EXHIBIT 99.3 FEDERAL DEPOSIT INSURANCE CORPORATION Washington, D.C. FORM F-2 Annual Report under Section 13 of the Securities and Exchange Act of 1934 For the Fiscal Year Ended 23297 December 31, 1995 (FDIC Certificate Number) SPRINGFIELD INSTITUTION FOR SAVINGS (exact name of bank as specified in charter) COMMONWEALTH OF MASSACHUSETTS (State or other jurisdiction of incorporation or organization) 04-1859200 (I.R.S. Employer Identification No.) 1441 Main Street Springfield, Massachusetts 01102 (address of principal office) Telephone: (413) 748-8000 (Bank's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class Common Stock, par value $1.00 per share Indicate by check mark if disclosure of delinquent filers pursuant to Item 10 is not contained herein, and will not be contained, to the best of the Bank's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form F-2 [ ] Indicate by check mark whether the bank (1) has filed all reports to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] The aggregate market value of the voting stock of the Bank held by non-affiliates of the Bank, based on the closing sale price for the Bank's Common Stock on February 28, 1996 as reported by NASDAQ, was $102,078,762.50. At December 31, 1995, the Bank had 5,710,700 shares of common stock, par value $1.00 per share. The number of shares of common stock outstanding on February 28, 1996, the most recent practicable is 5,718,200. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Springfield Institution for Savings Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders to be held on May 9, 1996 are incorporated by reference into Part I and III of this Form F-2. Portions of the Springfield Institution for Savings Registration Statement on Form F-1, as amended, and certain exhibits thereto, are incorporated by reference into Part IV of this Form F-2. CAUTIONARY STATEMENT FOR PURPOSES OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Bank desires to take advantage of the new "safe harbor" provisions of the Private Securities Litigation Reform Act of 1935. 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. The Bank wishes to caution readers that the following important factors, among others, may have affected and could in the future affect the Bank's actual results and could cause the Bank's actual results for subsequent periods to differ materially from those expressed in any forward-looking statement made by or on behalf on the Bank herein: (i) the effect of changes in laws and regulations, including federal and state banking laws and regulations, with which the Bank must comply, the cost of compliance either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the Bank's organization, compensation and benefit plans; (iii) the effect on the Bank's competitive position within in its market area increasing consolidation within the banking industry, and increasing competition from larger regional and out-of-state banking organizations as well as nonbank providers of various financial services; (iv) the effect of unforeseen changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the New England and national economy. PART I ITEM 1: BUSINESS Overview Established in 1827, Springfield Institution for Savings (the "Bank") is a state chartered, stock savings bank headquartered in Springfield, MA. The Bank provides a wide variety of financial services which include retail and commercial banking, residential mortgage origination and servicing, commercial real estate lending and consumer lending. The Bank serves its primary market of Hampden and Hampshire Counties through a network of 20 retail branches. The Bank completed a successful conversion from mutual to stock form (the "Conversion") on February 7, 1995. Through the issuance of 5,562,500 shares of common stock, the Bank received proceeds of $35.9 million, net of Conversion related costs and the Bank's Employee Stock Ownership Plan. The Bank's revenues are derived principally from interest payments on its loan portfolios and mortgage-backed and other investment securities. The Bank's primary sources of funds are deposits, borrowings and principal and interest payments on loans and mortgage-backed securities. Background Historically, the Bank's principal business was attracting deposits from the general public and investing those funds in loans secured by one to four family residential real estate. During the 1980's the Bank significantly increased its portfolio of commercial real estate and real estate-related commercial loans both directly and through certain of its wholly-owned direct and indirect real estate investment subsidiaries, including Colebrook Corporation ("Colebrook"). As the national and regional economic recession generally impaired borrowers' ability to repay loans, the level of the Bank's non-performing assets increased from the period of 1989 through 1992. As a consequence, the Bank increased its provision for loan losses and expenses of managing and disposing of non-performing assets, which resulted in net losses in each of the years 1990 through 1994. These net losses caused the Bank's total surplus to decline from a peak of $93.5 million or 8.64% of total assets at December 31, 1989 to $28.5 million or 3.10 % of total assets at December 31, 1994. The increase in the level of non-performing assets and regulatory concerns over the preservation of the Bank's capital, together with other factors in the operations of the Bank, resulted in the Bank entering into a Stipulation and Consent to the issuance of an Order to Cease and Desist (the "Order") with the Federal Deposit Insurance Corporation ("FDIC") and the Office of the Massachusetts Commissioner of Banks ("Commissioner of Banks") on May 12, 1992. The Order required, among other things, that the Bank submit a written plan to the FDIC and the Commissioner of Banks outlining the Bank's strategy to increase capital in the event the Bank's Tier I leverage capital ratio fell below 6%. In accordance with the Order, the Bank submitted a capital restoration plan to the FDIC and the Commissioner of Banks, strengthened its senior management team ("Management") and developed and implemented new strategies to improve the Bank's financial condition and to enhance profitability. The Bank's capital restoration plan called for the Bank to raise additional capital through the issuance of common stock in connection with the Conversion. In October 1994, the Commissioner of Banks approved the Bank's Plan of Conversion. On November 8, 1994, the FDIC raised no objections to the Bank's Plan of Conversion. Consequently, the Bank commenced a concurrent Depositor Subscription and Community Offering. The Bank closed the Conversion on February 7, 1995 with the issuance of 5,562,500 shares of common stock at $8.00 per share. The stock commenced trading on February 8, 1995 on the NASDAQ National Market System under the symbol 'SISB'. As a result of the Conversion there was a net increase to capital of $35.9 million. The Bank substantially strengthened its senior management team by hiring a new President and Chief Executive Officer, a new Chief Financial Officer, new Senior Executives in Credit Administration and Commercial Lending, Retail Banking, Treasury, Audit and Human Resources and several senior officers in Loan Review, Loan Workout and Commercial Lending. Management subsequently implemented a strategy to (1) reduce the level of the Bank's 3 non-performing assets, (2) reduce the risk profile of the Bank, (3) refocus on the Bank's "core" community banking activities to serve the needs of consumers and small businesses in the Bank's primary market area, (4) reduce operating expenses and improve operating efficiency, and (5) improve the Bank's capital position. Management recognized that the Bank needed to reduce its non-performing assets in order to make the bank more profitable and competitive. The Bank adopted an accelerated disposition program comprised of bulk sales of non-performing assets and other assets, accelerated sales of foreclosed properties and procedures to intensify loan workout and restructuring activities. This program resulted in significant reductions in non-performing assets in 1994 and 1995. At December 31, 1994 and 1995, non-performing assets totaled $25.9 million, or 2.81% of total assets, and $13.9 million, or 1.30% of assets, respectively. In 1995, as a result of this significant decline in non-performing assets, the Bank reduced its loan loss provision and foreclosed real estate expenses which contributed to net income of $11.5 million. With the proceeds from the Conversion and net income for the year, the Bank's total equity increased to $81.5 million or 7.61% of total assets at December 31, 1995. By regulatory definitions, the Bank is considered "well capitalized." Effective April 24, 1995, the Bank received notification from both the FDIC and the Commissioner of Banks that the Order had been terminated, which unconditionally released the Bank from its obligations under the Order. Since 1993, the Bank has been in the process of divesting its real estate investment business that was largely conducted through Colebrook and the Bank's other wholly-owned real estate investment subsidiaries (collectively the "Real Estate Subsidiaries"). This divestment is required by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). The Bank submitted its divestiture plan for the Real Estate Subsidiaries to the FDIC, which approved the plan in December 1995. This plan is scheduled to be completed by December 1997. Investment Activities The Bank engages in investment activities for both investment and liquidity purposes. The Bank maintains an investment securities portfolio which consists primarily of U.S. Government and agency securities, corporate obligations and Federal Home Loan Bank stock. Other short-term investments held by the Bank periodically include interest-bearing deposits and federal funds sold. The Bank also maintains a mortgage-backed securities portfolio consisting of securities issued and guaranteed by the Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) in addition to publicly traded and rated mortgage-backed securities issued by private financial intermediaries which are rated "AA" or higher by rating agencies of national prominence. Effective January 1, 1994, the Bank adopted Statement of Financial Accounting Standards ("SFAS") No. 115, " Accounting for Certain Investments in Debt and Equity Securities," and now holds both "available for sale" and "held to maturity" portfolios. Securities which the Bank has the intent and ability to hold until maturity are classified as held to maturity and are carried at amortized cost, while those securities which have been identified as assets that may be sold prior to maturity or assets for which there is not a positive intent to hold to maturity are classified as available for sale and are carried at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. 4 The following table sets forth certain information regarding the amortized cost and fair value of the Bank's investment portfolio at the dates indicated. Data for periods prior to January 1, 1994 do not distinguish between the available for sale and held to maturity portfolios, as the Bank had not adopted SFAS No. 115 prior to that time. December 31, 1995 --------------------------------------------------------------- Available for Sale Held to Maturity ----------------------------- ---------------------------- Amortized Amortized Cost Fair Value Cost Fair Value -------------- ------------ ------------ ----------- (Dollars in Thousands) U.S. government and agency obligations $ 7,700 $ 7,699 $ - $ - Mortgage-backed securities 222,673 224,101 161,168 161,481 Other bonds and short term obligations 9,300 9,300 11,625 11,449 Other securities 5,884 5,884 - - -------- -------- -------- -------- Total $245,557 $246,984 $172,793 $172,930 ======== ======== ======== ======== December 31, 1994 --------------------------------------------------------------- Available for Sale Held to Maturity ----------------------------- ---------------------------- Amortized Amortized Cost Fair Value Cost Fair Value -------------- ------------ ------------ ----------- (Dollars in Thousands) U.S. government and agency obligations $ 23,953 $ 23,882 $ 17,350 $ 16,173 Mortgage-backed securities 112,452 109,455 136,901 125,096 Other bonds and short term obligations 23,229 23,169 3,992 3,992 Other securities 4,808 4,815 - - -------- -------- -------- -------- Total $164,442 $161,321 $158,243 $145,261 ======== ======== ======== ======== December 31, 1993 ----------------------------- Amortized Cost Fair Value ------------ ----------- (Dollars in Thousands) U.S. government and agency obligations $ 47,477 $ 47,487 Mortgage-backed securities 114,443 114,602 Other bonds and short term obligations 64,813 65,022 Other securities 4,832 4,842 -------- -------- Total $231,565 $231,953 ======== ======== The Bank's investment portfolio increased $100.2 million between December 31, 1994 and December 31, 1995. This increase reflects the investment of proceeds from the Conversion and funds obtained from wholesale borrowing. In 1995, the Financial Accounting Standards Board ("FASB") issued a special report, "A Guide to Implementation of Statement 115," that provided additional guidance related to the application of SFAS 115. In connection with the issuance of this special report, the FASB allowed all organizations to review their portfolio classifications and make a one-time reclassification of securities between categories during the period from November 15, 1995 to December 31, 1995. On December 15, 1995, the Bank transferred securities with an amortized cost of $84.3 million and an unrealized loss of $1.2 million from the held to maturity portfolio to the available for sale portfolio. In addition, the Bank also transferred securities with an estimated fair value of $47.3 million and an unrealized gain of $0.3 million from the available for sale portfolio to the held to maturity portfolio. The unrealized gain of $0.3 million remains as a separate component of stockholders' equity. Subsequent to the transfer of these securities, the Bank sold $82.9 million of available for sale securities at a net loss of $0.9 million. 5 The following table sets forth the contractual maturity distribution of the carrying value and the weighted average yields of the investment portfolio at December 31, 1995. Changes in interest rates will affect actual maturities. Available for Sale: Held to Maturity: ----------------------------------------------- ----------------------------------------------- U.S. Other U.S. Other Government Mortgage Bonds & Total Government Mortgage Bonds & Total Agency Backed Short Term Debt & Agency Backed Short Term Debt Obligations Securities Obligations Securities Obligations Securities Obligations Securities Total ------------ ---------- ----------- ----------- ----------- ---------- ----------- ---------- ------ (Dollars in thousands) Within One Year: Amortized Cost $ - $ - $ 9,300 $ 9,300 $ - $ - $ - $ - $ 9,300 Weighted Avg Yield 0.00% 0.00% 5.38% 5.38% 0.00% 0.00% 0.00% 0.00% 5.38% 1-5 Years: Amortized Cost $ 4,700 $ 8,487 $ - $ 13,187 $ - $ 10,593 $ - $ 10,593 $ 23,780 Weighted Avg Yield 6.74% 7.53% 0.00% 6.74% 0.00% 7.81% 0.00% 7.81% 7.22% 5-10 Years: Amortized Cost $ 3,000 $ - $ - $ 3,000 $ - $ 9,963 $ 100 $ 10,063 $ 13,063 Weighted Avg Yield 6.00% 0.00% 0.00% 6.93% 0.00% 7.05% 6.73% 7.02% 6.97% Over 10 Years: Amortized Cost $ - $214,186 $ - $214,186 $ - $140,612 $ 11,525 $152,137 $366,323 Weighted Avg Yield 0.00% 6.91% 0.00% 6.91% 0.00% 7.05% 6.73% 7.02% 6.97% Total: Amortized Cost $ 7,700 $222,673 $ 9,300 $239,673 $ - $161,168 $ 11,625 $172,793 $412,466 Market Value $ 7,699 $224,101 $ 9,300 $241,100 $ - $161,481 $ 11,449 $172,930 $414,030 Weighted Avg Yield 6.45% 6.94% 5.38% 6.86% 0.00% 7.12% 6.75% 7.10% 6.96% As of December 31, 1995, approximately 96.2% of mortgage-backed securities available for sale and 65.3% of mortgage-backed securities held to maturity were adjustable rate. Lending Activities Gross loans comprised $573.1 million or 53.5% of total assets at December 31, 1995, compared to $513.5 million or 55.8% of total assets at December 31, 1994. The following table sets forth information concerning the Bank's loan portfolio in dollar amounts and percentages, by type of loan at December 31, 1995, 1994 and 1993, respectively. At December 31, ------------------------------------------------------------------------------------ 1995 1994 1993 ---------------------- ------------------------- ------------------------- Percent of Percent of Percent of Amount Total Amount Total Amount Total -------- ---------- -------- ---------- -------- ---------- (Dollars in Thousands) Residential real estate loans $263,551 45.99% $257,623 50.17% $264,011 41.21% Commercial real estate loans 118,005 20.59% 122,091 23.78% 227,313 35.49% Commercial loans 117,674 20.53% 80,296 15.64% 110,630 17.27% Home equity loans 67,657 11.81% 46,593 9.07% 26,819 4.19% Consumer loans 6,196 1.08% 6,883 1.34% 11,801 1.84% ------- ------ -------- ------ -------- ------ Total loans receivable, gross 573,083 100.00% 513,486 100.00% 640,574 100.00% ------- ------ -------- ------ -------- ------ Less: Unearned income and fees (566) 60 940 Allowance for loan losses 14,986 15,844 18,367 -------- -------- -------- Total loans receivable, net $558,663 $497,582 $621,267 ======== ======== ======== 6 Maturity of Loan Portfolio The following table sets forth the Bank's loan portfolio, before allowance for loan losses and unearned discounts, based on contractual maturities. The table does not consider prepayment assumptions. Principal amortization is included based on scheduled payments. Demand loans, and loans having no stated schedule of repayment and no stated maturity are reported as due within one year. Actual maturities may be significantly shorter due to changes in interest rates and economic conditions. At December 31, 1995 ------------------------------------------------------------------ Less Than 1 Year More Than 1 Year to 5 Years 5 Years Total ---------- ---------- --------- ----- (Dollars in thousands) Fixed rate loans (1): Residential real estate (2) $ 8,221 $ 5,028 $ 29,050 $ 42,299 Commercial real estate 8,404 8,560 15,045 32,009 Commercial 7,574 15,846 4,486 27,906 Home equity 115 756 1,845 2,716 Consumer 2,175 3,758 263 6,196 ------ ------ ------- ------- Total fixed rate loans 26,489 33,948 50,689 111,126 ------ ------ ------- ------- Adjustable rate loans (1): Residential real estate 2,943 14,348 203,961 221,252 Commercial real estate 11,341 42,278 32,377 85,996 Commercial 20,798 44,852 24,118 89,768 Home equity 145 798 63,998 64,941 Consumer - - - - ------ ------ ------- ------- Total adjustable rate loans 35,227 102,276 324,454 461,957 ------ ------ ------- ------- Total amounts due $61,716 $136,224 $375,143 $573,083 ======= ======== ======== ======== <FN> (1) Includes non-accrual loans. (2) Loans held for sale of $6.7 million are included as maturing in less than one year. </FN> Delinquency The following table sets forth a summary of the Bank's delinquent loans at December 31, 1995, 1994 and 1993 (dollars in thousands): At December 31, 1995 ---------------------------------------------------------------- 60-89 Days 90 Days or More --------------------------- --------------------------- Number Principal Number Principal of Balance of Balance Loans of Loans Loans of Loans -------- --------- -------- --------- Residential real estate loans 39 $2,472 75 $3,080 Commercial real estate loans 2 171 19 2,067 Commercial loans 8 493 3 36 Home equity loans 5 147 7 71 Consumer loans 24 13 12 14 -- ------ --- ------ Total delinquent loans 78 $3,296 116 $5,268 == ====== === ====== Delinquent loans to total gross loans 0.58% 0.92% 7 At December 31, 1994 ---------------------------------------------------------------- 60-89 Days 90 Days or More --------------------------- --------------------------- Number Principal Number Principal of Balance of Balance Loans of Loans Loans of Loans -------- --------- -------- --------- Residential real estate loans 24 $690 63 $2,686 Commercial real estate loans 1 129 6 2,150 Commercial loans 3 203 3 165 Home equity loans 10 195 16 339 Consumer loans 43 59 30 41 -- ------ --- ------ Total delinquent loans 81 $1,276 118 $5,381 == ====== === ====== Delinquent loans to total gross loans 0.25% 1.05% At December 31, 1993 ---------------------------------------------------------------- 60-89 Days 90 Days or More --------------------------- --------------------------- Number Principal Number Principal of Balance of Balance Loans of Loans Loans of Loans -------- --------- -------- --------- Residential real estate loans 40 $1,406 103 $8,296 Commercial real estate loans 5 5,066 8 5,976 Commercial loans 21 575 34 5,143 Home equity loans 8 159 20 571 Consumer loans 75 88 151 140 -- ------ --- ------ Total delinquent loans 149 $7,294 316 $20,126 === ====== === ====== Delinquent loans to total gross loans 1.14% 3.14% Allowance for Loan Losses The allowance for possible loan losses reflects an amount that in Management's judgment is adequate to provide for potential losses in the loan portfolio. In addition, examinations of the adequacy of the loan loss reserve are conducted periodically by various regulatory agencies. The Bank's loan loss reserve methodology emphasizes an evaluation of non-performing loans and those loans that have been identified as having a higher risk of becoming non-performing loans. The overall analysis is a continuing process that gives consideration to such factors as size and risk characteristics of the loan portfolio, the risk rating of individual credits, general economic conditions, historical delinquency and charge-off experience, the borrowers' financial capabilities and the underlying collateral, including, when appropriate, independent appraisals of real estate properties. In addition, Management periodically reviews the methodology of allocating reserves to the various loan categories based on similar factors. The Bank's allowance for possible loan losses is decreased by loan charge-offs and increased by provisions for possible loan losses and recoveries on loans previously charged-off. When commercial and residential real estate loans are foreclosed, the loan balance is compared with the fair value of the property. If the net carrying value of the loan at the time of foreclosure exceeds the fair value of the property less estimated selling costs, the difference is charged to the allowance for possible loan losses and the fair value of the property becomes the new cost basis of the real estate owned. The Bank has or obtains current appraisals on real estate owned at the time it obtains possession of the property. Real estate owned is subsequently carried at the lower of cost or fair value less estimated selling costs with any further adjustments reflected as a charge against operations. The Bank assesses the value of real estate owned on a periodic basis. The Bank maintains an allowance for estimated losses, which at December 31, 1995 amounted to $0.8 million, to account for declines in the carrying value of foreclosed real estate. 8 The allowance for possible loan losses at December 31, 1995 was $15.0 million, compared to $15.8 million at December 31, 1994. The activity in the allowance for possible loan losses for the fiscal years ended December 31, 1995, 1994 and 1993 is set forth in the following table: For The Years Ended December 31, ---------------------------------------- 1995 1994 1993 ------ ------ ------ (Dollars in Thousands) Balance, beginning of period $ 15,844 $ 18,367 $ 12,176 Provision for loan losses 4,359 25,742 15,740 Charge-offs: Residential real estate loans (472) (4,588) (2,558) Commercial real estate loans (4,632) (20,430) (3,693) Commercial loans (705) (5,729) (4,161) Home equity loans (51) (124) (215) Consumer loans (208) (233) (373) -------- -------- -------- Total charge-offs (6,068) (31,104) (11,000) Recoveries: Residential real estate loans 0 460 242 Commercial real estate loans 379 1,199 558 Commercial loans 301 1,058 566 Home equity loans 82 79 46 Consumer loans 89 43 39 -------- -------- -------- Total recoveries 851 2,839 1,451 -------- -------- -------- Net charge-offs (5,217) (28,265) (9,549) Balance at end of period $ 14,986 $ 15,844 $ 18,367 ======== ======== ======== Ratio of net loan charge-offs during the period to average loans outstanding during the period (0.96%) (4.94%) (1.36%) Ratio of allowance for loan losses to total loans at the end of the period 2.61% 3.09% 2.87% Ratio of allowance for loan losses to non-performing loans at the end of the period 155.71% 106.71% 33.09% Effective January 1, 1995, the Bank adopted No. SFAS 114, "Accounting by Creditors for Impairment of a Loan." At December 31, 1995, the recorded investment in loans that are considered impaired under SFAS No. 114 was $8.0 million. Included in this amount is $0.9 million of impaired loans for which the related SFAS 114 allowance is $0.3 million and $7.1 million of impaired loans for which the SFAS 114 allowance is zero. The average recorded investment in impaired loans during the year ended December 31, 1995 was approximately $9.8 million For the year ended December 31, 1995, the Bank recognized interest income on these impaired loans of $0.3 million. The following table shows the allocation of the allowance for loan losses to various types of loans. At December 31, --------------------------------------------------------------------------------- 1995 1994 1993 -------------------------- ------------------------ -------------------------- % of Total % of Total % of Total Allowance for Allowance for Allowance for Amount Loan Loss Amount Loan Losses Amount Loan Losses --------- --------------- ------- --------------- ------- ------------- Residential real estate loans . . . . . . . . . 1,881 12.55% 4,377 27.63% $ 1,949 10.61% Commercial real estate loans . . . . . . . . 6,784 45.27% 7,240 45.69% 10,568 57.54% Commercial loans . . . . . . . . . . . . . . . 5,480 36.57% 3,101 19.57% 5,605 30.52% Home Equity loans . . . . . . . . . . . . . . 672 4.48% 906 5.72% 120 0.65% Consumer loans . . . . . . . . . . . . . . . . 169 1.13% 220 1.39% 125 0.68% ------- ------ ------- ------ ------- ------ Total allowance for loan losses . . . . . . $14,986 100.00% $15,844 100.00% $18,367 100.00% ======= ====== ====== ====== ======= ====== 9 Deposit Distribution The principal source of funds for the Bank are deposits from local consumers and businesses. There were no brokered deposits at December 31, 1995. The Bank's deposits consist of demand and NOW accounts, passbook and statement savings accounts, Money Market accounts and Time deposit accounts. Total deposits were $885.4 million at December 31, 1995 compared to $853.6 million at December 31, 1993. In the fall of 1993, the Bank initiated a new strategy for obtaining consumer deposit accounts with a focus on increasing the number of checking and savings accounts at the Bank. From December 31, 1993 to December 31, 1995, the Bank has increased its demand and savings accountbalances by approximately $37.8 million, with the greatest proportion of growth in demand deposit accounts. This increase is a result of the Bank's consumer deposit strategy to attract and retain core deposits which provides the Bank with a lower cost source of funds. During the period from December 31, 1994 to December 31, 1995, Time deposit balances have increased $42.0 million, largely attributable to the introduction of the "Can't Lose CD" product, a 90 day CD which pays a rate equal to the prime rate less 350 basis points. As of December 31, 1995, the Bank had $32.0 million in "Can't Lose CD" balances. Money Market accounts have steadily declined from December, 1993 reflecting a shift to higher yielding Time deposits as well as an outflow to other investment vehicles such as annuities and mutual funds. The following table sets forth the distribution of the Bank's deposit accounts for each of the three years ended December 31, 1995, 1994 and 1993. At December 31, ------------------------------------------------------------------- 1995 1994 1993 --------------------- ------------------- ------------------- Percent Percent Percent of of of Amount Total Amount Total Amount Total -------- ------- ------- ------- -------- ------- (Dollars in Thousands) Demand deposits . . . . . . . . . . . . . . $ 71,539 8.08% $ 51,932 6.08% $ 36,997 4.23% NOW accounts . . . . . . . . . . . . . . . 57,271 6.47% 56,297 6.59% 58,595 6.70% Savings accounts . . . . . . . . . . . . . . 185,555 20.96% 184,513 21.62% 182,301 20.84% Money market accounts . . . . . . . . . . 203,313 22.96% 235,168 27.55% 255,553 29.21% Time deposits . . . . . . . . . . . . . . . . 367,708 41.53% 325,723 38.16% 341,460 39.02% -------- ------- -------- ------- -------- ------- Total deposits . . . . . . . . . . . . . . $885,386 100.00% $853,633 100.00% $874,906 100.00% ======== ======= ======== ======= ======== ======= The Bank does not actively solicit Time deposit accounts in excess of $100,000. The following table sets forth the remaining contractual maturities of the Bank's Time deposit portfolio in amounts greater than $100,000 at December 31, 1995. At December 31, 1995 --------------------- (Dollars in Thousands) Three months or less . . . . . . . . . . $11,051 Over three through six months . . . . . 5,168 Over six through 12 months . . . . . . . 8,926 Over 12 months . . . . . . . . . . . . . 5,464 ------- Total . . . . . . . . . . . . . . $30,609 ======= Borrowings Deposits are the primary source of funds for the Bank. However, the Bank is able to borrow from the Federal Home Loan Bank ("FHLB") of Boston and can enter into repurchase agreements. At December 31, 1995, the Bank's total outstanding FHLB advances and repurchase agreements were $41.5 million and $31.1 million, respectively. 10 Competition Vigorous competition exists in all areas in which the Bank engages in business. The Bank faces intense competition in its market areas from major banking and financial institutions, including many which have substantially greater resources or market presence than the Bank. Competitors of the Bank include commercial banks, savings banks, mutual funds, insurance companies, finance companies, credit unions and mortgage companies. Government Regulation The Bank is in a heavily regulated industry. As a state-chartered savings bank whose deposits are insured by the FDIC and the Depositors Insurance Fund, a private excess insurer, the Bank is subject to regulation by federal and state regulatory authorities including, but not limited to, the FDIC and the Commissioner of Banks. ITEM 2: PROPERTIES The Bank's corporate headquarters are located at 1441 Main Street, Springfield, Massachusetts 01102. At December 31, 1995 the Bank had 20 banking offices which are set forth in the table below. Own/Lease Location Expiration Date ------------ ----------------- Banking Offices 40 Springfield Street, Agawam Own 693 Memorial Drive, Chicopee Own 153 Meadow Street, Chicopee Own 465 North Main Street, East Longmeadow Lease/2010 1360 Carew Street, East Springfield Lease/2004 50 Holyoke Street, Holyoke Lease/2001 724 Bliss Road, Longmeadow Lease/01/97 52 East Street, Ludlow Lease/08/97 175 Main Street, Northampton Own 412 Boston Road, Springfield Own 1800 Boston Road, Springfield Own 619 Chestnut Street, Springfield Own 441 Cooley Street, Springfield Own 561 Sumner Avenue, Springfield Own 1441 Main Street, Springfield Own 807 Wilbraham Road, Springfield Lease/08/96 958 State Street, Springfield No Lease 968 Riverdale Road, West Springfield Lease/2006 1425 Westfield Street, West Springfield Lease/02/97 60 Main Street, Westfield Own ITEM 3: LEGAL PROCEEDINGS The Bank is not involved in any pending litigation other than routine legal proceedings occurring in the ordinary course of business. While the legal responsibility and financial impact with respect to such litigation cannot presently be ascertained, the Bank does not anticipate that any of these matters will result in the payment by the Bank of damages, that, in the aggregate, would be material in relation to the consolidated financial position or operations of the Bank. 11 ITEM 4: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of December 31, 1995, the Bank had 5,710,700 shares of Common Stock issued and outstanding. The response to this Item is incorporated by reference from the discussion under the headings "Security Ownership of Management and Directors" on Pages 56 and 57 of the "Proxy Statement of Springfield Institution for Savings, Annual Meeting of Shareholders, May 9, 1996" filed as Form F-5 with the FDIC (the "Proxy Statement"). PART II ITEM 5: MARKET FOR BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS (a) The Bank's Common Stock is traded on the NASDAQ National Market System ("NASDAQ") under the symbol "SISB". The following table sets forth the high and low last sale prices of the Common Stock, as reported by NASDAQ. 1995 High Low -------- ------- First Quarter** $11 1/16 $ 9 5/8 Second Quarter $13 1/16 $10 7/8 Third Quarter $16 $12 7/8 Fourth Quarter $17 1/8 $14 5/8 - -------- ** The Bank was a mutual company in 1994 and converted to a stockholder owned savings bank on February 7, 1995. Trading in the Bank's shares commenced on the NASDAQ market on February 8, 1995. (b) As of February 28, 1996, the most recent practicable date, the closing sale price of the Bank's Common Stock, as reported by NASDAQ, was $17 7/8 per share. As of that same date, the Bank had 1,202 holders of record of the Bank's Common Stock. This figure does not reflect beneficial ownership of shares held in nominee names. (c) While it is not anticipated that the Bank will be paying any cash dividends in the near future, the Board of Directors will be periodically reviewing whether any cash dividend should be paid. 12 ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA SELECTED FINANCIAL DATA: At December 31, ---------------------------------------------------------------- 1995 1994 1993 1992 1991 ----------- ---------- ---------- ---------- ---------- (In Thousands) Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,070,978 $ 920,689 $ 969,904 $1,002,513 $1,045,365 Investment securities . . . . . . . . . . . . . . . . . . . . . . 419,777 319,564 231,565 156,279 131,130 Loans receivable, gross . . . . . . . . . . . . . . . . . . . . . 573,083 513,486 640,574 717,301 786,600 Allowance for possible loan losses . . . . . . . . . . . . . . . . 14,986 15,844 18,367 12,176 11,873 Investments in real estate and real estate partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . 6,092 6,699 9,939 13,219 15,361 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 885,386 853,633 874,906 898,050 937,316 Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,071 2,392 6,063 6,240 6,415 Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 81,469 28,503 58,531 72,762 82,905 Asset Quality: Non-accruing loans . . . . . . . . . . . . . . . . . . . . . . . 9,037 14,472 52,308 63,865 54,888 Loans past due 90 days and still accruing . . . . . . . . . 587 376 3,205 5,679 4,215 ---------- ---------- ---------- ---------- ---------- Total non-performing loans . . . . . . . . . . . . . . . 9,624 14,848 55,513 69,544 59,103 Foreclosed real estate, net . . . . . . . . . . . . . . . . . . 1,529 4,951 25,085 52,757 49,750 Restructured loans on accrual status (1) . . . . . . . . . . 2,732 6,114 15,845 1,544 10,509 ---------- ---------- ---------- ---------- ---------- Total non-performing assets . . . . . . . . . . . . . . . $ 13,885 $ 25,913 $ 96,443 $ 123,845 $ 119,362 ========== ========== ========== ========== ========== <FN> (1) Restructured loans are loans for which concessions, including reduction of interest rates or deferral of interest or principal payments, have been granted to acknowledge changes in the borrower's financial condition or changes in the underlying cash flows of the loan's collateral. Restructured loans on non-accrual status are reported in the non-accrual loan category. Restructured loans on accrual status are those that have complied with the terms of a restructuring agreement for a satisfactory period (generally six months). </FN> 13 SELECTED OPERATING DATA: For the Year Ended December 31, -------------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (Dollars in thousands) Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . $ 69,916 $ 57,913 $ 63,174 $ 72,187 $ 86,165 Interest and dividend expense . . . . . . . . . . . . . . . . . . . . . . 32,556 23,792 27,175 36,537 57,562 -------- -------- -------- -------- -------- Net interest and dividend income . . . . . . . . . . . . . . . . . . . . 37,360 34,121 35,999 35,650 28,603 Less: provision for possible loan losses . . . . . . . . . . . . . . . . 4,359 25,742 15,740 13,219 8,610 -------- -------- -------- -------- -------- Net interest and dividend income after provision for possible loan losses . . . . . . . . . . . . . . . . . 33,001 8,379 20,259 22,431 19,993 Noninterest income: Net gain (loss) on sale of loans and securities . . . . . . . . . . . . (643) (553) 2,351 1,612 2,095 Loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,221 3,213 Deposit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,191 4,122 4,337 4,038 Other fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 355 1,547 1,207 -------- -------- -------- -------- -------- Total noninterest income . . . . . . . . . . . . . . . . . . . . . . 8,124 8,329 11,671 10,426 9,377 Noninterest expense: Operating expenses: Salaries and employee benefits . . . . . . . . . . . . . . . . . . . . 15,961 16,808 16,583 13,927 13,267 Occupancy expense of bank premises . . . . . . . . . . . . . . . . . . 3,459 3,410 3,502 3,575 3,532 Furniture and equipment expense . . . . . . . . . . . . . . . . . . . . 1,943 1,830 1,696 1,929 1,558 Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . 13,768 15,109 13,442 11,274 10,084 -------- -------- -------- -------- -------- Total operating expenses . . . . . . . . . . . . . . . . . . . . . 35,131 37,157 35,223 30,705 28,441 Foreclosed real estate expenses . . . . . . . . . . . . . . . . . . . . . 521 5,470 11,734 13,272 3,547 Net expense (income) of real estate operations . . . . . . . . . . . . . (227) 988 2,632 1,077 6,493 -------- -------- -------- -------- -------- Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . 35,425 43,615 49,589 45,054 38,481 -------- -------- -------- -------- -------- Income (loss) before income taxes and cumulative effect of change in accounting principles . . . . . . . . . . . . . . . . . . . . . . . . . 5,700 (26,907) (17,659) (12,197) (9,111) Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . (5,759) -- (3,384) (3,228) (636) -------- -------- -------- -------- -------- Income (loss) before cumulative effect of change in accouting principle . 11,459 (26,907) (14,275) (8,969) (8,475) Cumulative effect of change in accounting principle (1) . . . . . . . . . -- -- -- 1,295 -- -------- -------- -------- -------- -------- Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,459 ($26,907) ($14,275) ($10,264) ($ 8,475) ======== ======== ======== ======== ======== <FN> (1) Results from the January 1, 1992 adoption of SFAS No. 109, "Accounting for Income Taxes." </FN> 14 SELECTED FINANCIAL RATIOS AND OTHER DATA: At or For the Year Ended December 31, ------------------------------------------------------------ 1995 1994 1993 1992 1991 ------ ------ ------ ------ ----- Performance Ratios: (1) Return on average assets . . . . . . . . . . . . . . . . . . . . . 1.16% (2.88%) (1.46%) (1.01%) (0.79%) Return on average equity . . . . . . . . . . . . . . . . . . . . . 17.25% (63.55%) (20.85%) (13.24%) (9.47%) Net interest income/spread (2). . . . . . . . . . . . . . . . . . 3.59% 3.72% 4.06% 3.92% 2.74% Net interest margin (3). . . . . . . . . . . . . . . . . . . . . 4.00% 3.90% 4.13% 3.97% 2.95% Efficiency ratio (4) . . . . . . . . . . . . . . . . . . . . . . 76.16% 86.41% 77.72% 69.06% 79.26% Operating expenses to average assets . . . . . . . . . . . . . . 3.55% 3.98% (3.60%) 3.02% 2.66% Ratio of net loan charge-offs to average loans outstanding . . . . (0.96%) (4.94%) (1.36%) (1.72%) (1.19%) Asset Quality Ratios: Non-performing loans to total gross loans . . . . . . . . . . . . 1.68% 2.89% 8.67% 9.70% 7.51% Non-performing assets to total assets . . . . . . . . . . . . . . 1.30% 2.81% 9.94% 12.35% 11.42% Allowance for possible loan losses to non-performing loans . . . 155.71% 106.71% 33.09% 17.51% 20.09% Allowance for loan losses to total gross loans . . . . . . . . . 2.61% 3.09% 2.87% 1.70% 1.51% Capital Ratios: Equity to total assets . . . . . . . . . . . . . . . . . . . . . 7.61% 3.10% 6.03% 7.26% 7.93% Tier 1 leverage capital ratio . . . . . . . . . . . . . . . . . . 7.57% 3.43% 6.02% 7.28% 7.72% Tier 1 risk-based capital ratio . . . . . . . . . . . . . . . . . 12.52% 6.07% 8.47% 10.13% 10.78% Total risk-based capital ratio . . . . . . . . . . . . . . . . . . 13.77% 7.32% 9.72% 11.38% 12.28% Other Data: Number of deposit accounts . . . . . . . . . . . . . . . . . . . 208,254 156,524 147,835 144,118 152,395 Residential loan originations ($000s) . . . . . . . . . . . . . . $107,045 $176,355 $380,202 $392,045 $234,375 Loans serviced for others ($000s) . . . . . . . . . . . . . . . . $880,558 $935,066 $911,028 $792,243 $501,114 Number of full time equivalent employees . . . . . . . . . . . . . 410 463 533 530 480 Facilities: Full-service customer service facilities . . . . . . . . . . . . 20 19 19 20 20 Mortgage origination offices . . . . . . . . . . . . . . . . . . . - 2 2 2 2 <FN> (1) With the exception of end of period ratios, all ratios are based on average daily balances during the indicated periods and are annualized where appropriate. (2) Interest spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities (which do include non-interest bearing demand accounts). (3) Net interest margin represents the net interest income as a percent of average interest-earning assets, including the average daily balance amount of non-performing loans. (4) The efficiency ratio represents operating expenses as a percentage of net interest income and noninterest income, excluding gains/(losses) on sales of loans and securities. </FN> 15 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Financial Condition The following discussion and analysis of the financial condition and results of operations of the Bank should be read in conjunction with the Bank's Consolidated Financial Statements and Notes thereto, which are included in Exhibit A of this report. Balance Sheet Changes Total assets of $1,071.0 million at December 31, 1995 increased $150.3 million or 16.3 % from $920.7 million at December 31, 1994. This increase reflects the investment of net proceeds of $35.9 million from the Conversion as well as increases of $75.7 million in borrowed funds and $31.8 million in deposits. The growth in total assets occurred primarily in commercial and home equity loans and the investment portfolio. Commercial loans totaled $117.7 million as of December 31, 1995 compared to $80.3 million as of December 31, 1994, an increase of $37.4 million or 46.5%. This increase reflects the Bank's continued effort to expand its share of loans to small and medium sized businesses. Home equity loan balances grew from $46.6 million as of December 31, 1994 to $67.7 million as of December 31, 1995, an increase of $21.1 million or 45.6%. This increase is the result of the Bank's competitive loan pricing approach coupled with the waiver of closing costs on its home equity loan products. Investments increased $100.2 million to a total of $419.8 million as of December 31, 1995 from the $319.6 million reported one year earlier. Total deposits were $885.4 million as of December 31, 1995 compared to $853.6 million as of December 31, 1994, an increase of $31.8 million or 3.7%. During this period, the Bank sought to increase its share of primary deposit relationships. As a result of its consumer strategy, the Bank increased demand deposits by $19.6 million or 37.8%. Time deposit balances increased $42.0 million or 12.9% primarily due to the 1995 introduction of the "Can't Lose CD" product, a 90 day CD which pays a rate equal to the prime rate less 350 basis points. Total balances in this new CD product were $32.0 million as of December 31, 1995. Offsetting these increases, Money Market account balances decreased $31.9 million during the period reflecting a shift in balances to higher yielding Time deposits as well as outflow to other investment vehicles such as annuities and mutual funds. Asset Quality/Non-Performing Assets Non-performing assets declined $12.0 million to $13.9 million at December 31, 1995. The following table sets forth information regarding the components of non-performing assets for the periods presented. At December 31, ------------------------------ 1995 1994 1993 ------ ------ ------ (Dollars in Thousands) Non-accrual loans (1): Residential real estate loans $ 2,553 $ 2,651 $ 6,112 Commercial real estate loans 5,745 10,003 32,569 Commercial loans 638 1,492 13,489 Home equity loans 90 289 0 Consumer loans 11 37 138 ------ ------ ------ Total non-accrual loans 9,037 14,472 52,308 ------ ------ ------ Loans past due 90 days still accruing (2) 587 376 3,205 ------ ------ ------ Total non-performing loans 9,624 14,848 55,513 Foreclosed real estate (3) 1,529 4,951 25,085 Restructured loans on accrual status (4) 2,732 6,114 15,845 ------ ------ ------ Total non-performing assets $13,885 $25,913 $96,443 ====== ======= ======= Total non-performing loans to total gross loans 1.68% 2.89% 8.67% Total non-performing assets to total assets 1.30% 2.81% 9.94% Allowance for possible losses to non-performing loans 155.71% 106.71% 33.09% 16 (1) Non-accrual loans are loans that are contractually past due in excess of 90 days, for which the Bank has stopped the accrual of interest, or loans which are not past due but on which the Bank has stopped the accrual of interest based on management's assessment of the circumstances surrounding these loans. (2) Accruing loans past due 90 days or more are loans which have not been placed on non-accrual status as, in management's opinion, the collection of the loan and contractual interest, in full, is not in doubt. (3) Foreclosed real estate includes OREO, defined as real estate acquired through foreclosure or acceptance of a deed in lieu of foreclosure. The Bank carries foreclosed real estate at net realized value, which approximates fair value less estimated selling costs. (4) Restructured loans are loans for which concessions, including reduction of interest rates or deferral of interest or principal payments have been granted due to the borrower's financial condition. Restructured loans on non-accrual status are reported in the non-accrual loan category. Restructured loans on accrual status are those loans that have complied with terms of a restructuring agreement for a satisfactory period (generally six months). Liquidity Liquidity measures the ability of the Bank to meet its maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund its operations and to provide for customer credit needs. The Bank's principal sources of funds are deposits, advances from the FHLB of Boston, repurchase agreements, repayments and maturities on loans and securities, proceeds from the sale of securities in the available-for-sale portfolio, and funds provided by operations. While scheduled loan and security amortization and maturities are relatively predictable sources of funds, deposit flows and loan and security prepayments are greatly influenced by economic conditions and the general level of interest rates and competition. The Bank utilizes particular sources of funds based on comparative costs and availability. The Bank generally manages the pricing of its deposits to maintain a steady deposit balance, but has from time to time decided not to pay rates on deposits as high as its competition, and when necessary, will supplement deposits with longer term and/or less expensive alternative sources of funds such as advances from the FHLB and repurchase agreements. Liquidity management is both a daily and long-term responsibility of Management. The Bank adjusts its investments in cash and cash equivalents based upon Management's assessment of expected loan demand, projected security maturities, expected deposit flows, yields available on interest-bearing deposits, and the objectives of its asset/liability management program. If the Bank 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 Bank has a stable retail deposit base, Management believes that significant borrowings will not be necessary to maintain its current liquidity position. The Bank's ongoing principal use of capital resources remains the origination of single-family residential mortgage loans, commercial real estate loans, commercial loans, and home equity loans secured by residential real estate. Capital Resources/Regulatory Capital Under current FDIC capital regulations, state-chartered, non-member banks (banks that are not members of the Federal Reserve System), such as the Bank, are required to comply with three separate minimum capital requirements: a "Tier 1 leverage capital ratio" and two "risk-based" capital requirements: "Tier 1 risk-based capital ratio" and "Total risk-based capital ratio." The Tier 1 leverage capital ratio is expressed as a percentage of "Tier 1 capital" to quarterly average total assets. Tier 1 capital generally includes common stockholders' equity (including retained earnings), qualifying non-cumulative perpetual preferred stock and any related surplus and minority interests in the equity accounts of fully consolidated subsidiaries. In addition, deferred tax assets are allowable up to a certain limit. Intangible 17 assets, other than properly valued purchased mortgage servicing rights up to certain specified limits, must be deducted from Tier 1 capital. The unrealized gain or loss on securities available for sale is not included as a component of Tier 1 capital under the current guidelines. The Tier 1 risk-based capital ratio is expressed as a percentage of Tier 1 capital to total risk-weighted assets. Risk-weighted assets are calculated by assigning assets to one of several broad risk categories (0%, 20%, 50%, or 100%) based primarily on credit risk. The aggregate dollar value of the amount in each category is then multiplied by the risk-weight associated with the category. Risk-weights for all off-balance sheet items are determined by a two-step process. First, the "credit equivalent amount" of off-balance sheet items is determined in most cases by multiplying the off-balance sheet item by a credit conversion factor. Second, the credit equivalent amount is treated like any balance sheet asset and generally is assigned to the appropriate risk category. The resulting weighted values from each of the risk categories are added together, and this sum is the Bank's total risk-weighted assets that comprise the denominator of the risk-based capital ratios. The Total risk-based capital ratio is expressed as a percentage of "Qualifying total capital" to total risk weighted assets. Qualifying total capital consists of the sum of Tier 1 capital plus Tier 2 capital, which consists of cumulative perpetual preferred stock, mandatory convertible debt, term subordinated debt, and a certain portion of the allowance for loan losses up to a maximum of 1.25 % of risk- weighted assets. The following table reflects the regulatory capital position of the Bank at year end 1995, 1994 and 1993 as well as the December 31, 1995 minimum regulatory capital requirements for well-capitalized institutions. At December 31, ----------------------- FDIC 1995 1994 1993 Requirement ------ ------ ------ ----------- Tier 1 leverage capital ratio 7.57% 3.43% 6.02% 5.00% Tier 1 risk-based capital ratio 12.52% 6.07% 8.47% 6.00% Total risk-based capital ratio 13.77% 7.32% 9.72% 10.00% Interest Rate Risk Management The operations of the Bank are subject to the risk of interest rate fluctuations to the extent that there is a substantial difference in the amount of the Bank's assets and liabilities that reprice or mature within specific time periods. An asset-sensitive position indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specific time horizons, which would generally imply a favorable impact on net interest income in periods of rising interest rates and a negative impact in periods of falling interest rates. A liability-sensitive position would generally imply a negative impact on net interest income in periods of rising interest rates and a positive impact in periods of falling interest rates. The objective of the Bank's interest rate risk management process is to identify, manage, and control its interest rate risk within established limits in order to produce consistent earnings that are not contingent upon favorable trends in interest rates. This is attained by monitoring the levels of interest rates, the relationships between the rates earned on assets and the rates paid on liabilities, the absolute amount of assets and liabilities which reprice or mature over similar periods, and the effect of all of these factors on the estimated level of net interest income. During 1995, the Bank continued to enhance its analytical capability for measuring interest rate risk and its ability to respond to potential situations that might unduly increase such risk. There are a number of industry standards used to measure a financial institution's interest rate risk position. Most common among these is the one-year gap which is the difference between assets, liabilities, and off-balance sheet instruments that will mature or reprice within one year expressed as a percentage of total assets. Using Management's estimates of asset prepayments and core deposit decay in its computation, the Bank estimates that its cumulative one-year gap position was a positive $104.6 million or 9.8% of total assets at December 31, 1995. The Bank 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. 18 The following table sets forth the amounts of assets and liabilities outstanding at December 31, 1995, which are anticipated by the Bank 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 Bank's assets and liabilities could vary substantially if different assumptions were used or actual experience differs from the assumptions used. Management periodically reviews and, when appropriate, changes assumptions used in evaluating the Bank's interest rate sensitivity. GAP Position at December 31, 1995 --------------------------------------------------------------------------------- More than six Less than months less six months than one year 1 - 5 Years Over 5 Yrs TOTAL ------------ ------------- ----------- ---------- ------- (Dollars in Thousands) Assets: Federal funds sold and interest bearing deposits $ 8,045 $ - $ - $ - $ 8,045 Investment securities 232,642 121,884 40,786 24,465 419,777 Residential real estate loans 82,744 62,958 100,894 14,730 261,326 Commercial real estate loans 32,620 18,767 60,279 568 112,234 Residential real estate loans 82,744 62,958 100,894 14,730 261,326 Commercial loans 74,532 6,752 35,905 - 117,189 Home equity loans 61,401 290 4,585 1,616 67,892 Consumer loans 4,239 287 1,026 419 5,971 Other Assets - - - 78,544 78,544 -------- -------- -------- -------- ---------- Total assets $496,223 $210,938 $243,475 $120,342 $1,070,978 ======== ======== ======== ======== ========== Liabilities & stockholders' equity: Savings accounts $ 27,834 $ 27,834 $129,887 $ - $ 185,555 NOW accounts 8,590 8,590 40,091 - 57,271 Money market accounts 60,994 60,994 81,325 - 203,313 Time deposits 189,458 113,283 64,967 - 367,708 Borrowed funds 51,577 25,009 83 1,402 78,071 Other liabilities & stockholders' equity 14,210 14,210 42,632 108,008 179,060 -------- -------- -------- -------- ---------- Total liabilities & stockholders' equity $352,663 $249,920 $358,985 $109,410 $1,070,978 ======== ======== ======== ======== ========== Period GAP position $143,560 ($38,982) ($115,510) $10,932 Net period GAP as a percentage of total assets 13.40% (3.64%) (10.79%) Cumulative GAP $143,560 $104,578 ($10,932) - Cumulative GAP as a percentage of total assets 13.40% 9.76% (1.02%) - For purposes of the above interest sensitivity analysis: Residential loans held for sale at December 31, 1995 totaling $6.7 million are included 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 Bank's estimate of prepayments. Loans do not include non accrual loans of $9.0 million. Loans do not include the allowance for possible loan losses of $15.0 million. 19 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 Bank'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 demand deposit accounts are included in other liabilities and are assumed to decay at an annual rate of 40%. Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, while certain assets and liabilities may have similar contractual maturities or periods to repricing, they may react in different ways to changes in market interest rates. Further, in the event of a change in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Additionally, certain assets, such as adjustable rate mortgages, have features which restrict changes in interest rates on a short-term basis and over the life of the asset. Finally, the ability of borrowers to service their adjustable rate mortgages may decrease in the event of an interest rate increase. 20 Results of Operations Comparison of Years Ended December 31, 1995 and 1994 General For the year ended December 31, 1995 the Bank reported net income of $11.5 million as compared to a net loss of $26.9 million for the year ended December 31, 1994. This increase in earnings reflects growth in earning assets as well as lower levels of loan loss provision and foreclosed real estate expenses in 1995 versus 1994. During the year ended December 31, 1995 the Bank recorded a number of nonrecurring items. The Bank released $6.0 million of the valuation allowance on that portion of its net deferred tax asset associated with temporary differences (principally loan loss reserves). In addition, the Bank recorded a $0.9 million loss on the sale of securities in connection with the restructuring of its investment portfolio and a $0.5 million severance accrual related to organizational changes. These items were offset in part by a $0.4 million gain on the sale of a real estate investment and a $0.6 million insurance rebate from the Federal Deposit Insurance Corporation. The Bank's core operating earnings, net of nonrecurring items, were approximately $6.0 million for the year ended December 31, 1995. Net Interest Income Net interest income represents the difference between income earned on interest-earning assets and expense paid on interest bearing liabilities. Net interest income is affected by the mix and volume of assets and liabilities, and the movement and level of interest rates. 21 The following table sets forth, for the periods indicated, average balances, interest income and expense, and yields earned or rates paid on the major categories of assets and liabilities. Non-accrual loans have been included in the appropriate average balance loan category, but unpaid interest on non-accrual loans has not been included for purposes of determining interest income. For purposes of this table, investment securities available for sale are reflected at amortized cost. Twelve Months Ended December 31 -------------------------------------------------------------------------- 1995 1994 --------------------------------------- -------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost --------- -------- ---------- -------- -------- ---------- (Dollars in Thousands) Interest-earning assets: Fed funds sold and interest-bearing deposits $ 22,294 $ 1,316 5.82% $ 11,682 $ 527 4.45% Investment securities held to maturity 183,139 10,849 5.92% 147,943 8,173 5.52% Investment securities available for sale 184,551 12,214 6.62% 143,801 6,576 4.57% Residential real estate loans 266,276 20,970 7.88% 249,294 18,575 7.45% Commercial real estate loans 116,957 9,671 8.27% 182,626 13,236 7.25% Commercial loans 96,246 9,050 9.27% 95,093 7,210 7.48% Home equity loans 57,943 5,306 9.16% 32,890 2,651 8.06% Consumer loans 6,482 540 8.33% 12,088 965 7.98% -------- -------- ---- --------- -------- ---- Total interest-earning assets 933,888 69,916 7.49% 875,417 57,913 6.62% Allowance for loan losses (16,346) (22,015) Non-interest-earning assets 71,341 80,574 -------- -------- Total assets $988,883 $69,916 $933,976 $57,913 ======== ======= ======== ======= Interest-bearing liabilities: Deposits Savings accounts $185,176 $ 4,616 2.49% $188,125 $ 3,846 2.04% NOW accounts 53,955 727 1.35% 56,699 801 1.41% Money market accounts 212,272 6,945 3.27% 249,674 6,452 2.58% Time deposit accounts 349,950 18,136 5.18% 326,616 12,693 3.89% -------- -------- ---- --------- -------- ---- Total Deposits 801,353 30,424 3.80% 821,114 23,792 2.90% Borrowed funds 34,457 2,132 6.10% - - - -------- -------- ---- --------- -------- ---- Total interest-bearing liabilities 835,810 32,556 3.90% 821,114 23,792 2.90% Non-interest-bearing liabilities 86,632 70,236 -------- -------- Total liabilities 922,442 891,350 Total stockholders' equity 66,441 42,626 -------- -------- Total liabilities and stockholders' equity $988,883 $32,556 $933,976 $23,792 ======== ======= ======== ======= Net interest income/spread $37,360 3.59% $34,121 3.72% ======= ==== ======== ==== Net interest margin as a % of interest- earning assets 4.00% 3.90% ==== ==== Net interest income increased $3.2 million or 9.4% for the year ended December 31, 1995 versus the same period last year. This increase was the result of an increase in interest-earning assets combined with an increase of 10 basis points in the net interest margin to 4.00% for the year ended December 31, 1995 from 3.90% for the same period last year. Total interest income was $69.9 million for the year ended December 31, 1995, an increase of $12.0 million or 20.7%. This increase is attributable to higher levels of interest-earning assets and weighted average yields as 22 well as lower levels of non-performing assets. Interest-earning assets averaged $933.9 million for the year ended December 31, 1995 compared to $875.4 million for the year ended December 31, 1994, an increase of $58.5 million or 6.7%. Average investments increased $75.9 million or 26.0% reflecting the reinvestment of proceeds from the Conversion and leveraging a portion of the Bank's capital position. Average loans decreased $28.1 million reflecting bulk sales of loans, which occurred in 1994, partially offset by increases in residential real estate loans as well as home equity loans. The average yield on interest-earning assets was 7.49% for the year ended December 31, 1995 compared to 6.62% for the same period in 1994, an increase of 87 basis points or 13.1% reflecting the repricing of adjustable rate loans and investment securities to market rates and lower levels of non-accruing loans. These positive effects on interest income were partially offset by a change in asset mix from higher yielding loans to lower yielding investment securities. Total interest expense was $32.6 million for the year ended December 31, 1995 compared to $23.8 million for the same period in 1994, an increase of $8.8 million or 37.0%. This increase is attributable to higher deposit rates and the use of borrowings in 1995. The average rate paid on deposits was 3.80% for the year ended December 31, 1995 compared to 2.90% for the same period in 1994, an increase of 90 basis points or 31.0% reflecting a higher interest rate environment, continued competitive pricing pressures on consumer deposits, and the introduction of the "Can't Lose CD" product, which pays a rate equal to the prime rate less 350 basis points. Borrowings averaged $34.5 million during 1995 reflecting the Bank's leveraged Employee Stock Ownership Plan as well as the use of Federal Home Loan Bank Advances and repurchase agreements to leverage a portion of the Bank's capital position. Rate/Volume Analysis The following table presents the changes in net interest income resulting from changes in interest rates or changes in the volume of interest assets and interest-bearing liabilities during the periods indicated. Changes which are attributable to both rate and volume have been allocated evenly between the change in rate and volume components. For The Years Ended December 31, 1995 versus 1994 ---------------------------------- Increase (Decrease) Due to ---------------------------------- Volume Rate Net -------- ------ ----- (In Thousands) Interest earning assets: Federal funds sold and interest bearing deposits . . . . . . . . . $ 553 $ 236 $ 789 Investment securities held to maturity . . 2,015 661 2,676 Investment securities available for sale . 2,280 3,358 5,638 Residential real estate loans . . . . . . . . 1,301 1,094 2,395 Commercial real estate loans . . . . . . . (5,095) 1,530 (3,565) Commercial loans . . . . . . . . . . . . . . 98 1,742 1,840 Home equity loans . . . . . . . . . . . . . . 2,156 499 2,655 Consumer loans . . . . . . . . . . . . . . . (457) 32 (425) ------- ------- ------- Total interest-earning assets . . . . . . . . . 2,851 9,152 12,003 ------- ------- ------- Interest bearing liabilities: Deposits: Savings accounts . . . . . . . . . . . . . . . (67) 837 770 NOW accounts . . . . . . . . . . . . . . . . (38) (36) (74) Money market accounts . . . . . . . . . . . (1,095) 1,588 493 Time deposit accounts . . . . . . . . . . . . 1,058 4,385 5,443 ------- ------- ------- Total deposits . . . . . . . . . . . . . . . . (142) 6,774 6,632 Borrowed funds . . . . . . . . . . . . . . . . 1,066 1,066 2,132 ------- ------- ------- Total interest-bearing liabilities . . . . . . . 924 7,840 8,764 ------- ------- ------- Change in net interest income . . . . . . . . $ 1,927 $ 1,312 $ 3,239 ======= ======= ======== 23 Provision for Loan Losses The Bank recorded $4.4 million for the provision for possible loan losses in the year ended December 31, 1995 compared to $25.7 million in the year ended December 31, 1994. The loan loss provision in 1994 reflects the implementation of an accelerated disposition program. The provision for possible loan losses is based upon Management's judgment of the amount necessary to maintain the allowance for possible loan losses at a level which is considered adequate. For further discussion of this topic please refer to the section titled "Allowance for Possible Loan Losses" in the Balance Sheet Analysis section of this document. 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 represented are as follows: For The Years Ended December 31, ---------------------- 1995 1994 ------ ------ (Dollars in thousands) Net gain (loss) on sale of loans . . $ 243 $ (505) Net gain (loss) on sale of securities (886) (48) Loan charges and fees . . . . . . . 3,221 3,213 Service charges and fees . . . . . . 5,191 4,122 Other charges and fees . . . . . . . 355 1,547 ------ ------ $8,124 $8,329 ====== ====== Net loss on sale of loans declined $0.7 million reflecting mark to market losses of $0.5 million on residential loans held for sale recorded in 1994. Net loss on sale of securities increased $0.9 million reflecting losses on the sale of securities in connection with the restructuring of the investment portfolio. Deposit service charges and fees increased $1.1 million due primarily to increased service charges on noninterest bearing accounts. Other charges and fees declined $1.1 million in the year ended December 31, 1995 compared to the same period in 1994 primarily as the result of losses incurred in 1995 from the disposition of fixed assets and non-recurring income recorded in 1994, specifically gains on sales of lease financing receivables and tax abatements. Non-interest Expense Salaries and Benefits Expense Salaries and benefits expense totaled $15.9 million for the year ended December 31, 1995 compared to $16.8 million for the same period in 1994, a decrease of $0.8 million or 4.8% reflecting a reduction in headcount partially offset by standard wage increases as well as new employee benefit programs instituted in 1995. Other Operating Expense For The Years Ended December 31, ----------------------- 1995 1994 ------- ------- (Dollars in thousands) Marketing and public relations . . . . . $ 1,339 $ 1,638 Insurance . . . . . . . . . . . . . . . . . . 2,440 3,270 Professional services . . . . . . . . . . . . 2,902 4,076 Outside processing . . . . . . . . . . . . . 2,893 2,683 Other . . . . . . . . . . . . . . . . . . . . 4,194 3,442 ------- ------- $13,768 $15,109 ======= ======= 24 Marketing and public relations expense decreased $0.3 million reflecting a lower level of advertising expenses incurred in 1995. Insurance expense includes FDIC Insurance expense, which totaled $1.9 million in 1995 compared to $2.6 million in 1994, a decrease of $0.7 million. This decrease reflects an insurance premium reduction of $0.6 million from the FDIC in 1995. Professional services expense decreased $1.2 million for the year ended December 31, 1995 compared to the same period last year primarily due to costs incurred in 1994 related to the management and disposition of non-performing assets. Outside processing expenses increased $0.2 million due to higher transaction and account volume associated with increased account activity resulting from the consumer banking strategy, partially offset by savings which resulted from a renegotiated data processing contract. Other operating expenses increased $0.8 million primarily due to costs associated with shareholder relation activities and costs associated with significant growth in retail deposit accounts as a result of the consumer strategy. Foreclosed Real Estate Expense Foreclosed real estate expense reflects losses on sales, writedowns and net operating results of foreclosed properties. These expenses were $5.5 million in 1994 compared to $0.5 million in 1995. The expenses in 1994 reflect the Bank's aggressive program of selling foreclosed properties as part of its efforts to reduce the level of non-performing assets. Net Expenses of Real Estate Operations The Bank has certain subsidiaries that are engaged in various real estate investments directly or in joint ventures with unaffiliated partners. The Bank has terminated its real estate development activities and plans to sell its remaining real estate investments by December 31, 1997 as part of a divestiture plan submitted to the FDIC. The FDIC approved the plan in December of 1995. The net expense of real estate operations reflects the net operating results of these activities, writedowns on real estate properties and gains/losses on sales of these properties. Net expense (income) of real estate operations was ($0.2) million and $1.0 million in 1995 and 1994, respectively. Income Taxes In accordance with SFAS 109, "Accounting for Income Taxes," Management evaluated the income tax benefits associated with deductible temporary differences, based on the weight of available evidence, as to whether it is more likely than not that the income tax benefits would be realized. As a result, a 100% valuation allowance was established at December 31, 1994. Management reviews the valuation allowance on a periodic basis and, based upon all available facts and circumstances at that time, may adjust the level of the allowance. At December 31, 1995, Management evaluated the weight of available evidence and concluded that it is more likely than not that the Bank will realize a significant portion of the net deferred tax asset and has reduced the valuation allowance from $15.9 million at December 31, 1994 to $7.9 million at December 31, 1995. As part of that reduction, the Bank released $6.0 million of its valuation allowance resulting in a tax benefit. Factors influencing Management's judgment include among other things changes in the level of actual and expected future taxable income and anticipated reversals of net deductible temporary differences. In addition, the Bank recorded $0.2 million of state and federal alternative minimum tax provision in 1995. 25 Impact of Inflation Monetary assets and liabilities are claims to receive or pay a sum of money, the amount of which is fixed. Most assets and liabilities of a bank are monetary in nature. In times of inflation, monetary assets lose purchasing power and monetary liabilities gain purchasing power because the obligations will be repaid with dollars that have less purchasing power than at the time the assets and liabilities were recorded. Since the Bank's primary source of earnings is net interest income, interest rates have a more significant impact on the Bank's financial performance than the general levels of inflation. Interestrates do not necessarily move in the same direction or to the same extent as the prices of goods and services. Impact of Accounting Changes In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. SFAS 121 is effective prospectively for fiscal years beginning after December 15, 1995, and will be adopted by the Bank effective January 1, 1996. The Bank does not believe adoption of this statement will have a material impact on its results of operations. In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage Service Rights." SFAS 122 amends certain provisions of SFAS 65, "Accounting for Certain Mortgage Banking Activities," to eliminate the accounting distinction between rights to service mortgage loans for others that are acquired through loan origination activities and those acquired through purchase transactions. SFAS 122 is effective prospectively for fiscal years beginning after December 15, 1995, and will be adopted by the Bank effective January 1, 1996. The Bank does not believe the adoption of this statement will have a material impact on its results of operations or financial position. In November 1995, the FASB issued SFAS 123, "Accounting for Stock Based Compensation" which gives companies the option of employing intrinsic value accounting under the guidelines of Accounting Principles Board (APB) No. 25 or fair value accounting for stock based compensation. While SFAS 123 does not require the adoption of fair value accounting, it does require certain disclosures in the financial statements as if fair value accounting had been adopted, including pro forma net income and earnings per share. SFAS 123 is effective prospectively for fiscal years beginning after December 15, 1995, and will be adopted by the Bank effective January 1, 1996. The Bank will continue to apply APB 25 in accounting for stock based compensation. 26 Comparison of Years Ended December 31, 1994 and 1993 General For the year ended December 31, 1994 the Bank reported a net loss of $26.9 million as compared to a net loss of $14.3 million for the year ended December 31, 1993. The increased loss resulted from higher levels of loan loss provisions attendant to the completion of four bulk sales of loans and other problem assets during 1994. These sales involved non-performing loans, foreclosed real estate properties, and loans that were performing, but which management determined had undesirable credit characteristics. Net Interest Income Net interest income represents the difference between income earned on interest-earning assets and expense paid on interest bearing liabilities. Net interest income is affected by the mix and volume of assets and liabilities, and the movement and level of interest rates. The following table sets forth, for the periods indicated, average balances, interest income and expense, and yields earned or rates paid on the major categories of assets and liabilities. Non-accrual loans have been included in the appropriate average balance loan category, but unpaid interest on non-accrual loans has not been included for purposes of determining interest income. For purposes of this table, investment securities available for sale are reflected at amortized cost. Twelve Months Ended December 31, ------------------------------------------------------------------------ 1994 1993 ------------------------------------ -------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- (Dollars in Thousands) Interest-earning assets: Fed funds sold and interest-bearing deposits $ 11,682 $ 527 4.45% $ 8,154 $ 251 3.04% Investment securities held to maturity 147,943 8,173 5.52% 159,554 7,728 4.84% Investment securities available for sale 143,801 6,576 4.57% - - - Residential real estate loans 249,294 18,575 7.45% 292,941 23,626 8.07% Commercial real estate loans 182,626 13,236 7.25% 233,820 18,177 7.77% Commercial loans 95,093 7,210 7.48% 126,107 9,451 7.39% Home equity loans 32,890 2,651 8.06% 26,875 1,850 6.88% Consumer loans 12,088 965 7.98% 23,261 2,091 8.99% --------- -------- ----- --------- ------- ----- Total interest-earning assets 875,417 57,913 6.62% 870,712 63,174 7.26% Allowance for loan losses (22,015) (15,837) Non-interest-earning assets 80,574 123,340 --------- --------- Total assets $933,976 $57,913 $978,215 $63,174 ========= ======== ========= ======= Interest-bearing liabilities: Deposits Savings accounts $188,125 $ 3,846 2.04% $179,080 $ 4,190 2.34% NOW accounts 56,699 801 1.41% 57,509 1,045 1.82% Money market accounts 249,674 6,452 2.58% 259,568 7,010 2.70% Time deposit accounts 326,616 12,693 3.89% 353,775 14,930 4.22% --------- -------- ----- --------- ------- ----- Total interest-bearing liabilities 821,114 23,792 2.90% 849,932 27,175 3.20% Non-interest-bearing liabilities 70,236 59,818 --------- --------- Total liabilities 891,350 909,750 Total stockholders' equity 42,626 68,465 --------- --------- Total liabilities and stockholders' equity $933,976 $23,792 $978,215 $27,175 ========= ======== ========= ======= Net interest income/spread $34,121 3.72% $35,999 4.06% ======== ===== ======= ===== Net interest margin as a % of interest- earning assets 3.90% 4.13% ===== ===== 27 Net interest income declined $1.9 million or 5.2% for the year ended December 31, 1994 versus the same period last year. This net decrease resulted from a decrease in interest income of $5.3 million offset partially by a decrease in interest expense of $3.4 million. The decrease in interest income resulted from a change in asset mix to lower yielding (and lower risk) investments. The net impact of the above changes was a 34 basis point decrease in net interest spread and a 23 basis point decrease in net interest margin. Despite a small increase in interest-earning average assets of $4.7 million, interest income declined $5.3 million or 8.3 %. This decrease was largely attributable to a change in asset mix from higher yielding loans to lower yielding investment securities. Average loans outstanding decreased $131.0 million or 18.6% from $703.0 million at December 31, 1993 to $572.0 million at December 31, 1994. This decrease was attributable to the Bank's program to accelerate the disposition of its problem assets, and also to the securitization of $40 million in single-family residential mortgage loans. This decrease was offset by an increase of $132.2 million in investment securities. Interest expense declined $3.4 million in 1994 due largely to lower rates paid on deposits and, to a lesser extent, lower deposit levels. The average rate paid on deposits declined 30 basis points from 3.20% for the year ended December 31, 1993 to 2.90% for the year ended December 31, 1994. This accounted for $2.2 million of the decrease. The lower interest rates were across all deposit products. In addition, interest expense also declined due to lower average deposit balances of $821.1 million at December 31, 1994 versus $849.9 million at December 31, 1993, a 3.4% decrease. Rate/Volume Analysis The following table presents the changes in net interest income resulting from changes in interest rates or changes in the volume of interest assets and interest-bearing liabilities during the periods indicated. Changes which are attributable to both rate and volume have been allocated evenly between the change in rate and volume components. For the Years Ended December 31, 1994 versus 1993 --------------------------------- Increase (Decrease) Due to --------------------------------- Volume Rate Net ----------- ------- --------- (In Thousands) Interest earning assets: Federal funds sold and interest bearing deposits . . . $ 134 $ 142 $ 276 Investment securities held to maturity . . . . . . . (602) 1,047 445 Investment securities available for sale . . . . . . 3,288 3,288 6,576 Residential real estate loans . . . . . . . . . . . . . (3,386) (1,665) (5,051) Commercial real estate loans . . . . . . . . . . . . (3,845) (1,096) (4,941) Commercial loans . . . . . . . . . . . . . . . . . . . (2,338) 97 (2,241) Home equity loans . . . . . . . . . . . . . . . . . . . 449 352 801 Consumer loans . . . . . . . . . . . . . . . . . . . . (948) (178) (1,126) ------ ------ ------ Total interest-earning assets . . . . . . . . . . . . (7,248) 1,987 (5,261) ------ ------ ------ Interest bearing liabilities: Deposits: Savings accounts . . . . . . . . . . . . . . . . . . . . 198 (542) (344) NOW accounts . . . . . . . . . . . . . . . . . . . . . (13) (231) (244) Money market accounts . . . . . . . . . . . . . . . (261) (297) (558) Time deposit accounts . . . . . . . . . . . . . . . . (1,101) (1,136) (2,237) ------ ------ ------ Total interest-bearing liabilities . . . . . . . . . . (1,177) (2,206) (3,383) ------ ------ ------ Change in net interest income . . . . . . . . . . . ($6,071) $ 4,193 ($1,878) ======= ======= ======= 28 Provision for Loan Losses The Bank added $25.7 million to its allowance for loan losses in 1994 compared to $15.7 million in the prior year. The loan loss provision in 1994 reflects the implementation of the accelerated disposition program and the implementation of new loan loss reserve methodology. The provision for loan losses is based upon Management's judgment of the amount necessary to maintain the allowance for possible loan losses at a level which is considered adequate. Non-interest Income Non-interest income is composed of fee income for bank services and gains or losses from the sale of assets. The components of non-interest income for the periods represented are as follows: For The Years Ended December 31, ------------------------------- 1994 1993 ------- ------ (Dollars in thousands) Net gain (loss) on sale of loans . . ($ 505) $ 2,627 Net gain (loss) on sale of securities (48) (276) Loan charges and fees . . . . . . . 3,213 3,776 Service charges and fees . . . . . . 3,909 4,123 Other charges and fees . . . . . . . 1,760 1,421 -------- -------- $ 8,329 $ 11,671 ======== ======== The Bank originates fixed-rate residential mortgage loans primarily for sale into the secondary market. Net gains on the sale of loans declined $3.1 million partly due to lower production in 1994 as compared to 1993, as a consequence of the decreased demand for refinancing. A more volatile interest rate environment in 1994 resulted in a reduction of gains on sales of loans as well as the recognition of mark to market losses. Loan charges and fees declined $0.6 million due to the sale of the Bank's VISA credit card portfolio in the fourth quarter of 1993 and lower levels of residential mortgage originations. Other charges and fees increased $0.3 million in 1994 as a result of non-recurring income, specifically gains on the sale of lease financing receivables recorded in 1994. Non-interest Expense Other Operating Expense For The Years Ended December 31, ----------------------- 1994 1993 ------- ------- Marketing and public relations $ 1,638 $ 1,526 Insurance 3,270 3,324 Professional services 4,076 3,399 Outside processing 2,683 2,027 Other 3,442 3,166 ------- ------- $15,109 $13,442 ======= ======= Professional Services expense increased $0.7 million due to professional fees related to the management and disposition of non-performing assets and additional consulting services in connection with the Bank's new business strategies. Outside processing expenses increased $0.7 million due to higher transaction and account volumes associated with increased activity resulting from the new consumer banking strategy. 29 Foreclosed Real Estate Expense Foreclosed real estate expense reflects losses on sales, writedowns and net operating results of foreclosed properties. This expense totaled $5.5 million for the year ended December 31, 1994 compared to $11.7 million for the year ended December 31, 1993. Expenses in both years reflect the Bank's aggressive selling of foreclosed properties as part of its effort to reduce the level of non-performing assets. Net Expenses of Real Estate Operations Colebrook represents certain subsidiaries of the Bank that are engaged in various real estate investment activities directly or through joint ventures with unaffiliated partners. The Bank plans an orderly divestment of its real estate investments with a target date of December 31, 1997. Net expense of real estate operations reflect the net operating results of Colebrook, writedowns of real estate properties, and gains/losses on sales of these properties. Net expenses of real estate operations was $1.0 million for the year ended December 31, 1994 versus $2.6 million for the year ended December 31, 1993. Income Taxes Due to the Bank's continuing losses, there was no federal or state tax benefit or expense for the year ended December 31, 1994. In the fourth quarter of 1993, the Bank changed its status for federal income tax purposes. The Bank was no longer classified as a thrift institution but, rather, qualified as a bank under federal income tax rules. As a result, the Bank was eligible to carryback losses related to bad debts to the ten preceding tax years. Accordingly, the Bank recorded a tax benefit of $3.4 million in the fourth quarter of 1993. Impact of Inflation Monetary assets and liabilities are claims to receive or pay a sum of money, the amount of which is fixed. Most assets and liabilities of a bank are monetary in nature. In times of inflation, monetary assets lose purchasing power and monetary liabilities gain purchasing power because the obligations will be repaid with dollars that have less purchasing power than at the time the assets and liabilities were recorded. Since the Bank's primary source of earnings is net interest income, interest rates have a more significant impact on the Bank's financial performance than the general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. 30 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The response to this Item is attached as Exhibit A. The following items are found in the 1995 Consolidated Financial Statements and Notes. Page Consolidated Balance Sheets as of December 31, 1995 and 1994 A-1 Consolidated Statements of Operations for the three years ended December 31, 1995, 1994, and 1993 A-2 Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 1995, 1994, and 1993 A-3 Consolidated Statements of Cash Flows for the three years ended December 31, 1995, 1994, and 1993 A-4 Notes to Consolidated Financial Statements A-6 Report of Independent Accountants A-28 All other schedules are omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or Notes thereto. 31 PART III ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK (a) Directors of the Bank: The response to this Item regarding those persons who are directors of the Bank is contained in the discussion under the caption "Directors and Nominees" contained on pages 41 through 43 of the Proxy Statement filed as Form F-5 with the FDIC, which is incorporated by reference herein. (b) Principal Officers of the Bank: The following table sets forth certain information regarding the principal officers of the Bank (those Officers subject to Section 16 reporting requirements): Name Age Position and office with the Bank Office held since - ---- --- --------------------------------- ----------------- F. William Marshall, Jr.(1) 54 President & Chief Executive Officer, Director 1993 Frank W. Barrett(2) 56 Executive Vice President/Credit & Commercial 1994 Lending Group B. John Dill(3) 44 Executive Vice President of Bank; President of 1987 Colebrook Corporation John F. Treanor(4) 48 Executive Vice President, Chief Financial Officer 1994 & Treasurer Gilbert F. Ehmke(5) 36 Senior Vice President, Chief Investment Officer 1995 Henry J. McWhinnie(6) 52 Senior Vice President/Human Resources Group 1994 Jeanne Rinaldo(7) 47 Senior Vice President/Residential Mortgage 1992 Group Christopher A. Sinton(8) 51 Senior Vice President/Retail Banking Group 1995 Michael E. Tucker(9) 39 Senior Vice President & General Counsel 1993 Ting Chang(10) 32 Vice President/Investor Relations 1995 Laura Sotir Katz(11) 32 Vice President & Controller 1992 Brian Schwartz(12) 28 Vice President & Director of Internal Auditing 1995 (c) Family Relationships: The response to this item is incorporated by reference from the discussion under the caption "Management of the Bank - Directors and Nominees" in the Proxy Statement. - -------- (1) Mr. Marshall joined the Bank in May, 1993. He formerly served as Chairman and Chief Executive Officer of the Bank of Ireland First Holdings, Inc. and First NH Bank. Prior to 1991, Mr. Marshall served as Executive Vice President of Shawmut National Corporation. Mr. Marshall served as a Trustee of the Bank from May, 1993 until the Conversion of the Bank to stock form on February 8, 1995. (2) Mr. Barrett joined the Bank in January, 1994. He formerly served as Senior Vice President of Bank of Ireland First Holdings and First NH Bank; Senior Vice President of Shawmut Bank, N.A., and Executive Vice President of Shawmut Worcester County Bank, N.A. (3) Mr. Dill joined the Bank in 1974 and has served as Executive Vice President of the Bank since 1987 and President and Chief Executive Officer of Colebrook since 1982. (4) Mr. Treanor joined the Bank in August, 1994. He formerly served as Executive Vice President, Treasurer and Chief Financial Officer of Sterling Bancshares Corporation and Senior Vice President of Shawmut National Corporation. 32 (5) Mr. Ehmke joined the Bank in February, 1995. Prior to joining the Bank, he was Senior Vice President and Treasurer of Northeast Savings, F.A. in Hartford, Connecticut. (6) Mr. McWhinnie joined the Bank in September, 1994. He formerly served as Senior Vice President Human Resources of Bristol Savings Bank in Bristol, Connecticut and as Executive Vice President of Centerbank, Waterbury, Connecticut. (7) Ms. Rinaldo joined the Bank in 1988 and has served as Senior Vice President since May, 1992. (8) Mr. Sinton joined the Bank in February, 1995. He formerly was Executive Vice President-Retail Banking Division of United Jersey Bank. (9) Mr. Tucker joined the Bank in 1980 and has served as Senior Vice President since December, 1993 and General Counsel since 1985. (10) Ms. Chang joined the Bank in 1989 and has served as Vice President for Investor Relations since 1995. (11) Ms. Katz joined the Bank in 1990. She previously was a C.P.A. at Ernst and Young in Boston, Massachusetts. (12) Mr. Schwartz joined the Bank in May, 1995. He formerly served as Audit Manager with Shawmut National Corporation. Prior to 1993, he was Corporate Compliance Officer with MNC Financial Corporation. ITEM 10. MANAGEMENT COMPENSATION AND TRANSACTIONS The response to this Item is contained in the discussion under the captions "Executive Compensation", "Employment Agreements", "Benefits Under Plans", "Transactions with Certain Related Persons" and "Certain Business Relationships" contained on Pages 45 through 57 of the Proxy Statement, which is incorporated by reference herein. The disclosure required regarding the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 is contained at page 62 of the Proxy under the caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934". PART IV ITEM 11: EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM F-3 (a) Contents: (1) Financial Statements: All Financial Statements referred to in Part II, Item 8 of this Report are included as Exhibit A. The index is on page 31 of this Report. (2) Financial Statement Schedules: Schedules are omitted because the information is either not required, not applicable, or is included in Part II, items 6-8 of this report. (b) Reports on Form F-3: None filed during the fourth quarter of 1995. (c) Exhibits: (1) Articles of Incorporation and Bylaws (a) Amended and Restated Charter of Springfield Institution for Savings - filed as Exhibit 1(a) from the Bank's Registration Statement on Form F-1 (b) Amended and Restated By-laws of Springfield Institution for Savings - filed as Exhibit 1(b) from the Bank's Registration Statement on Form F-1 33 (2) Instruments Defining the Rights of Security Holders (a) Amended and Restated Charter of Springfield Institution for Savings - filed as Exhibit 1(a) from the Bank's Registration Statement on Form F- 1 (b) Amended and Restated By-laws of Springfield Institution for Savings - filed as Exhibit 1(b) from the Bank's Registration Statement on Form F- 1 (c) Specimen Certificate for shares of Common Stock of the Springfield Institution for Savings - filed as Exhibit 3 from the Bank's Registration Statement on Form F-1 (3) Material Contracts (a) Employment agreements for Messrs. F. William Marshall, Jr., Frank W. Barrett, B. John Dill, John F. Treanor, Henry J. McWhinnie, Ms. Jeanne Rinaldo, and Mr. Michael E. Tucker are incorporated by reference to Exhibit 7 from the Bank's Registration Statement on Form F-1 (b) The form of Employment agreements for Messrs. Gilbert F. Ehmke and Christopher A. Sinton is attached to this Report as Exhibit B. (4) Statement Regarding Computation of Per Share Earnings Such computation is attached to this Report as Exhibit C. (5) Statement Regarding Computation of Ratios As the Bank does not have any debt securities registered under Section 12 of the Act, no ratio of earnings to fixed charges appears in this Annual Report on Form F-2. (6) Exhibit Report to Security Holders The Springfield Institution for Savings 1995 Annual Report is furnished only for the information of the Federal Deposit Insurance Corporation and is not deemed to be filed herewith. (7) Letter Regarding Change in Accounting Principles None (8) Previously Unfiled Documents None (9) Subsidiaries of the Bank The Bank owns 100% of the capital stock of each of the following subsidiaries, all of which are Massachusetts corporations (unless otherwise indicated) and all of which are included in the Bank's consolidated financial statements: (1) Commerce Properties, Inc. (2) Properties Two, Inc. (Connecticut corporation) (3) Montague Properties, Inc (4) Village Park Properties, Inc. (Georgia corporation) (5) 1190 Adams Street Corporation (6) SIS Investment Corporation (7) SIS Investment Corporation II (8) Sherman Street Corporation (9) SIS Center, Inc. (10) Newgate Corporation (11) Colebrook Corporation (12) Colebrook-Leominster, Inc. 34 The Bank also owns 100% of the capital stock of each of the following subsidiaries through Colebrook Corporation, all of which are Massachusetts corporations (unless otherwise indicated) and all of which are included in the Bank's consolidated financial statements: (1) Colebrook Realty Services, Inc. (2) Colebrook-Diamond, Inc. (3) Colebrook-Riverdale Corporation (4) New Marlboro Corp. (5) Colebrook-Woodcrest, Inc. (6) Colebrook/Westor, Inc. (7) 140 Glastonbury Boulevard, Inc. (Connecticut Corporation) (8) Overlook, Inc. In addition, the Bank owns, either directly or through the wholly owned subsidiaries of Colebrook Corporation specified below, the percentage interest in the partnership or corporation set forth opposite each such wholly owned subsidiary. Partnership or Subsidiary Corporation Owned Percentage Interest - ------------------------------ ---------------------------- -------------------------- (1) Colebrook-Woodcrest, Inc. Hillman Associates 50% general partnership Partnership #4 Waltham Medical Associates 12.5% limited partnership Limited Partnership Wiljon Partnership 50% general partnership (2) New Marlboro Francoline Colebrook 50% general partnership Partnership #7 (3) Colebrook/Westor Corporation Westor Corporation 50% stockholder Westor Partnership 1% general partnership (98% limited partnership owned by Westor Corporation). (4) Newgate Corporation Sunchase Limited Partnership 14.57% limited partnership Capital Drive Limited Partnership 25% general partnership (5) Overlook, Inc. Chester Commons 99% limited partnership (6) Sherman Street Corporation Van Der Hayden 1% general partnership 35 SIGNATURES Pursuant to the requirements of the Section 13 of the Securities Exchange Act of 1934, the Bank has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. February 28, 1996 SPRINGFIELD INSTITUTION FOR SAVINGS By: /s/ F. William Marshall, Jr. F. William Marshall, Jr., President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Bank and in the capacities on the dates indicated. Signature Title Date --------- ------- ---- By: /s/ F. William Marshall, Jr. President, Chief Executive February 28, 1996 F. William Marshall, Jr. Officer and Director By: /s/ John F. Treanor Executive Vice President, February 28, 1996 John F. Treanor Chief Financial Officer and Treasurer By: /s/ Laura Sotir Katz Vice President, Controller February 28, 1996 Laura Sotir Katz (Chief Accounting Officer) By: /s/ John M. Naughton Director, Chairman of the February 28, 1996 John M. Naughton Board By: /s/ Teresita Alicea Director February 28, 1996 Teresita Alicea By: /s/ Mary E. Boland Director February 28, 1996 Mary E. Boland By: /s/ Sister Mary Caritas Geary, S.P. Director February 28, 1996 Sister Mary Caritas Geary, S.P. By; /s/ Donald F. Collins Director February 28, 1996 Donald F. Collins 36 Signature Title Date --------- ------- ---- By: /s/ Harry J Courniotes Director February 28, 1996 Harry J. Courniotes By: /s/ Paulette Henderson-Johnson Director February 28, 1996 Paulette Henderson-Johnson By: /s/ Charles L. Johnson Director February 28, 1996 Charles L. Johnson By: /s/ Stephen A. Shatz Director February 28, 1996 Stephen A. Shatz By: /s/ Gary P. Shannon Director February 28, 1996 Gary P. Shannon By: /s/ John H. Southworth Director February 28, 1996 John H. Southworth By: /s/ Albert E. Steiger, Jr. Director February 28, 1996 Albert E. Steiger, Jr. 37 EXHIBIT A SPRINGFIELD INSTITUTION FOR SAVINGS INDEX TO FINANCIAL STATEMENTS Page Consolidated Balance Sheets as of December 31, 1995 and 1994 A - 1 Consolidate Statements of Operations for the three years ended December 31, 1995, 1994, and 1993 A - 2 Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 1995, 1994 and 1993 A - 3 Consolidated Statements of Cash Flows for the three years ended December 31, 1995, 1994 and 1993 A - 4 Notes to Consolidated Financial Statements A - 6 Report of Independent Accountants A - 28 SPRINGFIELD INSTITUTION FOR SAVINGS CONSOLIDATED BALANCE SHEET (Dollars in Thousands) December 31, ---------------------------- 1995 1994 ------ ------ ASSETS Cash and due from banks $ 30,377 $ 30,100 Federal funds sold and interest bearing deposits 8,045 25,620 Investment securities available for sale 246,984 161,321 Investment securities held to maturity (market value 172,793 158,243 $172,930 at December 31, 1995; and $145,261 at December 31, 1994) Loans receivable, net of allowance for possible losses 558,663 497,582 ($14,986 at December 31, 1995 and $ 15,844 at December 31, 1994) Accrued interest and dividends receivable 7,109 5,116 Investments in real estate and real estate partnerships 6,092 6,699 Foreclosed real estate, net 1,529 4,951 Bank premises, furniture and fixtures, net 25,706 23,413 Other assets 13,680 7,644 ---------- -------- $1,070,978 $920,689 ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $885,386 $853,633 Federal Home Loan Bank advances 41,500 - Securities sold under agreements to repurchase 31,101 - Loans payable 5,470 2,392 Mortgagors' escrow deposits 4,193 5,306 Accrued expenses and other liabilities 21,859 30,855 ---------- -------- Total liabilities 989,509 892,186 ---------- -------- Commitments and contingent liabilities Stockholders' equity: Preferred stock ($1 par value; 5,000,000 shares authorized; no shares issued and outstanding) - - Common stock ($1 par value; 25,000,000 shares authorized; 5,710,700 shares issued in 1995) 5,710 - Unearned compensation (4,937) - Additional paid-in capital 35,887 - Retained earnings 43,083 31,624 Net unrealized gains (losses) on investment securities available for sale 1,726 (3,121) ---------- -------- Total stockholders' equity 81,469 28,503 ---------- -------- $1,070,978 $920,689 ========== ======== See accompanying Notes to the Consolidated Financial Statements A-1 SPRINGFIELD INSTITUTION FOR SAVINGS CONSOLIDATED STATEMENT OF OPERATIONS (Dollars In Thousands) For the Years Ended December 31, ------------------------------------------- 1995 1994 1993 ------ ------ ------ Interest and dividend income Interest on loans $ 45,536 $ 42,637 $ 55,195 Interest and dividends on investment securities available for sale 12,215 6,576 - Interest and dividends on investment securities held to maturity 10,849 8,173 7,728 Interest on federal funds sold and interest bearing deposits 1,316 527 251 ----------- ---------- ---------- Total interest and dividend income 69,916 57,913 63,174 ----------- ---------- ---------- Interest expense Interest on deposits 30,424 23,792 27,175 Interest on borrowed funds 2,132 - - ----------- ---------- ---------- Total interest expense 32,556 23,792 27,175 ----------- ---------- ---------- Net interest and dividend income 37,360 34,121 35,999 Less: Provision for possible loan losses 4,359 25,742 15,740 ----------- ---------- ---------- Net interest and dividend income after provision for possible loan losses 33,001 8,379 20,259 Noninterest income Net gain (loss) on sale of loans 243 (505) 2,627 Net gain (loss) on sale of securities (886) (48) (276) Fees and other income 8,767 8,882 9,320 ----------- ---------- ---------- Total noninterest income 8,124 8,329 11,671 ----------- ---------- ---------- Noninterest expense Operating expenses Salaries and employee benefits 15,961 16,808 16,583 Occupancy expense of bank premises, net 3,459 3,410 3,502 Furniture and equipment expense 1,943 1,830 1,696 Other operating expenses 13,768 15,109 13,442 ----------- ---------- ---------- Total operating expenses 35,131 37,157 35,223 ----------- ---------- ---------- Foreclosed real estate expense 521 5,470 11,734 Net (income) expense of real estate operations (227) 988 2,632 ----------- ---------- ---------- Total noninterest expense 35,425 43,615 49,589 ----------- ---------- ---------- Income (loss) before income tax benefit 5,700 (26,907) (17,659) Income tax benefit (5,759) - (3,384) ----------- ---------- ---------- Net income (loss) $ 11,459 ($ 26,907) ($ 14,275) =========== =========== =========== Pro forma earnings per share: (1) Primary $ 2.21 ($ 5.21) ($ 2.77) Fully diluted (2) $ 2.19 ($ 5.21) ($ 2.77) Pro forma weighted average shares outstanding: (1) Primary 5,174,037 5,174,037 5,174,037 Fully diluted 5,220,778 5,220,778 5,220,778 <FN> (1) Net income (loss) per share for the twelve months ended December 31, 1995, 1994 and 1993 is computed on a pro forma basis as if the stock issued in the conversion had been issued as of the beginning of each period presented. (2) For the years ended December 31, 1994 and 1993 the fully diluted earnings per share calculation is anti-dilutive. </FN> See accompanying Notes to the Consolidated Financial Statements A-2 SPRINGFIELD INSTITUTION FOR SAVINGS CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For The Years Ended December 31, 1995, 1994 and 1993 (Dollars In Thousands) Net unrealized Net gain (loss) unrealized on investment loss on Unearned Additional securities marketable Common Compen- Paid-In Retained available equity Stock sation Capital Earnings for sale securities Total ----------- ---------- ----------- ---------- ------------- -------------- ------- Balance at December 31, 1992 $ -- $ -- $ -- $ 72,806 $ -- ($ 44) $ 72,762 Net Loss -- -- -- (14,275) -- -- (14,275) Change in net unrealized loss on marketable equity securities -- -- -- -- -- 44 44 -------- -------- -------- -------- -------- -------- -------- Balance at December 31, 1993 -- -- -- $ 58,531 $ -- $ -- $ 58,531 ======== ======== ======== ======== ======== ======== ======== Balance at December 31, 1993 $ -- $ -- $ -- $ 58,531 $ -- $ -- $ 58,531 Net Loss -- -- -- (26,907) -- -- (26,907) Change in unrealized gain (loss) on investment securities available for sale -- -- -- -- (3,121) -- (3,121) -------- -------- -------- -------- -------- -------- -------- Balance at December 31, 1994 -- -- -- $ 31,624 ($ 3,121) $ -- $ 28,503 ======== ======== ======== ======== ======== ======== ======== Balance at December 31, 1994 $ -- $ -- $ -- $ 31,624 ($ 3,121) $ -- $ 28,503 Net Income -- -- -- 11,459 -- -- 11,459 Issuance of common stock 5,562 -- 33,909 -- -- -- 39,471 Unearned compensation 148 (5,375) 1,667 -- -- -- (3,560) Decrease in unearned compensation -- 438 311 -- -- -- 749 Change in unrealized gain (loss) on investment securities available for sale -- -- -- -- 4,847 -- 4,847 -------- -------- -------- -------- -------- -------- -------- Balance at December 31, 1995 $ 5,710 ($ 4,937) $ 35,887 $ 43,083 $ 1,726 $ -- $ 81,469 ======== ======== ======== ======== ======== ======== ======== A-3 SPRINGFIELD INSTITUTION FOR SAVINGS CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars In Thousands) For the Years Ended December 31, ------------------------------------ 1995 1994 1993 ------ ------ ------ Cash Flows From Operating Activities Net income (loss) $ 11,459 ($ 26,907) ($ 14,275) Adjustments to reconcile net income (loss) to net cash (used for)/ provided by operating activities Provision for possible loan losses 4,359 25,742 15,740 Provision for foreclosed real estate 836 6,034 7,975 Depreciation 3,026 3,605 3,089 Amortization of premium on investment securities, net 972 1,812 1,348 Amortization of lease income -- (1) (197) Investment security losses 886 48 276 Loss from equity investment in partnerships 133 987 346 (Gain) loss on sales of loans (243) 505 (2,627) Disbursements for mortgage loans held for sale (65,747) (126,727) (353,041) Receipts from mortgage loans held for sale 65,989 126,161 354,747 Loss (gain) on sale of fixed assets and real estate 609 (4,306) 178 Changes in assets and liabilities: (Increase) decrease in other assets, net (8,029) 1,382 563 (Decrease) increase in accrued expenses and other (8,996) 5,678 4,060 liabilities ------- ------ ------- Net cash (used for)/provided by operating activities 5,254 14,013 18,182 ------- ------ ------- Cash Flows From Investing Activities Proceeds from sales of investment securities available for 213,252 59,609 - sale Proceeds from maturities and principal payments received on investment securities available for sale 135,076 406,369 -- Purchase of investment securities available for sale (345,959) (497,675) -- Proceeds from sales of investment securities held to -- -- 82,406 maturity Net cash (used for)/provided by operating activities 5,254 14,013 18,182 Proceeds from maturities and principal payments received on investment securities held to maturity 33,287 13,783 160,770 Purchase of investment securities held to maturity (132,878) (75,067) (320,043) Net decrease in investment in real estate -- 6,005 2,353 Cash distributions from partnerships -- 63 36 Capital contributions to partnerships -- (401) (22) Net (increase) decrease in loans receivable (66,864) 20,685 50,119 Net decrease in foreclosed real estate 2,928 16,437 24,395 Principal payments received under leases -- 177 1,358 Proceeds from sale of loans 1,081 74,925 12,166 Proceeds from sale of fixed assets and leases -- 27 546 Purchase of fixed assets (5,454) (1,967) (1,925) ------- ------ ------- Net cash (used for)/provided by investing activities (165,531) 22,970 12,159 --------- ------ ------- See accompanying Notes to the Consolidated Financial Statements A-4 SPRINGFIELD INSTITUTION FOR SAVINGS CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars In Thousands) For the Years Ended December 31, ------------------------------------ 1995 1994 1993 ------ ------ ------ Cash Flows From Financing Activities Net proceeds from stock conversion $ 35,911 $ -- $ -- Net increase (decrease) in deposits 31,753 (21,273) (23,144) Net increase (decrease) in borrowings 75,679 (3,671) (177) Net (decrease) increase in mortgagors' escrow deposits (1,113) 79 883 Net decrease in unearned compensation 749 -- -- --------- --------- --------- Net cash provided by/(used for) financing activities 142,979 (24,865) (22,438) --------- --------- --------- (Decrease) increase in cash and cash equivalents (17,298) 12,118 7,903 Cash and cash equivalents, beginning of year 55,720 43,602 35,699 --------- --------- --------- Cash and cash equivalents, end of year $ 38,422 $ 55,720 $ 43,602 ========= ========= ========= Supplemental disclosures of cash flow information: Cash paid during the year for interest to depositors and $ 32,456 $ 23,751 $ 27,317 interest on debt Non-cash investing activities: Transfers to foreclosed real estate, net $ 342 $ 2,337 $ 4,698 A-5 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars In Thousands) General Established in 1827, Springfield Institution for Savings is a state chartered, stock savings bank headquartered in Springfield, Massachusetts. Springfield Institution for Savings and its subsidiaries (the "Bank") provides a variety of financial services which include retail and commercial banking, residential mortgage origination and servicing, commercial real estate lending and consumer lending. The Bank serves its primary market of Hampden and Hampshire Counties of Massachusetts through a network of 20 retail branches. The Bank's revenues are derived principally from interest payments on its loan portfolios and mortgage-backed and other investment securities. The Bank's primary sources of funds are deposits, borrowings and principal and interest payments on loans and mortgage-backed securities. 1. Accounting Policies The accounting and reporting policies of the Bank conform with generally accepted accounting principles. The significant policies are summarized below. The consolidated financial statements of the Bank are dependent on the use of estimates, particularly with regard to the allowance for possible loan losses and the value of other real estate. Estimates of loan collectability and real estate values involve a high degree of judgment and the use of appraisals and other information. Subsequent changes in general economic conditions and the financial condition of borrowers may require changes in such estimates. Consolidation The consolidated financial statements include the accounts of the Bank and its wholly owned subsidiaries, most of which are involved in the purchase, sale, management and rental of real estate. All significant intercompany items have been eliminated. Certain amounts in prior periods have been reclassified to conform to the current year presentation. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, federal funds sold and interest bearing deposits. Generally, federal funds are sold for one day periods. Investment Securities In May 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (FAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities" which requires that debt and equity securities be segregated into three categories: (i) held to maturity, which will be carried at amortized cost; (ii) available for sale, which will be valued at market with unrealized gains and losses reported as a separate component of stockholders' equity net of tax and (iii) trading securities, which will be valued at market with unrealized gains and losses included in current earnings. The Bank adopted FAS 115 effective January 1, 1994. The effect upon adoption at January 1, 1994 was to increase stockholders' equity by $1,069. Prior to adoption of this new standard, investment debt securities represented those securities which management had the intent and ability to hold until maturity and were stated at cost adjusted for amortization of premiums and accretion of discounts. Marketable equity securities were stated at the lower of their aggregate cost or market value with net unrealized losses reported as a reduction to the stockholders' equity account. Gains or losses from security transactions are computed under the specific identification method. A-6 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Investments in Real Estate and Real Estate Partnerships Investments in real estate reflect the Bank's interest in wholly owned real estate properties. Investments in real estate properties are carried at the lower of cost, including cost of improvements incurred subsequent to acquisition, or fair value less costs to sell. Investments in partnerships reflect the Bank's interest in joint venture real estate developments. Investments in partnerships which are greater than 50% owned by the Bank are accounted for using the equity method and are carried at the Bank's equity in the underlying assets. Loans Loans are stated at the principal amount outstanding, net of unearned income. Interest income on loans is accrued based on rates applied to amounts outstanding. Unearned income on loans made or purchased on a discounted basis are recognized in interest income over the lives of the loans using a method that approximates a level yield. Loans held for sale are carried at the lower of cost or market value. Loan origination and commitment fees and certain direct loan origination costs are deferred and the net amount is amortized as a yield adjustment over the average life of the loans using a method that approximates a level yield method. Loans on which the accrual of interest has been discontinued are classified as nonaccrual loans. Interest accruals on loans are normally discontinued whenever the payment of interest or principal is more than 90 days past due or when, in the opinion of management, such action is prudent. When a loan is placed on nonaccrual status, all interest previously accrued in the current year but not collected is reversed against current year interest income. Loans are removed from nonaccrual status when they become current as to principal and interest and when, in the opinion of management, the loans are estimated to be fully collectible as to principal and interest. The Bank may continue to accrue interest on loans past due 90 days or more that are well secured and in the process of collection. Restructured loans are loans for which concessions, including reduction of interest rates or deferral of interest or principal payments, have been granted to acknowledge changes in the borrower's financial condition or changes in underlying cash flows of the loan's collateral. Interest income on restructured loans is accrued at the modified rates after a satisfactory period of performance (generally six months). Effective January 1, 1995 the Bank adopted FAS 114, "Accounting by Creditors for Impairment of a Loan." FAS 114 modifies the accounting for impaired loans, defined as those loans, where, based on current information and events, it is probable that a creditor will be unable to collect all amounts due, both interest and principal, according to the contractual terms of the loan agreement. Specifically, FAS 114 requires that the allowance for possible loan losses related to impaired loans be determined based on the present value of expected cash flows discounted at the loan's effective interest rate or, as a practical expedient, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. The adoption of this statement did not have a material impact on the Bank's results of operations or financial position. Effective January 1, 1995, the Bank also adopted FAS 118, "Accounting by Creditors for an Impairment of a Loan - Income Recognition and Disclosure," which amends FAS 114 to permit a creditor to use existing methods for recognizing interest income on impaired loans. Generally, interest income received on impaired loans either continues to be applied by the Bank against principal or is realized as interest income, according to Management's judgment as to the collectability of the principal. A-7 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Allowance for Possible Loan Losses The allowance for possible loan losses is established through charges against income. Loans deemed uncollectable are charged against the allowance, while recoveries of amounts previously charged-off are credited to the allowance. The allowance represents an amount which, in Management's judgment, will be adequate to absorb probable losses on existing loans that may become uncollectable. Management's judgment in determining the adequacy of the allowance is based on various factors influencing the collectability of the loan. These factors include, but are not limited to, an analysis of the borrower's ability to meet the repayment terms, the borrower's overall financial condition, the estimated value of collateral supporting the credit, the concentration of credit risk in the portfolio and judgments as to the effect of current and anticipated economic conditions. Management's determination of the allowance is, by necessity, dependent upon estimates, appraisals and judgments, which may change because of changing economic conditions and the Bank's perception as to how these factors may affect the financial condition of the borrowers. Foreclosed Real Estate Real estate acquired through foreclosure is transferred to foreclosed real estate at the lower of the estimated fair value of the asset acquired or book value. The excess if any, of the loan over the fair value of the property at the time of transfer is charged to the Allowance for Possible Loan Losses. Subsequent declines in the value of the property are reflected as a valuation allowance and charged to operations. Subsequent to transfer, foreclosed real estate is carried at the lower of cost or the estimated fair value less expenses to dispose of the asset. Bank Premises, Furniture and Fixtures Bank premises, furniture and fixtures are stated at cost less accumulated depreciation and amortization. Depreciation is computed by use of the straight-line method over the estimated useful lives of the related assets, ranging from 3 to 30 years. Leasehold improvements are amortized over the shorter of the lease terms or the useful life of the improvement. Fair Values of Financial Instruments In 1992, the Bank adopted FAS 107, "Disclosures about Fair Value of Financial Instruments," which requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial position, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The calculation of fair value estimates is dependent upon certain subjective assumptions and involves significant uncertainties, resulting in variability in estimates with changes in assumptions. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in the fair value amounts disclosed. FAS 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Bank. In addition, the fair value estimates are not intended to reflect the liquidation value of the financial instruments. The following methods and assumptions were used by the Bank to estimate the fair value for each class of financial instruments for which it is practicable to estimate that value. Cash and short-term investments - The carrying amounts for cash and short-term investments are reasonable estimates of those assets' fair values. Investment securities - Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities. A-8 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Loans receivable, net - For adjustable rate residential loans that reprice frequently and with no significant change in credit risk, fair values are based on the market prices for securities collateralized by similar loans. For certain homogeneous categories of loans, such as some residential fixed rate mortgages, fair value is estimated using the quoted market price for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Accrued interest and dividends receivable - The carrying amount of interest and dividends receivable approximates its fair value. Deposit liabilities - The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date, that is, the carrying value. The fair value of fixed maturity certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently offered for deposits of similar remaining maturities on the future cash flows expected to be paid on the deposits. In estimating the fair value of deposit liabilities, FAS 107 prohibits financial entities from taking into account the value of its long-term relationships with depositors, commonly known as core deposit intangibles. Federal Home Loan Bank advances - The fair value of advances from the Federal Home Loan Bank of Boston is based on discounted values of contractual cash flows using rates currently offered for instruments with similar terms and maturities or, when available, quoted market prices. Securities sold under agreements to repurchase - The fair value of securities sold under agreements to repurchase are based on the discounted value of contractual cash flows using dealer quoted rates for agreements of similar terms and maturities. Loans payable - The fair values of the Bank's loans payable are estimated using discounted cash flow analyses, based on rates currently available to the Bank for debt with similar terms and remaining maturities. Standby letters of credit - The estimated fair value of financial guarantees, such as standby letters of credit, are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the creditworthiness of the counterparties or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. Commitments to extend credit - The fair value of commitments to extend credit, which includes unused lines of credit and commitments to fund loans, is estimated using the fees currently charged to enter into similar agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The commitments to extend credit have terms that are consistent with current market terms. Long-Lived Assets In March 1995, the FASB issued FAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. FAS 121 is effective prospectively for fiscal years beginning after December 15, 1995, and will be adopted by the Bank effective January 1, 1996. The Bank does not believe adoption of this statement will have a material impact on its results of operations. A-9 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Pension Plan and Other Employee Benefit Plans All eligible employees are covered by a non-contributory defined benefit pension plan which is administered by the Savings Bank Employees' Retirement Association. The pension plan is funded in an amount consistent with the funding requirements of federal laws and regulations. The Bank sponsors postretirement health care and life insurance benefit plans that provide health care and life insurance benefits for retired employees that have met certain age and service requirements. Postretirement health care and life insurance benefits expense is based upon an actuarial computation of current and future benefits to earnings for employees and retirees. The Bank accounts for its postretirement health care and life insurance benefits in accordance with FAS 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions." The Financial Accounting Standards Board has issued FAS 112, "Employers' Accounting for Postemployment Benefits," which requires accrual of a liability for all types of benefits paid to former or inactive employees after employment but before retirement. Benefits subject to this accounting pronouncement include salary continuation, supplemental unemployment benefits, severance benefits, disability-related benefits (including workers' compensation), job training and counseling and continuation of such benefits as health care and life insurance coverage. The Bank adopted this accounting standard beginning January 1, 1994. The adoption of FAS 112 did not have a material impact on the Bank's results of operations or financial position. The Bank sponsors a leveraged employee stock ownership plan ("ESOP") that covers all full-time and part-time employees with more than one year of service at the Bank. The ESOP was formed with the completion of the Bank's conversion from mutual to stock form (the "Conversion") on February 7, 1995. The Bank makes annual contributions to the ESOP equal to the ESOP's debt service. The ESOP's shares initially were pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to active employees, based on the proportion of debt service paid during the year. The Bank accounts for its ESOP in accordance with Statement of Position (SOP) 93-6. Accordingly, the debt of the ESOP is recorded as long-term debt and the shares pledged as collateral are reported as unearned compensation in the Bank's Consolidated Balance Sheet. As shares are released from collateral, the Bank records compensation expense equal to the current market price of the shares, and the shares become outstanding for purposes of calculating earnings per share. The Bank's Stock Option Plan (the "Stock Option Plan") was approved by the Bank's stockholders at its annual meeting on May 31, 1995. The Stock Option Plan provides for the granting of incentive and nonqualified stock options to certain employees and non-employee directors of the Bank and its wholly-owned subsidiaries for the purchase of the Bank's common stock at 100 percent of the fair market value at the date of grant. The maximum option term is 10 years. Options granted under the Stock Option Plan will generally vest, under ordinary circumstances, at 20% per year commencing on the first anniversary of the date of grant. Under the terms of the Stock Option Plan, 556,250 shares of authorized but unissued common stock were reserved for issuance under the Stock Option Plan. At December 31, 1995, 415,600 stock options had been granted under the Stock Option Plan. The Bank's Restricted Stock Plan (the "Restricted Stock Plan") was approved by the Bank's stockholders at its annual meeting on May 31, 1995. The Restricted Stock Plan provides for the granting of restricted stock to certain employees and non-employee directors of the Bank and its wholly-owned subsidiaries. The restricted stock vests over a period of time in which such grantee is employed by or serves as a director of the Bank. Each award under the Restricted Stock Plan will generally vest, under ordinary circumstances, at 20% per year commencing on the first anniversary of the date of grant. At December 31, 1995, 148,200 shares of restricted stock had been granted under the Restricted Stock Plan. A-10 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The Bank sponsors a defined contribution profit sharing plan (the Plan), with cash or deferral arrangements permitted by Internal Revenue Code subsection 401(k). The Plan was formed by the Bank in 1995. Substantially all employees are eligible to participate after satisfaction of the one year service requirement under the Plan. Under the savings aspect of the Plan, employees may contribute 1% to 12% of base compensation with up to 6% being eligible for matching contributions, at 25%, from the Bank. Contributions to the Plan by the Bank were $52 for the year ended December 31, 1995. In November 1995, the FASB issued FAS 123, "Accounting for Stock Based Compensation" which gives companies the option of employing intrinsic value accounting under the guidelines of Accounting Principles Board (APB) No. 25 or fair value accounting for stock based compensation. While FAS 123 does not require the adoption of fair value accounting, it does require certain disclosures in the financial statements as if fair value accounting had been adopted, including pro forma net income and earnings per share. FAS 123 is effective prospectively for fiscal years beginning after December 15, 1995, and will be adopted by the Bank effective January 1, 1996. The Bank will continue to apply APB 25 in accounting for stock based compensation. Mortgage Banking Activities Fees paid for the right to service mortgage loans are capitalized and amortized in proportion to, and over the period of, estimated net servicing income. Amortization is adjusted prospectively to reflect increases or decreases in prepayment experience. Purchased mortgage servicing rights of $405 and $589 at December 31, 1995 and 1994, respectively, are included in other assets. Servicing income represents fees earned for servicing real estate mortgage loans owned by outside investors. The fees are calculated on the outstanding principal balances of the loans serviced and are recorded as income when earned. The mortgage loans being serviced for outside investors are not included in the consolidated financial statements because they are not assets of the Bank. The Bank maintained a servicing portfolio for other investors of $880,558 and $935,066 at December 31, 1995 and 1994, respectively. In May 1995, the FASB issued FAS 122, "Accounting for Mortgage Service Rights." FAS 122 amends certain provisions of FAS 65, "Accounting for Certain Mortgage Banking Activities," to eliminate the accounting distinction between rights to service mortgage loans for others that are acquired through loan origination activities and those acquired through purchase transactions. FAS 122 is effective prospectively for fiscal years beginning after December 15, 1995, and will be adopted by the Bank effective January 1, 1996. The Bank does not believe the adoption of this statement will have a material impact on its results of operations or financial position. Income Taxes The Bank accounts for income taxes in accordance with FAS 109, "Accounting for Income Taxes." FAS 109 requires an asset and liability method of accounting for income taxes. Under the asset and liability method, deferred income taxes are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Under the deferred method, deferred taxes were recognized using the tax rate applicable to the year of the calculation and were not adjusted for subsequent changes in tax rates. A-11 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Pro forma Earnings Per Share Net income (loss) per share for the years ended December 31, 1995, 1994 and 1993 is computed on a pro forma basis as if the stock issued in the Conversion had been issued as of the beginning of each year presented and is adjusted for common stock equivalents as appropriate. 2. Conversion and Regulatory Matters On May 12, 1992, the Bank entered into a Stipulation and Consent to the issuance of an Order to Cease and Desist (the "Order") with the FDIC and the Massachusetts Commissioner of Banks ("Commissioner of Banks"). The Bank had previously entered into an informal agreement with the Commissioner of Banks. The terms of this informal agreement, which was entered into in April 1991, were similar to those of the Order. The Order placed certain restrictions on the Bank's operations, made other actions subject to the approval of the FDIC and the Commissioner of Banks, and contained certain affirmative obligations. In addition, the Order required the Bank to maintain a Tier 1 leverage capital ratio of at least 2%, and further provided that in the event that the Bank's Tier 1 leverage capital ratio falls below 6%, the Bank would submit a written plan to the FDIC to increase such ratio to at least 6%, and, within 180 days thereafter, achieve and thereafter maintain a Tier 1 leverage capital ratio of at least 6%. As a consequence of the net losses incurred by the Bank during 1994, the Bank's Tier 1 leverage capital ratio fell below the 6% minimum required by the Order, and its total risk-based capital ratio fell below the 8% minimum regulatory requirement. These net losses resulted primarily from the Bank's efforts to reduce the level of its non-performing assets through accelerated dispositions, which included bulk sales, and the adoption of new loan loss reserve methodologies and charge-off requirements. In accordance with the Order, the Bank submitted a capital restoration plan (the "Capital Restoration Plan") to the FDIC in May 1994, which plan, as subsequently modified following discussions with the FDIC, satisfied the FDIC's directive to raise capital. The Capital Restoration Plan, which was accepted by the Regional Office of the FDIC in August 1994, called for the Bank to raise the additional capital necessary to comply with the required capital ratios through the Conversion. The Conversion was successfully completed on February 7, 1995. The Bank issued 5,562,500 shares of common stock at a price of $8.00 per share. After deducting net expenses of approximately $5,029 relating to underwriting fees and other costs of the conversion process, and amounts relating to the ESOP of $3,560, the Bank received net proceeds of $35,911. With the infusion of the net proceeds from the Conversion, the Bank immediately satisfied the capital requirements of the Order and all minimum regulatory requirements and has the requisite capital levels to qualify for treatment as a "well capitalized" institution under the FDIC Improvement Act ("FDICIA"). Effective April 24, 1995, the Bank received notification from both the FDIC and the Commissioner of Banks that the Order had been terminated, which unconditionally released the Bank from its obligations under the Order. 3. Cash and Due from Banks Under provisions of the Federal Reserve Act, depository institutions are required to maintain certain average balances in the form of cash or non-interest bearing balances with a Federal Reserve Bank. Reserve balances of $4,794 and $3,004 at December 31, 1995 and 1994, respectively, were maintained in accordance with these requirements. A-12 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 4. Investment Securities The aggregate carrying amounts and approximate market values of investment securities at the following dates were: Securities Available for Sale December 31, 1995 -------------------------------------------- Book Unrealized Unrealized Market Value Gains Losses Value --------- ----------- ----------- -------- U.S. Government and agency obligations $ 7,700 $ 5 ($ 6) $ 7,699 Mortgage-backed securities 222,673 1,562 (134) 224,101 Other bonds and short-term obligations 9,300 - - 9,300 Other securities 5,884 - - 5,884 -------- -------- -------- -------- Total $245,557 $ 1,567 ($ 140) $246,984 ======== ======== ======== ======== Securities Held to Maturity December 31, 1995 -------------------------------------------- Book Unrealized Unrealized Market Value Gains Losses Value --------- ----------- ----------- -------- Mortgage-backed securities $161,168 $ 779 ($ 466) $161,481 Other bonds and short-term obligations 11,625 43 (219) 11,449 -------- -------- -------- -------- Total $172,793 $ 822 ($ 685) $172,930 ======== ======== ======== ======== Securities Available for Sale December 31, 1994 -------------------------------------------- Book Unrealized Unrealized Market Value Gains Losses Value --------- ----------- ----------- -------- U.S. Government and agency obligations $ 23,953 $ - ($ 71) $ 23,882 Mortgage-backed securities 112,452 - (2,997) 109,455 Other bonds and short-term obligations 23,229 - (60) 23,169 Other securities 4,808 7 - 4,815 -------- -------- -------- -------- Total $164,442 $ 7 ($ 3,128) $161,321 ======== ======== ======== ======== Securities Held to Maturity December 31, 1994 -------------------------------------------- Book Unrealized Unrealized Market Value Gains Losses Value --------- ----------- ----------- -------- U.S. Government and agency obligations $ 17,350 $ - ($ 1,177) $ 16,173 Mortgage-backed securities 136,901 - (11,805) 125,096 Other bonds and short-term obligations 3,992 - - 3,992 -------- -------- -------- -------- Total $158,243 $ - ($12,982) $145,261 ======== ======== ======== ======== A-13 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) At December 31, 1995, the net unrealized gain, net of tax effect, on available for sale securities that was included as a separate component of stockholders' equity was $1,427. At December 31, 1994, the net unrealized loss, net of tax effect, on available for sale securities was $3,121. Proceeds from the sale of available for sale investment securities were $213,252 and $59,609 during 1995 and 1994, respectively. Gross realized gains on sales of investment securities were $13 in 1995 and $473 in 1994, while gross realized losses were $899 in 1995 and $521 in 1994. In 1995, the FASB issued a special report, "A Guide to Implementation of Statement 115," that provided additional guidance related to the application of FAS 115. In connection with the issuance of this special report, the FASB allowed all organizations to review their portfolio classifications and make a one-time reclassification of securities between categories during the period from November 15, 1995 to December 31, 1995. On December 15, 1995, the Bank transferred securities with an amortized cost of $84,299 and an unrealized loss of $1,177 from the held to maturity portfolio to the available for sale portfolio. In addition, the Bank also transferred securities with an estimated fair value of $47,280 and an unrealized gain of $299 from the available for sale portfolio to the held to maturity portfolio. The unrealized gain of $299 remains as a separate component of stockholders' equity. Subsequent to the transfer of these securities, the Bank sold approximately $82,900 of available for sale securities at a net loss of $899. The book value of securities pledged to collateralize securities sold under agreements to repurchase and other items was $40,960 and $31,757 at December 31, 1995 and 1994, respectively. The amortized cost and estimated market value of debt securities are shown below by contractual maturity. Actual maturities may differ from contractual maturities because borrowers have the right to call or prepay obligations with or without call or prepayment penalties. December 31, 1995 ----------------------------------------------------------------------- Securities Available Securities Held For Sale To Maturity -------------------------------- --------------------------------- Book Market Book Market Value Value Value Value ------------ ------------ ------------ ----------- Within 1 year $9,300 $9,300 $0 $0 1-5 years 13,187 13,251 10,593 10,625 5-10 years 3,000 2,997 10,063 10,131 over ten years 214,186 215,552 152,137 152,174 -------- -------- -------- -------- Total $239,673 $241,100 $172,793 $172,930 ======== ======== ======== ======== December 31, 1994 ----------------------------------------------------------------------- Securities Available Securities Held For Sale To Maturity -------------------------------- --------------------------------- Book Market Book Market Value Value Value Value ------------ ------------ ------------ ----------- Within 1 year $ 44,182 $ 44,111 $ 11,500 $ 10,820 1-5 years 3,000 2,940 32,969 30,744 5-10 years 2,955 2,955 66,491 60,677 over ten years 109,497 106,500 47,283 43,020 -------- -------- -------- -------- Total $159,634 $156,506 $158,243 $145,261 ======== ======== ======== ======== A-14 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 5. Investments in Real Estate and Real Estate Partnerships The Bank has certain subsidiaries that are engaged in various real estate activities individually or in joint ventures with unaffiliated partners. Investments in real estate are comprise the following: December 31, --------------------------- 1995 1994 ------ ----- Operating properties Land $1,320 $1,704 Buildings and improvements, net of accumulated depreciation of $4,133 and $3,752, respectively 4,318 4,408 ------- ------- Total investment in real estate 5,638 6,112 Investments in real estate partnerships 454 587 ------- ------- Investments in real estate and real estate partnerships $6,092 $6,699 ======= ======= Net expense of real estate operations is summarized as follows: Years Ended December 31, ----------------------------- 1995 1994 1993 ---- ---- ---- Net expenses of operating real estate ($ 3) $ 303 $ 720 Writedowns on real estate 6 5,011 1,946 Net (gain)/loss on sale of real estate (230) (4,326) (34) ------- ------- ------- Net expenses of real estate operations ($ 227) $ 988 $ 2,632 ======= ======= ======= Depreciation expense of $381 in 1995, $912 in 1994, and $563 in 1993 is included in net expense of real estate operations. Losses recorded from the real estate partnerships under the equity method were $69, $987 and $346 for the same three year period and are also included in net expense of real estate operations. Loans to these partnerships at December 31, 1995 and 1994 amounted to $339 and $6,332, respectively. 6. Loans Receivable, Net Loans receivable, net, is composed of the following: December 31, --------------------------- 1995 1994 --------- --------- Residential real estate loans $ 263,551 $ 257,623 Commercial real estate loans 118,005 122,091 Commercial loans 117,674 80,296 Home equity loans 67,657 46,593 Consumer loans 6,196 6,883 --------- --------- Total loans receivable 573,083 513,486 Less: unearned discounts 566 (60) Allowance for possible losses (14,986) (15,844) --------- --------- Loans receivable, net $ 558,663 $ 497,582 ========= ========= At December 31, 1995 and December 31, 1994, residential real estate loans included loans held for sale of $6,724 and $625, respectively. A-15 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) In an effort to accelerate resolution of certain of its non-performing assets, the Bank entered into contracts for the bulk sale of certain loans during 1994. During the year ended December 31, 1994, the Bank sold loans in accordance with these contracts with a book value aggregating $66,269 of which $44,409 were then non-performing. The Bank charged-off $11,953 against the allowance for possible loan losses as a result of these sales. Risk Elements The Bank grants commercial and residential loans to customers primarily in New England. Although the Bank has a diversified portfolio, its debtors' ability to honor their contracts is substantially dependent upon the general economic conditions of the region. The Bank manages its loan portfolio to avoid concentration by industry or loan size to minimize its credit exposure. Commercial loans may be collateralized by the assets underlying the borrowers' business such as accounts receivable, equipment, inventory and real property. Residential mortgage and home equity loans are generally secured by the real property financed. Commercial real estate loans are generally secured by the underlying real property and lease agreements. The following table shows the components of non-performing assets: December 31, -------------------- 1995 1994 ------- ------- Nonaccruing loans $ 9,037 $14,472 Loans past due 90 days and still accruing 587 376 ------- ------- Total nonperforming loans 9,624 14,848 Foreclosed real estate, net 1,529 4,951 Restructured loans on accrual status 2,732 6,114 ------- ------- Total non performing assets $13,885 $25,913 ======= ======= The principal amount of non-performing loans, excluding non-performing restructured loans, aggregated approximately $9,422 and $14,750 at December 31, 1995 and 1994, respectively. Interest income that would have been recorded if the loans had been performing in accordance with their original terms aggregated $1,196, $1,683 and $2,282 for the years ended December 31, 1995, 1994 and 1993, respectively. Interest income recorded on these loans during the three years ended December 31, 1995, 1994 and 1993 was $983, $1,203 and $1,126, respectively. The principal amount of restructured loans aggregated $2,934 at December 31, 1995, and $6,212 at December 31, 1994. Interest income that would have been recorded if the loans had been performing in accordance with their original terms aggregated $378, $704 and $3,646 for the years ended December 31, 1995, 1994 and 1993, respectively. Interest income recorded on these loans amounted to $180, $570 and $2,555 for the years ended December 31, 1995, 1994 and 1993, respectively. Loans to Related Parties At December 31, 1995, and 1994, the amount of loans outstanding to directors, officers and other related parties (including real estate partnerships) was approximately $9,854 and $15,367, respectively. Included in the loans to related parties are non-accrual loans of zero and $5,053 at December 31, 1995 and 1994, respectively. Such loans were made in the ordinary course of business under the Bank's normal credit terms. During 1995 and 1994, new loans aggregating $791 and $2,124, respectively, were made or added and deductions and repayments totaled $6,304 and $23,176, respectively. Net charge-offs of zero and $850 were made against these loans in 1995 and 1994, respectively. Changes in the composition of the related parties resulted in additions to or deductions from loans outstanding to related parties. A-16 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 7. Allowance for Possible Loan Losses Changes in the allowance for possible loan losses are summarized as follows: Year ended December 31, -------------------------------- 1995 1994 1993 ------ ------ ------ Balance, beginning of year $ 15,844 $ 18,367 $ 12,176 Provision charged to operating expense 4,359 25,742 15,740 Loan charge-offs (6,068) (31,104) (11,000) Loan recoveries 851 2,839 1,451 -------- -------- -------- Balance, end of year $ 14,986 $ 15,844 $ 18,367 ======== ======== ======== As discussed in Note 1, the Bank adopted FAS 114 effective January 1, 1995. The FAS 114 analysis is applied only to the commercial and commercial real estate loan portfolios. Because of their homogeneous nature, the Bank's residential mortgage, home equity and consumer portfolios are evaluated collectively for impairment and a reserve requirement is developed under the historical loss method. Impaired loans are those loans for which, based on current information, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. All commercial and commercial real estate non-accrual loans are considered impaired loans, however the impaired classification may also include other loans which in Management's judgment meet the criteria described above. At December 31, 1995, the recorded investment in loans that are considered impaired under FAS 114 was $8.0 million. Included in this amount is $0.9 million of impaired loans for which the related FAS 114 allowance is $0.3 million and $7.1 million of impaired loans for which the FAS 114 allowance is zero. The average recorded investment in impaired loans during the year ended December 31, 1995 was approximately $9.8 million. For the year ended December 31, 1995, the Bank recognized interest income on these impaired loans of $0.3 million which approximated the net cash received. 8. Foreclosed Real Estate, Net Foreclosed real estate, net consists of the following: December 31, -------------------------- 1995 1994 ------ ------ Residential $231 $481 Commercial 2,073 5,012 ------ ------ 2,304 5,493 Less allowance (775) (542) ------ ------ Foreclosed real estate, net $1,529 $4,951 ====== ====== In an effort to accelerate resolution of certain of its non-performing assets, the Bank entered into a contract for the bulk sale of certain foreclosed real estate during 1994. During the year ended December 31, 1994, the Bank sold foreclosed real estate in accordance with this contract with a book value aggregating $4,743. The Bank charged-off $1,210 against the allowance for foreclosed real estate as a result of this sale. A-17 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Changes in the allowance for foreclosed real estate are summarized as follows: Year Ended December 31, ------------------------------ 1995 1994 1993 ------ ------ ----- Balance, beginning of period $ 542 $ 3,420 $ 2,068 Provision charged to expense 836 6,034 7,975 Dispositions, net (603) (8,912) (6,623) ------- ------- ------- Balance, end of period $ 775 $ 542 $ 3,420 ======= ======= ======= Foreclosed real estate expense is summarized as follows: Year Ended December 31, ----------------------------- 1995 1994 1993 ------ ------ ------ Net expense of operating foreclosed real estate ($ 225) $ 547 $ 1,687 Writedowns and net (gain) loss on foreclosed real estate, 746 4,923 10,047 net ------- ------- ------- Foreclosed real estate expense $ 521 $ 5,470 $11,734 ======= ======= ======= 9. Bank Premises, Furniture and Fixtures, Net Major categories of fixed assets are as follows: December 31, -------------------- 1995 1994 ------ ------ Buildings and improvements $ 27,529 $ 24,867 Leasehold improvements 6,114 6,051 Furniture and fixtures 14,828 13,298 -------- -------- 48,471 44,216 Less accumulated depreciation (22,765) (20,803) -------- -------- Bank premises, furniture and fixtures, net $ 25,706 $ 23,413 ======== ======== Depreciation expense aggregated $2,646, $2,693 and $2,526 for the years ended December 31, 1995, 1994 and 1993, respectively, and is included in occupancy expense and furniture and equipment expense. Rental income of $1,393, $1,368 and $1,120 for the years ended December 31, 1995, 1994, and 1993, respectively, is also included in occupancy expense. 10. Deposits Deposits consist of the following: December 31, ------------------------- 1995 1994 ---- ---- Money market accounts $203,313 $235,168 Demand deposits 71,539 51,932 NOW accounts 57,271 56,297 Savings accounts 185,555 184,513 Time deposits Time deposits under $100 337,099 302,670 Time deposits of $100 or more 30,609 23,053 -------- -------- Total deposits $885,386 $853,633 ======== ======== A-18 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 11. Federal Home Loan Bank Advances Pursuant to a blanket pledge agreement with the Federal Home Loan Bank of Boston ("FHLB"), advances are secured by the Bank's stock in the FHLB, certain qualifying first mortgage loans, mortgage-backed and mortgage-related securities, and other securities not otherwise pledged. Advances from the FHLB at December 31, 1995 and 1994 are summarized as follows: December 31, ------------------------------------------------------ 1995 1994 ----------------------- ------------------------ Weighted Weighted Average Average Year of Maturity Amount Rate Amount Rate - ---------------- -------- -------- --------- -------- 1996 $40,000 5.75% $ - - 2015 1,500 6.23% - - ------- ----- ------- ----- $41,500 5.76% $ - - ======= ===== ======= ===== At December 31, 1995 and December 31, 1994, there were no commitments for additional advances from the FHLB. 12. Securities Sold Under Agreements to Repurchase At December 31, 1995, securities sold under agreements to repurchase totaled $31,101. These agreements are treated as financings, and the obligations to repurchase securities sold are reflected as a liability in the Consolidated Balance Sheet The Bank's activity in securities sold under agreements to repurchase for the years ended December 31 is summarized as follows: Year Ended December 31, -------------------------- 1995 1994 1993 ---- ---- ---- Maximum month-end balance during the period $39,552 -- -- Average balance during the period $19,297 -- -- Weighted average interest rate during the period 5.87% -- -- Weighted average interest rate at end of period 5.49% -- -- At December 31, 1995, securities sold under agreements to repurchase had maturity ranges from May 1996 to December 1998 with a weighted average maturity at December 31, 1995 of 771 days. At December 31, 1995, mortgage-backed securities with carrying values totaling $32,765 and estimated fair values totaling $32,969 were pledged as collateral for securities sold under agreements to repurchase. It is the Bank's policy to enter into repurchase agreements only with major brokerage firms that are primary dealers in government securities. A-19 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 13. Loans Payable Loans payable consist of the following: December 31, ------------------------- 1995 1994 ------ ----- Mortgage note payable, principal and interest are payable in equal monthly installments of $18. This fully amortizing mortgage note bears interest at an interest rate of 7.5% and matures on October 25, 2015. Mortgage-backed securities with carrying values of $2,151 and estimated fair values of $2,201 were pledged as collateral for this mortgage note. $2,266 $2,314 Note issued by the Bank's Employee Stock Ownership Plan ("ESOP"), and guaranteed by the Bank. This note is subject to mandatory redemption through the operation of a sinking fund commencing on the last business day of June 1995 and continuing on the last business day of each June and December thereafter. The note bears interest at a variable rate per annum equal to the Prime Rate as published from time to time in the Wall Street Journal. The interest rate at December 31, 1995 was 8.50%. The proceeds for the issuance of the note were used by the Bank's ESOP solely for the purpose of purchasing 445,000 shares of the Bank's common stock. 3,204 -- Other loans payable -- 78 ------ ------ $5,470 $2,392 ====== ====== Aggregate required principal payments on the loans payable at December 31, 1995 for the next five years and thereafter are as follows: 1996 $ 407 1997 411 1998 416 1999 421 2000 425 2001 and thereafter 3,390 ------ $5,470 ====== At December 31, 1995, mortgage-backed securities having a carrying value of $4,325 and an estimated fair value of $4,402 were pledged to collateralize a letter of credit supporting the ESOP note, which honors demands for payment by the Note Trustee presented in accordance with the terms of the letter of credit. At December 31, 1995, the Bank also had an available, but unused, line of credit in the amount of $14,932 with the FHLB. A-20 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 14. Fair Market Value of Financial Instruments The following table presents the Bank's assets, liabilities, and unrecognized financial instruments at both their respective carrying or notional amounts and fair values. December 31, 1995 December 31, 1994 ------------------- ------------------- Carrying Fair Carrying Fair Amount Value Amount Value --------- -------- ---------- ------- Financial Assets: Cash and due from banks $ 30,377 $ 30,377 $ 30,100 $ 30,100 Federal funds sold and interest-bearing deposits 8,045 8,045 25,620 25,620 Investment securities 19,777 419,914 319,564 306,582 Loans receivable, net 58,663 577,772 497,582 487,265 Accrued interest and dividends receivable 7,109 7,109 5,116 5,116 Financial Liabilities: Deposits $885,386 $886,529 $853,633 $851,539 Federal Home Loan Bank advances 41,500 41,543 - - Securities sold under agreements to repurchase 31,101 31,189 - - Loans payable 5,470 5,746 2,392 1,799 Notional Fair Notional Fair Amount Value Amount Value --------- -------- ---------- ------- Unrecognized Financial Instruments: Standby letters of credit $ 252 $ 3 $ 146 $ 1 Commitments to extend credit 133,084 - 103,568 - A discussion of the methodologies and assumptions used by the Bank in determining these fair values is included in Note 1 under the subheading "Fair Values of Financial Instruments." 15. Pension Plan and Other Employee Benefit Plans The Bank's pension plan covers all employees who meet certain age and service requirements. Vested benefits, paid at retirement, are computed based upon a formula considering length of service and average compensation. Plan assets consist of marketable equity securities and United States Government and agency obligations. Net periodic pension cost for 1995, 1994 and 1993 included the following components: 1995 1994 1993 ---- ---- ---- Service cost - current period $ 631 $ 847 $ 786 Interest cost on projected benefit obligation 725 680 719 Actual return on assets (1,549) (474) (1,108) Net amortization and deferral 799 (213) 481 ------- ------- ------- Net periodic pension cost $ 606 $ 840 $ 878 ======= ======= ======= Assumptions used in the accounting for pension cost in 1995, 1994 and 1993 were as follows: 1995 1994 1993 ------ ----- ------ Discount rate 7.0% 8.0% 8.0% Average remaining service 28 years 28 years 29 years Expected long-term rate of return on plan assets 8.0% 8.0% 8.0% -------- -------- -------- A-21 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The discount rate is the estimated rate at which the obligation for pension benefits could effectively be settled. The average wage increase assumption of 5% reflects the Bank's best estimate of the future compensation levels of the individual employees covered by the plan. The expected long-term rate of return on plan assets reflects the average rate of earnings that the Bank estimates will be generated on the assets of the plan. The funded status of the plan is as follows: October 31, ---------------------- 1995 1994 ------ ------ Accumulated benefit obligation Vested benefits $ 6,292 $ 6,356 Nonvested benefits 278 210 -------- -------- Accumulated benefit obligation $ 6,570 $ 6,566 ======== ======== Projected benefit obligation ($10,170) ($10,167) Plan assets at fair value 8,808 8,237 -------- -------- Projected benefit obligation in excess of plan assets (1,362) (1,930) Unrecognized net (gain)/loss (2,103) (911) Unrecognized net transition asset being recognized over (316) (334) 25 years -------- -------- Accrued pension cost ($ 3,781) ($ 3,175) ======== ======== As discussed in Note 1, the Bank formed an ESOP with the completion of the Conversion in February, 1995. ESOP compensation expense for the year ended December 31, 1995 was $749. The ESOP shares as of December 31, 1995 were as follows (dollars in thousands except share amounts): 1995 ------ Allocated shares -- Shares released for allocation 54,812 Unreleased shares 390,188 ------- Total ESOP shares 445,000 ======= Fair value of unreleased shares $6,389 ======= 16. Stock Plans Stock Option Plan As discussed in Note 1, the Bank formed the Stock Option and Restricted Stock Plans in 1995 for the benefit of directors, officers and employees of the Bank and its wholly owned subsidiaries. A summary of the Bank's Stock Option Plan follows: Year Ended December 31, 1995 ------------- Options outstanding, beginning of year -- Granted 415,600 Exercised -- Cancelled -- ------- Options outstanding, end of year 415,600 ======= Option price per share $12.25 ------- A-22 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Of the 415,600 options granted in 1995, 376,415 shares represent incentive stock options and 39,185 shares represent non-qualified stock options. At December 31, 1995 there were options on 140,650 shares available for future grants under the Stock Option Plan. There were no options exercisable under the Stock Option Plan at December 31, 1995. Restricted Stock Plan A summary of the Bank's Restricted Stock Plan follows: Year Ended December 31, 1995 ------------ Balance, beginning of year - Granted 148,200 Cancelled - ------- Balance, end of year 148,200 ======= Market price at date of grant $12.25 ------- The fair market value of the share allocations, based on the market price at date of grant, is recorded as unearned compensation. Unearned compensation is amortized over the periods to be benefited. In 1995, the Bank recorded $230 of compensation expense related to the Restricted Stock Plan. At December 31, 1995, there were 74,300 shares available for grant under the Restricted Stock Plan. There were no shares vested under the Restricted Stock Plan at December 31, 1995. 17. Fees and Other Income Fees and other income are composed of the following: Year Ended December 31, ------------------------ 1995 1994 1993 ---- ---- ---- Loan charges and fees $3,221 $3,213 $3,776 Service charges on deposit accounts 5,191 4,122 4,123 Other charges and fees 355 1,547 1,421 ------ ------ ------ $8,767 $8,882 $9,320 ====== ====== ====== 18. Other Operating Expenses Other operating expenses are composed of the following: Year Ended December 31, --------------------------- 1995 1994 1993 ---- ---- ---- Marketing and public relations $ 1,339 $ 1,638 $ 1,526 Insurance 2,440 3,270 3,324 Professional services 2,902 4,076 3,399 Outside processing 2,893 2,683 2,027 Other 4,194 3,442 3,166 ------- ------- ------- $13,768 $15,109 $13,442 ======= ======= ======= A-23 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) 19. Income Taxes The components of the income tax benefit for the years ended December 31 are as follows: 1995 1994 1993 ---- ---- ---- Current Federal $ 136 $ - ($3,384) State 99 - - Deferred Federal (6,363) - - State 369 - - ------- ------- ------- ($5,759) $ - ($3,384) ======= ======= ======= A reconciliation of the statutory income tax rate to the consolidated effective income tax rate as well as a reconciliation of expected income tax benefit, computed at the applicable statutory rate, to the actual income tax benefit for the three years ended December 31, 1995, 1994, and 1993 follows: 1995 1994 1993 -------------------------- ------------------------- ---------------------- Percentage Percentage Percentage of pretax of pretax of pretax Amount income Amount loss Amount loss ------ ---------- ------ ---------- ------ ----------- Federal income tax at statutory rate $1,938 34.00% ($9,148) (34.00%) ($6,004) (34.00%) Change in valuation allowance (8,002) (140.38%) 9,952 36.99% 2,733 15.48% State income taxes 309 5.42% - -% - 0.00% Other (4) (0.07%) (804) (2.99%) (113) (0.64%) ------- -------- ------ ------- ------- ------- ($5,759) (101.03%) $ - 0.00% ($3,384) (19.16%) ======= ======== ====== ======= ======= ======= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 and 1994 are as follows: 1995 1994 --------- -------- Deferred Tax Assets: Allowance for loan losses $ 5,622 $ 5,909 Accrued pension 1,720 1,412 Employee stock awards 132 - Net operating loss carryforwards 4,261 6,147 Alternative minimum tax credit carryforwards 298 298 Investment tax credit carryforwards 1,721 1,721 Other 1,549 1,924 -------- -------- Total gross deferred tax assets 15,303 17,411 -------- -------- Deferred Tax Liabilities: Investment in real estate and Bank premises (1,442) (989) Other - (553) -------- -------- Total gross deferred tax liabilities (1,442) (1,542) -------- -------- Net deferred tax asset prior to valuation allowance 13,861 15,869 Valuation allowance (7,867) (15,869) -------- -------- Net deferred tax asset after valuation allowance $ 5,994 $ - ======== ======== A-24 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) The components of deferred tax (benefit) expense for the years ended December 31 follow: 1995 1994 ---- ---- Change in Deferred Tax Assets: Allowance for loan losses $ 287 ($ 2,492) Accrued pension (308) (405) Employee stock awards (132) - Net operating loss carryforwards 1,886 (5,164) Alternative minimum tax credit carryforwards - - Investment tax credit carryforwards - - Other 375 152 ------- ------ Total change in gross deferred tax assets 2,108 (7,909) ------- ------ Change in Deferred Tax Liabilities: Investment in real estate and Bank premises 453 (3,460) Other (553) 501 ------- ------ Total change in gross deferred tax liabilities (100) (2,959) ------- ------ Net deferred tax (benefit) expense prior to change in valuation allowance 2,008 (10,868) Change in Valuation allowance (8,002) 10,868 ------- ------ Net deferred tax (benefit) expense ($ 5,994) $ - ======= ======= At December 31, 1994 in accordance with FAS 109, Management evaluated the income tax benefits associated with the deductible temporary differences, based on the weight of available evidence, as to whether it is more likely than not that the income tax benefits would be realized, and as a result, a 100% valuation allowance was established. Management reviews the valuation allowance on a periodic basis and, based upon all available facts and circumstances at that time, may adjust the level of the allowance. At December 31, 1995 Management evaluated the weight of available evidence and concluded that it is more likely than not that the Bank will realize a significant portion of the net deferred tax asset and has reduced the valuation allowance from $15,869 at December 31, 1994 to $7,867 at December 31, 1995. Factors influencing Management's judgment include, among other things, changes in the levels of actual and expected future taxable income and anticipated reversals of net deductible temporary differences. The net change in the total valuation allowance for the year ended December 31, 1995 was a decrease of $8,002 and for the year ended December 31, 1994 was an increase of $10,868. At December 31, 1995, the Bank had investment tax credit carryforwards of approximately $1,721 which expire in years from 1998 through 2008. In addition, the Bank had alternative minimum tax credit carryforwards of approximately $298 which have an indefinite utilization period. At December 31, 1995, the Bank had net tax operating loss carryforwards of approximately $4,261 which will expire 2009. If certain substantial direct or indirect changes in the Bank's ownership should occur, there would be an annual limitation on the amount of carryforwards (including certain net unrealized built-in losses) which can be utilized for regular and alternative minimum tax purposes. 20. Commitments, Contingencies and Financial Instruments with Off-Balance Sheet Risk Off-Balance Sheet Instruments The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk A-25 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) in excess of the amount recognized in the Balance Sheet. The contract or notional amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank uses the same credit policies in making commitments and standby letters of credit as it does for on- balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit evaluation of the counterparty. The Bank's commitments to extend credit, which includes unused lines of credit and commitments to fund loans, were approximately $133,084 and $103,568 at December 31, 1995 and 1994, respectively. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank's commitments under standby letters of credit were $252 and $146 at December 31, 1995 and 1994, respectively. Commitments to sell loans are contracts for delayed delivery of loans in which the Bank agrees to make delivery at a specific future date of a specified instrument, at a specific price or yield. Risks arise from the possible inability to meet the terms of the contracts and from movements in interest rates. The Bank had commitments to sell $16,054 and $4,243 of loans at December 31, 1995 and 1994, respectively. Leases The Bank leases certain of its branch office facilities and equipment under nonfinancing leases having various maturities to 2010. Certain of the leases require payment of real estate taxes, insurance and maintenance. The future minimum rental payments required under these leases are approximately as follows: Year Ended December 31, - ----------------------- 1996 $ 332 1997 250 1998 215 1999 216 2000 230 2001 - 2010 919 ------ $2,162 ====== Total rental expense for 1995, 1994, and 1993 amounted to approximately $431, $461, and $401, respectively. Real Estate Partnerships The Bank is a limited partner in three limited partnerships. Under the terms of the partnership agreements, the Bank is committed to make approximate future capital contributions as follows: Year Ended December 31, - ----------------------- 1996 $134 1997 30 1998 - ---- $164 ==== A-26 SPRINGFIELD INSTITUTION FOR SAVINGS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) Litigation The Bank is involved in litigation arising in the normal course of business. Management does not believe that the ultimate liabilities arising from such litigation, if any, would be material in relation to the consolidated results of operations or financial position of the Bank. 21. Quarterly Consolidated Financial Information (Unaudited) Following is the quarterly financial information of the Bank for 1995 and 1994. First quarter Second quarter Third quarter Fourth quarter --------------------- --------------------- ------------------- ---------------------- 1995 1994 1995 1994 1995 1994 1995 1994 ---- ---- ---- ---- ---- ---- ---- ---- Net interest and dividend income $ 9,260 $ 8,467 $ 9,251 $ 8,853 $ 9,439 $ 8,191 $ 9,410 $ 8,609 Provision for possible loan losses 1,153 10,795 1,202 5,243 1,002 7,704 1,002 2,000 Net gain (loss) on sale of loans (6) (114) (4) (327) 72 (77) 180 13 Net gain (loss) on sale of securities 4 46 10 (137) - (24) (899) 67 Fees and other income 2,048 2,094 2,188 2,192 2,099 1,939 2,432 2,657 Noninterest expense 9,325 11,306 8,888 12,199 8,746 9,560 8,466 10,549 Income tax expense (benefit) 39 - 74 - 50 - (5,922) - -------- -------- -------- -------- -------- -------- -------- -------- Net income (loss) $ 789 ($11,608) $ 1,281 ($ 6,861) $ 1,812 ($ 7,235) $ 7,577 ($ 1,203) ======== ======== ======== ======== ======== ======== ======== ======== Earnings per share and pro forma earnings per share Primary $ 0.15 $ (2.25) $ 0.25 $ (1.34) $ 0.35 $ (1.39) $ 1.43 $ (0.24) Fully diluted $ 0.15 $ (2.25) $ 0.25 $ (1.34) $ 0.34 $ (1.39) $ 1.43 $ (0.24) A-27 Report of Independent Accountants To the Board of Directors and Stockholders of Springfield Institution for Savings In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Springfield Institution for Savings and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for the years in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Bank's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The financial statements of Springfield Institution for Savings for the year ended December 31, 1993 were audited by other independent accountants whose report dated January 21, 1994 expressed an unqualified opinion on those statements. As discussed in Notes 1 and 4, the Bank changed its method of accounting for investments in debt and equity securities in 1994. /s/Price Waterhouse LLP Boston, Massachusetts January 24, 1996 A-28 EXHIBIT B FORM OF EMPLOYMENT AND SEVERANCE AGREEMENT FOR SENIOR VICE PRESIDENTS OF SPRINGFIELD INSTITUTION FOR SAVINGS This AGREEMENT is made as of [date] by and between ___________ (the "Executive") and SPRINGFIELD INSTITUTION FOR SAVINGS, a Massachusetts savings bank (the "Bank"). WHEREAS, the Bank recognizes the substantial contribution the Executive has made and is expected to make to the Bank and wishes to protect his position therewith for the period provided in this Agreement; and WHEREAS, the Executive has been elected to, and has agreed to serve in the position of Senior Vice President of the Bank, a position of substantial responsibility; NOW, THEREFORE, in consideration of the contribution and responsibilities of the Executive, and upon the other terms and conditions hereinafter provided, the parties hereto agree as follows: I. TERM OF AGREEMENT. The term of this Agreement shall be deemed to have commenced as of the date hereof and shall continue for a period of twelve (12) full calendar months thereafter. Commencing on the first anniversary date of this Agreement and continuing at each anniversary date thereafter, the term of this Agreement shall renew for an additional year unless written notice is provided to the Executive by the Bank, or to the Bank by the Executive, at least ninety (90) days and not more than one hundred eighty (180) days prior to any such anniversary date, that this Agreement shall cease at the end of the then current term hereof. II. DEFINITIONS. For purposes of this Agreement, (a) "Affiliate" means any person or entity of any kind effectively controlling, effectively controlled by or effectively under common control with the Bank. (b) "Board" means the board of trustees of the Bank, if the Bank is a mutual savings bank, and the board of directors of the Bank, if the Bank is a stock savings bank. (c) "Change in Control" means a change in control of the Bank of a nature that would be required to be reported in response to Item 1 of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), other than any change in control directly related to or in connection with the conversion of the Bank from a state-chartered mutual savings bank to a state-chartered stock savings bank; a change in control of the Bank within the meaning of 12 U.S.C. ss.1817(i), the Change in Bank Control Act, and the Rules and Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. ss.303.4(a), other than any change in control directly related to or in connection with the conversion of the Bank from a state-chartered mutual savings bank to state-chartered stock savings bank; individuals who constitute the Board immediately after the consummation of the process of converting the Bank from a mutual-form savings bank to a stock- form savings bank (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to such consummation whose election was approved by a vote of at least three-quarters of the directors then comprising the Incumbent Board, or whose nomination for election by the Bank's shareholders was approved by the Bank's nominating committee then serving under the Board, shall be, for purposes of B-1 this clause (iii), considered as though he or she was a member of the Incumbent Board (but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents; approval by the depositors or shareholders of the Bank of a reorganization, merger or consolidation, or the consummation of any such reorganization, merger or consolidation, other than, in any case any such transaction occurring in connection with or directly related to the conversion of the Bank from a state-chartered mutual savings bank to a state-chartered stock savings bank, or a reorganization, merger or consolidation with respect to which all or substantially all of the individuals and entities who were the beneficial owners, immediately prior to such reorganization, merger or consolidation, of the Voting Interest in the Bank beneficially own, directly or indirectly, immediately after such reorganization, merger or consolidation more than eighty percent (80%) of the Voting Interest of the corporation or other entity resulting from such reorganization, merger or consolidation in substantially the same proportions as their respective ownership, immediately prior to such reorganization, merger or consolidation, of the Voting Interest in the Bank; approval by the depositors or shareholders of the Bank, as the case may be, of a complete liquidation or dissolution of the Bank, or the sale or other disposition of all or substantially all of the assets of the Bank, or the occurrence of any such liquidation, dissolution, sale or other disposition, other than, in any case, to a Subsidiary, directly or indirectly, of the Bank, or any Affiliate, or in connection with or directly related to any conversion of the Bank from a state-chartered mutual savings bank to a state-chartered stock savings bank; and/or the solicitation of proxies from shareholders or depositors of the Bank by someone other than the current management of the Bank and without the approval of the Board, seeking depositor or shareholder approval of a plan or reorganization, merger or consolidation of the Bank with one or more corporations as a result of which the depositors' or the shareholders' interests in the Bank are actually exchanged for or converted into securities not issued by the Bank. No failure on the part of the Executive to exercise any rights upon the occurrence of a Change in Control shall be deemed a waiver of or otherwise impair the rights of the Executive in respect of any subsequent events or circumstances constituting a Change in Control. (d) "Code" means the Internal Revenue Code of 1986, as amended, and as in effect from time to time, and/or any successor code thereto. (e) "Excise Tax" means any excise tax imposed under Section 4999 of the Code and/or any successor section thereto. (f) "Good Reason" means, and shall be deemed to exist if, without the written consent of the Executive, the Bank fails to appoint or reappoint the Executive as [Executive\Senior] Vice-President of the Bank, there occurs any reduction of base salary or material reduction in other benefits or any material change by the Bank to the Executive's function, duties, or responsibilities in effect on the date hereof, which change would cause the Executive's position with the Bank to become one of lesser responsibility, importance, or scope from the position and attributes thereof in effect on the date hereof, or there occurs any material breach of this Agreement by the Bank. (g) "Subsidiary" means any corporation in which the Bank has a direct or indirect legal or beneficial ownership interest, but only if the Bank owns or controls, directly or indirectly, securities possessing at least 50% of the total combined voting power of all classes of securities in any such corporation. (h) "Voting Interest" means securities of any class or classes or other ownership interests having general voting power under ordinary circumstances to elect members of a board of directors or trustees of any entity. III. PAYMENTS TO EXECUTIVE UPON TERMINATION. (a) The provisions of Section 4(a) hereof shall apply upon: (i) the involuntary termination of the Executive's employment at any time during the term of this Agreement, other than Termination for Cause (as defined below), following the occurrence of a Change in Control; or (ii) the voluntary termination of the Executive's employment for Good Reason at any time during the term of this Agreement, following the occurrence of a Change of Control. B-2 (b) The provisions of Section 4(b) shall apply upon the involuntary termination of the Executive's employment at any time during the term of this Agreement, other than for Termination for Cause, prior to the occurrence of a Change in Control. (c) The term "Termination for Cause" shall mean termination because of a material loss to the Bank or one of its Subsidiaries caused by the Executive's personal dishonesty, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses) or final cease and desist order, or any material breach of this Agreement. For purposes of this Section, no act, or the failure to act, on Executive's part shall be "willful" unless done, or omitted to be done, not in good faith and without reasonable belief that the action or omission was in the best interest of the Bank or its Subsidiaries. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a Notice of Termination which shall include a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, the Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause (except as required by the Employment Retirement Income Security Act of 1974, as amended ("ERISA") or other applicable law). Any stock options and limited rights granted to Executive under any stock option plan or unvested awards granted to Executive under any recognition and retention plan of the Bank, or any Subsidiary or Affiliate thereof, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause and shall not be exercisable by Executive at any time subsequent to such Termination for Cause. 4. TERMINATION BENEFITS. (a) Upon the termination of the Executive's employment by the Bank as described in Section 3(a) hereof, the Bank shall be obligated to make a lump sum severance payment, within thirty (30) days of such termination to the Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, in an amount equal to one (1) year's salary (at the then applicable annual salary of the Executive). In addition, the Executive shall be entitled to any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs of the Bank. (b) Upon the termination of the Executive's employment by the Bank as described in Section 3(b) hereof, the Bank shall be obligated to make a lump sum severance payment within thirty (30) days of such termination to the Executive, or in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, in an amount equal to one (1) year's salary (at the then applicable annual salary of the Executive). In addition, the Executive shall be entitled to any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs, if any, of the Bank. 5. NOTICE OF TERMINATION. (a) Any purported termination by the Bank, or by the Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (b) "Date of Termination" shall mean the date specified in the Notice of Termination which, in the instance of Termination for Cause, shall be immediate. 6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and the Executive, except that this Agreement shall not affect or operate to reduce B-3 any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. Nothing in this Agreement shall confer upon the Executive the right to continue in the employ of the Bank or shall impose on the Bank any obligation to employ or retain the Executive in its employ for any period. 7. NO ATTACHMENT. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment,encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. 8. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon, and inure to the benefit of, the Executive, the Bank and their respective successors and assigns. 9. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 10. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 11. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of this reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 12. GOVERNING LAW. The validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of The Commonwealth of Massachusetts. 13. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Springfield, Massachusetts as hereinbelow provided. If a dispute or controversy hereunder arises and, within thirty (30) days of each party's written notice thereof, such dispute or controversy has not been resolved by mutual accord, then such dispute or controversy shall be conclusively determined by three arbitrators, one arbitrator being selected by the Executive, one arbitrator being selected by the Bank and the third being selected by the two arbitrators so selected. In the event of their inability to agree on the selection of a third B-4 arbitrator, the third arbitrator shall be designated in accordance with the rules of the American Arbitration Association then in effect. In the event that within ten (10) business days after the above-referenced 30-day period expires without resolution of any dispute or controversy by mutual accord any party shall not have selected its arbitrator and given written notice thereof to the other party, such arbitrator shall be selected in accordance with the rules of the American Arbitration Association as then in effect. All determinations made by the arbitrators selected pursuant to the provisions of this Section shall be by majority vote and shall be final. Notice of any such determination shall be forthwith given to each party. Judgment may be entered on the arbitrators' award in any court having jurisdiction; provided, however, that the Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 14. INDEMNIFICATION AND ATTORNEYS' FEES. (a) The Bank shall indemnify, hold harmless and defend the Executive against reasonable costs, including legal fees, incurred by him in connection with his consultation with legal counsel or arising out of any action, suit or proceeding in which he may be involved, as a result of his efforts, in good faith, to defend or enforce the terms of this Agreement. (b) In the event any dispute or controversy arising under or in connection with the Executive's termination is resolved in favor of the Executive, whether by judgment, arbitration or settlement, the Executive shall be entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe benefits and any compensation and benefits due the Executive under this Agreement. (c) The Bank shall indemnify, hold harmless and defend Executive for all acts or omissions taken or not taken by him in good faith while performing services for the Bank to the same extent and upon the same terms and conditions as other similarly situated officers and directors of the Bank. If and to the extent that the Bank maintains, at any time during its employment of the Executive an insurance policy covering the other officers and directors of the Bank against law suits, the Bank shall use its best efforts to cause Executive to be covered under such policy upon the same terms and conditions as other similarly situated officers and directors. IN WITNESS WHEREOF, SPRINGFIELD INSTITUTION FOR SAVINGS has caused this Agreement to be executed by its duly authorized officer, and the Executive has signed this Agreement, as of the ____ day of _______________, 1994. ATTEST: SPRINGFIELD INSTITUTION FOR SAVINGS _____________________ BY:_____________________________ Secretary Name: F. William Marshall, Jr. Title: President and Chief Executive Officer [SEAL] WITNESS: _____________________________ ____________________________ [Name of Executive] B-5 FORM F-2 EXHIBIT C SPRINGFIELD INSTITUTION FOR SAVINGS COMPUTATION OF PRO FORMA PRIMARY AND FULLY DILUTED EARNINGS PER SHARE (In Thousands Except Per Share Amounts) Twelve Months Ended December 31, -------------------------------- 1995 1994 1993 ---- ---- ---- Primary: Net income (loss) $ 11,459 ($26,907) ($14,275) Pro forma income on net proceeds -- 1,189 1,189 Pro forma ESOP adjustment -- (1,028) (1,028) Pro forma RSP adjustment -- (230) (230) -------- -------- -------- Pro forma net income (loss) $ 11,459 ($26,976) ($14,344) ======== ======== ======== Pro forma weighted average shares outstanding during the period 5,562 5,562 5,562 Unearned ESOP shares (431) (431) (431) Stock options considered outstanding during the period 25 25 25 Restricted stock shares considered outstanding during the period 18 18 18 -------- -------- -------- Total shares 5,174 5,174 5,174 ======== ======== ======== Pro forma net income (loss) per share $ 2.21 ($ 5.21) ($ 2.77) ======== ======== ======== Fully Diluted: Net income (loss) $ 11,459 ($26,907) ($14,275) Pro forma income on net proceeds -- 1,189 1,189 Pro forma ESOP adjustment -- (1,028) (1,028) Pro forma RSP adjustment -- (230) (230) -------- -------- -------- Pro forma net income (loss) $ 11,459 ($26,976) ($14,344) ======== ======== ======== Pro forma weighted average shares outstanding during the period 5,562 5,562 5,562 Unearned ESOP shares (431) (431) (431) Stock options considered outstanding during the period 60 60 60 Restricted stock shares considered outstanding during the period 30 30 30 -------- -------- -------- Total shares 5,221 5,221 5,221 ======== ======== ======== Pro forma net income (loss) per share $ 2.19 ($ 5.17) ($ 2.75) ======== ======== ======== Pro forma net income (loss) for the years ended December 31, 1995, 1994, and 1993, respectively, assume that the stock issued in the conversion had been issued as of the beginning of the year. This computation includes the impact of the Restricted Stock Plan ("RSP") and the Stock Option Plan which were approved by the stockholders at the Annual Meeting of the Stockholders held on May 31, 1995. For the year ended December 31, 1994 and 1993 the fully diluted earnings per share calculation is antidilutive and therefore, the primary earnings per share is shown on Consolidated Statement of Operations in accordance with APB 15. C-1