additional service credit for any purpose, under any
plans of the Employer or SIS, as the case may be, that are intended to
comply with Section 401 of the Internal Revenue Code of 1986, as
amended, except as such plans shall otherwise provide.
C. Outplacement services including professional, secretarial and job
search support for the period commencing on the first calendar day
following the date on which such termination occurs and ending on the
second anniversary of the date on which such Acquisition is completed
at a total cost not to exceed the lesser of $12,000 or such smaller
amount equal to the product of $12,000 multiplied by a fraction, the
numerator of which is equal to the number of calendar days in the
period commencing on the first calendar day following the date on
which such termination occurs and ending on the second anniversary of
the date on which the Acquisition is completed, and the denominator of
which is 730.
<PAGE>
Employee shall have the option of taking a lump sum payment, less
applicable tax deductions, in lieu of such outplacement services.
If at any time during the term of this Agreement, Employee's employment is
terminated for any reason, other than for cause, death or voluntary leaving,
following the occurrence of an SIS Change of Control, then Employee shall
receive the following pay and benefits:
A. A total payment equal to two times the base amount (i.e., not including any
annual bonus) of Employee's annual salary as in effect immediately prior to
the date of termination.
B. Continuation of Employee in all medical and hospital insurance, life
insurance, disability insurance, pension, profit sharing or retirement
income plans, and deferred compensation plans at Employer's expense for the
period commencing on the first calendar day following the date on which
such termination occurs and ending on the second anniversary of such;
provided, however, that the Employee shall not, after his termination of
employment, be entitled to additional benefits, including contributions,
benefit accruals and additional service credit for any purpose, under any
plans of the Employer or SIS, as the case may be, that are intended to
comply with Section 401 of the Internal Revenue Code of 1986, as amended,
except as such plans shall otherwise provide.
C. Outplacement services including professional, secretarial and job search
support for the period commencing on the first calendar day following the
date on which such termination occurs and ending on the second anniversary
of such date at a total cost not to exceed $12,000. Employee shall have the
option of taking a lump sum payment, less applicable tax deductions, in
lieu of such outplacement services.
For purposes of this Article VII, the term "SIS Change of Control" shall mean a
change of control as defined in the second sentence of Article II of this
Agreement, except that the term "SIS" shall be substituted for the term
"Employer" in each instance in which the term "Employer" is used in such
definition, the reference to "the purchase of Employer's assets" shall mean the
purchase of all or substantially all of such assets and the reference to "Board
of Directors" as used in such definition shall mean the SIS Board of Directors.
5. SIS does hereby confirm that, from and after the date on which the
Acquisition is completed, SIS shall cause GBT, as its wholly owned subsidiary,
to honor the terms and conditions of the Plan in accordance with the
Participation Agreement.
6. Each of GBT and Employee hereby confirms and acknowledges that the
terms of the Trust have been amended as of the date hereof to the effect that
the definition of "Change of Control" contained in Section 13(d) of the Trust
pertains to a Change of Control affecting SIS and not GBT.
7. Each of GBT and Employee represents and warrants to SIS that attached
to this Amendment are true and complete copies of (i) the Employment Agreement,
the Plan and the Participation Agreement, as each is in full force and effect on
the date hereof, and (ii) the amendment to the Trust referred to in paragraph 6
above, which is in full force and effect on the date hereof
IN WITNESS WHEREOF, GBT and SIS have caused this Amendment to be executed
and delivered by their duly authorized officers and Employee has executed and
delivered this Amendment in his individual capacity, all as of the day and year
first above written.
<PAGE>
SIS BANCORP, INC.
By: /s/ Henry J. McWhinnie
-----------------------
Name: Henry J. McWhinnie
Title: SVP Human Resources
GLASTONBURY BANK & TRUST COMPANY
By: /s/ J. Gilbert Soucie
----------------------
Name: J. Gilbert Soucie
Title: President & CEO
EMPLOYEE:
/s/ J. Gilbert Soucie
-----------------
J. Gilbert Soucie
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
Agreement effective as of October 11, 1995, between Glastonbury Bank and
Trust Company Incorporated, with its principal office at 2461 Main Street,
Glastonbury, Connecticut 06033, (hereinafter referred to as "Employer") and J.
Gilbert Soucie of 39 South Mill Drive, Glastonbury, Connecticut, 06033
(hereinafter referred to as "Employee").
WITNESSETH:
WHEREAS Employer desires to retain the services of Employee on the terms
hereinafter set forth;
WHEREAS, Employer also recognizes the continuing possibility that a third
party could acquire Employer or a substantial part of its business, or obtain
through ownership of voting common stock of Employer a position of controlling
influence with respect to Employer;
WHEREAS Employer further desires to manifest its concern for Employees'
fair treatment and welfare in the event of a change of control and to be assured
that Employee will be available to advise Employer in such circumstances without
being influenced by the impact of a change of control on Employees' future role
with Employer;
WHEREAS, Employee desires to continue to render services to Employer and
has foregone other employment opportunities and compensation in reliance on the
promises contained in this Agreement;
NOW THEREFORE, in consideration of the premises and the mutual promises
herein contained, the parties agree as follows:
Article I
Employment
Employer hereby employs Employee in the position of President and Employee
hereby accepts such employment upon the terms and conditions hereinafter set
forth.
Article II
Term
The term of this Agreement shall begin on the effective date of a change of
control and will continue for twenty four (24) months thereafter unless sooner
terminated by mutual written agreement of the parties. For purposes of this
Agreement the term "change of control shall mean (i) the purchase or acquisition
of controlling interest in Employer's common stock or the purchase of Employer's
assets by any person or entity; or (ii) Regulatory Agency action which initiates
effectively causes a change in management of Employer; or (iii) a change in the
majority of the Board of Directors on or after the effective date of this
Agreement. "Effective date" shall mean the date said change of control shall
take effect based on the purchase or closing documents, change majority of the
Board of Directors, or the Regulatory Agency action as the case may be.
Notwithstanding the foregoing, if change of control shall occur at any time
within a period of twelve (12) months after the termination of Employee before
the change of control occurs for any reason other than "for cause" as defined in
Article VII of this Agreement, then the Employee shall receive all of the
severance pay and benefits set forth in Article VII upon a change of control.
<PAGE>
Article III
Compensation
For all services rendered by Employee under this Agreement, Employer shall
pay Employee an annual salary at least equal to Employee's annual salary during
the twelve (12) month period prior to the effective date of the change of
control. Said salary shall be payable in equal monthly installments commencing
the first of the month following the effective date.
Article IV
Duties
Employee shall be employed as President during the term of this Agreement.
Employee agrees to devote his entire working time to Employer as directed by the
Board of Directors, provided nothing herein shall prohibit Employee from
personally, and for his own account, investing or trading in real estate,
stocks, bonds, securities, commodities or other forms of investment for his own
benefit. Employee's duties, responsibilities and job location during the term of
this Agreement shall be substantially the same as they were during the twelve
(12) month period prior to the effective date of a change of control.
Article V
Benefits
During the term of this Agreement, Employee shall be entitled to and shall
receive all benefits and conditions of employment available generally to
employees of Employer at the same level and responsibility pursuant to Employer
plans and policies then in effect during the twelve (12) month period prior to
the effective date of the change of control including by way of illustration,
but not of limitation, Medical and Hospital Insurance, Life Insurance, Pension,
Profit Sharing, or Retirement Income Plans, Annual Vacation, Holidays,
Disability Insurance, Automobile and gas allowance.
Article VI
Bonus
During the term of this Agreement, Employee shall receive an annual bonus
equal to or greater than the bonus paid Employee during the twelve (12) month
period prior to the effective date of the change of control.
Article VII
Severance Pay/Benefits
If during the term of this Agreement Employee's employment terminates for
any reason other than for cause, death or voluntary leaving, Employee shall
receive the following pay and benefits:
A. A payment in Twenty four (24) monthly installments equal to two (2)
times what the Employee's salary has been for the Twelve (12) months prior
to the date of termination, commencing on the first of the month following
the date of termination;
B. Continuation of Employee in all Medical, Hospital, Life Insurance,
Disability, Profit-sharing, Retirement Income Plans, Executive Deferred
Compensation Plan and automobile and gas allowances at Employer's expense
for Twenty four (24) months from the date of termination;
<PAGE>
C. Out-placement Services including professional, secretarial, and job
search support for Twenty four (24) months from the date of termination at
a total cost not to exceed $12,000.00. Employee shall have the option of
taking a lump sum payment less applicable tax deductions in lieu of
outplacement;
For the purpose of this Article, the term "for cause" is defined as the
commission of a felony by employee or the deliberate refusal to render the
services specified in Article IV, provided in the latter case Employer has given
Employee 30 days prior written notice and the opportunity to cure. The term
"voluntary leaving" is defined to be the Employees' leaving employment with
Employer without any work related cause. Work related cause includes, but shall
not be limited to, any change of duties, change of reporting relationship,
change of location of work or other conditions which materially change the
employment relationship that existed during the twelve (12) month period prior
to the effective date of the change of control. Employee shall not be required
to render additional services for the payments referenced above nor shall
Employer restrict Employee's post-termination employment in any manner as a
condition of these payments.
If the application of this Section, upon a change of control shall cause
the payments under this Agreement, together with other payments the Employee may
be due, to exceed the golden parachute deductibility limits of Section 280g of
the Internal Revenue Code, as amended, or to be a violation of the golden
parachute provisions of Section 18 of the Federal Deposit Insurance Act or an
unsafe or unsound banking practice as provided pursuant to the Comptroller of
Currency Regulations, the payments shall be restricted or spread out to
eliminate the respective problem. The Board of Directors of the Employer shall
make the determination after it appears the change of control will occur, but
before it actually occurs. The determination of a violation of the golden
parachute provisions of the Federal Deposit Insurance Act or an unsafe or
unsound banking practice shall be triggered by a finding by the Federal Deposit
Insurance Corporation. If such a finding is proposed after a change of control,
the Trustee of the Rabbi Trust under the Executive Deferred Compensation Plan
shall be responsible to make the determination. The Employee shall be notified
of any restriction or potential adverse finding by the Federal Deposit Insurance
Corporation. He shall be given a reasonable opportunity to present his position
to the contrary in person, with representation, before the decision maker.
Article VIII
Disability/Death
If Employee dies or is totally and permanently disabled due to either
mental or physical causes during the term of this Agreement, Employer shall pay
the compensation and benefits specified in Article VII less sickness,
disability, or worker's compensation benefits Employee receives during said
period. Employer shall be furnished with acceptable medical evidence of
Employee's disability. Acceptable medical evidence shall be certification by a
physician satisfactory to both Employer and Employee, certifying that Employee
is then incapable of performing his duties under the Agreement. If the parties
cannot agree upon a physician to make the necessary examination and
certification, the parties shall submit the matter to the President of the local
medical society nearest to the place where the Employee is then physically
located to have a physician designated to make such examination and
certification, which shall be binding. Employer shall pay for all expenses
relating to said examination and certification. Employer shall implement the
provisions of Article VII as of the date of certification of the disability. In
the case of Employee's death during the term of the Agreement, all remaining
severance pay shall be paid to his estate and the Executive Deferred
Compensation Plan benefits shall be paid in accordance with the Plan provisions.
<PAGE>
Article IX
Applicable Law
This Agreement is made and entered into in the State of Connecticut, and
the laws of Connecticut shall govern its validity and interpretation and the
performance by the parties hereto of their respective duties and obligations
hereunder. The parties agree that jurisdiction and venue for any legal action
arising hereunder shall vest in Courts within the County of Hartford, State of
Connecticut.
Article X
Notice
Any notice, request, demand or other communication hereunder shall be in
writing and shall be deemed to be duly given when personally delivered to an
officer of the Employer or to the Employee, as the case may be, or when
delivered by mail at the following address:
For Employee For Employer
------------ ------------
Mr. J. Gilbert Soucie Chairman
39 South Mill Drive Glastonbury Bank & Trust Company
Glastonbury, CT 06033 2461 Main Street
Glastonbury, CT 06033
Article XI
Arbitration
Any controversy, claim or dispute arising out of or relating to this
Agreement or breach thereof, may be settled at the option of Employer or
Employee by arbitration in Hartford, Connecticut in accordance with the
expedited Arbitration Rules of the American Arbitration Association, Hartford,
Connecticut office and judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. In reaching his or her
decision, the arbitrator shall have no authority to change or modify any
provision of this Agreement.
Article XII
Successors/Assigns
The terms of this Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective personal representatives, successors
and assigns and the holders from time to time of any of the stock of Employer.
Article XIII
Entire Agreement
This Agreement supersedes all prior Agreements between the parties
concerning the subject matter hereof and this Agreement constitutes the entire
Agreement between the parties with respect thereto. This Agreement may be
modified only with a written instrument duly executed by each of the parties. No
person has any authority to make any representation or promise on behalf of any
of the parties not set forth herein and this Agreement has not been executed in
reliance upon any representation or promise except those contained herein. No
waiver by any party of any breach of this Agreement shall be deemed to be a
waiver of any preceding or succeeding breach.
<PAGE>
Article XIV
Attorneys Fees and Costs
Should either party be required to pursue action in a Court of Law or
Equity to enforce the terms of this Agreement, the other party shall be required
to reimburse the prevailing party for reasonable attorneys fees and costs of
enforcement, upon judgment, however this provision shall not apply to
arbitration under Article XI in which case each party shall pay for its own
attorneys fees and expenses but Employer shall pay for all costs and fees of any
Arbitrator.
Article XV
Usage
Any term used in the singular, plural, masculine, feminine or neuter form
shall be singular, plural, masculine, feminine of neuter as proper reading
requires.
Article XVI
Miscellaneous
Sections and other headings contained in this Employment Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Employment Agreement.
Should any valid Federal or State Law or final determination of
administrative agency or Court of competent jurisdiction affect any provision of
this Agreement the provision or provisions so affected should be automatically
conformed to the law or determination and otherwise the Agreement shall continue
in full force and effect.
Dated at Glastonbury, Connecticut this 15th day of August, 1997.
Subscribed and Sworn to before me this EMPLOYEE
15th day of August, 1997 J. Gilbert Soucie
/s/ Helen P. LaPlante /s/ J. Gilbert Soucie
- ---------------------- ----------------------
Notary Public (Signature)
Subscribed and Sworn to before me this EMPLOYER
15th day of August, 1997 Glastonbury Bank & Trust Company
/s/ Adelina G. Guaschino /s/ Ronald E. Bourbeau
- ------------------------- -----------------------
Notary Public Ronald E. Bourbeau,
Chairman, Duly Authorized
Subscribed and Sworn to before me this
15th Day of August, 1997
/s/ Adelina G. Guaschino /s/ Grace C. Nome
- ------------------------- ------------------
Notary Public Grace C. Nome,
Chairman, Personnel Committee
Duly Authorized
<PAGE>
THE GLASTONBURY BANK & TRUST COMPANY
EXECUTIVE DEFERRED COMPENSATION PLAN
<PAGE>
THE GLASTONBURY BANK & TRUST COMPANY
------------------------------------
EXECUTIVE DEFERRED COMPENSATION PLAN
------------------------------------
TABLE OF CONTENTS
-----------------
ARTICLE I
------- -
Purpose of the Plan - Effective Date
------------------------------------
1.01 Purpose 1
1.02 Effective Date 1
ARTICLE II
----------
Definitions
-----------
2.01 Active Participant 1
2.02 Beneficiary 1
2.03 Board of Directors 1
2.04 Cause 2
2.05 Change of Control 2
2.06 Committee 2
2.07 Earlier Retirement Date 2
2.08 Employee 2
2.09 Employer 2
2.10 Executive Officer 2
2.11 Insurance Company 2
2.12 Normal Retirement Date 2
2.13 Participant 2
2.14 Participation Agreement 3
2.15 Plan 3
2.16 Policy 3
2.17 Retirement Pension Plan 3
2.18 Total Disability 3
2.19 Voluntary Leaving 3
<PAGE>
ARTICLE III
-----------
Administration
--------------
3.01 Administration 3
ARTICLE IV
----------
Eligibility for Participation
-----------------------------
4.01 Selection of Executive Officers to be
Included in the Plan 4
ARTICLE V
---------
Benefits
--------
5.01 Normal Retirement Benefits 4
5.02 Earlier Retirement Benefits 5
5.03 Benefits Upon Termination of Employment 5
5.04 Change in Targeted Amount 5
5.05 Payment Options 6
5.06 Disability Benefits 6
5.07 Termination For Cause 7
Death Benefits
--------------
6.01 Pre-Retirement 7
6.02 Post Retirement 7
ARTICLE VII
-----------
Discretionary Purchase of Policies
----------------------------------
7.01 Discretionary Purchase of Policies 7
7.02 Interest of Participant 8
<PAGE>
ARTICLE VIII
------------
Termination and Amendment
-------------------------
8.01 Termination and Amendment 8
ARTICLE IX
----------
Claims Procedure
----------------
9.01 Determination 8
9.02 Review 8
9.03 Decision Binding 9
ARTICLE X
---------
Miscellaneous Provisions
------------------------
10.01 No Guarantee of Employment 9
10.02 Nonalienation of Benefits 9
10.03 Withholding 9
10.04 Gender and Number 9
10.05 Titles and Headings 9
10.06 Governing Law 10
10.07 Separability Clause 10
<PAGE>
THE GLASTONBURY BANK & TRUST COMPANY
------------------------------------
EXECUTIVE OEFERRED COMPENSATION PLAN
------------------------------------
ARTICLE I
---------
Purpose of the Plan - Effective Date
------------------------------------
Section 1.01 - Purpose -
- ------------ -------
The purpose of this p1an, which shall be known as the "The Glastonbury
Bank & Trust Company Executive Deferred Compensation Plan" (hereinafter referred
to as the "Plan"), is to provide for the payment of death and supplemental
retirement benefits to or in respect to Executive Officers of The Glastonbury
Bank & Trust Company (hereinafter referred to as "Glastonbury"). This Plan is
intended to assist Glastonbury in attracting and retaining Executive Officers of
outstanding ability.
Section 1.02 - Effective Date -
- ------------ --------------
This Plan shall be effective December 1, 1995.
ARTICLE II
----------
Definitions
-----------
Section 2.01 - Active Participant -
- ------------ ------------------
Shall mean an Executive Officer who becomes covered under this Plan as
provided in ARTICLE IV and remains covered until his participation ceases upon
retirement or termination of employment with Glastonbury, or termination of the
Plan.
Section 2.02 - Beneficiary -
- ------------ -----------
Shall mean any one or more persons, corporations or trusts last
designated by the Participant to receive the death benefits provided the
Participant under this Plan. All such designations shall be by written
instrument filed with, and in form satisfactory to, the Chairman of the Board of
Glastonbury. All such designations shall be revocable at any time by the
Participant, without the consent of any Beneficiary, by written instrument filed
with the Chairman of the Board of Glastonbury. If no designation is in effect
when any death benefits payable under this Plan become due, the Beneficiary
shall be the spouse of the Participant, or if no spouse is living, the
representatives of the Participant's estate.
Section 2.03 - Board of Directors -
- ------------ ------------------
Shall mean the Board of Directors of Glastonbury, sometimes referred
to as the Board.
<PAGE>
Section 2.04 - Cause -
- ------------ -----
Shall mean the occurrence of any event defined as "cause" in the
Executive Officer's Employment Agreement.
Section 2.05 - Change of Control -
- ------------ -----------------
Shall mean the occurrence of any event defined as a "change of
control" in the Executive Officer's Employment Agreement.
Section 2.06 - Committee -
- ------------ ---------
Shall mean the Executive Committee of the Board of Directors. After a
change of control, it shall mean the Trustee under the "Rabbi Trust" under this
Plan.
Section 2.07 - Earlier Retirement Date -
- ------------ -----------------------
Shall mean the Participant's Earlier Retirement Date as determined
under the Executive Officer's Participation Agreement.
Section 2.08 - Employee -
- ------------ --------
Shall mean a person, including an Executive Officer, employed by
Glastonbury.
Section 2.09 - Employer -
- ------------ --------
Shall mean The Glastonbury Bank & Trust Company.
Section 2.10 - Executive Officer -
- ------------ -----------------
Shall mean any officer of Glastonbury who has an Employment Agreement
and who is designated as an Executive Officer for purposes of this Plan by the
Chairman of the Board of Glastonbury or the Committee.
Section 2.11 - Insurance Company -
- ------------ -----------------
Shall mean any legal reserve life insurance company which shall issue
a Policy in accordance with ARTICLE VII of this Plan.
Section 2.12 - Normal Retirement Date -
- ------------ ----------------------
Shall mean the Participant's sixty-fifth (65th) birthday.
Section 2.13 - Participant -
- ------------
Shall mean the individual Participants in the Plan as selected by the
Chairman of the Board or the Committee, and shall be limited to Executive
Officers.
<PAGE>
Section 2.14 - Participation Agreement -
- ------------ -----------------------
Shall mean the document used by an Executive Officer and Glastonbury
to evidence the Executive Officer's participation in this Plan.
Section 2.15 - Plan
- ------------
Shall mean this "Executive Deferred Compensation Plan".
Section 2.16 - Policy -
- ------------ ------
Shall mean any life insurance policy purchased by Glastonbury on the
life of a Participant.
Section 2.17 - Retirement Pension Plan -
- ------------ -----------------------
Shall mean Glastonbury's defined benefit retirement pension plan as
currently in effect and as the same may be amended from time to time, and any
successor thereto or replacement thereof.
Section 2.18 - Total Disability -
- ------------ ----------------
For purposes of this Plan, a Participant shall be considered totally
disabled if he is eligible to receive disability payments under any long term
disability program maintained by the Employer.
Section 2.19 - Voluntary Leaving -
- ------------ -----------------
Shall mean the occurrence of any event defined as "Voluntary
Leaving" in the Executive Officer's Employment Agreement.
ARTICLE III
-----------
Administration
--------------
Section 3.01 - Administration -
------------ --------------
This Plan will be administered by and under the direction of the
Chairman of the Board. The Chairman of the Board shall adopt, and may from
time to time modify or amend, such rules and guidelines consistent herewith
as he may deem necessary or appropriate for carrying out the provisions and
purposes of the Plan, which, upon his adoption and so long as in effect,
shall be deemed a part hereof to the same extent as if set forth in the Plan
(hereinafter referred to as the "Administrative Guidelines") . Any
interpretation and construction by the Chairman of the Board of any provision
of, and the determination of any question arising under, the Plan; the
Administrative Guidelines, and any Participation Agreement under the Plan,
shall be final and conclusive.
<PAGE>
ARTICLE IV
----------
Eligibility for Participation
-----------------------------
Section 4.01 - Selection of Executive Officers to be Included in the Plan -
------------ ----------------------------------------------------- ----
Employees included in the Plan will be those Executive Officers who are
selected by the Chairman of the Board and approved by the Board of Directors
or the Committee. It is intended that Participants in the Plan will include
only those Executive Officers who, in the opinion of the Chairman of the
Board of the Committee, are most likely to make a substantial contribution to
the success of Glastonbury. Participation in the Plan shall be evidenced by
a Participation Agreement between the Chairman of the Board (or his
delegate), in the name of and on behalf of Glastonbury, and the Executive
Officer in such form and substance as shall be approved from time to time by
the Chairman.
ARTICLE V
---------
Benefits
--------
Section 5.01 - Normal Retirement Benefits -
- ------------ --------------------------
(a) Upon termination of employment with Glastonbury the Participant
has attained his Normal Retirement Date, or at such later time
as both Glastonbury and the Participant shall agree, the
Participant shall be entitled to a Normal Retirement Benefit
under this Plan. The annual amount of the Participant's Normal
Retirement Benefit shall be equal to the amount specified in the
Participation Agreement. Glastonbury shall pay such benefit to
the Participant in equal monthly installments for the life of
the Participant with one hundred percent (100%) of the
Participant's monthly benefit continuing to be paid upon his
death to his spouse, if such spouse were married to him at the
date benefit payments commence and at the date of his death and
such spouse survives him.
(b) The Normal Retirement Benefit payable to a Participant who
continues in employment after his Normal Retirement Date shall
not be actuarially increased to take account of the commencement
of such benefits after the Participant's Normal Retirement Date.
(c) The first installment of Normal Retirement Benefits under this
Plan shall be paid on the first day of the month coincident with
or next following the date on which the Participant's retirement
occurs, and subsequent installments shall be paid on the first
day of each subsequent month.
<PAGE>
Section 5.02 - Earlier Retirement Benefits -
- ------------ ---------------------------
(a) Upon termination of employment with Glastonbury on or after the
Participant's Earlier Retirement Date and before his Normal
Retirement Date, a Participant who elects to retire on Earlier
Retirement under the Retirement Pension Plan shall be considered
to have elected Earlier Retirement under this Plan, and shall be
entitled to an Earlier Retirement Benefit under this Plan if he
meets the requirements contained in his Participation Agreement
for Earlier Retirement Benefits. The annual amount of the
Participant's Earlier Retirement Benefit shall be determined in
accordance with his Participation Agreement. Glastonbury shall
pay such benefit to the Participant in equal monthly
installments for the life of the Participant with one hundred
percent (100%) of the Participant's monthly benefit continuing
to be paid upon his death to his spouse, if such spouse were
married to him at the date benefit payments commence and at the
date of his death and such spouse survives him.
(b) The first installment of Earlier Retirement Benefits under this
Plan shall be paid on the first day of the month coincident with
or next following the date on which the Participant's retirement
occurs, and subsequent installments shall be paid on the first
day of each subsequent month.
Section 5.03 - Benefits Upon Termination of Employment -
- ------------ ---------------------------------------
(a) Upon termination of employment with Glastonbury before the
Participant's Normal Retirement Date or Earlier Retirement Date,
a Participant shall be entitled to a benefit under this Plan to
the extent he meets the vesting requirements contained in the
Termination of Employment Benefit provisions of his
Participation Agreement. Glastonbury shall pay such benefit to
the Participant in equal monthly installments for the life of
the Participant with one hundred percent (100%) of the
Participant's monthly benefit continuing to be paid upon his
death to his spouse, if such spouse were married to him at the
date benefit payments commence and at the date of his death and
such spouse survives him.
(b) The first installment of Termination of Employment Benefits
under this Plan shall be paid on the first day of the month
coincident with or next following the date on which the
Participant's Normal Retirement Date occurs, and subsequent
installments shall be paid on the first day of each subsequent
month.
Section 5.04 - Change in Targeted Amount -
- ------------ -------------------------
A Participant shall execute a new Participation Agreement if the
targeted amount specified in his Participation Agreement is to be increased or
decreased because of a change in his office or for any other reason. The
effective date of his participation as specified in his new Participation
Agreement shall be the effective date of his participation as specified in
his original Participation Agreement.
<PAGE>
Section 5.05 - Payment Options -
- ------------ ---------------
Benefits under this paragraph shall be paid in accordance with the
payment method specified in Sections 5.01, 5.02 and 5.03, unless a Participant
------------- ---- ----
elects (in accordance with the second paragraph of this Section) an optional
method of payment described in the third paragraph of this Section. An optional
method of payment may be elected at any time prior to the Participant's
scheduled benefit commencement date under this Plan. The amount of the benefit
under any such optional method of payment shall be the Actuarial Equivalent (as
determined under the fourth paragraph of this Section) of the amount of the
benefit that would otherwise have been payable under Sections 5.01, 5.02, and
-------------- ----
5.03.
- ----
An optional method of payment may be elected by written instrument
filed with, and in form satisfactory to, the Chairman of the Board of
Glastonbury. All such elections shall be revocable at any time prior to the
Participant's scheduled benefit commencement date under this Plan by the
Participant by written instrument filed with the Chairman of the Board of
Glastonbury.
The following shall be the available optional methods of payment
under the Plan:
(a) 10 Years Certain and Life Option -
--------------------------------
This option provides a monthly benefit for the life of the
Participant but in no case for less than one hundred twenty
(120) months. If the Participant dies before he has received at
least one hundred twenty (120) monthly payments, monthly
payments will be continued to his Beneficiary until a total of
one hundred twenty (120) monthly payments has been made to the
Participant and his Beneficiary.
(b) 50% Joint and Survivor Spouse Option -
------------------------------------
This option provides a monthly benefit for the life of the
Participant with fifty percent (50%) of the Participant's
monthly benefit continuing to be paid upon his death to his
spouse, if such spouse were married to him at the date benefit
payments commence and at the date of his death and such spouse
survives him. This option shall be effective only if the
Participant and his spouse are alive on the date benefit
payments commence.
For purposes of this Section, the term "Actuarial Equivalent" shall
mean a benefit of equivalent value to the benefit that would otherwise have been
provided to the Participant determined on the basis of the following actuarial
assumptions: (a) interest at seven percent (7%); and (b) the UP-1984 Mortality
Table.
Section 5.06 - Disability Benefits -
- ------------ -------------------
If a Participant incurs a Total Disability during his employment or
while on leave of absence approved by the Employer, the Participant will
continue to be eligible for all retirement benefits provided by the Plan. The
period of his disability shall be considered as service and active participation
in this Plan for purposes of Sections 5.01, 5.02 and 5.03.
------------- ---- ----
<PAGE>
Section 5.07 - Termination For Cause -
- ------------ ---------------------
If a Participant's employment with Glastonbury is terminated for Cause
at any time, his benefits under this Plan shall be forfeited, and neither the
Participant nor his Beneficiary or any other person shall have any further
rights under this Plan.
ARTICLE VI
----------
Death Benefits
--------------
Section 6.01 - Pre-Retirement -
- ------------ --------------
If a Participant who is an Employee of Glastonbury dies before his
actual retirement or termination of employment, or while he is on a leave of
absence approved by the Employer, or while he is on Total Disability,
Glastonbury shall pay to the Participant's Beneficiary the pre-retirement death
benefit specified in the Participant' S Participation Agreement.
Section 6.02 - Post-Retirement -
- ------------ ---------------
(a)
If a Participant dies after he has separated from the employ of
Glastonbury and before the commencement of the payment of benefits
under this Plan, Glastonbury shall pay to the Participant's
Beneficiary an annual benefit equal to the amount determined in
accordance with his Participation Agreement as of the Participant's
date of retirement or other termination of employment. If his
death occurs before his Earlier Retirement Date, the amount of
benefit shall be reduced actuarially under the provisions of the
last paragraph of Section 5.05 for payment before his Normal
------------
Retirement Date. Such benefit shall be payable monthly beginning
on the first day of the month coincident with or next following the
month in which the Participant's death occurs, and shall continue
for the Beneficiary's life.
(b) If a Participant dies after benefit payments have begun,
Glastonbury shall pay the remaining benefits payable, if any,
under the method of payment in effect at the date of his death.
ARTICLE VII
-----------
Discretionary Purchase of Policies
----------------------------------
Section 7 .01 - Discretionary Purchase of Policies -
- ------------- ----------------------------------
Glastonbury may, but shall not be required to, offset its obligations under this
Plan through the purchase of life insurance on the life of each Participant.
Each Participant agrees to cooperate in the securing of life insurance on the
Participant's life by furnishing such information as Glastonbury and the
Insurance Company may require, taking such physical examinations as may be
necessary and taking any other such action as may be requested by Glastonbury
and the Insurance Company to obtain such insurance coverage. If the Participant
refuses to cooperate in the securing of life insurance, Glastonbury shall have
no further obligation under this Plan.
<PAGE>
Section 7.02 - Interest of Participant -
- ------------ -----------------------
Neither the Participant nor any Beneficiary shall have any interest in
any Policy purchased as provided in Section 7.01 nor in any other assets of
------------
Glastonbury. The Participant's and Beneficiary's only interest hereunder shall
be the right to receive the benefits set forth herein. Nothing in this Plan
shall be construed as the creation by Glastonbury of an escrow account or trust
fund or as any other form of asset segregation, it being the intention and
understanding of the parties that Glastonbury's obligations under this Plan
shall be unfunded and that the Participant and any Beneficiary shall, as to
claims under this Plan, be no more than a general creditor of Glastonbury.
ARTICLE VIII
------------
Termination and Amendment
-------------------------
Section 8.01 - Termination and Amendment -
- ------------ -------------------------
The Board of Directors of Glastonbury reserves in its sole and
exclusive discretion the right at any time, and from time to time, to amend this
Plan in any respect or terminate this Plan without restriction and without the
consent of any Participant or Beneficiary; provided, however, that neither an
amendment nor termination of the Plan may, without written approval of a
Participant, reduce or terminate any accrued benefit to or in respect of a
Participant, or eliminate any optional method of payment, except that after a
Change of Control an action of the Board of Directors of Glastonbury to amend or
terminate the Plan shall be effective only if all affected Participants give
their written approval to such action.
ARTICLE IX
----------
Claims Procedure
----------------
Section 9.01 - Determination -
- ------------ -------------
The Chairman shall be responsible for determining all claims for
benefits under this Plan. Within ninety (90) days after receiving a claim, the
Chairman shall notify a claimant of his decision. If the decision is adverse to
the claimant, the Chairman shall advise him of the reasons for the decision, of
the Plan provision involved, of any additional information he must provide to
perfect his claim and of his right to request a review of the decision.
Regardless, after a change of control, the Trustee of the Rabbi Trust shall act
in place of the Chairman and the Committee under the Claims Procedure.
Section 9.02 - Review -
- ------------ ------
A claimant may request a review of an adverse decision by written
request to the Committee made within sixty (60) days after receipt of the
decision. The claimant or his attorney may review pertinent documents and
submit written issues and comments. Within sixty (60) days after receiving a
request for review, the Committee shall notify the claimant in writing of (a)
its decision, (b) the reasons therefor, and (c) the Plan provisions upon which
it is based.
<PAGE>
Section 9.03 - Decision Binding -
- ------------ ----------------
The decision of the Committee after such review shall be made in the
Committee's sole and absolute discretion, and shall be final and binding upon
Glastonbury and the claimant.
ARTICLE X
---------
Miscellaneous Provisions
------------------------
Section 10.01 - No Guarantee of Employment -
- ------------- --------------------------
Nothing contained herein shall be deemed to give any individual the
right to be retained in the service of the Employer or to interfere with the
rights of the Employer to discharge any individual at any time, with or without
cause.
Section 10.02 - Nonalienation of Benefits -
- ------------- -------------------------
No benefits payable hereunder may be assigned, pledged, mortgaged or
hypothecated and, to the extent permitted by law, no such benefits shall be
subject to legal process or attachment for the payment of any claims against any
person entitled to receive the same. Regardless of the preceding sentence, if at
any time payments are to be made in accordance with the provisions of this Plan
and the Participant or the Beneficiary or both are in default under any
indebtedness to the Employer, then the payments remaining to be made to the
Participant or the Beneficiary or both may, at the discretion of the Board of
Directors of the Employer, be reduced by the amount of such indebtedness;
provided, however, that an election by the Employer not to reduce any such
payment or payments shall not constitute a waiver of its claim for such
indebtedness.
Section 10.03 - Withholding -
- ------------- -------------
Retirement payments made by Glastonbury under this Plan shall be
subject to withholding at the time of such payment, as shall be required under
any income tax or other law, whether of the United States or any other
jurisdiction.
Section 10.04 - Gender and Number -
- ------------- -----------------
The masculine pronoun wherever used herein shall include the feminine
gender and the feminine the masculine, and the singular number as used herein
shall include the plural and the plural the singular, unless the context clearly
indicates a different meaning.
Section 10.05 - Titles and-Headings -
- ------------- -------------------
The titles to ARTICLES and headings of Section or subsection of this
Plan are for convenience of reference and, in case of any conflict, the text of
the Plan, rather than titles and headings, shall control.
<PAGE>
Section.10.06 - Governing Law -
- ------------- -------------
The validity, construction and effect of the provisions of this Plan
in all respects shall be governed and regulated according to and by the laws of
the State of Connecticut and to the extent the laws of the State of Connecticut
are superseded by the laws of the United States of America, by the laws of the
United States of America.
Section 10.07 - Separability Clause -
- ------------- -------------------
The invalidity or unenforceability of any provision of this Plan shall
in no way affect the validity or enforceability of any other provision.
<PAGE>
THE GLASTONBURY BANK & TRUST COMPANY
------------------------------------
EXECUTIVE DEFERRED COMPENSATION PLAN
------------------------------------
PARTICIPATION AGREEMENT
-----------------------
The undersigned, J. Gilbert Soucie (hereinafter referred to as the
"Executive Officer"), having been selected by the Chairman (hereinafter
together with his authorized representatives, referred to as the "Chairman") of
the Board of Directors of The Glastonbury Bank and Trust Company (hereinafter
referred to as "Glastonbury") or the Committee as a Participant, and approved by
the Board of Directors as a Participant, pursuant to the provisions thereof, in
the "Glastonbury Bank & Trust Company Executive Deferred Compensation Plan"
(hereinafter referred to as the "Plan") , and Glastonbury, hereby agree as
follows:
(a) Executive Officer, effective as of December 1, 1995, shall became a
Participant in the Plan (a copy of which is attached hereto and
incorporated by reference).
(b) Executive Officer agrees and covenants that the Executive Officer's
participation in the Plan shall be subject to (and that the Executive
Officer shall be bound by) all the terms and conditions of the Plan,
and any and all rules and guidelines adopted thereunder by the
Chairman, as the same may be amended from time to time; Executive
Officer expressly acknowledges and agrees that any interpretation and
construction by the Chairman and/or the Committee of any provisions of,
and the determination of any question arising under the Plan and this
Agreement shall be final, binding, and conclusive.
(c) Executive Officer shall furnish to the Chairman all information
requested by him with respect to the Plan.
(d) Executive Officer shall execute such other or additional documents
and/or instruments and take such actions as the Chairman may require in
connection with his administration of the Plan.
(e) Executive Officer shall answer truthfully and fully any and all
questions and supply any and all information which the Chairman deems
necessary or desirable for the proper administration of the Plan,
without any reservations whatsoever.
(f) Executive Officer shall cooperate with the Chairman, appropriate
officers and employees of Glastonbury and any Insurance Company or
Companies selected by Glastonbury, without any reservations whatsoever,
with respect to any Policy or Policies purchased by Glastonbury in
connection with some or all of its obligations under the Plan and this
Agreement or any other program of deferred compensation; Glastonbury
shall be the owner of and possess all incidents of ownership as to any
such Policy or Policies which are part of the Plan, and the Executive
Officer shall have no right, title, or interest in or to any such
Policy.
(g) Neither the adoption of the Plan nor its operation shall in any way
affect the right and power of the Employer to dismiss or otherwise
terminate the employment or change the terms of employment or amount of
compensation of the Executive Officer, at any time for any reason with
or without cause.
(h) Glastonbury shall pay to the Executive Officer at his Normal Retirement
Date, subject to the reduction in the targeted amount contained in
Sections 5.02 and 5.03 of the Plan and this Participation Agreement, if
------------- ----
any, $60,000.00 per year, at the time and in the form specified in the
Plan.
<PAGE>
(i) Early Retirement Benefits. Participant may elect in writing to commence
receiving payments as of the first of any month on or after his sixty-
third (63rd) birthday but before his Normal Retirement Date with a 5/12
of 1% reduction for each month earlier than his Normal Retirement Date
at any time no later than thirty (30) days following his retirement.
(j) Termination of Employment Benefits. The Executive Officer shall be
entitled to the percentage specified below of the benefit specified in
(h) of this Agreement, upon termination of employment at the ages
specified below, payable at his Normal Retirement Date:
Age Vested Interest
--- ---------------
58 50%
59 60%
60 70%
61 80%
62 90%
63 100%
(k) Glastonbury shall pay a pre-retirement death benefit to the Executive
Officer's Beneficiary upon the death of the Executive Officer, subject
to the requirements of Section 6.01 of the Plan, in a lump sum amount
equal to $1,500,000.00.
(l) Executive Officer hereby designates the Beneficiary and Contingent
Beneficiary with respect to the death benefits provided for in Sections
--------
6.01 and 6.02 of the Plan.
---- ----
Beneficiary(ies):
Name: /s/ Joyce B. Soucie
--------------------
Social Security Number:
-------------------------------
Address: 39 S. Mill Drive
----------------
S. Glastonbury, CT 06073
------------------------
Contingent Beneficiary(ies):
Name:
------------------------------------------
Social Security Number:
------------------------
Address:
-----------------------------------------
-----------------------------------------
The Executive Officer may change the Beneficiary or Beneficiaries or
Contingent Beneficiary or Contingent Beneficiaries in this Agreement by
delivering in writing to the Chairman notice of a change of Beneficiary
on a form provided by the Chairman.
(m) The Chairman, in his discretion, may terminate an Executive
Officer's participation in the Plan and entitlement to any
benefits thereunder to or in respect of the Executive Officer,
upon the failure of the Executive Officer to fully and completely
comply with the provisions of this
<PAGE>
Agreement.
(n) This Agreement shall be binding upon the Executive Officer and the
Executive Officer's heirs, representatives, administrators, executors,
and successors.
(o) Any term defined in the Plan shall have in this Agreement the same
meaning given to it in the Plan, unless the context clearly indicates
a different meaning.
IN WITNESS WHEREOF, the Executive Officer and The Glastonbury Bank & Trust
Company have executed this Agreement this 15th day of August, 1997.
Witness: THE GLASTONBURY BANK & TRUST COMPANY
/s/ Adelina G. Guaschino /s/ Ronald E. Bourbeau
- ------------------------- -----------------------
Ronald E. Bourbeau,
Chairman, Duly Authorized
/s/ Adelina G. Guaschino By: /s/ Grace C. Nome
- ------------------------- ------------------
Grace C. Nome
Chairman, Personnel Committee
/s/ Helen P. LaPlante /s/ J Gilbert Soucie
- ---------------------- ---------------------
J. Gilbert Soucie
<PAGE>
AMENDMENT TO TRUST UNDER GLASTONBURY BANK
AND TRUST COMPANY, INC. EXECUTIVE DEFERRED
COMPENSATION PLAN AND OTHER ARRANGEMENTS
----------------------------------------
Pursuant to Section 12(a) of the Trust Agreement dated August 15, 1997, the
Company, Trustee and Participants agree that Section 13(d) of the Trust
Agreement shall be and hereby is amended and restated in its entirety to read as
follows:
(d) For purposes of this Trust, Change of Control shall mean: (i) the
purchase or acquisition of a controlling interest in the common stock of
SIS Bancorp, Inc. ("SIS") or the purchase of all or substantially all of
SIS's assets by any person or entity; or (ii) Regulatory Agency action
which initiates or effectively causes a change in management of SIS; or
(iii) a change in the majority of the Continuing Directors of SIS on or
after the date on which SIS's acquisition of 100% of the common stock of
Employer is consummated. The term "Continuing Director" means those
persons who either serve on the SIS Board of Directors as of the date on
which SIS acquires 100% of the common stock of Employer or who are
nominated or elected to serve on the SIS Board of Directors by a majority
of the Continuing Directors then in office.
GLASTONBURY BANK & TRUST COMPANY
December 16, 1997 By: /s/ Harvey A. Katz
- ----------------- -------------------
Date Harvey A. Katz, Director
By: /s/ Alden A. Ives
------------------
Alden A. Ives, Director
TRUST COMPANY OF CONNECTICUT, TRUSTEE
December 16, 1997 By: /s/ David B. Payne
- ----------------- -------------------
Date David B. Payne, President
<PAGE>
Exhibit 21
Subsidiaries of the Company
. The Company owns 100% of the capital stock of the Springfield Institution for
Savings d/b/a SIS Bank, a Massachusetts chartered stock savings bank (SIS
Bank) and 100% of the capital stock of the Glastonbury Bank & Trust Company
d/b/a GBT, a Connecticut chartered commercial bank (GBT).
. The Company also owns, through GBT, 100% of the capital stock of GBT
Insurance Group, Inc., a Connecticut corporation, which is included in the
Company's consolidated financial statements.
. The Company also owns through SIS Bank, 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)
(3) Village Park Properties, Inc. (Georgia corporation)
(4) SIS Investment Corporation
(5) SIS Investment Corporation II
(6) Sherman Street Corporation
(7) SIS Center, Inc.
(8) Newgate Corporation
(9) Colebrook Corporation
(10) Colebrook-Leominster, Inc.
(11) Overlook, Inc.
. The Company also owns 100% of the capital stock of each of the following
subsidiaries through SIS 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, Corp.
. In addition, the Company owns, either directly or through the wholly owned
subsidiaries of SIS Bank and Colebrook Corporation specified below, the
percentage interest in the partnership or corporation set forth opposite each
such wholly owned subsidiary.
<TABLE>
<CAPTION>
Subsidiary Partnership or Corporation Owned Percentage Interest
---------- -------------------------------- -------------------
<S> <C> <C>
(1) Newgate Corporation Hillman Associates 100% general partnership
Partnership #4
Wiljon Partnership 50% general partnership
(2) Colebrook/Westor Corp. Westor Corporation 50% stockholder
(3) Overlook, Inc. Chester Commons 99% limited partnership
(4) Sherman Street Corporation Van Der Hayden 1% general partnership
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We herby consent to the incorporation by reference in the Registration Statement
on Form S-8 (No. 333-11443) of SIS Bancorp, Inc. of our report dated January 22,
1998 appearing on page 76 of this Form 10-K.
/s/ Price Waterhouse
Price Waterhouse LLP
Boston, Massachusetts
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 50,297
<INT-BEARING-DEPOSITS> 7,117
<FED-FUNDS-SOLD> 10,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 576,108
<INVESTMENTS-CARRYING> 193,007
<INVESTMENTS-MARKET> 193,396
<LOANS> 828,761
<ALLOWANCE> 22,724
<TOTAL-ASSETS> 1,733,618
<DEPOSITS> 1,267,298
<SHORT-TERM> 297,420
<LIABILITIES-OTHER> 40,936
<LONG-TERM> 2,492
0
0
<COMMON> 71
<OTHER-SE> 125,401
<TOTAL-LIABILITIES-AND-EQUITY> 1,733,618
<INTEREST-LOAN> 68,186
<INTEREST-INVEST> 49,955
<INTEREST-OTHER> 1,073
<INTEREST-TOTAL> 119,214
<INTEREST-DEPOSIT> 41,720
<INTEREST-EXPENSE> 59,125
<INTEREST-INCOME-NET> 60,089
<LOAN-LOSSES> 1,895
<SECURITIES-GAINS> (126)
<EXPENSE-OTHER> 55,223
<INCOME-PRETAX> 18,813
<INCOME-PRE-EXTRAORDINARY> 11,418
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,418
<EPS-PRIMARY> 1.74
<EPS-DILUTED> 1.65
<YIELD-ACTUAL> 7.57
<LOANS-NON> 5,352
<LOANS-PAST> 431
<LOANS-TROUBLED> 1,124
<LOANS-PROBLEM> 24,082
<ALLOWANCE-OPEN> 19,549
<CHARGE-OFFS> 2,212
<RECOVERIES> 3,492
<ALLOWANCE-CLOSE> 22,742
<ALLOWANCE-DOMESTIC> 22,742
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 58,045
<INT-BEARING-DEPOSITS> 45
<FED-FUNDS-SOLD> 10,000
<TRADING-ASSETS> 458
<INVESTMENTS-HELD-FOR-SALE> 483,614
<INVESTMENTS-CARRYING> 220,646
<INVESTMENTS-MARKET> 219,911
<LOANS> 755,378
<ALLOWANCE> 19,549
<TOTAL-ASSETS> 1,596,610
<DEPOSITS> 1,177,561
<SHORT-TERM> 266,398
<LIABILITIES-OTHER> 31,017
<LONG-TERM> 2,848
0
0
<COMMON> 71
<OTHER-SE> 118,715
<TOTAL-LIABILITIES-AND-EQUITY> 1,596,610
<INTEREST-LOAN> 61,402
<INTEREST-INVEST> 39,326
<INTEREST-OTHER> 871
<INTEREST-TOTAL> 101,599
<INTEREST-DEPOSIT> 59,073
<INTEREST-EXPENSE> 48,915
<INTEREST-INCOME-NET> 52,684
<LOAN-LOSSES> 3,721
<SECURITIES-GAINS> 208
<EXPENSE-OTHER> 48,114
<INCOME-PRETAX> 15,655
<INCOME-PRE-EXTRAORDINARY> 20,685
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,685
<EPS-PRIMARY> 3.14
<EPS-DILUTED> 3.03
<YIELD-ACTUAL> 7.59
<LOANS-NON> 8,011
<LOANS-PAST> 428
<LOANS-TROUBLED> 892
<LOANS-PROBLEM> 33,190
<ALLOWANCE-OPEN> 18,612
<CHARGE-OFFS> 5,152
<RECOVERIES> 2,368
<ALLOWANCE-CLOSE> 19,549
<ALLOWANCE-DOMESTIC> 19,549
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
