FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended 09/30/96
OR
o 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 November 12,
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 nine months ended September 30, 1996 and 1995.....................1
Condensed Consolidated Statements of Financial Condition
at September 30, 1996 and December 31, 1995.................................2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1996 and 1995...............................3
Condensed Consolidated Statements of Changes in Stockholders' Equity
for the nine months ended September 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..............................................27
Item 2. Changes in Securities..........................................27
Item 3. Default upon Senior Securities.................................27
Item 4. Submission of Matters to a Vote of Security Holders............27
Item 5. Other Information..............................................27
Item 6. Exhibits and Reports on Form 8-K...............................27
SIGNATURES.................................................................28
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands Except Per Share Amounts)
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
September September September September
1996 1995 1996 1995
------------ ------------- ------------ ------------
Interest and dividend income
Loans $ 12,472 $ 11,868 $ 35,946 $ 33,897
Investment securities available for sale 5,934 3,154 15,230 8,484
Investment securities held to maturity 3,279 2,912 9,494 7,965
Federal funds sold and interest bearing deposits 121 353 380 970
------------ ------------- ------------ ------------
Total interest and dividend income 21,806 18,287 61,050 51,316
------------ ------------- ------------ ------------
Interest expense
Deposits 8,270 8,014 24,338 22,258
Borrowings 2,291 834 5,439 1,108
------------ ------------- ------------ ------------
Total interest expense 10,561 8,848 29,777 23,366
------------ ------------- ------------ ------------
Net interest and dividend income 11,245 9,439 31,273 27,950
Less: Provision for possible loan losses 750 1,002 2,200 3,357
------------ ------------- ------------ ------------
Net interest and dividend income after provision
for possible loan losses 10,495 8,437 29,073 24,593
Noninterest income:
Net gain (loss) on sale of loans 105 72 537 62
Net gain (loss) on sale of securities 62 - 64 14
Fees and other income 2,761 2,099 7,645 6,335
------------ ------------- ------------ ------------
Total noninterest income 2,928 2,171 8,246 6,411
------------ ------------- ------------ ------------
Noninterest expense:
Operating expenses:
Salaries and employee benefits 4,408 3,966 12,900 11,674
Occupancy expense of bank premises, net 810 887 2,387 2,592
Furniture and equipment expense 558 482 1,614 1,398
Other operating expenses 3,846 3,356 10,617 10,671
------------ ------------- ------------ ------------
Total operating expenses 9,622 8,691 27,518 26,335
------------ ------------- ------------ ------------
Foreclosed real estate expense 29 93 252 535
Net expense of real estate operations (8) (38) (170) 88
------------ ------------- ------------ ------------
Total noninterest expense 9,643 8,746 27,600 26,958
Income before income tax expense 3,780 1,862 9,719 4,046
Income tax (benefit) expense (6,421) 50 (5,931) 164
------------ ------------- ------------ ------------
Net income $ 10,201 $ 1,812 $ 15,650 $ 3,882
============ ============= ============ ============
Earnings per share and pro forma earnings per share: (1)
Primary $ 1.85 $ 0.35 $ 2.86 $ 0.76
Fully diluted $ 1.84 $ 0.34 $ 2.82 $ 0.75
Weighted average and pro forma weighted average shares
outstanding: (1)
Primary 5,511,554 5,244,741 5,475,422 5,139,672
Fully diluted 5,556,512 5,264,355 5,543,980 5,180,213
<FN>
(1) Net income per share for the three and nine months ended September 30, 1996 and the three months ended September 30, 1995 is
computed on weighted average shares outstanding for the period. Net income per share for the nine months ended September 30,
1995 is computed on a pro forma basis as if the conversion of the Bank from mutual to stock form had been completed as of the
beginning of the period presented.
See accompanying Notes to the Unaudited Financial Statements
</FN>
1
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In Thousands Except Share Amounts)
(Unaudited)
September 30, December 31,
1996 1995
----------------- ----------------
ASSETS
Cash and due from banks $ 34,709 $ 30,377
Federal funds sold and interest bearing deposits 17,545 8,045
Investment securities available for sale 386,050 246,984
Investment securities held to maturity (fair value: $193,819 at September
30, 1996 and $172,930 at December 31, 1995) 194,132 172,793
Loans receivable, net of allowance for possible losses
($ 15,488 at September 30, 1996 and $ 14,986 at December 31, 1995) 592,051 558,663
Accrued interest and dividends receivable 8,440 7,109
Investments in real estate and real estate partnerships 4,858 6,092
Foreclosed real estate, net 512 1,529
Bank premises, furniture and fixtures, net 25,660 25,706
Other assets 20,609 13,680
----------------- ----------------
Total asset $ 1,284,566 $ 1,070,978
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 954,132 $ 885,386
Federal Home Loan Bank advances 48,189 41,500
Securities sold under agreements to repurchase 151,144 31,101
Loans payable 3,026 5,470
Mortgage escrow 6,294 4,193
Accrued expenses and other liabilities 24,721 21,859
----------------- ----------------
Total liabilities 1,187,506 989,509
----------------- ----------------
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 (4,282) (4,937)
Additional paid in capital 42,469 41,790
Retained earnings 58,483 42,833
Net unrealized gain (loss) on investment securities available for sale 333 1,726
----------------- ----------------
Total stockholders' equity 97,060 81,469
----------------- ----------------
Total liabilities and stockholders' equity $ 1,284,566 $ 1,070,978
================= ================
<FN>
See accompanying Notes to the Unaudited Financial Statements
</FN>
2
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Nine Months Ended
September 30,
1996 1995
--------------- --------------
Cash Flows From Operating Activities
Net income $ 15,650 $ 3,882
Adjustments to reconcile net income to net cash provided by/
(used for) operating activities
Provision for possible loan losses 2,200 3,357
Provision for foreclosed real estate - 556
Depreciation 2,271 2,270
Amortization of premium on investment securities, net 1,585 615
ESOP and restricted stock expenses 1,104 515
Investment security (gains) (64) (14)
(Income) loss from equity investment in partnerships (47) 39
(Gain) on sale of loans (537) (62)
Disbursements for mortgage loans held for sale (65,258) (44,473)
Receipts from mortgage loans held for sale 65,795 44,535
Loss on sale of fixed assets and real estate 343 158
Changes in assets and liabilities:
(Increase) in other assets, net (8,501) (2,351)
Decrease (increase) in accrued expenses and other liabilities 3,092 (12,307)
--------------- --------------
Net cash provided by/(used for) operating activities 17,633 (3,280)
--------------- --------------
Cash Flows From Investing Activities
Proceeds from sales of investment securities - available for sale 30,863 -
Proceeds from maturities and principal payments received
on investment securities - available for sale 90,816 73,862
Purchase of investment securities - available for sale (262,977) (105,633)
Proceeds from maturities and principal payments received
on investment securities - held to maturity 37,211 15,291
Purchase of investment securities - held to maturity (58,991) (50,046)
Proceeds from sale of investments in real estate partnerships 475 -
Net change in loans receivable (40,489) (45,527)
Net change in foreclosed real estate 1,862 334
Proceeds from sale of loans 4,056 912
Proceeds from sale of fixed assets and leases 267 -
Purchase of fixed assets (2,029) (3,834)
--------------- --------------
Net cash (used for) investing activities (198,936) (114,641)
--------------- --------------
<FN>
See accompanying Notes to the Unaudited Financial Statements
</FN>
3
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars In Thousands)
(Unaudited)
Nine Months Ended
September 30,
1996 1995
--------------- --------------
Cash Flows from Financing Activities
Net proceeds from stock conversion - 35,911
Net increase in deposits 68,746 22,274
Net increase in borrowings 124,288 62,821
Net increase in mortgagors' escrow deposits 2,101 1,536
--------------- --------------
Net cash provided by financing activities 195,135 122,542
--------------- --------------
Increase in cash and cash equivalents 13,832 4,621
Cash and cash equivalents, beginning of year 38,422 55,720
--------------- --------------
Cash and cash equivalents, end of period $ 52,254 $ 60,341
=============== ==============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest to depositors
and interest on debt $ 29,861 $ 23,348
Non-cash investing activities:
Transfers to foreclosed real estate, net $ 845 $ 244
<FN>
See accompanying Notes to the Unaudited Financial Statements
</FN>
4
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The Nine Months Ended September 30, 1996 and 1995
(Dollars In Thousands)
Net unrealized
gain (loss)
on investment
Additional securities
Common Unearned Paid-In Retained available
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 - - - 15,650 - 15,650
Unearned compensation - (315) 297 - - (18)
Decrease in unearned compensation - 970 382 - - 1,352
Change in unrealized gain (loss) on investment
securities available for sale - - - - (1,393) (1,393)
------------ ------------- ------------ ------------ ---------------- -------------
Balance at September 30, 1996 $ 57 $ (4,282) $ 42,469 $ 58,483 $ 333 $ 97,060
============ ============= ============ ============ ================ =============
Balance at December 31, 1994 $ - $ - $ - $ 31,624 $ (3,121) $ 28,503
Net income - - - 3,882 - 3,882
Issuance of common stock 56 - 39,665 (250) - 39,471
Unearned compensation - (3,560) - - - (3,560)
Decrease in unearned compensation - 312 203 - - 515
Change in unrealized gain (loss) on investment
securities available for sale - - - - 4,211 4,211
------------ ------------- ------------ ------------ ---------------- -------------
Balance at September 30, 1995 $ 56 $ (3,248) $ 39,868 $ 35,256 $ 1,090 $ 73,022
============ ============= ============ ============ ================ =============
<FN>
See accompanying Notes to the Unaudited Consolidated Financial Statements
</FN>
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 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 F-2") filed by the Bank for the year ended
December 31, 1995. The Form F-2 was included as Exhibit 99.3 in the registration
statement on Form 8-A 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 nine 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
September 30, 1996 or on the results of its operations for the three and nine
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 nine months ended September 30, 1996 and
the three months ended September 30, 1995 is computed on weighted shares
outstanding for the period. Net income per share for the nine months ended
September 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. Income Taxes
The Company 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. In accordance with FAS 109,
income tax benefits associated with deductible temporary differences are
evaluated periodically based on the weight of available evidence as to whether
it is more likely than not that the income tax benefits will be realized.
In the third quarter of 1996 the Company recorded an income tax benefit of $8.0
resulting primarily from two non-recurring tax events. The Company recognized a
one time gain of $2.8 million as a result of the recently enacted Small Business
Jobs Protection Act of 1996. In addition, Management reevaluated the
realizability of its deferred tax asset and determined that, based on the weight
of available evidence, it was more likely than not that it would be realized.
Accordingly, the Company recognized the remainder of its deferred tax asset of
$5.2 million.
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 ("the Reorganization"). Upon the
effectiveness of the Reorganization, 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 22
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 September 30, 1996 and
September 30, 1995
The Company reported net income of $10.2 million, or $1.84 per share, for the
third quarter of 1996 as compared to net income of $1.8 million, or $0.34 per
share for the same period last year. The financial results for the quarter were
affected by two nonrecurring tax events totaling $8.0 million. The Company
recognized a one time gain of $2.8 million as a result of the recently enacted
Small Business Job Protection Act of 1996. In addition, the Company recognized
the remainder of its deferred tax asset of $5.2 million. The Company also
experienced improved results in core earnings primarily attributed to increased
net interest income and noninterest income, partially offset by higher
noninterest expenses.
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 September 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 $ 9,029 $ 122 5.29% $ 23,829 $ 353 5.80%
Investment securities held to maturity 193,415 3,279 6.78% 199,396 2,912 5.84%
Investment securities available for sale 353,556 5,933 6.71% 182,225 3,154 6.92%
Residential real estate loans 241,064 4,764 7.90% 273,150 5,474 8.02%
Commercial real estate loans 119,211 2,596 8.71% 113,013 2,363 8.36%
Commercial loans 139,128 3,053 8.59% 102,886 2,495 9.49%
Home equity loans 87,201 1,834 8.37% 60,292 1,396 9.13%
Consumer loans 4,373 225 20.58% 6,354 140 8.81%
-------------- ----------- ------------ --------------- ------------ ------------
Total interest-earning assets 1,146,977 21,806 7.60% 961,545 18,287 7.61%
Allowance for loan losses (15,195) (16,219)
Non-interest-earning assets 86,001 71,154
-------------- ---------------
Total assets $ 1,217,783 $ 21,806 $ 1,016,480 18,287
============== =========== =============== ============
Interest-bearing liabilities
Deposits
Savings accounts $ 196,741 $ 1,236 2.50% $ 185,510 $ 1,168 2.50%
NOW accounts 56,639 156 1.10% 54,436 177 1.29%
Money market accounts 208,641 1,740 3.32% 206,811 1,740 3.34%
Time deposit accounts 389,219 5,137 5.25% 359,883 4,929 5.43%
-------------- ----------- ------------ --------------- ------------ ------------
Total interest-bearing deposits 851,240 8,269 3.86% 806,640 8,014 3.94%
Borrowed funds 162,513 2,292 5.52% 53,543 834 6.10%
-------------- ----------- ------------ --------------- ------------ ------------
Total interest-bearing liabilities 1,013,753 10,561 4.14% 860,183 8,848 4.08%
Non-interest-bearing liabilities 115,809 85,959
-------------- ---------------
Total liabilities 1,129,562 946,142
Stockholders' equity 88,221 70,338
-------------- ---------------
Total liabilities and stockholders'
equity $ 1,217,783 $ 10,561 $ 1,016,480 $ 8,848
============== =========== =============== ============
Net interest income/spread $11,245 3.46% $9,439 3.53%
=========== ============ ============ ============
Net interest margin as a % of interest-
earning assets 3.92% 3.93%
============ ============
Net interest income for the three months ended September 30, 1996 was $11.2
million compared to $9.4 million for the three months ended September 30, 1995,
an increase of $1.8 million or 19.1%. This increase is primarily due to a $185.4
million increase in average interest-earning assets.
Total interest income was $21.8 million for the three months ended September 30,
1996, an increase of $3.5 million or 19.2% from the same period last year. This
increase is attributable to higher levels of interest-earning assets. Average
interest-earning assets totaled $1.1 billion in the third quarter of 1996
compared to $961.5 million in the third quarter of 1995, an increase of $185.4
million or 19.3%. Total investments increased $165.4 million and were funded by
higher deposit levels and borrowed funds. Total loans increased $34.9 million as
the Company continued to focus on the commercial and home equity market
segments, which grew by $36.2 million or 35.2% and $26.5 million or 43.7%,
respectively. Residential real estate loan balances declined $32.1 million or
11.8%, reflecting significant refinancing activity during the first quarter of
1996 combined with a decrease in adjustable rate mortgage production volume for
the nine months ended September 30, 1996 versus the same period in 1995. 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 $10.6 million for the three months ended September
30, 1996 compared to $8.8 million during the same period in 1995, an increase of
$1.7 million or 19.4%. This increase is attributable to increases in
interest-bearing deposits and borrowed funds. Interest-bearing deposits totaled
$851.2 million for the quarter ended September 30, 1996 compared to $806.6
million for the same period in 1995, an increase of $44.6 million or 5.5%. This
growth occurred primarily in Time and Savings deposits, which increased $29.3
and $11.2 million respectively. Time deposits increased as a result of a new
nine month CD product, which was introduced in the second quarter of 1996.
Management believes that 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 $162.5 million for the three months ended
September 30, 1996 compared to $53.5 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 September 30,
1996 versus 1995
---------------------------------------------------
Increase (Decrease) Due to
---------------------------------------------------
Volume Rate Net
-------------- -------------- ---------------
Interest-earning assets:
Federal funds sold and
interest bearing deposits $ (210) $ (21) $ (231)
Investment securities held to maturity (94) 461 367
Investment securities available for sale 2,922 (142) 2,780
Residential real estate loans (640) (71) (711)
Commercial real estate loans 132 101 233
Commercial loans 837 (279) 558
Home equity loans 584 (146) 438
Consumer loans (73) 158 85
-------------- -------------- ---------------
Total interest-earning assets 3,458 61 3,519
-------------- -------------- ---------------
Interest-bearing liabilities:
Deposits:
Savings accounts 71 - 71
NOW accounts 7 (28) (21)
Money market accounts 15 (15) -
Time deposit accounts 394 (189) 205
-------------- -------------- ---------------
Total deposits 487 (232) 255
Borrowed funds 1,617 (159) 1,458
-------------- -------------- ---------------
Total interest-bearing liabilities 2,104 (391) 1,713
-------------- -------------- ---------------
Change in net interest income $ 1,354 $ 452 $ 1,806
============== ============== ===============
9
Provision for Possible Loan Losses
The Company added $0.8 million to its provision for possible loan losses in the
third quarter of 1996 compared to $1.0 million in the third quarter of 1995. The
provision for possible loan losses is based upon Management's judgment of the
amount necessary to maintain the allowance for possible loan losses at a level
which is considered adequate. For further discussion of this topic please refer
to "Balance Sheet Analysis - Comparison of September 30, 1996 to December 31,
1995 - Allowance for Possible Loan Losses."
Non-interest Income
Non-interest income is composed of fee income for bank services and gains or
losses from the sale of assets. The components of non-interest income for the
periods presented are as follows:
Three months ended
September 30,
----------------------------------
1996 1995
------------- -------------
Net gain (loss) on sale of loans $ 105 $ 72
Net gain (loss) on sale of securities 62 -
Loan charges and fees 948 726
Deposit related fees 1,592 1,269
Other charges and fees 221 104
------------- -------------
$ 2,928 $ 2,171
============= =============
Loan charges and fees increased $0.2 million primarily due to commercial loan
prepayment fees.
Deposit service charges increased $0.3 million due primarily to fees associated
with 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 $4.4 million for the third quarter of 1996
compared to $4.0 million for the same period in 1995, an increase of $0.4
million reflecting standard wage increases, higher ESOP and restricted stock
expenses as a result of increases in the Company's stock price, and an increase
in staffing related to new branch openings and branch related support for the
Company's consumer strategy.
10
Other Operating Expense
The components of other operating expense for the periods presented are as
follows:
Three months ended
September 30,
----------------------------------
1996 1995
------------- ---------------
Marketing and public relations $ 752 $ 337
Insurance 93 752
Professional services 854 643
Outside processing 1,035 541
Other 1,112 1,083
------------- ---------------
$ 3,846 $ 3,356
============= ===============
Marketing and public relations expense increased $0.4 million, reflecting the
expanded use of television advertising directed towards the Company's consumer
strategy.
Insurance expense includes FDIC deposit insurance expense, which totaled $1
thousand in the third quarter of 1996 compared to $0.6 million in the same
period in 1995. This decrease is attributable to a significant reduction in FDIC
premiums.
Professional services increased $0.2 million due to legal expenses related to
the Reorganization and litigation matters occurring in the normal course of
business.
Outside processing increased $0.5 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.
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 for the three months ended
September 30, 1996 remained consistent with levels in the comparable prior year
quarter.
Income Taxes
For the three month period ended September 30, 1996 the Company recorded an
income tax benefit of $6.4 million compared with income tax expense of $0.1
million for the three month period ended September 30, 1995. The decrease in
income tax expense was the result of two non-recurring tax events totaling a
benefit of $8.0 million. The Company recognized a one time gain of $2.8 million
as a result of the recently enacted Small Business Jobs Protection Act of 1996.
In addition, during the quarter, Management reevaluated the realizability of its
deferred tax asset and determined that, based on the weight of available
evidence, it was more likely than not that it would be realized. Accordingly,
the Company recognized the remainder of its deferred tax asset of $5.2 million.
The increase in income tax expense exclusive of these two items is the result of
increased pre-tax earnings in 1996.
11
Results of Operations for the Nine Months Ended September 30, 1996 and September
30, 1995
The Company reported net income of $15.7 million, or $2.82 per share, for the
nine months ended September 30, 1996 as compared to net income of $3.9 million,
or $0.75 per share, on a pro forma basis, for the same period last year. The
financial results were affected by two nonrecurring tax events totaling $8.0
million which occurred in the third quarter of 1996. The Company recognized a
one time gain of $2.8 million as a result of the recently enacted Small Business
Job Protection Act of 1996. In addition, the Company recognized the remainder of
its deferred tax asset of $5.2 million. The Company also experienced improved
results in core earnings primarily attributed to increased net interest income
and noninterest income as well as lower provisions for 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.
12
Nine Months Ended September 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 $ 9,404 $ 380 5.31% $ 21,913 $ 971 5.84%
Investment securities held to maturity 186,354 9,494 6.79% 181,658 7,965 5.85%
Investment securities available for sale 312,169 15,230 6.51% 171,893 8,484 6.58%
Residential real estate loans 246,932 14,557 7.86% 267,122 15,738 7.86%
Commercial real estate loans 119,139 7,613 8.52% 118,590 7,320 8.23%
Commercial loans 126,587 8,386 8.70% 92,321 6,535 9.33%
Home equity loans 77,748 4,911 8.44% 55,939 3,865 9.25%
Consumer loans 6,103 479 10.48% 6,542 438 8.93%
-------------- ----------- ------------ ------------ ------------ ------------
Total interest-earning assets 1,084,436 61,050 7.51% 915,878 51,316 7.47%
Allowance for loan losses (15,255) (16,425)
Non-interest-earning assets 83,851 70,128
-------------- ------------
Total assets $ 1,153,032 $ 61,050 $ 969,581 $ 51,316
============== =========== ============ ============
Interest-bearing liabilities
Deposits
Savings accounts $ 193,874 $ 3,631 2.50% $ 185,019 $ 3,447 2.49%
NOW accounts 56,101 485 1.15% 53,612 550 1.37%
Money market accounts 206,425 5,137 3.32% 214,432 5,212 3.25%
Time deposit accounts 377,253 15,085 5.34% 344,830 13,049 5.06%
-------------- ----------- ------------ ------------ ------------ ------------
Total deposits 833,653 24,338 3.90% 797,893 22,258 3.73%
Borrowed funds 129,272 5,439 5.53% 23,220 1,108 6.29%
-------------- ----------- ------------ ------------ ------------ ------------
Total interest-bearing liabilities 962,925 29,777 4.13% 821,113 23,366 3.80%
Non-interest-bearing liabilities 106,574 84,263
-------------- ------------
Total liabilities 1,069,499 905,376
Total stockholders' equity 83,533 64,205
-------------- ------------
Total liabilities and stockholders'
equity $ 1,153,032 $ 29,777 $ 969,581 $ 23,366
============== =========== ============ ============
Net interest income/spread $31,273 3.38% $27,950 3.67%
=========== ============ ============ ============
Net interest margin as a % of interest-
earning assets 3.85% 4.07%
============ ============
Net interest income for the nine months ended September 30, 1996 was $31.3
million compared to $28.0 million for the nine months ended September 30, 1995,
an increase of $3.3 million or 11.9%. This increase is primarily due to a $168.6
million increase in average interest-earning assets partially offset by a 22
basis point decrease in net interest margin.
Total interest income was $61.1 million for the nine months ended September 30,
1996, an increase of $9.7 million or 19.0% from the same period last year. This
increase is primarily attributable to higher levels of interest-earning assets.
Average interest-earning assets totaled $1.1 billion for the nine months ended
September 30, 1996 compared to $915.9 million for the same period in 1995, an
increase of $168.6 million or 18.4%. Total investments increased $145.0 million
and were funded by higher deposit levels and borrowed funds. Total loans
increased $36.1 million as the Company continued to focus on the commercial and
home equity market segments, which grew by $34.3 million or 37.1% and $21.9
million or 39.2%, respectively. Residential real estate loan balances declined
$20.2 million or 7.6%, reflecting significant refinancing activity to fixed rate
products during the first quarter of 1996, as well as a decline in production
for adjustable rate mortgage products. The Company originates long-term fixed
rate mortgages for sale in the secondary market and generally holds adjustable
rate mortgages in the Company's loan portfolio.
13
Total interest expense was $29.8 million for the nine months ended September 30,
1996 compared to $23.4 million during the same period in 1995, an increase of
$6.4 million or 27.4%. This increase is attributable to increases in
interest-bearing deposits, rates paid on deposits and borrowed funds.
Interest-bearing deposits totaled $833.7 million for the nine months ended
September 30, 1996 compared to $797.9 million for the same period in 1995, an
increase of $35.8 million or 4.5%. This growth occurred primarily in Time
deposits, which increased $32.4 million. The average rate paid on deposits was
3.90% for the nine months ended September 30, 1996 compared to 3.73% for the
nine months ended September 30, 1995, an increase of 17 basis points or 4.6%
principally reflecting repricing of the existing portfolio as well as continued
competitive pricing pressures. Borrowed funds averaged $129.3 million for the
nine months ended September 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.
Nine months ended September 30,
1996 versus 1995
---------------------------------------------------
Increase (Decrease) Due to
---------------------------------------------------
Volume Rate Net
-------------- -------------- ---------------
Interest-earning assets:
Federal funds sold and
interest bearing deposits $ (529) $ (61) $ (590)
Investment securities held to maturity 223 1,306 1,529
Investment securities available for sale 6,884 (138) 6,746
Residential real estate loans (1,190) 9 (1,181)
Commercial real estate loans 34 259 293
Commercial loans 2,347 (497) 1,850
Home equity loans 1,450 (404) 1,046
Consumer loans (32) 73 41
-------------- -------------- ---------------
Total interest-earning assets 9,187 547 9,734
-------------- -------------- ---------------
Interest-bearing liabilities:
Deposits:
Savings accounts 165 19 184
NOW accounts 24 (89) (65)
Money market accounts (197) 122 (75)
Time deposit accounts 1,262 774 2,036
-------------- -------------- ---------------
Total deposits 1,254 826 2,080
Borrowed funds 4,761 (430) 4,331
-------------- -------------- ---------------
Total interest-bearing liabilities 6,015 396 6,411
-------------- -------------- ---------------
Change in net interest income $ 3,172 $ 151 $ 3,323
============== ============== ===============
14
Provision for Possible Loan Losses
The Company added $2.2 million to its provision for possible loan losses for the
nine months ended September 30, 1996 compared to $3.4 million for the same
period in 1995. This decrease of $1.2 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 "Balance Sheet Analysis
Comparison of September 30, 1996 to December 31, 1995 - Allowance for Possible
Loan Losses."
Non-interest Income
Non-interest income is composed of fee income for bank services and gains or
losses from the sale of assets. The components of non-interest income for the
periods presented are as follows:
Nine months ended
September 30,
-------------------------------------
1996 1995
--------------- ---------------
Net gain/(loss) on sale of loans $ 537 $ 62
Net gain/(loss) on sale of securities 64 14
Loan charges and fees 2,428 2,321
Deposit related fees 4,539 3,558
Other charges and fees 678 456
--------------- ---------------
$ 8,246 $ 6,411
=============== ===============
Net gain on sale of loans increased $0.5 million due to an increase in the
amount of loans sold on a servicing released basis.
Deposit service charges increased $1.0 million due primarily to fees associated
with the Company's larger noninterest bearing account base.
Other charges and fees increased $0.2 million reflecting an increase in
brokerage fees.
Salaries and Benefits Expense
Salaries and benefits expense totaled $12.9 million for the nine months ended
September 30, 1996 compared to $11.7 million for the same period in 1995, an
increase of $1.2 million reflecting standard wage increases, the introduction of
new benefit programs including ESOP, restricted stock and 401(k) plans, and
higher ESOP and restricted stock expenses as a result of increases in the
Company's stock price.
Occupancy Expense
Total occupancy expense was $2.4 million for the nine months ended September 30,
1996, a decrease of $0.2 million from the same period in 1995 primarily as a
result of the improved operating results of SIS Center, the Company's corporate
headquarters.
15
Other Operating Expense
The components of other operating expense for the periods presented are as
follows:
Nine months ended
September 30,
------------------------------------------
1996 1995
----------------- -----------------
Marketing and public relations $ 1,629 $ 1,009
Insurance 287 2,444
Professional services 2,344 2,115
Outside processing 3,090 2,240
Other 3,267 2,863
----------------- -----------------
$ 10,617 $ 10,671
================= =================
Marketing and public relations expense increased $0.6 million, reflecting the
expanded use of television advertising directed towards the Company's consumer
strategy.
Insurance expense includes FDIC deposit insurance expense, which totaled $2
thousand for the nine months ended September 30, 1996 compared to $2.0 million
in the same period in 1995. This decrease is attributable to a significant
reduction in FDIC premiums.
Professional services increased $0.2 million due to legal expenses related to
the Reorganization and litigation matters occurring in the normal course of
business.
Outside processing increased $0.9 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 $0.4 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 $0.3 million for
the nine months ended September 30, 1996 compared to $0.5 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 for the nine months ended
September 30, 1996 remains consistent with the levels in the comparable prior
year period.
Income Taxes
For the nine month period ended September 30, 1996 the Company recorded an
income tax benefit of $5.9 million compared with income tax expense of $0.2 for
the nine month period ended September 30, 1995. The decrease in income tax
expense was the result of two non-recurring tax events in the third quarter of
1996 totaling a benefit of $8.0 million. The Company recognized a one time gain
of $2.8 million as a result of the recently enacted Small Business Jobs
Protection Act of 1996. In addition, during the quarter, Management reevaluated
the realizability of its deferred tax asset and determined that, based on the
weight of available evidence, it was more likely than not that it would be
realized. Accordingly, the Company recognized the remainder of its deferred tax
asset of $5.2 million. The increase in income tax expense exclusive of these two
items is the result of increased pre-tax earnings in 1996.
16
BALANCE SHEET ANALYSIS - COMPARISON OF SEPTEMBER 30, 1996 TO DECEMBER 31, 1995
Total assets increased from $1.1 billion at December 31, 1995 to $1.3 billion at
September 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 $160.4 million from $419.8 million
at December 31, 1995 to $580.2 million at September 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 Company's investment portfolio at the dates indicated.
September 30, 1996
------------------------------------------------------------------------
Available for Sale Held to Maturity
-------------------------------- --------------------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
-------------- ------------- ------------- -------------
U.S. government and agency obligations $ 22,062 $ 22,049 $ - $ -
Mortgage-backed securities 337,668 338,075 159,060 158,803
Other bonds and short term obligations 11,289 11,240 35,072 35,016
Other securities 14,681 14,686 - -
-------------- ------------- ------------- -------------
Total $ 385,700 $ 386,050 $ 194,132 $ 193,819
============== ============= ============= =============
December 31, 1995
------------------------------------------------------------------------
Available for Sale Held to 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
============== ============= ============= =============
17
Loan Portfolio Composition
Gross loans comprised $606.6 million or 47.2% of total assets as of September
30, 1996. The following table sets forth information concerning the Company's
loan portfolio in dollar amounts and percentages, by type of loan at September
30, 1996 and at December 31, 1995.
September 30, 1996 December 31, 1995
----------------------------- -----------------------------
Percent of Percent of
Amount Total Amount Total
------------- -------------- ------------- -------------
Residential real estate loans $ 244,067 40.24% $ 263,551 45.99%
Commercial real estate loans 121,803 20.08% 118,005 20.59%
Commercial loans 144,431 23.81% 117,674 20.53%
Home equity loans 91,554 15.09% 67,657 11.81%
Consumer loans 4,707 0.78% 6,196 1.08%
------------- -------------- ------------- -------------
Total loans receivable, gross 606,562 100.00% 573,083 100.00%
Less:
Unearned income and fees (977) (566)
Allowance for possible loan losses 15,488 14,986
------------- -------------
Total loans receivable, net $ 592,051 $ 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 nine months ended September 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 September 30, 1996.
During the nine months ended September 30, 1996, commercial loan balances
increased $26.8 million, reflecting the Company's continued focus on lending
activities in the local business market.
Home equity loans outstanding have increased $23.9 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 decrease in the Company's consumer loan portfolio from December 31, 1995 to
September 30, 1996 reflects the July 10, 1996 sale of the Company's student loan
portfolio and a runoff in personal installment loan balances partially offset by
an increase of $0.8 million in overdraft protection lines. Effective July 1,
1996, the Company discontinued the origination of student loans. The Company
will provide applications to prospective borrowers and refer these customers to
the Student Loan Marketing Association. 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.
18
Non-performing Assets
Non-performing assets totaled $7.6 million as of September 30, 1996 compared to
$13.9 million as of December 31, 1995, a decrease of $6.3 million or 45.2%.
The following table sets forth information regarding the components of
non-performing assets for the periods presented:
September 30, 1996 December 31, 1995
-------------------- --------------------
Non-accrual loans (1):
Residential real estate loans $ 1,149 $ 2,553
Commercial real estate loans 2,805 5,745
Commercial loans 859 638
Home equity loans 221 90
Consumer loans 27 11
-------------------- --------------------
Total non-accrual loans 5,061 9,037
-------------------- --------------------
Loans past due 90 days still accruing (2) 1,143 587
-------------------- --------------------
Total non-performing loans 6,204 9,624
Foreclosed real estate (3) 512 1,529
Restructured loans on accrual status (4) 887 2,732
-------------------- --------------------
Total non-performing assets $ 7,603 $ 13,885
==================== ====================
Total non-performing loans to total
gross loans 1.05% 1.72%
Total non-performing assets to total
assets 0.59% 1.30%
Allowance for possible losses to
non-performing loans 249.65% 155.71%
<FN>
(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).
</FN>
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 balances sheet weaknesses. Potential problem loans
totaled $15.6 million or 1.2% of total assets at September 30, 1996 compared to
$20.7 million or 1.9% of total assets at December 31, 1995.
19
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, historical 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 September 30, 1996 was $15.5 million,
compared to $16.6 million at September 30, 1995. The activity in the allowance
for possible loan losses for the nine months ended September 30, 1996 and 1995
was as follows:
Nine Months ended September 30,
-----------------------------
1996 1995
------------ ------------
Balance at beginning of period $ 14,986 $ 15,844
Provision for possible loan losses 2,200 3,357
Charge-offs:
Residential real estate loans (755) (414)
Commercial real estate loans (2,255) (2,048)
Commercial loans (355) (489)
Home equity loans (190) (25)
Consumer loans (61) (182)
------------ ------------
Total charge-offs (3,616) (3,158)
------------ ------------
Recoveries:
Residential real estate loans 594 51
Commercial real estate loans 1036 242
Commercial loans 163 141
Home equity loans 98 68
Consumer loans 27 71
------------ ------------
Total recoveries 1,918 573
------------ ------------
Net charge-offs (1,698) (2,585)
------------ ------------
Balance, end of period $ 15,488 $ 16,616
============ ============
Ratio of allowance for possible loan losses
to total loans at the end of the period 2.55% 2.99%
Ratio of allowance for possible loan losses to
non-performing loans at the end of the period 249.65% 123.94%
20
At September 30, 1996, the recorded investment in loans that are considered
impaired under SFAS 114 was $9.0 million. Included in this amount is $0.4
million of impaired loans for which the related SFAS 114 allowance is $0.1
million and $8.6 million of impaired loans for which the SFAS 114 allowance is
zero. The average recorded investment in impaired loans during the three and
nine months ended September 30, 1996 was approximately $7.2 million and $9.0
million, respectively. For the three and nine month periods ended September 30,
1996, the Company recognized interest income on these impaired loans of $0.1
million and $0.3 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.
September 30, 1996 December 31, 1995
------------------------------- -------------------------------
% of Total % of Total
Allowance Allowance
for for
Amount Loan Losses Amount Loan Losses
----------- ---------------- ------------ ----------------
Residential real estate loans $1,561 10.08% $1,881 12.55%
Commercial real estate loans 6,872 44.37% 6,784 45.27%
Commercial loans 5,814 37.54% 5,480 36.57%
Home equity loans 964 6.22% 672 4.48%
Consumer loans 277 1.79% 169 1.13%
----------- ---------------- ------------ ----------------
Total allowance for
possible loan losses $15,488 100.00% $14,986 100.00%
=========== ================ ============ ================
21
Deposit Distribution
The principal source of funds for the Company are deposits from local consumers
and businesses. There were no brokered deposits at September 30, 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 $954.1 million at September 30, 1996 compared to $885.4
million at December 31, 1995, an increase of $68.7 million. This growth occurred
primarily in Demand deposits, Savings accounts and Time deposits. Demand
deposits and Savings accounts increased $28.8 million and $9.6 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 provide 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 $16.1 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 1996.
As of September 30, 1996, total balances for this new product were $15.2
million.
The following table presents the composition of deposits for the periods
indicated:
September 30, 1996 December 31, 1995
------------------------------ -----------------------------
Percent Percent
of of
Amount Total Amount Total
-------------- ------------ -------------- ------------
Demand deposits $ 100,334 10.52% $ 71,539 8.08%
NOW accounts 56,542 5.93% 57,271 6.47%
Savings accounts 195,150 20.45% 185,555 20.96%
Money market accounts 210,887 22.10% 203,313 22.96%
Time deposits 391,219 41.00% 367,708 41.53%
-------------- ------------ -------------- ------------
Total deposits $ 954,132 100.00% 885,386 100.00%
============== ============ ============== ============
22
Regulatory Capital
Under current Federal Reserve Board (the "FRB") capital regulations, bank
holding companies, such as the Company, 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 Company as
of September 30, 1996 and December 31, 1995 as well as the September 30, 1996
minimum FRB capital requirements.
September 30, December 31, FRB
1996 1995 Requirement
------------- ------------ ------------
Tier 1 leverage capital ratio 7.31% 7.57% 3.00% (1)
Tier 1 risk-based capital ratio 12.13% 12.52% 4.00%
Total risk-based capital ratio 13.39% 13.77% 8.00%
(1) The FRB expects most bank holding companies, including those organizations
experiencing or anticipating significant growth, to operate with an additional
cushion of Tier 1 leverage capital of at least 100 to 200 basis points.
23
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 $40.1 million or 3.13%
of total assets at September 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 September 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.
24
GAP Position
at September 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 $ 17,545 $ - $ - $ - $ 17,545
Investment securities 330,844 109,229 105,354 34,755 580,182
Residential real estate loans 73,957 68,579 85,441 15,248 243,225
Commercial real estate loans 49,151 10,645 59,201 - 118,997
Commercial loans 62,985 11,478 66,691 2,638 143,792
Home equity loans 71,789 1,022 11,632 7,399 91,842
Consumer loans 3,835 192 380 215 4,622
Other assets - - - 84,361 84,361
-------------- -------------- -------------- --------------- --------------
Total assets $ 610,106 $ 201,145 $ 328,699 $ 144,616 $ 1,284,566
============== ============== ============== =============== ==============
Liabilities & stockholders' equity:
Savings accounts $ 29,272 $ 29,272 $ 136,606 $ - $ 195,150
NOW accounts 8,482 8,482 39,578 - 56,542
Money market accounts 63,266 63,266 84,355 - 210,887
Time deposits 219,250 110,528 61,441 - 391,219
Borrowed funds 174,223 25,053 497 2,586 202,359
Other liabilities & stockholders' equity 20,006 20,006 60,021 128,376 228,409
-------------- -------------- -------------- --------------- --------------
Total liabilities & stockholders' equity $ 514,499 $ 256,607 $ 382,498 $ 130,962 $ 1,284,566
============== ============== ============== =============== ==============
Period GAP position $ 95,607 $ (55,462) $ (53,799) $ 13,654
Net period GAP as a percentage of total assets 7.44% -4.32% -4.19% 1.06%
Cumulative GAP $ 95,607 $ 40,145 $ (13,654) -
Cumulative GAP as a percentage of total
assets 7.44% 3.13% -1.06% -
<FN>
For purposes of the above interest sensitivity analysis:
Residential loans held for sale at September 30, 1996 totaling $4.5 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 $5.1 million.
Loans do not include the allowance for loan loss of $15.5 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 $100.3 million are included in other liabilities
and are assumed to decay at an annual rate of 40%.
</FN>
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.
25
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.
26
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 of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
11. Computation of Earnings per Share and Pro Forma
Earnings per Share
(b) Reports on Form 8-K
On September 26, 1996, the Company filed a current report on Form
8-K regarding an announcement of the Company's intended treatment of
certain tax benefits.
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)
November 14, 1996 /s/ F. William Marshall, Jr.
- ------------------- -----------------------------------
Date F. William Marshall, Jr.
President and Chief Executive Officer
November 14, 1996 /s/ John F. Treanor
- ------------------- -----------------------------------
Date John F. Treanor
Executive Vice President and Chief
Financial Officer
28