FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended 09/30/98
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 000-20809
SIS BANCORP, INC.
(Exact Name of Issuer as Specified in its Charter)
Massachusetts 04-3303264
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SIS BANCORP, INC.
1441 Main Street
Springfield, Massachusetts 01102
(Address of Principal Executive Offices) (Zip Code)
(413) 748-8000
(Issuers Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of the registrant's common
stock, as of the latest practicable date: 7,188,645 shares as of November 6,
1998.
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report contains certain "forward-looking statements" including statements
concerning plans, objectives, future events or performance and assumptions and
other statements which are other than statements of historical fact. SIS
Bancorp, Inc. and its subsidiaries (the "Company") wishes to caution readers
that the following important factors, among others, may have affected and could
in the future affect the Company's actual results and could cause the Company's
actual results for subsequent periods to differ materially from those expressed
in any forward-looking statement made by or on behalf of the Company herein: (i)
the effect of changes in laws and regulations, including federal and state
banking laws and regulations, with which the Company must comply, and the
associated costs of compliance with such laws and regulations either currently
or in the future as applicable; (ii) the effect of changes in accounting
policies and practices, as may be adopted by the regulatory agencies as well as
by the Financial Accounting Standards Board; (iii) the effect on the Company's
competitive position within its market area of the increasing consolidation
within the banking and financial services industries, including the increased
competition from larger regional and out-of-state banking organizations as well
as nonbank providers of various financial services; (iv) the effect of changes
in interest rates; (v) the effect of changes in the business cycle and downturns
in the local, regional or national economies; (vi) the effect of the "year 2000"
issue (i.e. that current computer programs use only two digits to identify a
year in the date field and cannot reflect a change in the century) on the
Company's financial condition or results of operations; and (vii) the impact of
pending litigation on the Company's financial condition or results of
operations.
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet
at September 30, 1998 and December 31, 1997...............................1
Condensed Consolidated Statement of Operations for the
three and nine months ended September 30, 1998 and 1997...................2
Condensed Consolidated Statement of Cash Flows for the
nine months ended September 30, 1998 and 1997.............................3
Condensed Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended September 30, 1998 and 1997.....................5
Notes to the Unaudited Financial Statements...............................6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................29
Item 2. Changes in Securities............................................29
Item 3. Default upon Senior Securities...................................29
Item 4. Submission of Matters to a Vote of Security Holders..............29
Item 5. Other Information................................................29
Item 6. Exhibits and Reports on Form 8-K.................................29
SIGNATURES...............................................................30
<PAGE>
<TABLE>
<CAPTION>
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
(Unaudited)
September 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 37,225 $ 50,297
Federal funds sold and short term investments 52,242 17,317
Investment securities available for sale 619,420 576,108
Investment securities held to maturity (fair value: $245,202 at September 30,
1998 and $193,396 at December 31, 1997) 244,238 193,007
Loans receivable, net of allowance for possible losses
($23,924 at September 30, 1998 and $22,724 at December 31, 1997) 875,250 828,761
Accrued interest and dividends receivable 11,676 10,749
Investments in real estate and real estate partnerships -- 2,903
Foreclosed real estate, net 679 1,209
Bank premises, furniture and fixtures, net 36,966 35,843
Other assets 22,722 17,424
----------- -----------
Total assets $ 1,900,418 $ 1,733,618
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,343,063 $ 1,267,298
Federal Home Loan Bank advances 203,251 184,121
Securities sold under agreements to repurchase 175,065 113,299
Loans payable 2,294 2,492
Mortgage escrow deposits 6,945 5,642
Accrued expenses and other liabilities 30,660 35,294
----------- -----------
Total liabilities 1,761,278 1,608,146
----------- -----------
Commitments and contingent liabilities -- --
Stockholders' equity:
Preferred stock ($.01 par value; 5,000,000 shares
authorized: no shares issued and outstanding) -- --
Common stock ($.01 par value; 25,000,000 shares authorized; shares
issued: 7,170,956 at September 30, 1998 and 7,081,187 at December 31, 1997;
shares outstanding: 7,170,956 at September 30, 1998 and 6,947,787 at
December 31, 1997) 72 71
Unearned compensation (2,807) (3,123)
Additional paid-in capital 57,259 54,755
Retained earnings 84,850 75,153
Accumulated other comprehensive income -
net after tax unrealized gain (loss) on investment securities available for sale (234) 2,133
Treasury stock, at cost (0 and 133,400 shares at September 30, 1998 and
December 31, 1997, respectively) -- (3,517)
----------- -----------
Total stockholders' equity 139,140 125,472
----------- -----------
Total liabilities and stockholders' equity $ 1,900,418 $ 1,733,618
=========== ===========
See accompanying Notes to the Unaudited Financial Statements
</TABLE>
1
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<TABLE>
<CAPTION>
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars In Thousands Except Per Share Amounts)
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 18,934 $ 17,426 $ 54,963 $ 50,368
Investment securities available for sale 9,090 8,914 26,031 26,600
Investment securities held to maturity 3,901 3,519 11,067 10,988
Investment securities held for trading -- 3 -- 8
Federal funds sold and short term investments 505 378 1,596 808
----------- ----------- ----------- -----------
Total interest and dividend income 32,430 30,240 93,657 88,772
----------- ----------- ----------- -----------
Interest expense:
Deposits 11,265 10,619 32,834 30,969
Borrowings 5,171 4,596 14,193 12,800
----------- ----------- ----------- -----------
Total interest expense 16,436 15,215 47,027 43,769
----------- ----------- ----------- -----------
Net interest and dividend income 15,994 15,025 46,630 45,003
Less: Provision for possible loan losses 252 466 755 1,431
----------- ----------- ----------- -----------
Net interest and dividend income after provision
for possible loan losses 15,742 14,559 45,875 43,572
Noninterest income:
Net gain on sale of loans 362 136 986 328
Net gain on sale of securities available for sale 1 17 3 77
Net gain on sale of securities held for trading -- 24 -- 43
Fees and other income 4,180 4,044 12,059 11,038
----------- ----------- ----------- -----------
Total noninterest income 4,543 4,221 13,048 11,486
----------- ----------- ----------- -----------
Noninterest expense:
Operating expenses:
Salaries and employee benefits 6,870 6,203 19,725 18,258
Occupancy expense of bank premises, net 1,295 1,214 3,835 3,573
Furniture and equipment expense 844 858 2,739 2,421
Other operating expenses 5,071 4,312 13,553 12,683
----------- ----------- ----------- -----------
Total operating expenses 14,080 12,587 39,852 36,935
----------- ----------- ----------- -----------
Foreclosed real estate (income) expense (61) 100 7 15
Net (income) expense of real estate operations (1,149) (63) (1,740) 416
----------- ----------- ----------- -----------
Total noninterest expense 12,870 12,624 38,119 37,366
Income before income tax expense 7,415 6,156 20,804 17,692
Income tax expense 2,817 2,327 7,905 6,867
----------- ----------- ----------- -----------
Net income $ 4,598 $ 3,829 $ 12,899 $ 10,825
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.66 $ 0.59 $ 1.89 $ 1.64
Diluted $ 0.63 $ 0.56 $ 1.79 $ 1.57
Weighted average shares outstanding:
Basic 6,931,805 6,513,970 6,834,836 6,591,452
Diluted 7,256,700 6,828,948 7,211,812 6,891,860
See accompanying Notes to the Unaudited Financial Statements
</TABLE>
2
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<TABLE>
<CAPTION>
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 12,899 $ 10,825
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for possible loan losses 755 1,431
Provision for foreclosed real estate -- 1
Depreciation 3,351 3,004
Amortization of premium on investment securities, net 3,831 2,222
ESOP and restricted stock expenses 1,912 1,375
Investment security gains (3) (120)
Increase in assets held for trading -- (61)
Income from equity investment in partnerships -- 6
Gain on sale of mortgage loans held for sale (986) (328)
Disbursements for mortgage loans held for sale (122,454) (42,571)
Receipts from mortgage loans held for sale 123,440 42,899
Gain on sale of fixed assets and real estate (1,216) (171)
Changes in assets and liabilities:
Increase in other assets, net (4,652) (2,537)
(Decrease) increase in accrued expenses and other liabilities (3,301) 8,239
--------- ---------
Net cash provided by operating activities 13,576 24,214
--------- ---------
Cash Flows From Investing Activities
Proceeds from sale of investment securities available for sale 2,358 11,472
Proceeds from maturities and principal payments received
on investment securities available for sale 216,362 122,509
Purchase of investment securities available for sale (269,302) (210,216)
Proceeds from maturities and principal payments received
on investment securities held to maturity 64,700 37,006
Purchase of investment securities held to maturity (116,432) (23,913)
Net increase in loans receivable (47,376) (73,350)
Net decrease in foreclosed real estate 662 728
Proceeds from sale of loans -- 92
Proceeds from sale of investments in real estate 3,592 --
Proceeds from sale of fixed assets 358 135
Purchase of fixed assets and other (4,305) (4,220)
--------- ---------
Net cash used for investing activities (149,383) (139,757)
--------- ---------
See accompanying Notes to the Unaudited Financial Statements
3
<PAGE>
<CAPTION>
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(Dollars In Thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash Flows from Financing Activities
Net increase in deposits 75,765 74,123
Net increase in borrowings 80,698 37,139
Net increase in mortgagors' escrow deposits 1,303 2,109
Net proceeds from exercise of stock options 3,096 168
Repurchase/retirement of common stock -- (4,193)
Cash dividends paid (3,202) (2,478)
--------- ---------
Net cash provided by financing activities 157,660 106,868
--------- ---------
Increase in cash and cash equivalents 21,853 (8,675)
Cash and cash equivalents, beginning of period 67,614 68,090
--------- ---------
Cash and cash equivalents, end of period $ 89,467 $ 59,415
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest to depositors
and interest on debt $ 46,588 $ 36,269
Income taxes paid $ 6,129 $ 506
Non-cash investing activities:
Transfers to foreclosed real estate, net $ 132 $ 917
See accompanying Notes to the Unaudited Financial Statements
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 1998 and 1997
(Dollars In Thousands)
Accumulated other
comprehensive income:
Net unrealized
Additional gain (loss) on
Common Unearned Paid-In Retained investment securities
Stock Compensation Capital Earnings available for sale
---------- ------------ ----------- ---------- ---------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 71 $ (3,123) $ 54,755 $ 75,153 $ 2,133
Net income -- -- -- 12,899 --
Cash dividends declared -- -- -- (3,202) --
Net issuance of common stock in connection with employee
and non-employee directors benefit programs 1 (567) 1,475 -- --
Decrease in unearned compensation -- 883 1,029 -- --
Change in unrealized gain on investment
securities available for sale -- -- -- -- (2,367)
--------- --------- --------- --------- ---------
Balance at September 30, 1998 $ 72 $ (2,807) $ 57,259 $ 84,850 $ (234)
========= ========= ========= ========= =========
Balance at December 31, 1996 $ 71 $ (3,693) $ 53,836 $ 67,119 $ 1,453
Net income -- -- -- 10,825 --
Cash dividends declared -- -- -- (2,478) --
Net issuance of common stock in connection with employee
and non-employee directors benefit programs -- (98) (68) -- --
Decrease in unearned compensation -- 755 620 -- --
Change in unrealized gain on investment
securities available for sale -- -- -- -- 1,165
Treasury stock purchased -- -- -- -- --
--------- --------- --------- --------- ---------
Balance at September 30, 1997 $ 71 $ (3,036) $ 54,388 $ 75,466 $ 2,618
========= ========= ========= ========= =========
<CAPTION>
Treasury Stock
at Cost Total
-------------- -----------
<S> <C> <C>
Balance at December 31, 1997 $ (3,517) $ 125,472
Net income -- 12,899
Cash dividends declared -- (3,202)
Net issuance of common stock in connection with employee
and non-employee directors benefit programs 3,517 4,426
Decrease in unearned compensation -- 1,912
Change in unrealized gain on investment
securities available for sale -- (2,367)
--------- ---------
Balance at September 30, 1998 $ -- $ 139,140
========= =========
Balance at December 31, 1996 $ -- $ 118,786
Net income -- 10,825
Cash dividends declared -- (2,478)
Net issuance of common stock in connection with employee
and non-employee directors benefit programs 333 167
Decrease in unearned compensation -- 1,375
Change in unrealized gain on investment
securities available for sale -- 1,165
Treasury stock purchased (4,193) (4,193)
--------- ---------
Balance at September 30, 1997 $ (3,860) $ 125,647
========= =========
See accompanying Notes to the Unaudited Financial Statements
</TABLE>
5
<PAGE>
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
1. Condensed Consolidated Financial Statements
The Condensed Consolidated Financial Statements of the Company included herein
are unaudited, and in the opinion of management all adjustments, consisting only
of normal recurring adjustments necessary for a fair presentation of the
financial condition, results of operations and cash flows, as of and for the
periods covered herein, have been made. The Company's historical financial
statements have been restated to reflect the combination with Glastonbury Bank &
Trust Company. Certain information and note disclosures normally included in
Condensed Consolidated Financial Statements have been omitted as they are
included in the most recent Securities and Exchange Commission ("SEC") Form 10-K
and accompanying Notes to the Financial Statements (the "Form 10-K") filed by
the Company for the year ended December 31, 1997. Management believes that the
disclosures contained herein are adequate to make a fair presentation.
These unaudited condensed consolidated financial statements should be read in
conjunction with the Form 10-K.
The results for the three and nine month interim periods covered hereby are not
necessarily indicative of the operating results for a full year.
2. New Accounting Pronouncements
In June 1997, the FASB issued SFAS 130 "Reporting Comprehensive Income" which
establishes standards for disclosure of comprehensive income. Comprehensive
income represents net income for a period plus the change in equity of a
business during a period from non-shareholder sources. Excluding net income, the
Company's only source of comprehensive income is its unrealized gain (loss) on
investment securities available for sale, net of tax. SFAS 130 requires the
restatement of prior periods for comparative purposes. The Company adopted SFAS
130 on January 1, 1998. Adoption of this Statement did not have a material
impact on the Company's financial position or results of operations. Total
comprehensive income for the three and nine months ended September 30, 1998 was
$4.3 million and $13.9 million, respectively compared to $5.5 million and $13.9
million, respectively for the three and nine months ended September 30, 1997.
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 operating segments as components of an
enterprise about which separate financial information is available that is
evaluated by management in deciding how to allocate resources and in assessing
performance. The Company adopted SFAS 131 on January 1, 1998. Adoption of this
Statement did not have a material impact on the Company's financial position or
results of operations.
In February 1998, the FASB issued SFAS 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits - an amendment of FASB Statements No.
87, 88 and 106" (SFAS 132) which revises employers' disclosures about pension
and other postretirement benefit plans, though it does not change the
measurement or recognition of those plans. The Company adopted SFAS 132
effective January 1, 1998. Adoption of this Statement did not have a material
impact on the Company's financial position or results of operations.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes a new model for accounting for
derivatives and hedging activities and supersedes and amends a number of
existing standards. SFAS 133 is effective for fiscal years beginning after June
15, 1999, but earlier application is permitted as of the beginning of any fiscal
quarter subsequent to June 1998. Upon initial application, all derivatives are
required to be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be reassessed and documented pursuant to the provisions of
SFAS 133. Management is currently assessing the impact of SFAS 133 on the
Company's financial position and results of operations.
6
<PAGE>
3. 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>
(Unaudited) (Unaudited)
Three months ended Nine months ended
--------------------------------- ---------------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 4,598 $ 3,829 $ 12,899 $ 10,825
Weighted average shares outstanding:
Basic 6,931,805 6,513,970 6,834,836 6,591,452
Effect of dilutive securities:
Stock options 307,085 287,156 328,388 257,093
Restricted stock 17,810 27,822 48,588 43,315
---------- ---------- ---------- ----------
Diluted 7,256,700 6,828,948 7,211,812 6,891,860
========== ========== ========== ==========
Net income per share:
Basic $ 0.66 $ 0.59 $ 1.89 $ 1.64
Diluted $ 0.63 $ 0.56 $ 1.79 $ 1.57
</TABLE>
4. Dividend Policy
The Company paid a cash dividend in the amount of $0.16 per share on August 24,
1998. On October 20, 1998 the Company declared a dividend of $0.16 per share
payable on or about November 23, 1998 to shareholders of record as of the close
of business on November 2, 1998.
5. Divestment Related Charges
The Company had certain subsidiaries that engaged in various real estate
investments, directly or in joint ventures with unaffiliated partners. In
accordance with the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the Company terminated its real estate development activities
and has completed the sale of its remaining real estate investments. In the
first quarter of 1997, the Company established a reserve of $1.0 million
relating to the divestment of its real estate investment and brokerage
subsidiaries, Colebrook Inc. and subsidiaries ("Colebrook"). The $1.0 million
reserve consisted of $0.7 million in severance and benefit accruals and $0.3
million for professional and other expenses.
The Company completed its divestment of Colebrook on July 21, 1998 with the sale
of its sole remaining real estate investment for net proceeds of $3.6 million.
The Company recognized a gain of $1.1 million related to the sale which is
included in net income of real estate operations.
Based upon final terms of the divestment, related expenses were $0.6 million,
consisting of $0.3 million in severance and benefits and $0.3 million in
professional and other expenses. The remaining reserve balance of $0.4 million,
primarily related to unused severance, was reversed in June 1998 and is
reflected in net income of real estate operations.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
Overview
SIS Bancorp, Inc. (the "Company") is a Massachusetts corporation formed in 1996
and serves as the bank holding company for Springfield Institution for Savings
("SIS Bank"), and Glastonbury Bank & Trust Company ("GBT"). The Company was
formed for the purpose of reorganizing SIS Bank into a holding company structure
("the Reorganization"). Upon the effectiveness of the Reorganization, SIS Bank
became a wholly-owned subsidiary of the Company and SIS Bank's former
stockholders became stockholders of the Company. The Company acquired GBT on
December 17, 1997.
Established in 1827, SIS Bank is a Massachusetts chartered stock savings bank
headquartered in Springfield, Massachusetts. GBT, with its headquarters located
in Glastonbury, Connecticut, is a Connecticut chartered commercial bank founded
in 1919. Substantially all of the Company's operations are conducted through its
subsidiary banks.
The Company provides a wide variety of financial services through both SIS Bank
and GBT (the "Banks"), including retail and commercial banking, residential
mortgage origination and servicing, commercial and consumer lending, and
merchant processing. The Banks serve the consumers and businesses located in
western Massachusetts and central Connecticut through a network of 33 full
service branches.
The Company's revenues are derived principally from dividend payments received
from the Banks, which in turn derive their revenues principally from interest
payments on their loan portfolios and mortgage-backed and other investment
securities. The Banks' primary sources of funds are deposits, borrowings and
principal and interest payments on loans and mortgage-backed securities.
On July 20, 1998, the Company entered into an Agreement and Plan of Merger with
Peoples Heritage Financial Group, Inc. ("PHFG"), pursuant to which the Company
would be acquired by PHFG, SIS Bank would be merged into PHFG's Massachusetts
banking subsidiary and the Company's shareholders would receive, subject to
adjustment under certain circumstances, 2.25 shares of PHFG common stock for
each outstanding share of the Company's common stock. The Company expects its
pending acquisition by PHFG to be completed, subject to the parties' receipt of
all necessary approvals from the Board of Governors of the Federal Reserve
System ("FRB"), the Office of Thrift Supervision, the Maine Bureau of Banking
("Maine Bureau"), the Massachusetts Board of Bank Incorporation and the
Connecticut Commissioner of Banks, prior to December 31, 1998. PHFG has
currently received the required approvals of the FRB and the Maine Bureau. The
Company's shareholders have approved the pending acquisition at a special
meeting held on November 12, 1998.
Year 2000
The Year 2000 issue exists because many computer systems and applications
(including those in non-information technology equipment and systems) currently
use two-digit date fields to designate a year. As the century date change
occurs, date-sensitive systems will recognize the Year 2000 as 1900, or not at
all. This inability to recognize or properly interpret dates beyond the year
1999 may cause business disruptions as systems process critical financial and
operational information incorrectly.
During 1997, the Company formed a Year 2000 team to develop and execute the Year
2000 project and has developed an implementation plan to resolve its Year 2000
issues. The Company is addressing this issue in accordance with the guidance set
forth in various statements that have been issued by the Federal Financial
Institutions Examination Council. The Company is also monitored in its Year 2000
efforts by reports to, and examinations by, various regulators, including the
Federal Deposit Insurance Corporation, the Federal Reserve Board, and the
Massachusetts and Connecticut Commissioners of Banks. The Year 2000 project has
been designated as the highest priority activity of the Company's Information
Technology Department. Since 1997, the Company has been reviewing its systems
and programs to identify those that contain two-digit year codes, and is in the
process of upgrading its infrastructure and corporate facilities to achieve Year
2000 compliance. In addition, the Company is actively working with its major
third-party vendors and large commercial borrowers to assess their compliance
and remediation efforts.
8
<PAGE>
The Company has identified the following phases of the Year 2000 project. In the
awareness phase, the Company defined the Year 2000 issue, communicated the Year
2000 issue to all employees and its Board of Directors and obtained executive
level support and funding. In the assessment phase, the Company created a
comprehensive Year 2000 plan which includes conducting an inventory of all
systems which may be affected by the Year 2000 issue including facilities and
related non-information technology systems (embedded technology), computer
systems, hardware, and services and products provided by third-party vendors,
and assessing risk of non-compliance for each identified system. In the
renovation phase, the Company renovates or fixes certain systems, while all
others are replaced or retired. In the validation phase, the Company conducts
testing to ensure all systems, including renovated systems, are Year 2000
compliant for present and future dates. Finally, in the implementation phase,
the Company places compliant systems in production.
As of September 30, 1998, the Company had completed the remedial phases
associated with awareness and assessment and was conducting the procedures
associated with the renovation and validation phases. The Company expects to
complete all critical renovations by December 31, 1998. The Company had
completed test plans as of June 30, 1998 and expects to complete testing of
internal systems by December 31, 1998 and external testing of third-party vendor
systems by March 31, 1999. The Company's core processing systems, including
general ledger, home equity line, commercial loan, investments and deposit
applications, have been upgraded to Year 2000 compliant versions, tested, and
implemented. The Company is also in the process of verifying that critical third
party vendors and large commercial borrowers have adequately addressed their own
systems issues. In connection with this verification, the Company will determine
whether its loan loss reserves are adequate in light of any additional risk
associated with the Company's loan portfolio due to commercial borrowers' Year
2000 issues.
The primary costs associated with the Year 2000 issue consist of expenses for
the replacement or upgrade of third party systems, the replacement of personal
computers and professional services costs. The Company may also incur expenses
related to the repair or replacement of non-computer equipment with embedded
technology such as elevators and bank vaults. The Company presently estimates
that the Company's total direct, out-of-pocket cost relating to the Year 2000
issue to be approximately $0.7 million of which approximately $18 thousand had
been incurred through September 30, 1998. With the exception of the Year 2000
project leader, this direct cost does not include salary and overhead expenses
of employees from various departments within the Company which devote a portion
of their time to the Year 2000 project. These indirect costs are included in the
Company's normal operating expenses. It is anticipated that a substantial
portion of the total cost will be incurred over the next 15 months and will be
expensed as incurred.
There are many risks associated with the Year 2000 issue, including the
possibility of a failure of the Company's computer and non-information
technology systems. Such failures could have a material adverse effect on the
Company and may cause system malfunctions, incorrect or incomplete transaction
processing, and the inability to reconcile accounting books and records. Even if
the Company successfully remediates its Year 2000 issues, it can be materially
and adversely affected by failure of third-party vendors or large commercial
loan borrowers to remediate their own 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. The
Company is presently unaware of any situation where any vendor or large
commercial borrower will not be able to modify its products and systems in a
timely manner. If the above mentioned risks are not remedied, the Company may
experience business interruption or shutdown, financial loss, regulatory
actions, damage to the Company's franchise, and legal liability. The Company
intends to document Year 2000 contingency plans during 1999 to address these
potential risks.
The Company is currently not aware of any Year 2000 problem for which a solution
is not available. In addition, the Company is not aware of any obstacles or
issues that are presently anticipated in connection with the resolution of Year
2000 issues that are likely to cause significant operational problems or are
otherwise expected to have a material adverse effect on the Company's financial
condition or results of operations.
Results of Operations for the Three Months Ended September 30, 1998 and
September 30, 1997
The Company reported net income of $4.6 million, or $0.63 per diluted share for
the three months ended September 30, 1998 as compared to net income of $3.8
million, or $0.56 per diluted share for the same period last year. These results
primarily reflect increases in net interest income, noninterest income and net
income of real estate operations as well as lower provisions for possible loan
losses, partially offset by an increase in operating expenses.
9
<PAGE>
Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income is
affected by the mix and volume of assets and liabilities, and the movement and
level of interest rates. The Company invests in certain assets that have
preferential tax treatment. In order to present yields on a comparable basis,
net interest income is presented on a fully taxable equivalent basis for
purposes of yield and margin analysis.
The following table sets forth, for the period indicated, average balances,
interest income and expense, and yields earned or rates paid on the major
categories of assets and liabilities. Non-accrual loans have been included in
the appropriate average balance loan category, but unpaid interest on
non-accrual loans has not been included for purposes of determining interest
income. In addition, investment securities available for sale are reflected at
amortized cost.
<TABLE>
<CAPTION>
Three Months Ended September 30,
------------------------------------------------------------------------------------------
1998 1997
------------------------------------------- ---------------------------------------------
Average Average Average Average
Balance (3) Interest (1) Yield/Cost (1) Balance Interest (1) Yield/Cost (1)
------------ -------------- -------------- ------------ ------------ ---------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Fed funds sold and short-term investments $ 38,968 $ 505 5.07% $ 27,678 $ 379 5.36%
Investment securities held to maturity 245,350 3,901 6.36% 206,573 3,519 6.81%
Investment securities available for sale 605,438 9,361 6.18% 541,837 9,053 6.68%
Investment securites held for trading -- -- -- 552 4 2.84%
Residential real estate loans 237,556 4,707 7.93% 289,915 5,820 8.03%
Commercial real estate loans 180,191 4,142 9.19% 177,145 3,957 8.94%
Commercial loans 272,881 6,193 8.88% 202,713 4,433 8.56%
Home equity loans 175,847 3,638 8.21% 144,958 2,927 8.01%
Consumer loans 12,634 306 9.69% 10,125 289 11.42%
---------- ------- ------ ----------- ------- ------
Total interest-earning assets 1,768,865 32,753 7.41% 1,601,496 30,381 7.59%
Allowance for loan losses (23,667) (21,624)
Non-interest-earning assets 120,373 114,716
---------- -----------
Total assets $1,865,571 $32,753 $ 1,694,588 $30,381
========== ======= =========== =======
Interest-bearing liabilities:
Deposits
Savings accounts $ 221,045 $ 1,109 1.99% $ 264,720 $ 1,561 2.34%
NOW accounts (2) 39,863 106 1.05% 49,005 158 1.28%
Money manager accounts (2) 44,703 122 1.08% 31,572 85 --
Money market accounts 257,449 2,060 3.17% 206,880 1,736 3.33%
Time deposit accounts 586,144 7,868 5.33% 527,828 7,079 5.32%
---------- ------- ------ ----------- ------- ------
Total interest-bearing deposits 1,149,204 11,265 3.89% 1,080,005 10,619 3.90%
Borrowed funds 357,596 5,171 5.66% 306,245 4,596 5.87%
---------- ------- ------ ----------- ------- ------
Total interest-bearing liabilities 1,506,800 16,436 4.33% 1,386,250 15,215 4.35%
Non-interest-bearing liabilities 224,332 188,216
---------- -----------
Total liabilities 1,731,132 1,574,466
Total stockholders' equity 134,439 120,122
---------- -----------
Total liabilities and
stockholders's equity $1,865,571 $16,436 $ 1,694,588 $15,215
========== ======= =========== =======
Net interest income/spread $16,317 3.08% $15,166 3.24%
======= ====== ======= ======
Net interest margin as a % of interest-
earning assets 3.69% 3.79%
====== ======
Tax equivalent adjustment $ 323 $ 141
------- -------
Net interest income/spread per Condensed
Consolidated Statement of Operations $15,994 $15,025
======= =======
<FN>
(1) On a fully taxable equivalent basis. Calculated using a Federal income tax rate of 35% for 1998 and 34% for 1997.
(2) During July 1997, the Company implemented a program which converted certain NOW accounts to money manager accounts. This
program has no effect on the Company's depositors, but has provided additional investable funds to the Company by substantially
reducing the reserve balances required to be maintained at the Federal Reserve Bank of Boston.
(3) A reclassification of some savings accounts to money market accounts affecting average balance outstanding was made in
connection with the GBT acquisition.
</FN>
</TABLE>
Net interest income on a fully taxable equivalent basis for the three months
ended September 30, 1998 was $16.3 million compared to $15.2 million for the
three months ended September 30, 1997, an increase of $1.1 million or 7.6%.
10
<PAGE>
This increase was the result of a $167.4 million increase in interest-earning
assets partially offset by a 10 basis point decrease in the net interest margin.
Total interest income was $32.8 million on a fully taxable equivalent basis for
the three months ended September 30, 1998, an increase of $2.4 million or 7.8%
from the same period last year. This increase is attributable to higher levels
of interest-earning assets, partially offset by lower yields on interest-earning
assets. Average interest-earning assets totaled $1.8 billion in the third
quarter of 1998 compared to $1.6 billion in the third quarter of 1997, an
increase of $167.4 million or 10.5% and were funded by higher deposit levels and
borrowed funds. Average investments increased $101.8 million or 13.6%. Average
loans increased $54.3 million as the Company continued to focus on the
commercial and home equity market segments, which grew by $70.2 million or 34.6%
and $30.9 million or 21.3%, respectively. Average commercial real estate loans
increased $3.0 million or 1.7% reflecting growth in commercial construction
lending. Average residential real estate loan balances declined $52.4 million or
18.1% for the three months ended September 30, 1998, reflecting amortization and
prepayments of the existing loan portfolio, partially offset by new originations
of adjustable rate mortgages. The Company continues to actively originate loans
secured by first mortgages on one to four family residences, and offers a
variety of fixed and adjustable rate mortgage loan products. The Company
originates long-term fixed rate mortgages for sale in the secondary market and
generally holds adjustable rate mortgages in the Company's loan portfolio.
Yields on interest-earning assets declined 18 basis points from the third
quarter of 1997 primarily reflecting a lower level of interest rates on the
Company's investment securities caused by increased prepayments of
mortgage-backed securities which result in accelerated premium amortization.
Accelerated prepayment speeds were the result of lower long-term interest rates
which significantly increased refinancing activity.
Total interest expense was $16.4 million for the three months ended September
30, 1998 compared to $15.2 million during the same period in 1997, an increase
of $1.2 million or 8.0%. This increase is attributable to increases in
interest-bearing deposits and borrowed funds. Average interest-bearing deposits
increased $69.2 million or 6.4%. This growth occurred primarily in time deposits
which increased $58.3 million or 11.0% largely due to growth in time deposits of
local municipalities. Borrowed funds averaged $357.6 million for the three
months ended September 30, 1998 compared to $306.2 million for the same period
in 1997. These borrowings were used to match fund fixed rate assets and manage
the Company's interest rate risk position.
The following table presents the changes in net interest income (on a fully
taxable equivalent basis) resulting from changes in interest rates or changes in
the volume of interest-earning assets and interest-bearing liabilities during
the periods indicated. Changes which are attributable to both rate and volume
have been allocated evenly between the change in rate and volume components.
11
<PAGE>
<TABLE>
<CAPTION>
Three months ended September 30,
1998 versus 1997
----------------------------------------------------
Increase (Decrease) Due to
----------------------------------------------------
Volume Rate Net
---------- --------- ---------
(Dollars In Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold and
interest bearing deposits $ 150 $ (24) $ 126
Investment securities held to maturity 639 (257) 382
Investment securities available for sale 1,023 (715) 308
Investment securities held for trading (2) (2) (4)
Residential real estate loans (1,044) (69) (1,113)
Commercial real estate loans 69 116 185
Commercial loans 1,563 197 1,760
Home equity loans 631 80 711
Consumer loans 66 (49) 17
------- ------- -------
Total interest-earning assets 3,095 (723) 2,372
------- ------- -------
Interest-bearing liabilities:
Deposits:
Savings accounts (238) (214) (452)
NOW accounts (27) (25) (52)
Money manager account 36 1 37
Money market accounts 414 (90) 324
Time deposit accounts 782 7 789
------- ------- -------
Total deposits 967 (321) 646
Borrowed funds 757 (182) 575
------- ------- -------
Total interest-bearing liabilities 1,724 (503) 1,221
------- ------- -------
Change in net interest income $ 1,371 $ (220) $ 1,151
======= ======= =======
</TABLE>
Provision for Possible Loan Losses
The Company's provision for possible loan losses was $0.3 million for the third
quarter of 1998 compared to $0.5 million in the third quarter of 1997. The
provision for possible loan losses is based upon management's judgment of the
amount necessary to maintain the allowance for possible loan losses at a level
which is considered adequate. For further information see "Balance Sheet
Analysis - Non-performing Assets" and "- Allowance for Possible Loan Losses".
12
<PAGE>
Non-interest Income
Non-interest income is composed of fee income for bank services and gains or
losses from the sale of assets. The components of non-interest income for the
periods presented are as follows:
Three months ended
September 30,
-------------------
1998 1997
------ ------
(Dollars in Thousands)
Net gain on sale of loans $ 362 $ 136
Net gain on sale of securities 1 17
Net gain on securities held for trading -- 24
Loan charges and fees 733 854
Deposit related fees 2,219 1,962
Merchant processing fees 488 449
Other charges and fees 740 779
------ ------
$4,543 $4,221
====== ======
Non-interest income totaled $4.5 million for the third quarter of 1998 compared
to $4.2 million for the same period in 1997, an increase of $0.3 million or
7.6%. Net gain on sale of loans increased $0.2 million due to an increase in
mortgage production and corresponding sale of loans to the secondary market.
Deposit service charges and fees increased $0.3 million due to fees associated
with the Company's larger non-interest bearing deposit base. Loan charges and
fees decreased $0.1 million reflecting a decline in the Company's mortgage
servicing portfolio.
Non-interest Expense
Salaries and Benefits Expense
Salaries and benefits expense totaled $6.9 million for the third quarter of 1998
compared to $6.2 million for the same period in 1997. This increase of $0.7
million reflects increased staffing related to new branch openings,
branch-related support as well as support needed to meet increased residential
origination volumes. In addition, the Company experienced higher benefit costs
associated with restricted stock vesting and the Employee Stock Ownership Plan
("ESOP").
Occupancy Expense of Bank Premises
Occupancy expense totaled $1.3 million for the third quarter of 1998 compared to
$1.2 million for the same period in 1997, an increase of $0.1 million which is
attributed to the expense of new branch openings.
Other Operating Expense
The components of other operating expense for the periods presented are as
follows:
Three months ended
September 30,
-------------------
1998 1997
------ ------
(Dollars in Thousands)
Marketing $ 884 $ 470
Insurance 162 173
Professional services 906 846
Outside processing 1,418 1,262
Other 1,701 1,561
------ ------
$5,071 $4,312
====== ======
13
<PAGE>
Other operating expenses totaled $5.1 million for the third quarter of 1998
compared to $4.3 million for the third quarter of 1997, an increase of $0.8
million. Marketing expense increased $0.4 million due to additional radio and
print advertisement as well as branch displays and brochures for GBT. Outside
processing expenses increased $0.2 million and other operating expenses
increased $0.1 million from the comparable period, reflecting costs associated
with higher transaction and account volume resulting from the Company's consumer
strategy. Professional services increased $0.1 million due to an increase in
consulting fees partially offset by lower levels of home equity closing cost
expense.
Net Expense of Real Estate Operations
The Company's former real estate investment and brokerage subsidiary, Colebrook,
engaged in various real estate investments, directly or in joint ventures with
unaffiliated partners. In accordance with FDICIA, the Company terminated its
real estate development activities and has completed the sale of its remaining
real estate investments. At September 30, 1998 the divestment of Colebrook was
complete.
Net income of real estate operations for the third quarter of 1998 was $1.1
million compared to $0.1 million for the same period in 1997. Results for the
third quarter of 1998 reflect a $1.1 million gain on the sale of a real estate
investment.
Income Taxes
For the three months ended September 30, 1998 the Company recorded income tax
expense of $2.8 million compared to expense of $2.3 million for the three months
ended September 30, 1997. This increase is attributable to a 20.5% increase in
pre-tax earnings.
Results of Operations for the Nine Months Ended September 30, 1998 and September
30, 1997
The Company reported net income of $12.9 million, or $1.79 per diluted share for
the nine months ended September 30, 1998 as compared to net income of $10.8
million, or $1.57 per diluted share for the same period last year. These results
reflect increases in net interest income, noninterest income and net income of
real estate operations, as well as lower provisions for possible loan losses,
partially offset by increases in operating expenses and income tax expense.
Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income is
affected by the mix and volume of assets and liabilities, and the movement and
level of interest rates. The Company invests in certain assets that have
preferential tax treatment. In order to present yields on a comparable basis,
net interest income is presented on a fully taxable equivalent basis for
purposes of yield and margin analysis.
The following table sets forth, for the period indicated, average balances,
interest income and expense, and yields earned or rates paid on the major
categories of assets and liabilities. Non-accrual loans have been included in
the appropriate average balance loan category, but unpaid interest on
non-accrual loans has not been included for purposes of determining interest
income. In addition, investment securities available for sale are reflected at
amortized cost.
14
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------------------------------------------
1998 1997
------------------------------------------- ---------------------------------------------
Average Average Average Average
Balance (3) Interest (1) Yield/Cost (1) Balance Interest (1) Yield/Cost (1)
------------ -------------- -------------- ------------ ------------ ---------------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Fed funds sold and short-term investments $ 41,428 $ 1,596 5.08% $ 20,198 $ 808 5.28%
Investment securities held to maturity 226,026 11,067 6.53% 217,066 10,988 6.75%
Investment securities available for sale 576,993 26,750 6.18% 529,507 26,992 6.80%
Investment securities held for trading -- -- -- 505 12 3.13%
Residential real estate loans 254,861 15,246 7.98% 290,164 17,351 7.97%
Commercial real estate loans 183,596 12,403 9.01% 171,327 11,574 9.01%
Commercial loans 241,922 16,037 8.74% 196,451 12,893 8.65%
Home equity loans 167,370 10,445 8.34% 131,231 7,855 8.00%
Consumer loans 12,489 914 9.76% 9,504 779 10.93%
----------- -------- ----- ---------- ----------- -----
Total interest-earning assets 1,704,685 94,458 7.39% 1,565,953 89,252 7.60%
Allowance for loan losses (23,336) (20,755)
Non-interest-earning assets 123,942 113,301
----------- ----------
Total assets $ 1,805,291 $ 94,458 $1,658,499 $ 89,252
=========== ======== ========== ===========
Interest-bearing liabilities:
Deposits
Savings accounts $ 227,040 $ 3,439 2.03% $ 263,041 $ 4,600 2.34%
NOW accounts (2) 40,961 398 1.30% 69,811 623 1.19%
Money manager accounts (2) 47,463 406 1.14% 10,640 85 --
Money market accounts 249,594 6,065 3.25% 205,972 5,116 3.32%
Time deposit accounts 564,453 22,526 5.34% 518,460 20,545 5.30%
----------- -------- ----- ---------- ----------- -----
Total interest-bearing deposits 1,129,511 32,834 3.89% 1,067,924 30,969 3.88%
Borrowed funds 327,595 14,193 5.71% 294,972 12,800 5.72%
----------- -------- ----- ---------- ----------- -----
Total interest-bearing liabilities 1,457,106 47,027 4.32% 1,362,896 43,769 4.29%
Non-interest-bearing liabilities 219,432 176,595
----------- ----------
Total liabilities 1,676,538 1,539,491
Total stockholders' equity 128,753 119,008
----------- ----------
Total liabilities and
stockholders' equity $ 1,805,291 $ 47,027 $1,658,499 $ 43,769
=========== ======== ========== ===========
Net interest income/spread $ 47,431 3.07% $ 45,483 3.31%
======== ===== =========== =====
Net interest margin as a % of interest-
earning assets 3.71% 3.87%
===== =====
Tax equivalent adjustment $ 801 $ 480
-------- ----------
Net interest income/spread per Condensed
Consolidated Statement of Operations $ 46,630 $ 45,003
======== ==========
<FN>
(1) On a fully taxable equivalent basis. Calculated using a Federal income tax rate of 35% for 1998 and 34% for 1997.
(2) During July 1997, the Company implemented a program which converted certain NOW accounts to money manager accounts. This
program has no effect on the Company's depositors, but has provided additional investable funds to the Company by substantially
reducing the reserve balances required to be maintained at the Federal Reserve Bank of Boston.
(3) A reclassification of some savings accounts to money market accounts affecting average balance outstanding was made in
connection with the GBT acquisition.
</FN>
</TABLE>
Net interest income on a fully taxable equivalent basis for the nine months
ended September 30, 1998 was $47.4 million compared to $45.5 million for the
nine months ended September 30, 1997, an increase of $1.9 million or 4.3%. This
increase was the result of a $138.7 million increase in interest-earning assets
partially offset by a 16 basis point decrease in the net interest margin.
Total interest income was $94.5 million on a fully taxable equivalent basis for
the nine months ended September 30, 1998, an increase of $5.2 million or 5.8%
from the same period last year. This increase is attributable to higher levels
of interest-earning assets, partially offset by lower yields on interest-earning
assets. Average interest-earning assets totaled $1.7 billion for the nine months
ended September 30, 1998 compared to $1.6 billion for the nine months ended
September 30, 1997, an increase of $138.7 million or 8.9% and were funded by
higher deposit levels and borrowed funds. Average investments increased $55.9
million or 7.5%. Average loans increased $61.6 million as the Company continued
to focus on the commercial and home equity market segments, which grew by $45.5
million or 23.1% and $36.1 million or 27.5%, respectively. Average commercial
real estate loans increased $12.3 million or 7.2% reflecting growth in
commercial construction lending. Average residential real estate loan balances
declined $35.3 million or 12.2% for the nine months ended September 30, 1998,
reflecting amortization and prepayments of the existing loan portfolio,
partially offset by the origination of adjustable rate mortgages. The Company
continues to actively originate loans secured by first mortgages on one to four
family residences, and offers a variety of fixed and adjustable rate
15
<PAGE>
mortgage loan products. The Company originates long-term fixed rate mortgages
for sale in the secondary market and generally holds adjustable rate mortgages
in the Company's loan portfolio. Yields on interest-earning assets declined 21
basis points from the nine months ended September 30, 1997 primarily reflecting
a lower level of interest rates on the Company's investment securities caused by
increased prepayments of mortgage-backed securities which result in accelerated
premium amortization. Accelerated prepayment speeds were the result of lower
long-term interest rates which significantly increased refinancing activity.
Total interest expense was $47.0 million for the nine months ended September 30,
1998 compared to $43.8 million during the same period in 1997, an increase of
$3.2 million or 7.4%. This increase is attributable to increases in
interest-bearing deposits and borrowed funds. Average interest-bearing deposits
increased $61.6 million or 5.8%. This growth occurred primarily in time deposits
which increased $46.0 million or 8.9% largely due to growth in deposits of local
municipalities. Borrowed funds averaged $327.6 million for the nine months ended
September 30, 1998 compared to $295.0 million for the same period in 1997. These
borrowings were used to match fund fixed rate assets and manage the Company's
interest rate risk position.
The following table presents the changes in net interest income (on a fully
taxable equivalent basis) resulting from changes in interest rates or changes in
the volume of interest-earning assets and interest-bearing liabilities during
the periods indicated. Changes which are attributable to both rate and volume
have been allocated evenly between the change in rate and volume components.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 versus 1997
----------------------------------------
Increase (Decrease) Due to
----------------------------------------
Volume Rate Net
---------- ----------- ---------
(Dollars In Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold and
short term investments $ 834 $ (46) $ 788
Investment securities held to maturity 446 (367) 79
Investment securities available for sale 2,310 (2,552) (242)
Investment securities held for trading (6) (6) (12)
Residential real estate loans (2,111) 6 (2,105)
Commercial real estate loans 829 -- 829
Commercial loans 2,999 145 3,144
Home equity loans 2,209 381 2,590
Consumer loans 232 (97) 135
------- ------- -------
Total interest-earning assets 7,742 (2,536) 5,206
------- ------- -------
Interest-bearing liabilities:
Deposits:
Savings accounts (587) (574) (1,161)
NOW accounts (269) 44 (225)
Money manager accounts 305 16 321
Money market accounts 1,072 (123) 949
Time deposit accounts 1,828 152 1,981
------- ------- -------
Total deposits 2,349 (484) 1,865
Borrowed funds 1,415 (22) 1,393
------- ------- -------
Total interest-bearing liabilities 3,764 (506) 3,258
------- ------- -------
Change in net interest income $ 3,978 $(2,030) $ 1,948
======= ======= =======
</TABLE>
16
<PAGE>
Provision for Possible Loan Losses
The Company's provision for possible loan losses was $0.8 million for the nine
months ended September 30, 1998 compared to $1.4 million for the same period in
1997. The provision for possible loan losses is based upon management's judgment
of the amount necessary to maintain the allowance for possible loan losses at a
level which is considered adequate. For further information see "Balance Sheet
Analysis - Non-performing Assets" and "- Allowance for Possible Loan Losses".
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:
Nine months ended
September 30,
-------------------
1998 1997
------ ------
(Dollars in Thousands)
Net gain on sale of loans $ 986 $ 328
Net gain on sale of securities 3 77
Net gain on securities held for trading -- 43
Loan charges and fees 2,276 2,355
Deposit related fees 6,293 5,564
Merchant processing fees 1,398 1,358
Other charges and fees 2,092 1,761
------- -------
$13,048 $11,486
======= =======
Non-interest income totaled $13.0 million for the nine months ended September
30, 1998 compared to $11.5 million for the same period in 1997, an increase of
$1.5 million or 13.6%. Deposit service charges and fees increased $0.7 million
due to fees associated with the Company's larger non-interest bearing deposit
base. Net gain on sale of loans increased $0.7 million due to an increase in
mortgage production and corresponding sale of loans to the secondary market.
Other charges and fees increased $0.3 million due to increases in brokerage
service fees and fees associated with Business Manager, a commercial cash
management product introduced by the Company in 1997, which involves the funding
and management of accounts receivable for small-to-medium-sized business
customers. Loan charges and fees decreased $0.1 million reflecting the decline
in the residential mortgage servicing portfolio.
Non-interest Expense
Salaries and Benefits Expense
Salaries and benefits expense totaled $19.7 million for the nine months ended
September 30, 1998 compared to $18.3 million for the same period in 1997, an
increase of $1.4 million reflecting standard wage increases, increased staffing
related to new branch openings, branch-related support, as well as support
needed to meet increased residential origination volumes. In addition, the
Company experienced higher benefit costs associated with restricted stock
vesting and the ESOP.
Occupancy Expense of Bank Premises
Occupancy expense totaled $3.8 million for the nine months ended September 30,
1998 compared to $3.6 million for the same period in 1997, an increase of $0.2
million which is attributed to the expense of new branch openings.
Furniture and Equipment Expense
Furniture and equipment expense increased $0.3 million reflecting new branch
openings as well as investments in new technology.
17
<PAGE>
Other Operating Expense
The components of other operating expense for the periods presented are as
follows:
Nine months ended
September 30,
-------------------
1998 1997
------ ------
(Dollars in Thousands)
Marketing $ 2,016 $ 1,568
Insurance 467 547
Professional services 2,030 2,436
Outside processing 4,114 3,650
Other 4,926 4,482
------- -------
$13,553 $12,683
======= =======
Other operating expenses totaled $13.6 million for the nine months ended
September 30, 1998 compared to $12.7 million for the same period in 1997, an
increase of $0.9 million. Outside processing and other operating expenses
increased $0.5 million and $0.4 million respectively, from the comparable period
reflecting costs associated with higher transaction and account volumes
resulting from the Company's consumer strategy. Marketing increased $0.4 million
due to additional radio and print advertisement as well as branch displays and
brochures for GBT. Professional services decreased $0.4 million due to lower
levels of legal expenses.
Net Expense of Real Estate Operations
The Company's former real estate investment and brokerage subsidiary, Colebrook,
engaged in various real estate investments, directly or in joint ventures with
unaffiliated partners. In accordance with FDICIA, the Company terminated its
real estate development activities and has completed the sale of its remaining
real estate investments. At September 30, 1998 the divestment of Colebrook was
complete.
Net income of real estate operations for the nine months ended September 30,
1998 was $1.7 million compared to net expense of $0.4 million for the same
period in 1997. 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. Results for
the nine months ended September 30, 1998 were influenced by a $1.1 million gain
on the sale of a real estate investment in the third quarter, the second quarter
reversal of the remaining $0.4 million Colebrook divestment reserve, as well as
income of $0.2 million representing normal operating earnings.
Income Taxes
For the nine months ended September 30, 1998 the Company recorded income tax
expense of $7.9 million compared to expense of $6.9 million for the nine months
ended September 30, 1997. This increase is attributable to a 17.6% increase in
pre-tax earnings, partially offset by a lower overall effective rate resulting
from state tax planning strategies.
18
<PAGE>
Balance Sheet Analysis - Comparison Of September 30, 1998 To December 31, 1997
Total assets increased from $1.7 billion at December 31, 1997 to $1.9 billion at
September 30, 1998. This increase primarily reflects growth in investment
securities and loans funded through an increase in deposits and wholesale
borrowings.
Investments
The Company's investment portfolio increased $94.6 million from $769.1 million
at December 31, 1997 to $863.7 million at September 30, 1998.
The Company engages in investment activities for both investment and liquidity
purposes. The Company maintains an investment securities portfolio which
consists primarily of U.S. Government and Agency securities, corporate
obligations, asset-backed securities, collateralized mortgage obligations, FHLB
stock, and marketable equity securities. Other short-term investments held by
the Company periodically include interest-bearing deposits and federal funds
sold. The Company also maintains a mortgage-backed securities portfolio
consisting of securities issued and guaranteed by the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and
the Government National Mortgage Association ("GNMA") in addition to publicly
traded mortgage-backed securities issued by private financial intermediaries
which are rated "AA" or higher by rating agencies of national prominence.
Securities which the Company has the intent and ability to hold until maturity
are classified as held-to-maturity and are carried at amortized cost, while
those securities which have been identified as assets that may be sold prior to
maturity or assets for which there is not a positive intent to hold to maturity
are classified as available-for-sale and are carried at fair value, with
unrealized gains and losses excluded from earnings and reported net of tax as
accumulated other comprehensive income as a separate component of stockholders'
equity.
During 1997 GBT held trading securities. However, concurrent with the
acquisition of GBT, the Company sold its position in these instruments. At
September 30, 1998 and December 31, 1997, the Company held no trading
securities.
The table below sets forth certain information regarding the amortized cost and
fair value of the Company's investment portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------------------------------
Available for Sale Held to Maturity
---------------------------- --------------------------
(Dollars In Thousands)
Amortized Amortized
Cost Fair Value Cost Fair Value
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government and Agency obligations $ 17,017 $ 17,119 $ -- $ --
Collateralized mortgage obligations 46,690 46,804 12,854 12,994
Mortgage-backed securities 495,842 493,756 165,705 166,017
Asset-backed securities -- -- 65,349 65,861
Other bonds and short term obligations 8,968 9,591 330 330
Other securities 51,294 52,150 -- --
-------- -------- -------- --------
Total $619,811 $619,420 $244,238 $245,202
======== ======== ======== ========
<CAPTION>
December 31, 1997
-----------------------------------------------------------
Available for Sale Held to Maturity
---------------------------- --------------------------
(Dollars In Thousands)
Amortized Amortized
Cost Fair Value Cost Fair Value
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government and Agency obligations $ 15,608 $ 15,636 $ 2,400 $ 2,391
Collateralized mortgage obligations 51,273 51,415 2,934 2,953
Mortgage-backed securities 458,659 460,478 141,282 141,563
Asset-backed securities -- -- 46,046 46,143
Other bonds and short term obligations 8,966 9,355 345 346
Other securities 38,128 39,224 -- --
-------- -------- -------- --------
Total $572,634 $576,108 $193,007 $193,396
======== ======== ======== ========
</TABLE>
19
<PAGE>
Loan Portfolio Composition
Gross loans comprised $896.2 million or 47.2% of total assets as of September
30, 1998. The following table sets forth information concerning the Company's
loan portfolio in dollar amounts and percentages, by type of loan at September
30, 1998 and at December 31, 1997.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
-------------------------------- --------------------------------
Percent of Percent of
Amount Total Amount Total
--------------- ------------- -------------- --------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Residential real estate loans $235,738 26.30% $281,457 33.13%
Commercial real estate loans 188,624 21.05% 185,226 21.80%
Commercial loans 280,551 31.31% 212,869 25.06%
Home equity loans 179,005 19.97% 158,753 18.69%
Consumer loans 12,270 1.37% 11,189 1.32%
-------- ------ -------- ------
Total loans receivable, gross 896,188 100.00% 849,494 100.00%
-------- ------ -------- ------
Less:
Unearned income and fees (2,986) (1,991)
Allowance for loan losses 23,924 22,724
-------- --------
Total loans receivable, net $875,250 $828,761
======== ========
</TABLE>
The Company continues to actively originate loans secured by first mortgages on
one to four family residences, and offers a variety of fixed and adjustable rate
mortgage loan products. The Company originates long-term fixed rate mortgages
for sale in the secondary market and generally holds adjustable rate mortgages
in the Company's loan portfolio. During the nine months ended September 30,
1998, the Company experienced an increase in prepayments in its adjustable rate
mortgage portfolio. These prepayments offset new originations and resulted in a
$45.7 million decrease in residential real estate balances between December 31,
1997 and September 30, 1998.
During the nine months ended September 30, 1998, commercial loan balances
increased $67.7 million, reflecting the Company's continued focus on lending
activities in the local business market. Home equity loans increased $20.3
million from December 31, 1997 to September 30, 1998 as the Company continues to
actively promote home equity products.
20
<PAGE>
Non-performing Assets
Non-performing assets declined from $8.1 million at December 31, 1997 to $5.0
million at September 30, 1998. The decline is primarily attributed to the
movement of non-accrual loans to accrual status. The following table sets forth
information regarding the components of non-performing assets for the periods
presented:
September 30, December 31,
1998 1997
------------- ------------
(Dollars In Thousands)
Non-accrual loans (1):
Residential real estate loans $1,132 $1,211
Commercial real estate loans 675 1,542
Commercial loans 1,561 2,414
Home equity loans 282 181
Consumer loans 27 4
------ ------
Total non-accrual loans 3,677 5,352
------ ------
Loans past due 90 days still accruing (2) 371 431
------ ------
Total non-performing loans 4,048 5,783
Foreclosed real estate (3) 679 1,209
Restructured loans on accrual status (4) 275 1,124
------ ------
Total non-performing assets $5,002 $8,116
====== ======
Total non-performing loans to total
gross loans 0.45% 0.68%
Total non-performing assets to total
assets 0.26% 0.47%
Allowance for possible losses to
non-performing loans 591.01% 392.94%
(1) Non-accrual loans are loans that are contractually past due in excess of 90
days, for which the Company has stopped the accrual of interest, or loans which
are not past due but on which the Company has stopped the accrual of interest
based on management's assessment of the circumstances surrounding these loans.
(2) Accruing loans past due 90 days or more are loans which have not been placed
on non-accrual status as, in management's opinion, the collection of the loan,
in full, is not in doubt.
(3) Foreclosed real estate includes OREO, defined as real estate acquired
through foreclosure or acceptance of a deed in lieu of foreclosure. The Company
carries foreclosed real estate at the lower of cost or net realizable value,
which approximates fair value less estimated selling costs.
(4) Restructured loans are loans for which concessions, including reduction of
interest rates or deferral of interest or principal payments, have been granted
due to the borrower's financial condition. Restructured loans on non-accrual
status are reported in the non-accrual loan category. Restructured loans on
accrual status are those loans that have complied with terms of a restructuring
agreement for a satisfactory period (generally six months).
21
<PAGE>
The principal amount of non-performing loans including non-performing
restructured loans aggregated $4.0 million at September 30, 1998 and $5.8
million at December 31, 1997. Interest income that would have been recorded if
the loans had been performing in accordance with their original terms aggregated
$0.3 million and $0.4 million for the nine months ended September 30, 1998 and
1997, respectively. Interest income recorded on these loans for the nine months
ended September 30, 1998 and 1997 was $0.1 million and $0.3 million,
respectively.
The principal amount of accruing restructured loans aggregated $0.3 million at
September 30, 1998 compared to $1.1 million at December 31, 1997, a decrease of
$0.8 million. Interest income that would have been recorded if the loans had
been performing within their original terms aggregated $18 thousand and $0.2
million for the periods ended September 30, 1998 and 1997, respectively.
Interest income recorded on these loans amounted to $21 thousand and $0.1
million for the nine months ended September 30, 1998 and 1997, respectively.
Watch List Loans
The Company maintains a "watch list" of loans, which represents performing loans
that have potential weaknesses that require management's attention. These
potential weaknesses may stem from a variety of factors including, among other
things, economic or market conditions, adverse conditions in the obligor's
operations or financial condition weaknesses. Watch list loans totaled $17.2
million and $24.1 million at September 30, 1998 and December 31, 1997,
respectively.
Classified Loans
The Company's Credit Grade Policy (the "Policy") provides for the classification
of loans considered to be of lesser quality as "substandard", "doubtful", or
"loss" loans. A loan is considered substandard under the Policy if it is
inadequately protected by the current sound worth and paying capacity of the
obligor or of the collateral pledged, if any. Substandard loans include those
characterized by the "distinct possibility" that the Company will sustain "some
loss" if the deficiencies are not corrected. Loans classified as doubtful, of
which the Company has none, have all of the weaknesses inherent in those
classified as substandard with the added characteristic that the weaknesses
present make "collection or liquidation in full" on the basis of currently
existing facts, conditions and values, "improbable." Loans characterized as
loss, of which the Company has none, are those considered "uncollectible" and of
such little value that their continuance as bankable assets is not warranted.
Classified loans, all of which are categorized substandard, totaled $9.5 million
and $6.2 million at September 30, 1998 and December 31, 1997, respectively.
Included in these amounts are $3.7 million and $5.4 million of loans which have
been reported as non-performing assets at September 30, 1998 and December 31,
1997, respectively.
Allowance for Possible Loan Losses
The allowance for possible loan losses reflects an amount that, in management's
judgment, is adequate to provide for potential losses in the loan portfolio. In
addition, examinations of the adequacy of the loan loss reserve are conducted
periodically by various regulatory agencies. The allowance for possible loan
losses at September 30, 1998 was $23.9 million, compared to $22.5 million at
September 30, 1997.
22
<PAGE>
The activity in the allowance for possible loan losses for the nine months ended
September 30, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
--------- ---------
(Dollars In Thousands)
<S> <C> <C>
Balance, beginning of period $ 22,724 $ 19,549
Provision for loan losses 755 1,431
Charge-offs:
Residential real estate loans (268) (202)
Commercial real estate loans (426) (721)
Commercial loans (324) (459)
Home equity loans (41) (135)
Consumer loans (184) (200)
Merchant processing (55) (51)
-------- --------
Total charge-offs (1,298) (1,768)
Recoveries:
Residential real estate loans -- 2
Commercial real estate loans 1,277 2,821
Commercial loans 420 331
Home equity loans 12 80
Consumer loans 34 38
Merchant processing -- --
-------- --------
Total recoveries 1,743 3,272
-------- --------
Net recoveries (charge-offs) 445 1,504
Balance, end of period $ 23,924 $ 22,484
======== ========
Ratio of net loan recoveries (charge-offs) during the period to
average loans outstanding during the period 0.05% 0.19%
Ratio of allowance for possible loan losses to total loans
at the end of the period 2.67% 2.65%
Ratio of allowance for possible loan losses to non-performing
loans at the end of the period 591.01% 360.26%
</TABLE>
At September 30, 1998, the recorded investment in loans that are considered
impaired under SFAS 114 "Accounting by Creditors for Impairment of a Loan" was
$8.5 million. Included in this amount is $1.4 million of impaired loans for
which the related SFAS 114 allowance is $0.5 million and $7.2 million of
impaired loans for which the SFAS 114 allowance is zero. The average recorded
investment in impaired loans during the three and nine months ended September
30, 1998 was approximately $8.2 million and $8.6 million, respectively. For the
three and nine month periods ended September 30, 1998, the Company recognized
interest income on these impaired loans of $0.1 million and $0.4 million,
respectively.
23
<PAGE>
The following table shows the allocation of the allowance for possible loan
losses to the various types of loans as well as the percentage of allowance for
possible loan losses in each category to total allowance for possible loan loss.
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
---------------------------- ---------------------------
% of % of
Total Total
Allowance for Allowance for
Amount Loan Losses Amount Loan Losses
----------- ------------- --------- -------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Residential real estate loans $ 2,675 11.18% $ 3,664 16.12%
Commercial real estate loans 7,516 31.42% 5,632 24.78%
Commercial loans 9,025 37.73% 8,328 36.65%
Home equity loans 2,518 10.52% 3,183 14.01%
Consumer loans 1,008 4.21% 1,274 5.61%
Merchant processing 1,182 4.94% 643 2.83%
------- ------ ------- ------
Total allowance for possible loan losses $23,924 100.00% $22,724 100.00%
======= ====== ======= ======
</TABLE>
Deposit Distribution
The principal source of funds for the Company are deposits from local consumers
and businesses. There were no brokered deposits at September 30, 1998 or
December 31, 1997. The Company's deposits consist of demand and NOW accounts,
money manager accounts, passbook and statement savings accounts, money market
accounts and time deposits. The following table presents the composition of
deposits at the dates indicated:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
----------------------- -----------------------
Percent Percent
of of
Amount Total Amount Total
---------- -------- ---------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Demand deposits $ 190,547 14.19% $ 171,343 13.52%
NOW accounts 46,312 3.45% 51,412 4.06%
Money manager accounts (1) 39,398 2.93% 39,447 3.11%
Savings accounts 217,861 16.22% 263,449 20.79%
Money market accounts 253,066 18.84% 211,286 16.67%
Time deposits 595,879 44.37% 530,361 41.85%
---------- ------ ---------- ------
Total deposits $1,343,063 100.00% $1,267,298 100.00%
========== ====== ========== ======
<FN>
(1) Money manager accounts represent NOW account balances which have been
transferred to money market accounts to provide additional investable funds
to the Company by substantially reducing the reserve balances required to
be maintained at the Federal Reserve Bank of Boston. This program has no
effect on the Company's depositors.
</FN>
</TABLE>
Total deposits were $1.3 billion at both September 30, 1998 and December 31,
1997. Deposits increased $75.8 million with growth occurring primarily in demand
deposits and time deposits. The $45.6 million decrease in savings accounts is
offset by a comparable increase in money market accounts, which is attributable
to the conversion of some savings accounts in connection with the GBT
acquisition. Demand deposits increased $19.2 million reflecting growth in
business deposits, as a result of active solicitation of these accounts, and
consumer deposits, as customers continue to take advantage of free checking
accounts offered as a result of the Company's consumer deposit strategy. The
$65.5 million increase in time deposits is primarily attributable to growth in
deposits of local municipalities.
24
<PAGE>
Borrowings
Borrowings consist of FHLB advances, securities sold under agreements to
repurchase, and loans payable related to the Company's ESOP. The Company
generally uses borrowings to match fund fixed rate assets and manage the
Company's interest rate risk position. Borrowings increased $80.7 million from
$299.9 million at December 31, 1997 to $380.6 million at September 30, 1998
reflecting a portion of the funding for the growth in loans and investments.
Regulatory Capital
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material adverse effect
on the Company's financial statements. Under applicable capital adequacy
requirements the Company must meet specific minimum capital requirements that
involve quantitative measures of the Company's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital to risk-weighted assets and Tier 1
capital to total average assets. Management believes, as of September 30, 1998,
that the Company meets all capital adequacy requirements to which it is subject.
Under the FDIC's regulatory framework for prompt corrective action, both SIS
Bank and GBT are considered well capitalized as of September 30, 1998. To be
categorized as well capitalized the Banks must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table below. As of September 30, 1998 the Company also qualified as well
capitalized under the applicable Federal Reserve Board regulations.
Capital amounts and ratios are monitored by management for the Company, SIS Bank
and GBT to ensure qualification as well capitalized. In connection with
maintaining GBT's qualification as well capitalized the Company has discontinued
GBT dividend payments to the parent company.
25
<PAGE>
The actual capital amounts and ratios for the Company, SIS Bank and GBT are
presented in the table below, no deductions were made from capital for
interest-rate risk.
<TABLE>
<CAPTION>
Minimum Minimum
Requirements Requirements
For Capital To Qualify As
Actual Adequacy Purposes Well Capitalized
-------------------- ------------------------ ----------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------- ----------- ---------- --------- -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of September 30, 1998:
Tier I Capital (to Average Assets)
Company $139,348 7.5% $ 74,623 4.0% N/A
SIS Bank $115,416 7.4% $ 62,821 4.0% $ 78,527 5.0%
GBT $ 19,097 6.5% $ 11,805 4.0% $ 14,756 5.0%
Tier I Capital (to Risk Weighted Assets)
Company $139,348 11.5% $ 48,507 4.0% $ 72,761 6.0%
SIS Bank $115,416 11.5% $ 40,291 4.0% $ 60,437 6.0%
GBT $ 19,097 9.3% $ 8,220 4.0% $ 12,330 6.0%
Total Capital (to Risk Weighted Assets)
Company $154,601 12.7% $ 97,014 8.0% $121,268 10.0%
SIS Bank $128,095 12.7% $ 80,583 8.0% $100,729 10.0%
GBT $ 21,671 10.6% $ 16,439 8.0% $ 20,549 10.0%
As of December 31, 1997:
Tier I Capital (to Average Assets)
Company $123,340 7.2% $ 68,834 4.0% N/A
SIS Bank $103,780 7.1% $ 58,358 4.0% $ 72,947 5.0%
GBT $ 17,291 6.6% $ 10,422 4.0% $ 13,028 5.0%
Tier I Capital (to Risk Weighted Assets)
Company $123,340 11.9% $ 41,568 4.0% $ 62,352 6.0%
SIS Bank $103,780 11.9% $ 35,044 4.0% $ 52,565 6.0%
GBT $ 17,291 10.6% $ 6,507 4.0% $ 9,761 6.0%
Total Capital (to Risk Weighted Assets)
Company $136,438 13.1% $ 83,137 8.0% $103,921 10.0%
SIS Bank $114,825 13.1% $ 70,087 8.0% $ 87,609 10.0%
GBT $ 19,344 11.9% $ 13,014 8.0% $ 16,268 10.0%
</TABLE>
Interest Rate Risk Management
Using management's estimates of asset prepayments and core deposit decay in its
computation, the Company estimates that its cumulative one-year gap position was
liability sensitive by $29.3 million or 1.54% of total assets at September 30,
1998. The following table sets forth the amounts of assets and liabilities
outstanding at September 30, 1998, which are anticipated by the Company to
mature or reprice in each of the future time periods shown using certain
assumptions based on its historical experience, the current interest rate
environment, and other data available to management. Management believes that
these assumptions approximate actual experience and considers such assumptions
reasonable, however, the interest rate sensitivity of the Company's assets and
liabilities could vary substantially if different assumptions were used or
actual experience differs from the assumptions used. Management periodically
reviews and, when appropriate, changes the assumptions used in creating this
table.
26
<PAGE>
<TABLE>
<CAPTION>
GAP Position
At September 30, 1998
----------------------------------------------------------------------
More than six
Less than months less
six months than one year 1 - 5 Years Over 5 Yrs TOTAL
------------ -------------- ----------- ----------- ----------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Federal funds sold and
interest bearing deposits $ 52,242 $ -- $ -- $ -- $ 52,242
Investment securities 323,351 189,285 287,172 63,850 863,658
Residential real estate loans 55,406 55,362 96,449 27,720 234,937
Commercial real estate loans 45,817 13,147 110,009 18,928 187,901
Commercial loans 105,263 14,893 148,952 10,521 279,629
Home equity loans 112,739 7,296 32,478 28,279 180,792
Consumer loans 6,391 1,027 4,820 -- 12,238
Other assets -- -- -- 89,021 89,021
---------- ---------- ---------- ---------- ----------
Total assets $ 701,209 $ 281,010 $ 679,880 $ 238,319 $1,900,418
========== ========== ========== ========== ==========
Liabilities & stockholders' equity:
Savings accounts $ 32,679 $ 32,679 $ 152,503 $ -- $ 217,861
NOW accounts 12,858 12,857 59,995 -- 85,710
Money market accounts 75,920 75,920 101,226 -- 253,066
Time deposits 406,201 131,077 57,382 1,219 595,879
Borrowed funds 142,242 12,914 188,518 36,936 380,610
Other liabilities & stockholders' equity 38,109 38,109 114,328 176,746 367,292
---------- ---------- ---------- ---------- ----------
Total liabilities & stockholders' equity $ 708,009 $ 303,556 $ 673,952 $ 214,901 $1,900,418
========== ========== ========== ========== ==========
Period GAP position $ (6,800) $ (22,546) $ 5,928 $ 23,418
Net period GAP as a percentage of total assets (0.35%) (1.19%) 0.31% 1.23%
Cumulative GAP $ (6,800) $ (29,346) $ (23,418) --
Cumulative GAP as a percentage of total
assets (0.35%) (1.54%) (1.23%) --
Cumulative GAP as a percentage of total
interest-earning assets (0.38%) (1.62%) (1.29%) --
Cumulative interest-earning assets as a
percentage of cumulative interest-bearing 104.67% 105.01% 111.18% 118.15%
liabilities
<FN>
For purposes of the above interest sensitivity analysis:
Residential loans held for sale at September 30, 1998 totaling $10.4 million are in the less than six month interest
sensitivity period.
Fixed rate assets are scheduled by contractual maturity and adjustable rate assets are scheduled by their next repricing date.
In both cases, assets that have prepayment optionality are adjusted for the Company's estimate of prepayments.
Loans do not include non-accrual loans of $3.7 million.
Loans do not include the allowance for loan loss of $23.9 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 $190.5 million are included in other liabilities and are assumed to decay at an
annual rate of 40%.
</FN>
</TABLE>
27
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, while certain assets and liabilities may have
similar contractual maturities or periods to repricing, they may react in
different ways to changes in market interest rates. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Additionally,
certain assets, such as adjustable rate mortgages, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Finally, the ability of borrowers to service their adjustable rate mortgages may
decrease in the event of an interest rate increase.
To offset these inherent weaknesses 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. In addition, the Company utilizes duration analysis and calculates
the Company's market value of portfolio equity under various interest rate
scenarios.
Liquidity
Liquidity measures the ability of the Company to meet its maturing obligations
and existing commitments, to withstand fluctuations in deposit levels, to fund
its operations and to provide for customer credit needs. If the Company requires
funds beyond its ability to generate them internally, it has additional
borrowing capacity with the FHLB and collateral eligible for repurchase
agreements. Because the Company has a stable retail deposit base, management
believes that significant borrowings will not be necessary to maintain its
current liquidity position. Management intends to continue seeking opportunities
for expansion and believes that the Company's liquidity, capital resources and
borrowing capabilities are adequate for its current and intended operations.
Market Risk
As a financial institution, the Company's chief market risk is interest rate
risk. The Company has no exposure to foreign currency or commodity prices. Its
exposure to equity prices is limited to marketable equity securities contained
within its available for sale investment portfolio. At September 30, 1998 the
Company did not have a trading portfolio.
Interest rate risk is the sensitivity of income to variations in interest rates
over defined time horizons. The primary goal of interest rate risk management is
to control this risk within limits and guidelines approved by the Company's
Board of Directors. These limits and guidelines reflect the Company's tolerance
for interest rate risk.
The Company attempts to control interest rate risk by identifying exposures,
quantifying them, and identifying their impact on income. The Company quantifies
its interest rate risk exposures using simulation models as well as gap
analyses. The Company manages its interest rate exposures using a combination of
on-balance sheet instruments, consisting principally of fixed and variable rate
securities, deposit pricing and FHLB borrowings. See the GAP Position analysis
under this Item 2 and the notes to the Consolidated Financial Statements under
Item 8 in the Company's Form 10-K for the year ended December 31, 1997 for
further information regarding market risk of these instruments.
At September 30, 1998 and December 31, 1997, the Company had no outstanding
exposures to off-balance sheet interest rate instruments such as swaps, forwards
or futures. GBT held derivative financial instruments during 1997. However, in
December, 1997 concurrent with the acquisition of GBT, the Company sold its
position in these instruments. At September 30, 1998 the Company held no
derivative financial instruments.
28
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Default upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) On November 12, 1998,a Special Meeting of the Stockholders of SIS
Bancorp, Inc. was held at the headquarters of SIS Bancorp, Inc., 1441
Main Street, Springfield, Massachusetts.
(b) N/A
(c) The only proposal presented at the meeting was to "Consider and vote upon a
proposal to adopt the Agreement and Plan of Merger dated as of July 20, 1998, as
amended (the "Merger Agreement") among Peoples Heritage Financial Group, Inc.
("PHFG"), Peoples Heritage Merger Corp., a wholly-owned subsidiary of Peoples
Heritage Financial Group, Inc., and SIS Bancorp, Inc. ("SIS"), which provides,
among other things, for (i) the merger of SIS with and into Peoples Heritage
Merger Corp., and (ii) the conversion of each share of SIS common stock
outstanding immediately prior to the merger (other than any dissenting shares
under Massachusetts law and certain other shares) into the right to receive 2.25
shares of Peoples Heritage Financial Group, Inc. common stock, subject to
possible adjustments under certain circumstances, plus cash in lieu of any
fractional shares" as more fully described in the Proxy statement for the
meeting.
<TABLE>
<CAPTION>
Votes For (shares) Votes Against (shares) Votes Abstained (shares) Broker Non-Votes
------------------ ---------------------- ------------------------ ----------------
<S> <C> <C> <C>
4,991,614 96,729 19,030 None
</TABLE>
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K
On July 21, 1998, the Company filed a Form 8-K reporting the signing of
a definitive Agreement and Plan for Merger dated July 20, 1998 between
the Company and People's Heritage Financial Group, Inc.
29
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, as amended, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIS BANCORP, INC.
(Registrant)
November 13, 1998 /s/ F. William Marshall, Jr.
Date F. William Marshall, Jr.
President and Chief Executive Officer
November 13, 1998 /s/ John F. Treanor
Date John F. Treanor
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
30
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited financial statements of SIS Bancorp, Inc. at and for the period ended
September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 37,225
<INT-BEARING-DEPOSITS> 25,242
<FED-FUNDS-SOLD> 27,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 619,420
<INVESTMENTS-CARRYING> 244,238
<INVESTMENTS-MARKET> 245,202
<LOANS> 875,250
<ALLOWANCE> 23,924
<TOTAL-ASSETS> 1,900,418
<DEPOSITS> 1,343,063
<SHORT-TERM> 378,316
<LIABILITIES-OTHER> 37,605
<LONG-TERM> 2,294
0
0
<COMMON> 72
<OTHER-SE> 139,068
<TOTAL-LIABILITIES-AND-EQUITY> 1,900,418
<INTEREST-LOAN> 54,963
<INTEREST-INVEST> 37,098
<INTEREST-OTHER> 1,596
<INTEREST-TOTAL> 93,657
<INTEREST-DEPOSIT> 32,834
<INTEREST-EXPENSE> 47,027
<INTEREST-INCOME-NET> 46,630
<LOAN-LOSSES> 755
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 38,119
<INCOME-PRETAX> 20,804
<INCOME-PRE-EXTRAORDINARY> 20,804
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,899
<EPS-PRIMARY> 1.89
<EPS-DILUTED> 1.79
<YIELD-ACTUAL> 7.39
<LOANS-NON> 3,677
<LOANS-PAST> 371
<LOANS-TROUBLED> 275
<LOANS-PROBLEM> 17,190
<ALLOWANCE-OPEN> 22,724
<CHARGE-OFFS> 1,298
<RECOVERIES> 1,743
<ALLOWANCE-CLOSE> 23,924
<ALLOWANCE-DOMESTIC> 23,924
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
