FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended 06/30/96
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 000-20809
SIS BANCORP, INC.
(Exact Name of Issuer as Specified in its Charter)
Massachusetts 04-3303264
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SIS BANCORP, INC.
1441 Main Street
Springfield, Massachusetts 01102
(Address of Principal Executive Offices) (Zip Code)
(413) 748-8000
(Issuers Telephone Number , Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate the number of shares outstanding of the registrant's common
stock, as of the latest practicable date: 5,722,600 shares as of August 8, 1996.
CAUTIONARY STATEMENT FOR PURPOSES OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report contains certain "forward-looking statements" including statements
concerning plans, objectives, future events or performance and assumptions and
other statements which are other than statements of historical fact. SIS
Bancorp, Inc. and its subsidiaries (the "Company") wishes to caution readers
that the following important factors, among others, may have affected and could
in the future affect the Company's actual results and could cause the Company's
actual results for subsequent periods to differ materially from those expressed
in any forward-looking statement made by or on behalf on the Company herein: (i)
the effect of changes in laws and regulations, including federal and state
banking laws and regulations, with which the Company must comply, and the
associated costs of compliance with such laws and regulations either currently
or in the future as applicable; (ii) the effect of changes in accounting
policies and practices, as may be adopted by the regulatory agencies as well as
by the Financial Accounting Standards Board, or of changes in the Company's
organization, compensation and benefit plans; (iii) the effect on the Company's
competitive position within its market area of the increasing consolidation
within the banking and financial services industries, including the increased
competition from larger regional and out-of-state banking organizations as well
as nonbank providers of various financial services; (iv) the effect of
unforeseen changes in interest rates; and (v) the effect of changes in the
business cycle and downturns in the local, regional or national economies.
SIS BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1996 and 1995.......................... 1
Condensed Consolidated Statements of Financial Condition
at June 30, 1996 and December 31, 1995..................................... 2
Condensed Consolidated Statements of Cash Flows for the
three and six months ended June 30, 1996 and 1995.......................... 3
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the six months ended June 30, 1996 and 1995............................ 5
Notes to the Unaudited Financial Statements................................ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.............................. 7
PART II OTHER INFORMATION
Item 1. Legal
Proceedings................................................................ 26
Item 2. Changes in Securities.............................................. 26
Item 3. Default upon Senior Securities..................................... 26
Item 4. Submission of Matters to a Vote of Security Holders................ 26
Item 5. Other Information.................................................. 26
Item 6. Exhibits and Reports on Form 8-K................................... 26
SIGNATURES..................................................................28
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
-------------------------- -------------------------
June June June June
1996 1995 1996 1995
---------- ---------- ---------- ----------
Interest and dividend income
Loans ......................................................... $ 11,922 $ 11,411 $ 23,474 $ 22,029
Investment securities available for sale ...................... 5,170 2,674 9,296 5,330
Investment securities held to maturity ........................ 3,269 2,769 6,215 5,053
Federal funds sold and interest bearing deposits .............. 45 153 259 617
---------- ---------- ---------- ----------
Total interest and dividend income ............. 20,406 17,007 39,244 33,029
---------- ---------- ---------- ----------
Interest expense
Deposits ...................................................... 7,992 7,528 16,068 14,244
Borrowings .................................................... 1,957 228 3,148 274
---------- ---------- ---------- ----------
Total interest expense ......................... 9,949 7,756 19,216 14,518
---------- ---------- ---------- ----------
Net interest and dividend income ...................................... 10,457 9,251 20,028 18,511
Less: Provision for possible loan losses .............................. 750 1,202 1,450 2,355
---------- ---------- ---------- ----------
Net interest and dividend income after provision
for possible loan losses ...................................... 9,707 8,049 18,578 16,156
Noninterest income:
Net gain (loss) on sale of loans .............................. 162 (4) 432 (10)
Net gain (loss) on sale of securities ......................... -- 10 2 14
Fees and other income ......................................... 2,575 2,188 4,884 4,236
---------- ---------- ---------- ----------
Total noninterest income ....................... 2,737 2,194 5,318 4,240
---------- ---------- ---------- ----------
Noninterest expense:
Operating expenses:
Salaries and employee benefits ....................... 4,242 3,672 8,492 7,708
Occupancy expense of bank premises, net .............. 795 805 1,577 1,705
Furniture and equipment expense ...................... 514 457 1,056 916
Other operating expenses ............................. 3,656 3,780 6,771 7,315
---------- ---------- ---------- ----------
Total operating expenses ...................... 9,207 8,714 17,896 17,644
---------- ---------- ---------- ----------
Foreclosed real estate expense ................................ 63 112 223 442
Net expense of real estate operations ......................... (148) 62 (162) 127
---------- ---------- ---------- ----------
Total noninterest expense ..................... 9,122 8,888 17,957 18,213
Income before income tax expense ...................................... 3,322 1,355 5,939 2,183
Income tax expense .................................................... 278 74 490 113
---------- ---------- ---------- ----------
Net income .................................... $ 3,044 $ 1,281 $ 5,449 $ 2,070
========== ========== ========== ==========
Earnings per share and pro forma earnings per share: (1)
Primary ...................................................... $ 0.56 $ 0.25 $ 1.00 $ 0.40
Fully diluted ................................................ $ 0.56 $ 0.25 $ 1.00 $ 0.40
Weighted average and pro forma weighted average shares outstanding: (1)
Primary ...................................................... 5,434,834 5,117,700 5,432,265 5,117,500
Fully diluted ................................................ 5,450,529 5,130,034 5,445,968 5,123,767
<FN>
(1) Net income per share for the three and six months ended June 30, 1996 is
computed on weighted average shares outstanding for the period. Net income per
share for the six months ended June 30, 1995 is computed on a pro forma basis as
if the conversion of the Bank from mutual to stock had been completed as of the
beginning of the period presented.
</FN>
See accompanying Notes to the Unaudited Financial Statements
1
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands Except Share Amounts)
(Unaudited)
June 30, December 31,
1996 1995
----------- ------------
ASSETS
Cash and due from banks ..................................................... $ 35,931 $ 30,377
Federal funds sold and interest bearing deposits ............................ 10,045 8,045
Investment securities available for sale .................................... 337,444 246,984
Investment securities held to maturity (fair value: $192,728 at June 30, 1996
and $172,930 at December 31, 1995).......................................... 193,197 172,793
Loans receivable, net of allowance for possible losses
($ 14,913 at June 30, 1996 and $ 14,986 at December 31, 1995) .............. 578,635 558,663
Accrued interest and dividends receivable ................................... 7,946 7,109
Investments in real estate and real estate partnerships ..................... 5,494 6,092
Foreclosed real estate, net ................................................. 427 1,529
Bank premises, furniture and fixtures, net .................................. 25,602 25,706
Other assets ................................................................ 15,122 13,680
----------- -----------
Total assets ............................................................ $ 1,209,843 $ 1,070,978
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .................................................................... $ 927,298 $ 885,386
Federal Home Loan Bank advances ............................................. 74,493 41,500
Securities sold under agreements to repurchase .............................. 91,400 31,101
Loans payable ............................................................... 3,026 5,470
Mortgage escrow ............................................................. 4,321 4,193
Accrued expenses and other liabilities ...................................... 22,309 21,859
----------- -----------
Total liabilities ..................................................... 1,122,847 989,509
----------- -----------
Stockholders' equity:
Preferred stock ($.01 par value; 5,000,000 shares
authorized: no shares issued and outstanding) ............................. -- --
Common stock ($.01 par value; 25,000,000 shares authorized; shares
issued and outstanding: 5,722,600 in 1996 and 5,710,700 in 1995) ............ 57 57
Unearned compensation ....................................................... (4,503) (4,937)
Additional paid in capital .................................................. 42,308 41,790
Retained earnings ........................................................... 48,282 42,833
Net unrealized gain (loss) on investment securities available for sale ...... 852 1,726
----------- -----------
Total stockholders' equity ............................................ 86,996 81,469
----------- -----------
Total liabilities and stockholders' equity .................................. $ 1,209,843 $ 1,070,978
=========== ===========
See accompanying Notes to the Unaudited Financial Statements
2
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------
1996 1995
--------- ---------
Cash Flows From Operating Activities
Net income .............................................................................................. $ 5,449 $ 2,070
Adjustments to reconcile net income to net cash (used for)/
provided by operating activities
Provision for possible loan losses ................................................................. 1,450 2,355
Provision for foreclosed real estate ............................................................... -- 461
Depreciation ....................................................................................... 1,510 1,551
Amortization of premium on investment securities, net .............................................. 1,193 314
ESOP and restricted stock expenses ................................................................. 722 101
Investment security (gains) ........................................................................ (2) (14)
(Income) loss from equity investment in partnerships ............................................... (145) 1
(Gain) loss on sale of loans ....................................................................... (432) 10
Disbursements for mortgage loans held for sale ..................................................... (54,864) (29,251)
Receipts from mortgage loans held for sale ......................................................... 55,296 29,242
Loss on sale of fixed assets and real estate ....................................................... 342 158
Changes in assets and liabilities:
(Increase) in other assets, net ................................................................ (1,644) (73)
Decrease (increase) in accrued expenses and other liabilities .................................. 680 (12,464)
--------- ---------
Net cash (used for)/provided by operating activities ...................................... 9,555 (5,539)
--------- ---------
Cash Flows From Investing Activities
Proceeds from sales of investment securities - available for sale .................................. 12,200 9
Proceeds from maturities and principal payments received
on investment securities - available for sale .................................................... 71,652 54,326
Purchase of investment securities - available for sale .............................................. (176,695) (64,563)
Proceeds from maturities and principal payments received
on investment securities - held to maturity ...................................................... 25,862 7,476
Purchase of investment securities -held to maturity ................................................. (46,583) (50,046)
Proceeds from sale of investments in real estate partnerships ....................................... 475 --
Net change in loans receivable ...................................................................... (22,549) (44,923)
Net change in foreclosed real estate ................................................................ 1,767 242
Proceeds from sale of loans ......................................................................... 462 250
Proceeds from sale of fixed assets and leases ....................................................... -- 158
Purchase of fixed assets ............................................................................ (1,480) (2,805)
--------- ---------
Net cash (used for)/provided by investing activities ...................................... (134,889) (99,876)
--------- ---------
See accompanying Notes to the Unaudited Financial Statements
3
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars In Thousands)
(Unaudited)
Six Months Ended
June 30,
-------------------
1996 1995
-------- --------
Cash Flows from Financing Activities
Net proceeds from stock conversion .................................................................... -- 35,946
Net increase in deposits .............................................................................. 41,912 8,448
Net increase in borrowings ............................................................................ 90,848 50,837
Net increase (decrease) in mortgagors' escrow deposits ................................................ 128 (271)
-------- --------
Net cash provided by/(used for) financing activities ............................................ 132,888 94,960
-------- --------
Increase (decrease) in cash and cash equivalents ........................................................ 7,554 (10,455)
Cash and cash equivalents, beginning of year ............................................................ 38,422 55,720
-------- --------
Cash and cash equivalents, at quarter end ............................................................... $ 45,976 $ 45,265
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest to depositors
and interest on debt ....................................................................... $ 19,217 $ 14,075
Non-cash investing activities:
Transfers to foreclosed real estate, net ........................................................... $ 665 $ 74
See accompanying Notes to the Unaudited Financial Statements
4
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY
For The Six Months Ended June 30, 1996 and 1995
(Dollars In Thousands)
Net unrealized
gain (loss)
Additional on investment
Common Unearned Paid-In Retained securities avaliable
Stock Compensation Capital Earnings for sale Total
-------- ------------ ---------- -------- -------------------- ---------
Balance at December 31, 1995 ................. $ 57 $ (4,937) $ 41,790 $ 42,833 $ 1,726 $ 81,469
Net income ................................... -- -- -- 5,449 -- 5,449
Issuance of common stock ..................... -- -- -- -- -- --
Unearned compensation ........................ -- (315) 297 -- -- (18)
Decrease in unearned compensation ............ -- 749 221 -- -- 970
Change in unrealized gain (loss) on investment --
securities available for sale ............ -- -- -- -- (874) (874)
---------- --------- -------- -------- -------- --------
Balance at June 30, 1996 ..................... $ 57 $ (4,503) $ 42,308 $ 48,282 $ 852 $ 86,996
========== ========= ======== ======== ======== ========
Balance at December 31, 1994 ................. $ -- $ -- $ -- $ 31,624 $ (3,121) $ 28,503
Net income ................................... -- -- -- 2,070 -- 2,070
Issuance of common stock ..................... 56 -- 39,665 (250) -- 39,471
Unearned compensation ........................ -- (3,560) -- -- -- (3,560)
Decrease in unearned compensation ............ -- 190 101 -- -- 291
Change in unrealized gain (loss) on investment
securities available for sale ............ -- -- -- -- 4,011 4,011
-------- -------- -------- -------- -------- --------
Balance at June 30, 1995 ..................... $ 56 $ (3,370) $ 39,766 $ 33,444 $ 890 $ 70,786
======== ======== ======== ======== ======== ========
See accompanying Notes to the Unaudited
Consolidated Financial Statements
5
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
1. Holding Company Formation
SIS Bancorp, Inc., a Massachusetts corporation, was organized by Springfield
Institution for Savings (the "Bank") for the purpose of reorganizing the Bank
into a holding company structure. The Company acquired 100% of the outstanding
shares of the Bank's common stock, par value $1.00 per share, in a 1:1 exchange
for shares of the Company's common stock, par value $.01 per share (the "Company
Common Stock"). Upon the effectiveness of such share-for-share exchange (the
"Reorganization") on June 21, 1996, the Bank became the wholly-owned subsidiary
of the Company and the Bank's former stockholders became stockholders of the
Company. The Reorganization was accounted for as a pooling of interests, and
accordingly, the information included in the financial statements and their
accompanying notes presents the combined results of the Bank and the Company as
if the merger had been effected on January 1, 1995.
2. Condensed Consolidated Financial Statements
The Condensed Consolidated Financial Statements of the Company included herein
are unaudited, and in the opinion of Management all adjustments, consisting only
of normal recurring adjustments necessary for a fair presentation of the
financial condition, results of operations and cash flows, as of and for the
periods covered herein, have been made. Certain information and note disclosures
normally included in Condensed Consolidated Financial Statements prepared in
accordance with generally accepted accounting principles have been omitted as
they are included in the most recent Federal Deposit Insurance Corporation
("FDIC") Form F-2 Annual Report and accompanying Notes to the Financial
Statements (the "Form F2") filed by the Bank for the year ended December 31,
1995. The Form F-2 was included as Exhibit 99.3 in the Form 8-A registration
statement filed by the Company with the Securities and Exchange Commission on
June 3, 1996. Management believes that the disclosures contained herein are
adequate to make a fair presentation.
It is suggested that these unaudited condensed consolidated financial statements
be read in conjunction with the Form F-2.
The results for the three and six month interim periods covered hereby are not
necessarily indicative of the operating results for a full year.
3. New Accounting Pronouncements
Effective January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 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. The adoption of this statement
did not have a material affect on the Company's financial position as of June
30, 1996 or on the results of its operations for the three and six month periods
then ended.
4. Dividend Policy
While the Company does not pay a cash dividend on its common stock at this time,
the Board of Directors of the Company periodically reviews the appropriateness
of a cash dividend in light of the Company's existing policies.
5. Earnings Per Share and Pro Forma Earnings Per Share
Net income per share for the three and six months ended June 30, 1996 and the
three months ended June 30, 1995 is computed on weighted shares outstanding for
the period. Net income per share for the six months ended June 30, 1995 is
computed on a pro forma basis as if the stock issued in the conversion of the
Bank from mutual to stock form had been issued as of the beginning of the
period.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
Overview
As discussed in Note 1 of the financial statements included in this filing, SIS
Bancorp, Inc., a Massachusetts corporation (the "Company"), was organized by
Springfield Institution for Savings (the "Bank") for the purpose of reorganizing
the Bank into a holding company structure. Upon the effectiveness of the
Reorganization on June 21, 1996, the Bank became the wholly-owned subsidiary of
the Company and the Bank's former stockholders became stockholders of the
Company. The Company's Common Stock is quoted on the NASDAQ National Market
System under the symbol "SISB", which had previously been used by the Bank.
The Bank is a state chartered, stock form 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 21
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 Company's Employee Stock Ownership Plan (the
"ESOP").
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.
Results of Operations for the Three Months Ended June 30, 1996 and June 30, 1995
The Company reported net income of $3.0 million, or $0.56 per share, for the
second quarter of 1996 as compared to net income of $1.3 million, or $0.25 per
share, for the same period last year. The improved results are primarily
attributable to increased net interest income and noninterest income as well as
lower provisions for possible loan losses.
Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income is
affected by the mix and volume of assets and liabilities, and the movement and
level of interest rates.
The following table sets forth, for the period indicated, average balances,
interest income and expense, and yields earned or rates paid on the major
categories of assets and liabilities. Non-accrual loans have been included in
the appropriate average balance loan category, but unpaid interest on
non-accrual loans has not been included for purposes of determining interest
income. In addition, investment securities available for sale are reflected at
amortized cost.
7
Three Months Ended June 30,
---------------------------------------------------------------------------------
1996 1995
--------------------------------------- --------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------- ----------- ---------- ---------- ----------- ----------
Interest-earning assets:
Fed funds sold and interest-bearing deposits .. $ 3,396 $ 45 5.24% $ 9,814 $ 153 6.17%
Investment securities held to maturity ........ 193,672 3,269 6.75% 189,279 2,769 5.85%
Investment securities available for sale ...... 319,709 5,170 6.47% 163,414 2,674 6.55%
Residential real estate loans ................. 243,998 4,758 7.80% 268,568 5,247 7.81%
Commercial real estate loans .................. 119,523 2,573 8.61% 118,882 2,518 8.47%
Commercial loans .............................. 128,974 2,841 8.71% 91,905 2,181 9.39%
Home equity loans ............................. 76,590 1,592 8.36% 55,902 1,310 9.40%
Consumer loans ................................ 7,096 158 8.91% 6,600 155 9.39%
----------- ----------- ------ ---------- ---------- ---------
Total interest-earning assets ................. 1,092,958 20,406 7.47% 904,364 17,007 7.52%
Allowance for loan losses ..................... (14,737) (17,095)
Non-interest-earning assets .................... 84,258 70,642
----------- ----------
Total assets ...............................$ 1,162,479 $ 20,406 $957,911 $ 17,007
=========== =========== ========== ==========
Interest-bearing liabilities
Deposits
Savings accounts .............................$ 195,987 $ 1,218 2.50% $185,842 $ 1,155 2.49%
NOW accounts ................................. 57,412 161 1.13% 53,084 187 1.41%
Money market accounts ........................ 206,801 1,701 3.31% 211,113 1,751 3.33%
Time deposit accounts ........................ 371,828 4,912 5.31% 344,743 4,435 5.16%
------------ ----------- ------- ---------- ---------- ---------
Total interest-bearing deposits ............... 832,028 7,992 3.86% 794,782 7,528 3.80%
borrowed funds ................................ 141,217 1,957 5.48% 13,457 228 6.70%
----------- ----------- ------- ---------- ---------- ---------
Total interest-bearing liabilities ............ 973,245 9,949 4.11% 808,239 7,756 3.85%
Non-interest-bearing liabilities .............. 106,530 80,817
----------- ----------
Total liabilities ............................. 1,079,775 889,056
Stockholders' equity .......................... 82,704 68,855
----------- ----------
Total liabilities and stockholders' equity. $ 1,162,479 $ 9,949 $957,911 $ 7,756
=========== =========== ========== ==========
Net interest income/spread .................... $ 10,457 3.36% $ 9,251 3.67%
=========== ======= ========== =========
Net interest margin as a % of interest-
earning assets ................................. 3.83% 4.09%
======= =========
Net interest income for the three months ended June 30, 1996 was $10.5 million
compared to $9.3 million for the three months ended June 30, 1995, an increase
of $1.2 million or 13.0%. This increase is primarily due to a $188.6 million
increase in average earning assets partially offset by a 26 basis points
decrease in net interest margin.
Total interest income was $20.4 million for the three months ended June 30,
1996, an increase of $3.4 million or 20.0% from the same period last year. This
increase is attributable to higher levels of interest-earning assets.
Interest-earning assets totaled $1.1 billion in the second quarter of 1996
compared to $904.4 million in the second quarter of 1995, an increase of $188.6
million or 20.9%. Total investments increased $160.7 million reflecting higher
deposit levels as well as leveraging a portion of the Company's capital
position. Total loans increased $34.3 million as the Company continued to focus
on the commercial (small business) and home equity market segments, which grew
by $37.1 million or 40.3% and $20.7 million or 37.0%, respectively. Residential
real estate loan balances declined $24.6 million or 9.2%, reflecting significant
refinancing activity during the first quarter of 1996. The Company originates
long-term fixed rate mortgages for sale in the secondary market and generally
holds adjustable rate mortgages in the Company's loan portfolio.
8
Total interest expense was $9.9 million for the three months ended June 30, 1996
compared to $7.8 million during the same period in 1995, an increase of $2.1
million or 28.3%. This increase is attributable to increases in interest-bearing
deposits and borrowed funds. Interest-bearing deposits totaled $832.0 million
for the quarter ended June 30, 1996 compared to $794.8 million for the same
period in 1995, an increase of $37.2 million or 4.7%. This growth occurred
primarily in Time and Savings deposits, which increased $27.1 and $10.1 million
respectively. Time deposits increased as a result of the new "Can't Lose CD"
product, which pays an interest rate equal to the prime rate less 350 basis
points. Savings deposit growth reflects the continued success of the totally
free savings account, a key feature of the Company's consumer strategy. Borrowed
funds averaged $141.2 million for the three months ended June 30, 1996 compared
to $13.5 million for the same period in 1995 reflecting the use of Federal Home
Loan Bank ("FHLB") advances and repurchase agreements to leverage a portion of
the Company's capital.
The following table presents the changes in net interest income resulting from
changes in interest rates or changes in the volume of interest-earning assets
and interest-bearing liabilities during the periods indicated. Changes which are
attributable to both rate and volume have been allocated evenly between the
change in rate and volume components.
Three months ended June 30,
1996 versus 1995
-----------------------------
Increase (Decrease) Due to
-----------------------------
Volume Rate Net
------- ------- -------
Interest-earning assets:
Federal funds sold and
interest bearing deposits ........................ $ (93) $ (15) $ (108)
Investment securities held to maturity .............. 70 430 500
Investment securities available for sale ............ 2,541 (45) 2,496
Residential real estate loans ....................... (480) (9) (489)
Commercial real estate loans ........................ 14 41 55
Commercial loans .................................... 848 (188) 660
Home equity loans ................................... 457 (175) 282
Consumer loans ...................................... 11 (8) 3
------- ------- -------
Total interest-earning assets ......................... 3,368 31 3,399
------- ------- -------
Interest-bearing liabilities:
Deposits:
Savings accounts .................................... 63 -- 63
NOW accounts ........................................ 14 (40) (26)
Money market accounts ............................... (36) (14) (50)
Time deposit accounts ............................... 352 125 477
------- ------- -------
Total deposits ........................................ 393 71 464
Borrowed funds ........................................ 1,968 (239) 1,729
------- ------- -------
Total interest-bearing liabilities .................... 2,361 (168) 2,193
------- ------- -------
Change in net interest income ......................... $ 1,007 $ 199 $ 1,206
======= ======= =======
9
Provision for Possible Loan Losses
The Company provided $0.8 million for its provision for possible loan losses in
the second quarter of 1996 compared to $1.2 million in the second quarter of
1995. This decrease of $0.4 million reflects an improvement in the credit
quality profile of the loan portfolio. 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 presented are as follows:
Three months ended
June 30,
------------------------------------
1996 1995
------------ ------------
Net gain (loss) on sale of loans $ 162 $ (4)
Net gain (loss) on sale of securities - 10
Loan charges and fees 757 788
Deposit related fees 1,544 1,200
Other charges and fees 274 200
-------- --------
$2,737 $2,194
======== ========
Net gain (loss) on sale of loans increased $0.2 million due to an increase in
the amount of loans sold servicing released.
Deposit service charges and fees increased $0.3 million due primarily to the
Company's larger noninterest bearing account base.
Other charges and fees increased $0.1 million reflecting higher brokerage fees.
Salaries and Benefits Expense
Salaries and benefits expense totaled $4.2 million for the second quarter of
1996 compared to $3.7 million for the same period in 1995, an increase of $0.5
million reflecting standard wage increases, the introduction of new benefit
programs including ESOP, restricted stock and 401(k) plan, and higher ESOP and
restricted stock expenses as a result of an increase in the Company's stock
price.
10
Other Operating Expense
The components of other operating expense for the periods presented are as
follows:
Three months ended
June 30,
----------------------------------
1996 1995
-------------- ---------------
Marketing and public relations $ 493 $ 365
Insurance 93 891
Professional services 851 825
Outside processing 1,098 803
Other 1,121 896
---------- ---------
$3,656 $3,780
========== =========
Marketing and public relations expense increased $0.1 million reflecting a
higher level of advertising expenses directed towards the Company's consumer
strategy of obtaining consumer deposit accounts in connection with its increased
emphasis on community banking activities.
Insurance expense includes FDIC deposit insurance expense, which totaled $1
thousand in the second quarter of 1996 compared to $0.7 million in the same
period in 1995. This decrease is attributable to a significant reduction in FDIC
premiums.
Outside processing increased $0.3 million reflecting higher transaction and
account volume associated with increased account activity resulting from the
Company's consumer strategy, as well as costs associated with the outsourcing of
the Company's item processing operations in 1996.
Other operating expenses increased $0.2 million primarily due to supplies and
postage costs associated with growth in consumer deposit accounts as a result of
the Company's consumer strategy.
Net Expense of Real Estate Operations
The Company has certain subsidiaries that are engaged in various real estate
investments directly or in joint ventures with unaffiliated partners. The
Company has terminated its real estate development activities and is in the
process of selling its remaining real estate investments. Net expense of real
estate operations reflects the net operating results of these activities,
writedowns on real estate properties and gains/losses on sales of these
properties. Net expense of real estate operations of $(0.1) million and $0.1
million for the three months ended June 30, 1996 and June 30, 1995,
respectively, reflects normal operating results.
Income Taxes
The Company recorded $0.3 million of state and federal alternative minimum tax
provision in the second quarter of 1996 compared to $0.1 million in the second
quarter of 1995. This increase in taxes resulted from the increase in pretax
earnings between the periods ended June 30, 1995 and 1996.
11
Results of Operations for the Six Months Ended June 30, 1996 and June 30, 1995
The Company reported net income of $5.4 million, or $1.00 per share, for the six
months ended June 30, 1996 as compared to net income of $2.1 million, or $0.40
per share, on a pro forma basis, for the same period last year. The improved
results are primarily attributable to increased net interest income and
noninterest income as well as the lower provisions for possible loan losses.
Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income is
affected by the mix and volume of assets and liabilities, and the movement and
level of interest rates.
The following table sets forth, for the period indicated, average balances,
interest income and expense, and yields earned or rates paid on the major
categories of assets and liabilities. Non-accrual loans have been included in
the appropriate average balance loan category, but unpaid interest on
non-accrual loans has not been included for purposes of determining interest
income. In addition, investment securities available for sale are reflected at
amortized cost.
Six Months Ended June 30,
----------------------------------------------------------------------------------
1996 1995
--------------------------------------- ---------------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
----------- ----------- ----------- ----------- ----------- -----------
Interest-earning assets:
Fed funds sold and interest-bearing deposits ...$ 9,594 $ 259 5.34% $ 20,840 $ 617 5.89%
Investment securities held to maturity ......... 182,841 6,215 6.80% 169,885 5,053 5.95%
Investment securities available for sale ....... 291,192 9,296 6.38% 169,397 5,330 6.29%
Residential real estate loans .................. 249,899 9,792 7.84% 264,141 10,266 7.77%
Commercial real estate loans ................... 119,102 5,018 8.43% 121,424 4,958 8.17%
Commercial loans ............................... 120,248 5,333 8.77% 86,952 4,039 9.24%
Home equity loans .............................. 72,971 3,077 8.48% 53,373 2,469 9.33%
Consumer loans ................................. 6,977 254 7.32% 6,677 297 8.90%
---------- ----------- -------- ---------- ---------- ----------
Total interest-earning assets .................. 1,052,824 39,244 7.45% 892,689 33,029 7.40%
Allowance for loan losses ...................... (15,286) (16,611)
Non-interest-earning assets .................... 82,267 70,299
---------- ----------
Total assets ...................................$ 1,119,805 $ 39,244 $ 946,377 $ 33,029
========== =========== ========== ==========
Interest-bearing liabilities
Deposits
Savings accounts .............................$ 192,419 $ 2,395 2.50% $ 184,769 $ 2,279 2.49%
NOW accounts ................................. 55,829 328 1.18% 53,194 374 1.42%
Money market accounts ........................ 205,305 3,397 3.33% 218,305 3,471 3.21%
Time deposit accounts ........................ 371,205 9,948 5.39% 337,178 8,120 4.86%
---------- ----------- -------- ----------- ---------- ----------
Total deposits ................................. 824,758 16,068 3.92% 793,446 14,244 3.62%
Borrowed funds ................................. 112,469 3,148 5.54% 7,808 274 6.98%
---------- ----------- -------- ----------- ---------- ----------
Total interest-bearing liabilities ............. 937,227 19,216 4.12% 801,254 14,518 3.65%
Non-interest-bearing liabilities ............... 101,415 84,047
---------- ---------
Total liabilities .............................. 1,038,642 885,301
Total stockholders' equity ..................... 81,163 61,076
---------- ---------
Total liabilities and stockholders' equity .$ 1,119,805 $ 19,216 $ 946,377 $ 14,518
========== =========== ========== ==========
Net interest income/spread ..................... $ 20,028 3.33% $ 18,511 3.75%
========== ======== ========== ==========
Net interest margin as a % of interest-
earning assets ................................. 3.80% 4.15%
======== ==========
12
Net interest income for the six months ended June 30, 1996 was $20.0 million
compared to $18.5 million for the six months ended June 30, 1995, an increase of
$1.5 million or 8.2%. This increase is primarily due to a $160.1 million
increase in average earning assets partially offset by a 35 basis points
decrease in net interest margin.
Total interest income was $39.2 million for the six months ended June 30, 1996,
an increase of $6.2 million or 18.8% from the same period last year. This
increase is primarily attributable to higher levels of interest-earning assets.
Interest-earning assets totaled $1.1 billion for the six months ended June 30,
1996 compared to $892.7 million for the same period in 1995, an increase of
$160.1 million or 17.9%. Total investments increased $134.8 million reflecting
higher deposit levels as well as leveraging of a portion of the Company's
capital position. Total loans increased $36.6 million as the Company continued
to focus on the commercial (small business) and home equity market segments,
which grew by $33.3 million or 38.3% and $19.6 million or 36.7%, respectively.
Residential real estate loan balances declined $14.2 million or 5.4% reflecting
significant refinancing activity to a fixed rate market during the first quarter
of 1996. The Company originates long-term fixed rate mortgages for sale in the
secondary market and generally holds adjustable rate mortgages in the Company's
loan portfolio.
Total interest expense was $19.2 million for the six months ended June 30, 1996
compared to $14.5 million during the same period in 1995, an increase of $4.7
million or 32.4%. This increase is attributable to increases in interest-bearing
deposits, deposit rates and borrowed funds. Interest-bearing deposits totaled
$824.8 million for the six months ended June 30, 1996 compared to $793.4 million
for the same period in 1995, an increase of $31.3 million or 4.0%. This growth
occurred primarily in Time deposits, which increased $34.0 million principally
as a result of the new "Can't Lose CD." The Can't Lose CD pays an interest rate
equal to the prime rate less 350 basis points. The average rate paid on deposits
was 3.92% for the six months ended June 30, 1996 compared to 3.62% for the six
months ended June 30, 1995, an increase of 30 basis points or 8.3% principally
reflecting repricing of the existing portfolio as well as continued competitive
pricing pressures and the introduction of the Can't Lose CD. Borrowed funds
averaged $112.5 million for the six months ended June 30, 1996 reflecting the
use of FHLB advances and repurchase agreements to leverage a portion of the
Company's capital.
The following table presents the changes in net interest income resulting from
changes in interest rates or changes in the volume of interest-earning assets
and interest-bearing liabilities during the periods indicated. Changes which are
attributable to both rate and volume have been allocated evenly between the
change in rate and volume components.
Six months ended June 30,
1996 versus 1995
-------------------------------
Increase (Decrease) Due to
-------------------------------
Volume Rate Net
------- ------- -------
Interest-earning assets:
Federal funds sold and
interest bearing deposits .................................................. $ (318) $ (40) $ (358)
Investment securities held to maturity ........................................ 413 749 1,162
Investment securities available for sale ...................................... 3,859 107 3,966
Residential real estate loans ................................................. (556) 82 (474)
Commercial real estate loans .................................................. (96) 156 60
Commercial loans .............................................................. 1,512 (218) 1,294
Home equity loans ............................................................. 866 (258) 608
Consumer loans ................................................................ 12 (55) (43)
------- ------- -------
Total interest-earning assets ................................................... 5,692 523 6,215
------- ------- -------
Interest-bearing liabilities:
Deposits:
Savings accounts .............................................................. 95 21 116
NOW accounts .................................................................. 17 (63) (46)
Money market accounts ......................................................... (211) 137 (74)
Time deposit accounts ......................................................... 866 962 1,828
------- ------- -------
Total deposits .................................................................. 767 1,057 1,824
Borrowed funds .................................................................. 3,301 (427) 2,874
------- ------- -------
Total interest-bearing liabilities .............................................. 4,068 630 4,698
------- ------- -------
Change in net interest income ................................................... $ 1,624 $ (107) $ 1,517
======= ======= =======
13
Provision for Possible Loan Losses
The Company provided $1.5 million for its provision for possible loan losses for
the six months ended June 30, 1996 compared to $2.4 million for the same period
in 1995. This decrease of $0.9 million reflects an improvement in the credit
quality profile of the loan portfolio. 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 presented are as follows:
Six months ended June 30,
---------------------------------
1996 1995
----------------- --------------
Net gain/(loss) on sale of loans $ 432 $ (10)
Net gain/(loss) on sale of securities 2 14
Loan charges and fees 1,480 1,595
Deposit related fees 2,947 2,289
Other charges and fees 457 352
--------- ---------
$5,318 $4,240
========= =========
Net gain (loss) on sale of loans increased $0.4 million due to an increase in
the amount of loans sold servicing released.
Deposit service charges and fees increased $0.6 million due primarily to the
Company's larger noninterest bearing account base.
Other charges and fees increased $0.1 million reflecting an increase in
brokerage fees.
Salaries and Benefits Expense
Salaries and benefits expense totaled $8.5 million for the six months ended June
30, 1996 compared to $7.7 million for the same period in 1995, an increase of
$0.8 million reflecting standard wage increases, the introduction of new benefit
programs including ESOP, restricted stock and 401(k) plan, and higher ESOP and
restricted stock expenses as a result of an increase in the Company's stock
price.
Occupancy Expense
Total occupancy expense was $1.6 million for the six months ended June 30, 1996,
a decrease of $0.1 million from the same period in 1995 as a result of the
improved operating results of SIS Center, the Company's corporate headquarters.
14
Other Operating Expense
The components of other operating expense for the periods presented are as
follows:
Six months ended June 30,
-------------------------------------------
1996 1995
------------------ ------------------
Marketing and public relations $ 877 $ 672
Insurance 194 1,692
Professional services 1,490 1,472
Outside processing 2,055 1,698
Other 2,156 1,781
--------- ----------
$6,772 $7,315
========= ==========
Marketing and public relations expense increased $0.2 million reflecting a
higher level of advertising expenses directed towards the Company's consumer
strategy for obtaining consumer deposit accounts in connection with its
increased emphasis on community banking activities.
Insurance expense includes FDIC deposit insurance expense, which totaled $2
thousand for the six months ended June 30, 1996 compared to $1.4 million in the
same period in 1995. This decrease is attributable to a significant reduction in
FDIC premiums.
Outside processing increased $0.4 reflecting higher transaction and account
volume associated with increased account activity resulting from the Company's
consumer strategy, as well as costs associated with the outsourcing of the
Company's item processing operations in 1996.
Other operating expenses increased $0.4 million primarily due to supplies and
postage costs associated with growth in consumer deposit accounts as a result of
the Company's consumer strategy.
Foreclosed Real Estate Expense
Foreclosed real estate expense reflects losses on sales, writedowns and net
operating results of foreclosed properties. These expenses were $0.2 million for
the six months ended June 30, 1996 compared to $0.4 million for the same period
in 1995. This $0.2 million decrease reflects lower levels of foreclosed
properties.
Net Expense of Real Estate Operations
The Company has certain subsidiaries that are engaged in various real estate
investments directly or in joint ventures with unaffiliated partners. The
Company has terminated its real estate development activities and is in the
process of selling its remaining real estate investments. Net expense of real
estate operations reflects the net operating results of these activities,
writedowns on real estate properties and gains/losses on sales of these
properties. Net expense of real estate operations of $(0.2) million and $0.1
million for the six months ended June 30, 1996 and June 30, 1995 respectively,
reflects normal operating results.
Income Taxes
The Company recorded $0.5 million of state and federal alternative minimum tax
provision in the six months ended June 30, 1996 compared to $0.1 million for the
same period in 1995. This increase in taxes resulted from the increase in pretax
earnings between the periods ended June 30, 1995 and 1996.
15
BALANCE SHEET ANALYSIS - COMPARISON AT JUNE 30, 1996 TO DECEMBER 31, 1995
Total assets increased from $1.07 billion at December 31, 1995 to $1.21 billion
at June 30, 1996. This increase reflects growth in loans and investments funded
through an increase in deposits and wholesale borrowings.
Investments
The Company's investment portfolio increased $110.8 million from $419.8 million
at December 31, 1995 to $530.6 million at June 30, 1996.
The Company engages in investment activities for both investment and liquidity
purposes. The Company maintains an investment securities portfolio which
consists primarily of U.S. Government and Agency securities, corporate
obligations, asset-backed securities, collateralized mortgage obligations,
Federal Home Loan Bank stock, and marketable equity securities. Other short-term
investments held by the Company periodically include interest-bearing deposits
and federal funds sold. The Company also maintains a mortgage-backed securities
portfolio consisting of securities issued and guaranteed by the Federal National
Mortgage Association ("FNMA") and the Federal Home Loan Mortgage Company
("FHLMC") in addition to publicly traded mortgage-backed securities issued by
private financial intermediaries which are rated "AA" or higher by rating
agencies of national prominence.
Securities which the Company has the intent and ability to hold until maturity
are classified as held-to-maturity and are carried at amortized cost, while
those securities which have been identified as assets that may be sold prior to
maturity or assets for which there is not a positive intent to hold to maturity
are classified as available-for-sale and are carried at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity.
The table below sets forth certain information regarding the amortized cost and
fair value of the Corporation's investment portfolio at the dates indicated.
June 30, 1996
----------------------------------------------
Available for Held to
Sale Maturity
----------------------- ---------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---------- ---------- --------- ----------
U.S. government and agency obligations ......................... $ 15,060 $ 14,948 $ -- $ --
Mortgage-backed securities ..................................... 299,841 300,065 166,577 166,217
Other bonds and short term obligations ......................... 8,648 8,581 26,620 26,511
Other securities ............................................... 13,924 13,850 -- --
----------- -------- -------- --------
Total ...................................................... $ 337,473 $337,444 $193,197 $192,728
=========== ======== ======== ========
December 31, 1995
-----------------------------------------------
Available for Held to
Sale Maturity
----------------------- ----------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
----------- ---------- --------- ----------
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
=========== ======== ======== ========
16
Loan Portfolio Composition
Gross loans comprised $592.7 million or 49.0% of total assets as of June 30,
1996. The following table sets forth information concerning the Company's loan
portfolio in dollar amounts and percentages, by type of loan at June 30, 1996
and at December 31, 1995.
June 30, 1996 December 31, 1995
------------------------ -----------------------
Percent of Percent of
Amount Total Amount Total
--------- ----------- --------- -----------
Residential real estate loans .............................................. $ 244,100 41.18% $ 263,551 45.99%
Commercial real estate loans ............................................... 118,435 19.98% 118,005 20.59%
Commercial loans ........................................................... 139,557 23.55% 117,674 20.53%
Home equity loans .......................................................... 83,806 14.14% 67,657 11.81%
Consumer loans ............................................................. 6,822 1.15% 6,196 1.08%
--------- -------- --------- ---------
Total loans receivable, gross ........................................... 592,720 100.00% 573,083 100.00%
Less:
Unearned income and fees .................................................... (828) (566)
Allowance for possible loan losses .......................................... 14,913 14,986
--------- ---------
Total loans receivable, net .............................................. $ 578,635 $ 558,663
========= =========
The Company continues to actively originate loans secured by first mortgages on
one to four family residences, and offers a variety of fixed and adjustable rate
mortgage loan products. The Company originates long-term fixed rate mortgages
for sale in the secondary market and generally holds adjustable rate mortgages
in the Company's loan portfolio. During the six months ended June 30, 1996, the
Company experienced an increase in prepayments in its adjustable rate mortgage
portfolio due to lower interest rates. These prepayments offset new originations
and resulted in a $19.5 million decrease in residential real estate loans
between December 31, 1995 and June 30, 1996.
During the six months ended June 30, 1996 commercial loan balances increased
$21.9 million, reflecting the Company's continued focus on lending activities in
the small business market.
Home equity loans outstanding have increased $16.1 million since December 31,
1995 resulting from the Company's pricing strategy, the waiver of closing costs
and the active promotion of these products.
The growth in the Company's consumer loan portfolio from December 31, 1995 to
June 30, 1996 reflects increases of $1.0 million in student loans and $0.8
million in overdraft protection lines, partially offset by runoff in personal
installment loan balances. The Company offered student loans to its customers
until June 30, 1996. These loans are subsidized by the government and held by
the Company while the student is in school. When the student graduates and
repayment begins the loans are sold to the Student Loan Marketing Association
("SLMA"). Effective July 1, 1996 the Company discontinued the origination of
student loans. The Company continues to offer applications to prospective
borrowers and refers these customers to SLMA. The company continues to offer
overdraft protection lines associated with the transaction accounts of its
customers. The company has discontinued offering most types of personal
installment loans. This decision was made based on the low volumes achieved by
the Company and the highly competitive nature of consumer products offered by
Bank and non-Bank competitors.
17
Non-performing Assets
Non-performing assets totaled $10.5 million as of June 30, 1996 compared to
$13.9 million as of December 31, 1995, a decrease of $3.4 million or 24.5%.
The following table sets forth information regarding the components of
non-performing assets for the periods presented:
June 30, 1996 December 31, 1995
------------- -----------------
Non-accrual loans (1):
Residential real estate loans $2,246 $2,553
Commercial real estate loans 5,123 5,745
Commercial loans 1,151 638
Home equity loans 340 90
Consumer loans 12 11
-------- --------
Total non-accrual loans 8,872 9,037
-------- --------
Loans past due 90 days still accruing (2) 296 587
-------- --------
Total non-performing loans 9,168 9,624
Foreclosed real estate (3) 427 1,529
Restructured loans on accrual status (4) 891 2,732
======== ========
Total non-performing assets $10,486 $13,885
======== ========
Total non-performing loans to total
gross loans 1.55% 1.68%
Total non-performing assets to total
assets 0.87% 1.30%
Allowance for possible losses to
non-performing loans 162.66% 155.71%
(1) Non-accrual loans are loans that are contractually past due in excess of 90
days, for which the Bank has discontinued the accrual of interest, or loans
which are not past due but on which the Bank has discontinued the accrual of
interest based on Management's assessment of the circumstances surrounding these
loans.
(2) Accruing loans past due 90 days or more are loans which have not been placed
on non-accrual status as, in management's opinion, the collection of the loan,
in full, is not in doubt.
(3) Foreclosed real estate includes OREO, defined as real estate acquired
through foreclosure or acceptance of a deed in lieu of foreclosure. The Bank
carries foreclosed real estate at net realizable value, which approximates fair
value less estimated selling costs.
(4) Restructured loans are loans for which concessions, including reduction of
interest rates or deferral of interest or principal payments have been granted
due to the borrower's financial condition. Restructured loans on non-accrual
status are reported in the non-accrual loan category. Restructured loans on
accrual status are those loans that have complied with terms of a restructuring
agreement for a satisfactory period (generally six months).
Potential Problem Loans
The Bank maintains a "watch list" of potential problem loans, which are
performing loans that have potential weaknesses that require Management's
attention. These potential weaknesses may stem from a variety of factors
including, among other things economic or market conditions, adverse trends in
the obligor's operations or balance sheet weaknesses. Potential problem loans
totaled $15.6 million (1.3% of total assets) at June 30, 1996.
18
Allowance for Possible Loan Losses
The allowance for possible loan losses reflects an amount that in Management's
judgment is adequate to provide for potential losses in the loan portfolio. In
addition, examinations of the adequacy of the loan loss reserve are conducted
periodically by various regulatory agencies.
The Company's loan loss reserve methodology emphasizes an evaluation of
non-performing loans and those loans that have been identified as having a
higher risk of becoming non-performing loans. The overall analysis is a
continuing process that gives consideration to such factors as size and risk
characteristics of the loan portfolio, the risk rating of individual credits,
general economic conditions, historic delinquency and charge-off experience and
the borrowers' financial capabilities and the underlying collateral, including,
when appropriate, independent appraisals of real estate properties. In addition,
Management periodically reviews the methodology of allocating reserves to the
various loan categories based on similar factors.
The Company's allowance for possible loan losses is decreased by loan
charge-offs and increased by provisions for possible loan losses and recoveries
on loans previously charged-off. When commercial and residential real estate
loans are foreclosed, the loan balance is compared with the fair value of the
property. If the net carrying value of the loan at the time of foreclosure
exceeds the fair value of the property less estimated selling costs, the
difference is charged to the allowance for possible loan losses and the fair
value of the property becomes the new cost basis of the real estate owned. The
Company has or obtains current appraisals on real estate owned at the time it
obtains possession of the property. Real estate owned is subsequently carried at
the lower of cost or fair value less estimated selling costs with any further
adjustments reflected as a charge against operations. The Company assesses the
value of real estate owned on a periodic basis.
The allowance for possible loan losses at June 30, 1996 was $14.9 million,
compared to $16.0 million at June 30, 1995. The activity in the allowance for
possible loan losses for the six months ended June 30, 1996 and 1995 was as
follows:
Six Months
ended June 30,
---------------------------------------
1996 1995
--------------- ---------------
Balance at beginning of period $14,986 $15,844
Provision for possible loan losses 1,450 2,355
Charge-offs:
Residential real estate loans (563) (323)
Commercial real estate loans (2,102) (2,048)
Commercial loans (180) (45)
Home equity loans (138) (25)
Consumer loans (38) (91)
--------------- ----------------
Total charge-offs (3,021) (2,532)
--------------- ----------------
Recoveries:
Residential real estate loans 577 51
Commercial real estate loans 762 160
Commercial loans 100 99
Home equity loans 39 28
Consumer loans 20 44
--------------- ----------------
Total recoveries 1,498 382
--------------- ----------------
Net charge-offs (1,523) (2,150)
--------------- ----------------
Balance, end of period $14,913 $16,049
=============== ================
Ratio of allowance for possible loan losses to
total loans at the end of the period 2.51% 2.89%
Ratio of allowance for possible loan losses to
non-performing loans at the end of the period 162.66% 116.28%
19
At June 30, 1996, the recorded investment in loans that are considered impaired
under SFAS 114 was $8.3 million. Included in this amount is $3.8 million of
impaired loans for which the related SFAS 114 allowance is $0.5 million and $4.5
million of impaired loans for which the SFAS 114 allowance is zero. The average
recorded investment in impaired loans during the three and six months ended June
30, 1996 was approximately $8.2 million and $9.4 million, respectively. For the
three and six month periods ended June 30, 1996, the Company recognized interest
income on these impaired loans of zero and $0.2 million, respectively.
The following table shows the allocation of the allowance for possible loan
losses to the various types of loans as well as the percentage of loans in each
category to total loans.
June 30, 1996 December 31, 1995
-------------------- ---------------------
% of Total % of Total
Allowance Allowance
for for
Amount Loan Losses Amount Loan Losses
------ ----------- ------- -----------
Residential real estate loans .............................. $ 1,269 8.51% $1,881 12.55%
Commercial real estate loans ............................... 8,372 56.14% 6,784 45.27%
Commercial loans ........................................... 4,517 30.29% 5,480 36.57%
Home equity loans .......................................... 536 3.59% 672 4.48%
Consumer loans ............................................. 219 1.47% 169 1.13%
---------- --------- -------- ---------
Total allowance for
possible loan losses .................................. $ 14,913 100.00% $14,986 100.00%
========== ========= ======== =========
20
Deposit Distribution
The principal source of funds for the Company are deposits from local consumers
and businesses. There were no brokered deposits at June 30, 1996. The Company's
deposits consist of demand and NOW accounts, passbook and statement savings
accounts, Money Market accounts and Time deposit accounts.
Total deposits were $927.3 million at June 30, 1996 compared to $885.4 million
at December 31, 1995, an increase of $41.9 million. This growth occurred
primarily in Demand deposits, Savings accounts and Time deposits. Demand
deposits and Savings accounts increased $15.6 million and $11.4 million,
respectively as customers continue to take advantage of free savings and
checking accounts offered as a result of the Company's consumer deposit strategy
to attract and retain core deposits, which provides the Company with a lower
cost source of funds. Also contributing to the growth of Demand deposit balances
is an increase in business checking accounts of $3.6 million resulting from the
Company's focus on small business banking. The growth in Time deposits is
primarily attributable to the introduction of a new nine month CD in June of
1996. As of June 30, total balances for this new product were $8.4 million.
The following table presents the composition of deposits for the periods
indicated:
June 30, 1996 December 31, 1995
------------------- -------------------
Percent Percent
of of
Amount Total Amount Total
-------- ------- -------- -------
Demand deposits ................ $ 87,173 9.40% $ 71,539 8.08%
NOW accounts ................... 58,579 6.32% 57,271 6.47%
Savings accounts ............... 197,003 21.24% 185,555 20.96%
Money market accounts .......... 206,880 22.31% 203,313 22.96%
Time deposits .................. 377,663 40.73% 367,708 41.53%
-------- ------- -------- -------
Total deposits .............. $927,298 100.00% $885,386 100.00%
======== ======= ======== =======
21
Regulatory Capital
Under current FDIC capital regulations, state-chartered, non-member banks (i.e.,
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 total quarterly average assets. Tier 1 capital generally includes common
stockholders' equity (including retained earnings), qualifying noncumulative
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 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 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 Company'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 as of
June 30, 1996 and December 31, 1995 as well as the June 30, 1996 minimum
regulatory capital requirements for well-capitalized institutions.
June 30, December 31, FDIC
1996 1995 Requirement
------- ---------- -----------
Tier 1 leverage capital ratio ......... 7.38% 7.57% 5.00%
Tier 1 risk-based capital ratio ....... 12.22% 12.52% 6.00%
Total risk-based capital ratio ........ 13.48% 13.77% 10.00%
Under current Federal Reserve Board (the "FRB") capital regulations, bank
holding companies, such as the Company, are also required to comply with minimum
capital requirements, which are substantially the same as those which apply to
the Bank under the FDIC regulations. As of June 30, 1996, the Company's capital
ratios, which on a consolidated basis are substantially the same as those set
forth above with respect to the Bank, qualify the Copany as "well capitalized"
under applicable FRB regulations.
22
Interest Rate Risk Management
The operations of the Company are subject to the risk of interest rate
fluctuations to the extent that there is a substantial difference in the amount
of the Company's assets and liabilities repricing or maturing 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 Company's interest rate risk management process is to
identify, manage and control its interest rate risk within established limits in
order to produce consistent earnings that are not contingent upon favorable
trends in interest rates. This is attained by monitoring the levels of interest
rates, the relationships between the rates paid on assets and the rates paid on
liabilities, the absolute amount of assets and liabilities which reprice or
mature over similar periods, and the effect of all of these factors on the
estimated level of net interest income.
There are a number of industry standards used to measure a financial
institution's interest rate risk position. Most common among these is the
one-year 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 Company estimates
that its cumulative one-year gap position was a positive $55.7 million or 4.61%
of total assets at June 30, 1996. The Company also utilizes income simulation
modeling in measuring its interest rate risk and managing its interest rate
sensitivity. Income simulation not only considers the impact of changing market
interest rates on forecasted net interest income, but also takes into
consideration other factors such as yield curve relationships, the volume and
mix of assets and liabilities, customer preferences and general market
conditions.
The following table sets forth the amounts of assets and liabilities outstanding
at June 30, 1996, which are anticipated by the Company to mature or reprice in
each of the future time periods shown using certain assumptions based on its
historical experience, the current interest rate environment, and other data
available to management. Management believes that these assumptions approximate
actual experience and considers such assumptions reasonable, however, the
interest rate sensitivity of the Company's assets and liabilities could vary
substantially if different assumptions were used or actual experience differs
from the assumptions used. Management periodically reviews and, when
appropriate, changes assumptions used in creating this table.
23
GAP Position
at June 30, 1996
------------------------------------------------------------------
More than six
Less than months less
six months than one year 1 - 5 Years Over 5 Yrs TOTAL
---------- ------------- ----------- ---------- --------
Assets:
Federal funds sold and
interest bearing deposits ............... $ 10,045 $ -- $ -- $ -- $ 10,045
Investment securities .................. 293,322 129,373 72,129 35,817 530,641
Residential real estate loans.............. 79,361 62,637 85,538 14,620 242,156
Commercial real estate loans............... 36,896 18,781 57,629 -- 113,306
Commercial loans .......................... 65,154 8,455 61,351 3,630 138,590
Home equity loans.......................... 66,806 853 10,257 5,971 83.887
Consumer loans ............................ 2,223 3,655 594 265 6,737
Other assets .............................. -- -- -- 84,481 84,481
---------- ---------- ---------- --------- ---------
Total assets .............................. $ 553,807 $ 223,754 $ 287,498 $ 144,784 $1,209,843
========== ========== ========== ========= =========
Liabilities & stockholders' equity:
Savings accounts .......................... $ 29,550 $ 29,550 $ 137,903 $ -- $ 197,003
NOW accounts .............................. 8,786 8,786 41,007 -- 58,579
Money market accounts...................... 62,064 62,064 82,752 -- 206,880
Time deposits ............................. 200,527 118,451 58,685 -- 377,663
Borrowed funds ............................ 167,450 23 210 1,236 168,919
Other liabilites & stockholders equity..... 17,286 17,286 51,859 114,368 200,799
---------- ---------- ---------- --------- ---------
Total liabilities & stockholders' equity... $ 485,663 $ 236,160 $ 372,416 $ 115,604 $1,209,843
========== ========== ========== ========= =========
Period GAP position........................ $ 68,144 $ (12,406) $ (84,918) $ 29,180
Net period GAP as a percentage of total
assets.................................. 5.63% (1.03%) (7.02%) 2.41%
Cumulative GAP ............................ $ 68,144 $ 55,738 $ (29,180) --
Cumulative GAP as a percentage of total
assets ................................. 5.63% 4.61% (2.41%) --
For purposes of the above interest sensitivity analysis:
Residential loans held for sale at June 30, 1996 totaling $3.2 million are
in the less than six month interest sensitivity period.
Fixed rate assets are scheduled by contractual maturity and adjustable rate
assets are scheduled by their next repricing date. In both cases, assets
that have prepayment optionality are adjusted for the Bank's estimate of
prepayments.
Loans do not include non accrual loans of $8.9 million.
Loans do not include the allowance for loan loss of $14.9 million.
In certain deposit categories where there is no contractual maturity,
Management assumed the sensitivity characteristics listed below based on
the current interest rate environment and the Company's historical
experience. Management reviews these assumptions on a quarterly basis and
may modify them as circumstances dictate.
- Savings accounts are assumed to decay at an annual rate of 30%.
- NOW accounts are assumed to decay at an annual rate of 30%.
- Money market accounts are assumed to decay at an annual rate of 60%.
- Non-interest bearing accounts of $87.2 million are included in
other liabilities and are assumed to decay at an annual rate of 40%.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, while certain assets and liabilities may have
similar contractual maturities or periods to repricing, they may react in
different ways to changes in market interest rates. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table. Additionally,
certain assets, such as adjustable rate mortgages, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Finally, the ability of borrowers to service their adjustable rate mortgages may
decrease in the event of an interest rate increase.
24
Liquidity
Liquidity measures the ability of the Company to meet its maturing obligations
and existing commitments, to withstand fluctuations in deposit levels, to fund
its operations and to provide for customer credit needs.
The Company's 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, the general level of interest rates and competition. The Company
utilizes particular sources of funds based on comparative costs and
availability. The Company generally manages the pricing of its deposits to
maintain a steady deposit balance, but has from time to time decided not to pay
rates on deposits as high as its competition, and when necessary, will
supplement deposits with longer term and/or less expensive alternative sources
of funds such as advances from the FHLB and repurchase agreements.
Liquidity management is both a daily and long-term responsibility of Management.
The Company adjusts its investments in cash and cash equivalents based upon
Management's assessment of expected loan demand, projected security maturities,
expected deposit flows, yields available on interest-bearing deposits, and the
objectives of its asset/liability management program. If the Company requires
funds beyond its ability to generate them internally, it has additional
borrowing capacity with the FHLB and collateral eligible for repurchase
agreements. Because the Company has a stable retail deposit base, Management
believes that significant borrowings will not be necessary to maintain its
current liquidity position.
The Company's ongoing principal use of capital resources remains the origination
of single-family residential mortgage loans, commercial real estate loans,
commercial loans, and consumer loans secured by residential real estate.
25
Part II. Other Information
Item 1. Legal Proceedings
The Company 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 Company.
Item 2. Changes in Securities
Not applicable
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2. Agreement and Plan of Reorganization dated as of January 31, 1996
between the Company and the Bank (incorporated by reference from
Appendix A to the Proxy Statement-Prospectus dated March 27, 1996
included as Exhibit 99.5 to the Company's Registration Statement on
Form 8-A).
3.(i) Articles of Incorporation (incorporated by reference from Exhibit 99.1
to the Company's Registration Statement on Form 8-A).
3.(ii) Bylaws (incorporated by reference from Exhibit 99.2 to the Company's
Registration Statement on Form 8-A).
10.1 Employment agreement dated August 23, 1994 for Mr. F. William Marshall,
Jr.
10.2 The form of employment agreement for Messrs. Frank W. Barrett, B. John
Dill and John F. Treanor.
10.3 The form of employment agreement for Messrs. Gilbert F. Ehmke, Henry J.
McWhinnie, Ms. Jeanne Rinaldo, Messrs. Christopher A. Sinton, and
Michael E. Tucker (incorporated by reference from Exhibit B to the FDIC
Form F-2 filed as Exhibit 99.3 to the Company's Registration Statement
on Form 8-A).
10.4 Directors Stock Option Plan and Management Stock Option Plan
10.5 Directors Restricted Stock Plan and Management Restricted Stock Plan
11. Computation of Earnings per Share and Proforma Earnings per Share.
27. Financial Data Schedule.
26
(b) Report on Form 8-K
Form 8-K, dated June 21, 1996, was filed reporting the completion of
the reorganization of the Bank into a holding company form of organization.
27
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, as amended,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIS BANCORP, INC.
(Registrant)
Date: August 14, 1996 By: /s/ John F. Treanor
John F. Treanor
Executive Vice President and
Chief Financial Officer
(authorized officer and principal
financial officer)
28