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 06/30/97
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: 5,576,842 shares as of August 4, 1997.
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") wish to caution readers that
the following important factors, among others, may have affected and could in
the future affect the Company's actual results and could cause the Company's
actual results for subsequent periods to differ materially from those expressed
in any forward-looking statement made by or on behalf of the Company herein: (i)
the effect of changes in laws and regulations, including federal and state
banking laws and regulations, with which the Company must comply, and the
associated costs of compliance with such laws and regulations either currently
or in the future as applicable; (ii) the effect of changes in accounting
policies and practices, as may be adopted by the regulatory agencies as well as
by the Financial Accounting Standards Board, 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 Statement of Operations for the
three and six months ended June 30, 1997 and 1996........................ 1
Condensed Consolidated Statement of Financial Condition
at June 30, 1997 and December 31, 199.................................... 2
Condensed Consolidated Statement of Cash Flows for the
six months ended June 30, 1997 and 1996.................................. 3
Condensed Consolidated Statement of Changes in Stockholders' Equity
for the six months ended June 30, 1997 and 1996.......................... 5
Notes to the Unaudited Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................ 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................................. 27
SIGNATURES............................................................... 28
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars In Thousands Except Per Share Amounts)
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
---------------------- ---------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
--------- --------- --------- ---------
Interest and dividend income:
Loans $ 13,343 $ 11,922 $ 26,327 $ 23,474
Investment securities available for sale 8,298 5,170 16,086 9,296
Investment securities held to maturity 3,317 3,269 6,680 6,215
Federal funds sold and short term investments 130 45 359 259
-------- -------- -------- --------
Total interest and dividend income 25,088 20,406 49,452 39,244
-------- -------- -------- --------
Interest expense:
Deposits 8,542 7,992 16,879 16,068
Borrowings 3,990 1,957 7,524 3,148
-------- -------- -------- --------
Total interest expense 12,532 9,949 24,403 19,216
-------- -------- -------- --------
Net interest and dividend income 12,556 10,457 25,049 20,028
Less: Provision for possible loan losses 400 750 801 1,450
-------- -------- -------- --------
Net interest and dividend income after provision
for possible loan losses 12,156 9,707 24,248 18,578
Noninterest income:
Net gain on sale of loans 86 162 192 432
Net gain on sale of securities 11 -- 11 2
Fees and other income 2,764 2,575 5,376 4,884
-------- -------- -------- --------
Total noninterest income 2,861 2,737 5,579 5,318
-------- -------- -------- --------
Noninterest expense:
Operating expenses:
Salaries and employee benefits 4,941 4,242 9,660 8,492
Occupancy expense of bank premises, net 927 795 1,903 1,577
Furniture and equipment expense 523 514 1,031 1,056
Other operating expenses 3,568 3,656 7,241 6,771
-------- -------- -------- --------
Total operating expenses 9,959 9,207 19,835 17,896
-------- -------- -------- --------
Foreclosed real estate (income) expense (4) 63 (32) 223
Net expense (income) of real estate operations 58 (148) 479 (162)
-------- -------- -------- --------
Total noninterest expense 10,013 9,122 20,282 17,957
Income before income tax expense 5,004 3,322 9,545 5,939
Income tax expense 2,014 278 3,785 490
-------- -------- -------- --------
Net income $ 2,990 $ 3,044 $ 5,660 $ 5,449
======== ======== ======== ========
Earnings per share:
Primary $ 0.53 $ 0.56 $ 1.03 $ 1.00
Fully diluted $ 0.53 $ 0.56 $ 1.02 $ 1.00
Weighted average shares outstanding:
Primary 5,634,786 5,434,834 5,608,141 5,432,265
Fully diluted 5,657,177 5,450,529 5,640,349 5,445,968
See accompanying Notes to the Unaudited Financial Statements
1
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars In Thousands Except Share Amounts)
(Unaudited)
June 30, December 31,
1997 1996
----------- -----------
ASSETS
Cash and due from banks $ 42,807 31,902
Federal funds sold and short-term investments 10,585 10,045
Investment securities available for sale 493,862 449,323
Investment securities held to maturity (fair value: $184,424 at June 30, 1997
and $191,617 at December 31, 1996) 184,993 192,174
Loans receivable, net of allowance for possible losses
($16,392 at June 30, 1997 and $15,597 at December 31, 1996) 645,877 610,597
Accrued interest and dividends receivable 9,846 8,982
Investments in real estate and real estate partnerships 2,703 2,757
Foreclosed real estate, net 214 381
Bank premises, furniture and fixtures, net 27,783 27,106
Other assets 15,875 15,345
----------- -----------
Total assets $ 1,434,545 $ 1,348,612
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,015,404 $ 969,517
Federal Home Loan Bank advances 118,878 68,471
Securities sold under agreements to repurchase 158,809 176,577
Loans payable 2,670 2,848
Mortgage escrow deposits 4,707 4,396
Accrued expenses and other liabilities 30,804 24,886
----------- -----------
Total liabilities 1,331,272 1,246,695
----------- -----------
Commitments and contingent liabilities -- --
Stockholders' equity:
Preferred stock ($.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding) -- --
Common stock ($.01 par value; 25,000,000 shares authorized; shares
issued: 5,727,242 at June 30, 1997 and 5,723,600 at December 31, 1996;
outstanding: 5,576,842 at June 30, 1997 and 5,723,600 at December 31, 1996) 57 57
Unearned compensation (3,306) (3,693)
Additional paid-in capital 43,039 42,665
Retained earnings 65,472 60,993
Net unrealized gain on investment securities available for sale 1,976 1,895
Treasury stock, at cost (150,400 shares at June 30, 1997) (3,965) --
----------- -----------
Total stockholders' equity 103,273 101,917
----------- -----------
Total liabilities and stockholders' equity $ 1,434,545 $ 1,348,612
=========== ===========
See accompanying Notes to the Unaudited Financial Statements
2
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars In Thousands)
(Unaudited)
Six Months Ended
June 30,
-----------------------
1997 1996
---------- ----------
Cash Flows From Operating Activities
Net income $ 5,760 $ 5,449
Adjustments to reconcile net income to net cash provided by/
(used for) operating activities
Provision for possible loan losses 801 1,450
Depreciation 1,479 1,510
Amortization of premium on investment securities, net 1,112 1,193
ESOP and restricted stock expenses 868 722
Investment security gains -- (2)
Income from equity investment in partnerships (2) (145)
Gain on sale of loans (192) (432)
Disbursements for mortgage loans held for sale (26,746) (54,864)
Receipts from mortgage loans held for sale 26,938 55,296
Loss on sale of fixed assets and real estate -- 342
Changes in other assets and other liabilities:
Increase in other assets, net (1,803) (1,644)
Increase in accrued expenses and other liabilities 5,918 680
--------- ---------
Net cash provided by operating activities 14,133 9,555
--------- ---------
Cash Flows From Investing Activities
Proceeds from sales of investment securities available for sale 3,634 12,200
Proceeds from maturities and principal payments received
on investment securities available for sale 62,425 71,652
Purchase of investment securities available for sale (110,994) (176,695)
Proceeds from maturities and principal payments received
on investment securities held to maturity 21,333 25,862
Purchase of investment securities held to maturity (14,378) (46,583)
Net decrease in investments in real estate -- 475
Net increase in loans receivable (36,201) (22,549)
Net decrease in foreclosed real estate 195 1,767
Proceeds from sale of loans 92 462
Purchase of fixed assets (2,100) (1,480)
--------- ---------
Net cash used for investing activities (75,994) (134,889)
--------- ---------
See accompanying Notes to the Unaudited Financial Statements
3
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (continued)
(Dollars In Thousands)
(Unaudited)
Six Months Ended
June 30,
---------------------
1997 1996
-------- ---------
Cash Flows from Financing Activities
Net increase in deposits 45,887 41,912
Net increase in borrowings 32,461 90,848
Net increase in mortgagors' escrow deposits 311 128
Net proceeds from exercise of stock options 121 --
Repurchase of common stock (4,193) --
Cash dividends paid (1,281) --
-------- --------
Net cash provided by financing activities 73,306 132,888
-------- --------
Increase in cash and cash equivalents 11,445 7,554
Cash and cash equivalents, beginning of period 41,947 38,422
-------- --------
Cash and cash equivalents, end of period $ 53,392 $ 45,976
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest to depositors
and interest on debt $ 23,734 $ 19,217
Non-cash investing activities:
Transfers to foreclosed real estate, net $ 28 $ 665
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, 1997 and 1996
(Dollars In Thousands)
Net unrealized
gain (loss)
on investment
Unearned Additional securities Treasury
Common Compen- Paid-In Retained available Stock
Stock sation Capital Earnings for sale at Cost Total
------- -------- --------- -------- ------------ ---------- ---------
Balance at December 31, 1996 $ 57 $(3,693) $42,665 $60,993 $ 1,895 $ -- $ 101,917
Net income -- -- -- 5,760 -- -- 5,760
Cash dividends declared ($0.24 per share) -- -- -- (1,281) -- -- (1,281)
Issuance of common stock in connection with employee
and non-employee directors benefit programs -- (98) (9) -- -- 228 121
Decrease in unearned compensation -- 485 383 -- -- -- 868
Change in unrealized gain (loss) on investment
securities available for sale -- -- -- -- 81 -- 81
Treasury stock purchased -- -- -- -- -- (4,193) (4,193)
------ ------- ------- ------- --------- ------- ---------
Balance at June 30, 1997 $ 57 $(3,306) $43,039 $65,472 $ 1,976 $(3,965) $ 103,273
====== ======= ======= ======= ========= ======= =========
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 in connection with employee
and non-employee directors benefit programs -- (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
====== ======= ======= ======= ========= ======= =========
See accompanying Notes to the Unaudited Financial Statements
5
SIS BANCORP, INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
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 in a manner similar to 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 Reorganization had been effected on January 1,
1996.
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 Securities and Exchange
Commission ("SEC") Form 10-K and accompanying Notes to the Financial Statements
(the "Form 10-K") filed by the Company for the year ended December 31, 1996.
Management believes that the disclosures contained herein are adequate to make a
fair presentation.
These unaudited condensed consolidated financial statements should be read in
conjunction with the Form 10-K.
The results for the three and 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, 1997, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", that provides accounting and
reporting standards which require that after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. In addition to
setting requirements regarding the initial recording and subsequent accounting
for assets, liabilities and derivatives acquired in transfers of financial
assets, this Statement requires that debtors reclassify financial assets pledged
as collateral and that secured parties recognize those assets and their
obligation to return them in certain circumstances in which the secured party
has taken control of those assets. SFAS 125 is effective prospectively for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996 and for collateral related matters on January
1, 1998. The adoption of this statement did not have a material affect on the
Company's financial position as of June 30, 1997 or on the results of its
operations for the three and six month periods then ended.
In February of 1997 the Financial Accounting Standards Board issued SFAS 128,
"Earnings Per Share". SFAS 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. This statement simplifies the standards
for computing EPS previously found in APB Opinion No. 15, "Earnings Per Share,"
and makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures and requires reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. SFAS 128 will be effective for
financial statements issued after December 15, 1997, and will be adopted by the
Company in its December 31, 1997 financial statements.
If SFAS 128 had been effective during the first six months of 1997, pro forma
basic EPS for the three and six months ended June 30, 1997 would have been $0.57
and $1.10, respectively. Pro forma diluted EPS for the three and six months
ended June 30, 1997 would have been $0.53 and $1.03, respectively.
6
4. Dividend Policy
The Company paid a cash dividend in the amount of $0.12 per share on May 23,
1997. On July 23, 1997 the Company declared a dividend of $0.14 per share
payable on August 21, 1997 to shareholders of record as of the close of business
on August 4, 1997.
5. Divestment Related Charges
The Company has certain subsidiaries that are engaged in various real estate
investments, directly or in joint ventures with unaffiliated partners. In
accordance with the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the Company has terminated its real estate development
activities and is in the process of selling its remaining real estate
investments. In the first quarter of 1997, the Company established a reserve of
$1.0 million relating to the divestment of its real estate investment and
brokerage subsidiaries, Colebrook Inc. and subsidiaries (" Colebrook"). This
amount is included in net expense of real estate operations in the June 30, 1997
Condensed Consolidated Statement of Operations. The $1.0 million reserve
consists of $0.7 million in severance and benefit accruals and $0.3 million for
other expenses. As of June 30, 1997, no amounts have been paid relating to the
divestiture. This divestment is scheduled to be completed by March 31, 1998.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
Overview
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. Substantially all of the Company's operations are conducted through the
Bank. The Bank provides a wide variety of financial services which include
retail and commercial banking, residential mortgage origination and servicing,
and commercial and consumer lending. 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, 1997 and June 30, 1996
The Company reported net income of $3.0 million, or $0.53 per share fully
diluted for the second quarter of 1997 as compared to net income of $3.0
million, or $0.56 per share fully diluted for the same period last year. These
results reflect an increase in net interest income as well as lower provisions
for possible loan losses, offset by increases in noninterest expense and income
tax expense.
Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income is
affected by the mix and volume of assets and liabilities, and the movement and
level of interest rates. The Company invests in certain assets that have
preferential tax treatment. In order to present yields on a comparable basis,
net interest income is presented on a fully taxable equivalent basis for
purposes of yield and margin analysis.
The following table sets forth, for the period indicated, average balances,
interest income and expense, and yields earned or rates paid on the major
categories of assets and liabilities. Non-accrual loans have been included in
the appropriate average balance loan category, but unpaid interest on
non-accrual loans has not been included for purposes of determining interest
income. In addition, investment securities available for sale are reflected at
amortized cost.
8
Three Months Ended June 30,
------------------------------------------------------------------------------------
1997 1996
---------------------------------------- -----------------------------------------
Average Average Average Average
Balance Interest(1) Yield/Cost(1) Balance Interest(1) Yield/Cost)(1)
---------- ------------ ------------- ---------- ------------- ---------------
(Dollars In Thousands)
Interest-earning assets:
Fed funds sold and short-term investments $ 9,764 $ 131 5.31% $ 3,396 $ 45 5.24%
Investment securities held to maturity 190,435 3,318 6.97% 193,672 3,269 6.75%
Investment securities available for sale 493,752 8,365 6.78% 319,709 5,170 6.47%
Residential real estate loans 235,695 4,744 8.05% 243,998 4,758 7.80%
Commercial real estate loans 113,098 2,464 8.71% 119,523 2,573 8.61%
Commercial loans 174,434 3,810 8.64% 128,974 2,841 8.71%
Home equity loans 114,075 2,241 7.88% 76,590 1,592 8.36%
Consumer loans 4,408 135 12.25% 7,096 158 8.91%
---------- ---------- ----- ---------- --------- -----
Total interest-earning assets 1,335,661 25,208 7.55% 1,092,958 20,406 7.47%
Allowance for loan losses (16,447) (14,737)
Non-interest-earning assets 92,818 84,258
--------- ----------
Total assets $1,412,032 $ 25,208 $1,162,479 $ 20,406
========== ========== ========== =========
Interest-bearing liabilities:
Deposits
Savings accounts $ 206,839 $ 1,161 2.25% $ 195,987 $ 1,218 2.50%
NOW accounts 59,222 148 1.00% 57,412 161 1.13%
Money market accounts 205,782 1,703 3.32% 206,801 1,701 3.31%
Time deposit accounts 422,393 5,530 5.25% 371,828 4,912 5.31%
---------- ---------- ----- ---------- --------- -----
Total interest-bearing deposits 894,236 8,542 3.83% 832,028 7,992 3.86%
Borrowed funds 274,991 3,990 5.74% 141,217 1,957 5.48%
---------- ---------- ----- ---------- --------- -----
Total interest-bearing liabilities 1,169,227 12,532 4.30% 973,245 9,949 4.11%
Non-interest-bearing liabilities 142,110 106,530
--------- ----------
Total liabilities 1,311,337 1,079,775
Total stockholders' equity 100,695 82,704
---------- ----------
Total liabilities and stockholders' equity $1,412,032 $ 12,532 $1,162,479 $ 9,949
========== ========== ========== =========
Net interest income/spread $ 12,676 3.25% $ 10,457 3.36%
========== ===== ========= =====
Net interest margin as a % of interest-
earning assets 3.80% 3.83%
===== =====
Tax equivalent adjustment $ 120 $ -
--------- ---------
Net interest income/spread per Condensed Consolidated
Statement of Operations $ 12,556 $ 10,457
========= =========
<FN>
(1) On a fully taxable equivalent basis. Calculated using a Federal income tax rate of 34% for 1997 and 1996.
</FN>
Net interest income on a fully taxable equivalent basis for the three months
ended June 30, 1997 was $12.7 million compared to $10.5 million for the three
months ended June 30, 1996, an increase of $2.2 million or 21.2%. Total interest
income was $25.2 million on a fully taxable equivalent basis for the three
months ended June 30, 1997, an increase of $4.8 million or 23.5% from the same
period last year. These increases are primarily due to an increase in average
interest-earning assets.
Average interest-earning assets totaled $1.3 billion in the second quarter of
1997 compared to $1.1 billion in the second quarter of 1996, an increase of
$242.7 million or 22.2%. Total investments increased $170.8 million and were
funded by higher deposit levels and borrowed funds. Total loans increased $65.5
million as the Company continued to focus on the commercial and home equity
market segments, which grew by $45.5 million or 35.3% and $37.5 million or
48.9%, respectively. Residential real estate loan balances declined $8.3 million
or 3.4% for the three months ended June 30, 1997, reflecting amortization and
prepayments of the existing loan portfolio partially offset by adjustable rate
9
mortgage production. The Company originates long-term fixed rate mortgages for
sale in the secondary market and generally holds adjustable rate mortgages in
the Company's loan portfolio.
Total interest expense was $12.5 million for the three months ended June 30,
1997 compared to $9.9 million during the same period in 1996, an increase of
$2.6 million or 26.0%. This increase is attributable to increases in
interest-bearing deposits and borrowed funds. Average interest-bearing deposits
totaled $894.2 million for the quarter ended June 30, 1997 compared to $832.0
million for the same period in 1996, an increase of $62.2 million or 7.5%. This
growth occurred primarily in time deposits which increased $50.6 million largely
attributable to the introduction of new CD products. Borrowed funds averaged
$275.0 million for the three months ended June 30, 1997 compared to $141.2
million for the same period in 1996 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 (on a fully
taxable equivalent basis) resulting from changes in interest rates or changes in
the volume of interest-earning assets and interest-bearing liabilities during
the periods indicated. Changes which are attributable to both rate and volume
have been allocated evenly between the change in rate and volume components.
Three months ended June 30,
1997 versus 1996
------------------------------
Increase (Decrease) Due to
------------------------------
Volume Rate Net
--------- -------- --------
Interest-earning assets:
Federal funds sold and
interest bearing deposits $ 85 $ 1 $ 86
Investment securities held to maturity (56) 104 48
Investment securities available for sale 2,882 314 3,196
Residential real estate loans (165) 151 (14)
Commercial real estate loans (139) 30 (109)
Commercial loans 997 (28) 969
Home equity loans 758 (109) 649
Consumer loans (71) 48 (23)
------- ------- -------
Total interest-earning assets 4,291 511 4,802
------- ------- -------
Interest-bearing liabilities:
Deposits:
Savings accounts 64 (121) (57)
NOW accounts 5 (18) (13)
Money market accounts (8) 10 2
Time deposit accounts 665 (47) 618
------- ------- -------
Total deposits 726 (176) 550
Borrowed funds 1,897 136 2,033
------- ------- -------
Total interest-bearing liabilities 2,623 (40) 2,583
------- ------- -------
Change in net interest income $ 1,668 $ 551 $ 2,219
======= ======= =======
Provision for Possible Loan Losses
The Company's provision for possible loan losses was $0.4 million for the second
quarter of 1997 compared to $0.8 million in the second quarter of 1996. The
provision for possible loan losses is based upon management's judgment of the
amount necessary to maintain the allowance for possible loan losses at a level
which is considered adequate.
10
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,
---------------------------
1997 1996
------- -------
Net gain on sale of loans $ 86 $ 162
Net gain on sale of securities 11 --
Loan charges and fees 696 754
Deposit related fees 1,690 1,544
Other charges and fees 378 277
------ ------
$2,861 $2,737
====== ======
Net gain on sale of loans decreased $0.1 million. Management attributes the
decrease to reduced production and sale of fixed rate single family residential
mortgage loans due to a higher interest rate environment.
Loan charges and fees decreased $0.1 million as a result of lower mortgage
servicing fees.
Deposit service charges increased $0.1 million due primarily to fees associated
with the Company's larger noninterest bearing account base.
Non-interest Expense
Salaries and Benefits Expense
Salaries and benefits expense totaled $4.9 million for the second quarter of
1997 compared to $4.2 million for the same period in 1996, an increase of $0.7
million reflecting standard wage increases as well as an increase in staffing
related to new branch openings and branch related support.
Occupancy Expense of Bank Premises
Occupancy expense of bank premises totaled $0.9 million for the second quarter
1997 compared to $0.8 million for the same period in 1996, an increase of $0.1
million. This increase is primarily due to costs associated with the expansion
of the retail branch network and the addition of stand alone ATMs.
11
Other Operating Expense
The components of other operating expense for the periods presented are as
follows:
Three months ended
June 30,
------------------------
1997 1996
------- -------
Marketing $ 406 $ 422
Insurance 131 93
Professional services 609 851
Outside processing 1,160 1,098
Other 1,262 1,192
------ ------
$3,568 $3,656
====== ======
Professional services expense decreased $0.2 million, primarily due to lower
levels of legal, consulting, and audit and accounting expenses.
Outside processing expense increased $0.1 million, reflecting higher transaction
and account volume resulting from 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 remained relatively
flat for the three months ended June 30, 1997 compared to the same period last
year.
Net Expense of Real Estate Operations
The Company's real estate investment and brokerage subsidiary, Colebrook Inc.
and subsidiaries ("Colebrook") engages in various real estate investments,
directly or in joint ventures with unaffiliated partners. In accordance with the
Federal Deposit Insurance Corporation Improvement Act of 1991 (" FDICIA"), the
Company 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 of $0.1 million and $(0.1) million for the three months ended
June 30, 1997 and June 30, 1996, respectively reflects normal operating results.
Income Taxes
For the three months ended June 30, 1997 the Company recorded income tax expense
of $2.0 million compared with income tax expense of $0.3 million for the three
months ended June 30, 1996. The increase in income tax expense is attributable
to the Company becoming fully taxable for financial reporting purposes beginning
in the fourth quarter of 1996 and a 50.6% increase in pre-tax earnings.
12
Results of Operations for the Six Months Ended June 30, 1997 and June 30, 1996
The Company reported net income of $5.8 million, or $1.03 per share fully
diluted for the six months ended June 30, 1997 as compared to net income of $5.4
million, or $1.00 per share fully diluted for the same period last year. The
improved results are primarily attributable to increased net interest income as
well as lower provisions for possible loan losses partially offset by higher
noninterest expenses and income tax expense.
Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income is
affected by the mix and volume of assets and liabilities, and the movement and
level of interest rates. The Company invests in certain assets that have
preferential tax treatment. In order to present yields on a comparable basis,
net interest income is presented on a fully taxable equivalent basis for
purposes of yield and margin analysis.
The following table sets forth, for the period indicated, average balances,
interest income and expense, and yields earned or rates paid on the major
categories of assets and liabilities. Non-accrual loans have been included in
the appropriate average balance loan category, but unpaid interest on
non-accrual loans has not been included for purposes of determining interest
income. In addition, investment securities available for sale are reflected at
amortized cost.
Six Months Ended June 30,
------------------------------------------------------------------------------------
1997 1996
---------------------------------------- -----------------------------------------
Average Average Average Average
Balance Interest(1) Yield/Cost(1) Balance Interest(1) Yield/Cost)(1)
---------- ------------ ------------- ---------- ------------- ---------------
(Dollars In Thousands)
Interest-earning assets:
Fed funds sold and short-term investments $ 13,645 $ 359 5.23% $ 9,594 $ 259 5.34%
Investment securities held to maturity 191,748 6,680 6.97% 182,841 6,215 6.80%
Investment securities available for sale 475,878 16,240 6.83% 291,192 9,296 6.38%
Residential real estate loans 236,501 9,475 8.01% 249,899 9,792 7.84%
Commercial real estate loans 114,180 5,022 8.80% 119,102 5,018 8.43%
Commercial loans 169,996 7,337 8.58% 120,248 5,333 8.77%
Home equity loans 110,091 4,316 7.91% 72,971 3,077 8.48%
Consumer loans 4,409 263 11.93% 6,977 254 7.32%
---------- ---------- ----- ---------- ---------- ----
Total interest-earning assets 1,316,448 49,692 7.55% 1,052,824 39,244 7.45%
Allowance for loan losses (16,167) (15,286)
Non-interest-earning assets 91,521 82,267
---------- ----------
Total assets $1,391,802 $ 49,692 $1,119,805 $ 39,244
========== ========== ========== ==========
Interest-bearing liabilities:
Deposits
Savings accounts $ 202,625 $ 2,260 2.25% $ 192,419 $ 2,395 2.50%
NOW accounts 58,632 292 1.00% 55,829 328 1.18%
Money market accounts 205,511 3,381 3.32% 205,305 3,397 3.33%
Time deposit accounts 422,101 10,946 5.23% 371,205 9,948 5.39%
---------- ---------- ----- ---------- ---------- ----
Total interest-bearing deposits 888,869 16,879 3.83% 824,758 16,068 3.92%
Borrowed funds 265,985 7,524 5.63% 112,469 3,148 5.54%
---------- ---------- ----- ---------- ---------- ----
Total interest-bearing liabilities 1,154,854 24,403 4.26% 937,227 19,216 4.12%
Non-interest-bearing liabilities 136,375 101,415
---------- ----------
Total liabilities 1,291,229 1,038,642
Total stockholders' equity 100,573 81,163
---------- ----------
Total liabilities and stockholders' equity $1,391,802 $ 24,403 $1,119,805 $ 19,216
========== ========== ========== ==========
Net interest income/spread $ 25,289 3.29% $ 20,028 3.33%
========== ===== ========== =====
Net interest margin as a % of interest-
earning assets 3.84% 3.80%
===== =====
Tax equivalent adjustment $ 240 $ -
---------- ----------
Net interest income/spread per Condensed Consolidated
Statement of Operations $ 25,049 $ 20,028
========== ==========
<FN>
(1) On a fully taxable equivalent basis. Calculated using a Federal income tax rate of 34% for 1997 and 1996.
</FN>
13
Net interest income on a fully taxable equivalent basis for the six months ended
June 30, 1997 was $25.3 million compared to $20.0 million for the six months
ended June 30, 1997, an increase of $5.3 million or 26.3%. Total interest income
was $49.7 million on a fully taxable equivalent basis for the six months ended
June 30, 1997, an increase of $10.4 million or 26.7% from the same period last
year. These increases are primarily due to an increase in average
interest-earning assets.
Average interest-earning assets totaled $1.3 billion for the six months ended
June 30, 1997 compared to $1.1 billion for the same period in 1996, an increase
of $263.6 million or 25.0%. Total investments increased $193.6 million and were
funded by higher deposit levels and borrowed funds. Total loans increased $66.0
million as the Company continued to focus on the commercial and home equity
market segments, which grew by $49.7 million or 41.4% and $37.1 million or
50.9%, respectively. Residential real estate loan balances declined $13.4
million or 5.4% for the six months ended June 30, 1997, reflecting amortization
and prepayments of the existing loan portfolio partially offset by adjustable
rate mortgage production. The Company originates long-term fixed rate mortgages
for sale in the secondary market and generally holds adjustable rate mortgages
in the Company's loan portfolio.
Total interest expense was $24.4 million for the six months ended June 30, 1997
compared to $19.2 million during the same period in 1996, an increase of $5.2
million or 27.0%. This increase is attributable to increases in interest-bearing
deposits and borrowed funds. Average interest-bearing deposits totaled $888.9
million for the six months ended June 30, 1997 compared to $824.8 million for
the same period in 1996, an increase of $64.1 million or 7.8%. This growth
occurred primarily in time deposits which increased $50.9 million largely
attributable to the introduction of new CD products. Borrowed funds averaged
$266.0 million for the six months ended June 30, 1997 compared to $112.5 million
for the same period in 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 (on a fully
taxable equivalent basis) resulting from changes in interest rates or changes in
the volume of interest-earning assets and interest-bearing liabilities during
the periods indicated. Changes which are attributable to both rate and volume
have been allocated evenly between the change in rate and volume components.
Six Months Ended June 30,
1997 versus 1996
-------------------------------------
Increase (Decrease) Due to
-------------------------------------
Volume Rate Net
------------ --------- -----------
(Dollars In Thousands)
Interest-earning assets:
Federal funds sold and
short term investments $ 108 $ (8) $ 100
Investment securities held to maturity 307 158 465
Investment securities available for sale 6,099 845 6,944
Residential real estate loans (531) 214 (317)
Commercial real estate loans (212) 216 4
Commercial loans 2,177 (173) 2,004
Home equity loans 1,510 (271) 1,239
Consumer loans (123) 132 9
-------- -------- --------
Total interest-earning assets 9,335 1,113 10,448
-------- -------- --------
Interest-bearing liabilities:
Deposits:
Savings accounts 120 (255) (135)
NOW accounts 15 (51) (36)
Money market accounts 3 (19) (16)
Time deposit accounts 1,342 (344) 998
-------- -------- --------
Total deposits 1,480 (669) 811
Borrowed funds 4,320 56 4,376
-------- -------- --------
Total interest-bearing liabilities 5,800 (613) 5,187
-------- -------- --------
Change in net interest income $ 3,535 $ 1,726 $ 5,261
======== ======== ========
14
Provision for Possible Loan Losses
The Company's provision for possible loan losses was $0.8 million for the six
months ended June 30, 1997 compared to $1.5 million for the same period in 1996.
The provision for possible loan losses is based upon management's judgment of
the amount necessary to maintain the allowance for possible loan losses at a
level which is considered adequate.
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,
-----------------------
1997 1996
------- --------
Net gain on sale of loans $ 192 $ 432
Net gain on sale of securities 11 2
Loan charges and fees 1,381 1,461
Deposit related fees 3,294 2,947
Other charges and fees 701 476
------ ------
$5,579 $5,318
====== ======
Net gain on sale of loans decreased $0.2 million. Management attributes the
decrease to reduced production and sale of fixed rate single family residential
mortgage loans due to a higher interest rate environment.
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 $0.2 million due primarily to an increase in
brokerage fees and the introduction of a new commercial product in 1997 which
involves the funding and management of accounts receivable for small-to-medium
sized business customers.
Non-interest Expense
Salaries and Benefits Expense
Salaries and benefits expense totaled $9.7 million for the six months ended June
30, 1997 compared to $8.5 million for the same period in 1996, an increase of
$1.2 million reflecting standard wage increases, higher ESOP and restricted
stock expenses as a result of an increase in the Company's stock price, as well
as an increase in staffing related to new branch openings and branch related
support.
Occupancy Expense of Bank Premises
Occupancy expense of bank premises totaled $1.9 million for the six months ended
June 30, 1997 compared to $1.6 million for the same period in 1996, an increase
of $0.3 million. This increase is primarily due to costs associated with the
expansion of the retail branch network and the addition of stand alone ATMs.
15
Other Operating Expense
The components of other operating expense for the periods presented are as
follows:
Six months ended
June 30,
-----------------------
1997 1996
------- --------
Marketing $ 997 $ 752
Insurance 270 194
Professional services 1,356 1,490
Outside processing 2,277 2,055
Other 2,341 2,280
------ ------
$7,241 $6,771
====== ======
Marketing expense increased $0.2 million related to advertising and marketing
expenses associated with the promotion of home equity lines and loans.
Insurance expense increased $0.1 million as a result of higher FDIC insurance
premiums.
Outside processing increased $0.2 million, reflecting higher transaction and
account volume resulting from 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 zero for the six
months ended June 30, 1997 compared to $0.2 million for the same period in 1996.
This $0.2 million decrease reflects increased gains on the sale of foreclosed
properties during the six months ended June 30, 1997 as compared to the same
period last year.
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. In
accordance with FDICIA, 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 was $0.5 million for the six
months ended June 30, 1997 or $0.6 million higher compared to the same period in
1996. In the first quarter of 1997, the Company established a reserve of $1.0
million relating to the divestment of Colebrook which was partially offset by a
$0.6 million gain on the sale of a real estate property. The $1.0 million
reserve consists of $0.7 million in severance and benefit accruals and $0.3
million for other expenses. As of June 30, 1997, no amounts have been paid
relating to the divestiture. This divestment is scheduled to be completed by
March 31, 1998.
Income Taxes
For the six months ended June 30, 1997 the Company recorded income tax expense
of $3.8 million compared with income tax expense of $0.5 million for the six
months ended June 30, 1996. The increase in income tax expense is attributable
to the Company becoming fully taxable for financial reporting purposes beginning
in the fourth quarter of 1996 and a 60.7% increase in pre-tax earnings.
16
Balance Sheet Analysis - Comparison Of June 30, 1997 To December 31, 1996
Total assets increased from $1.3 billion at December 31, 1996 to $1.4 billion at
June 30, 1997. This increase primarily reflects growth in loans and investments
funded through an increase in deposits and wholesale borrowings.
Investments
The Company's investment portfolio increased $37.4 million from $641.5 million
at December 31, 1996 to $678.9 million at June 30, 1997.
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 net of tax 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.
June 30, 1997
-----------------------------------------------------------------------
Available for Sale Held to Maturity
-------------------------------- --------------------------------
(Dollars In Thousands)
Amortized Amortized
Cost Fair Value Cost Fair Value
------------- ------------ ------------ ------------
U.S. Government and Agency obligations $ 29,087 $ 29,039 $ -- $ --
Collateralized mortgage obligations 28,128 28,042 -- --
Mortgage-backed securities 409,642 412,637 139,383 138,953
Asset-backed securities -- -- 45,410 45,271
Other bonds and short term obligations -- -- 200 200
Other securities 23,878 24,144 -- --
-------- -------- -------- --------
Total $490,735 $493,862 $184,993 $184,424
======== ======== ======== ========
December 31, 1996
-----------------------------------------------------------------------
Available for Sale Held to Maturity
-------------------------------- --------------------------------
(Dollars In Thousands)
Amortized Amortized
Cost Fair Value Cost Fair Value
------------- ------------ ------------ ------------
U.S. Government and Agency obligations $ 29,901 $ 29,943 $ -- $ --
Collateralized mortgage obligations 28,965 29,007 -- --
Mortgage-backed securities 371,921 374,218 149,856 149,252
Asset-backed securities -- -- 42,118 42,165
Other bonds and short term obligations 1,681 1,681 200 200
Other securities 14,276 14,474 -- --
-------- -------- -------- --------
Total $446,744 $449,323 $192,174 $191,617
======== ======== ======== ========
17
Loan Portfolio Composition
Gross loans comprised $660.4 million or 46.0% of total assets as of June 30,
1997. The following table sets forth information concerning the Company's loan
portfolio in dollar amounts and percentages, by type of loan at June 30, 1997
and at December 31, 1996.
June 30, 1997 December 31, 1996
------------------------ ----------------------
Percent of Percent of
Amount Total Amount Total
----------- ---------- --------- ----------
(Dollars In Thousands)
Residential real estate loans $238,470 36.11% $242,410 38.79%
Commercial real estate loans 120,160 18.19% 118,442 18.95%
Commercial loans 173,587 26.28% 155,808 24.93%
Home equity loans 121,953 18.47% 104,206 16.67%
Consumer loans 6,260 0.95% 4,132 0.66%
-------- ------ -------- ------
Total loans receivable, gross 660,430 100.00% 624,998 100.00%
-------- ------ -------- ------
Less:
Unearned income and fees (1,839) (1,196)
Allowance for loan losses 16,392 15,597
-------- --------
Total loans receivable, net $645,877 $610,597
======== ========
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, 1997, the
Company experienced an increase in prepayments in its adjustable rate mortgage
portfolio. These prepayments offset new originations and resulted in a $3.9
million decrease in residential real estate balances between December 31, 1996
and June 30, 1997.
During the six months ended June 30, 1997, commercial loan balances increased
$17.8 million, reflecting the Company's continued focus on lending activities in
the local business market. During this same period commercial real estate loan
balances increased $1.7 million primarily due to new originations, partially
offset by prepayments.
Home equity loans outstanding have increased $17.7 million since December 31,
1996. Management attributes this increase to the active promotion of these
products.
Non-performing Assets
Non-performing assets totaled $6.7 million as of June 30, 1997 compared to $7.6
million as of December 31, 1996, a decrease of $0.8 million or 11.1%.
18
The following table sets forth information regarding the components of
non-performing assets for the periods presented:
June 30, December 31,
1997 1996
--------------- ---------------
(Dollars In Thousands)
Non-accrual loans (1):
Residential real estate loans $1,537 $1,287
Commercial real estate loans 3,048 4,428
Commercial loans 759 674
Home equity loans 135 157
Consumer loans -- 1
------ ------
Total non-accrual loans 5,479 6,547
------ ------
Loans past due 90 days still accruing (2) 540 428
------ ------
Total non-performing loans 6,019 6,975
Foreclosed real estate (3) 214 381
Restructured loans on accrual status (4) 477 198
------ ------
Total non-performing assets $6,710 $7,554
====== ======
Total non-performing loans to total
gross loans 0.91% 1.12%
Total non-performing assets to total
assets 0.47% 0.56%
Allowance for possible losses to
non-performing loans 272.34% 223.61%
(1) Non-accrual loans are loans that are contractually past due in excess of 90
days, for which the Company has stopped the accrual of interest, or loans which
are not past due but on which the Bank has stopped the accrual of interest based
on management's assessment of the circumstances surrounding these loans.
(2) Accruing loans past due 90 days or more are loans which have not been placed
on non-accrual status as, in management's opinion, the collection of the loan,
in full, is not in doubt.
(3) Foreclosed real estate includes OREO, defined as real estate acquired
through foreclosure or acceptance of a deed in lieu of foreclosure. The Company
carries foreclosed real estate at the lower of cost or net realizable value,
which approximates fair value less estimated selling costs.
(4) Restructured loans are loans for which concessions, including reduction of
interest rates or deferral of interest or principal payments, have been granted
due to the borrower's financial condition. Restructured loans on non-accrual
status are reported in the non-accrual loan category. Restructured loans on
accrual status are those loans that have complied with terms of a restructuring
agreement for a satisfactory period (generally six months).
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 allowance for possible loan
losses at June 30, 1997 was $16.4 million, compared to $14.9 million at June 30,
1996. The activity in the allowance for possible loan losses for the six months
ended June 30, 1997 and 1996 was as follows:
Six Months Ended
June 30,
-------------------------------
1997 1996
---------- ----------
(Dollars In Thousands)
Balance, beginning of period $ 15,597 $ 14,986
Provision for loan losses 801 1,450
Charge-offs:
Residential real estate loans (126) (563)
Commercial real estate loans (300) (2,102)
Commercial loans (128) (180)
Home equity loans (38) (138)
Consumer loans (123) (38)
-------- --------
Total charge-offs (715) (3,021)
Recoveries:
Residential real estate loans 1 577
Commercial real estate loans 542 762
Commercial loans 74 100
Home equity loans 73 39
Consumer loans 19 20
-------- --------
Total recoveries 709 1,498
-------- --------
Net recoveries/(charge-offs) (6) (1,523)
Balance, end of period $ 16,392 $ 14,913
======== ========
Ratio of net loan recoveries/(charge-offs) during the period to
average loans outstanding during the period - (0.27%)
Ratio of allowance for possible loan losses to total loans
at the end of the period 2.48% 2.51%
Ratio of allowance for possible loan losses to non-performing
loans at the end of the period 272.34% 162.66%
20
At June 30, 1997, the recorded investment in loans that are considered impaired
under SFAS 114 "Accounting by Creditors for Impairment of a Loan" was $9.6
million. Included in this amount is $0.2 million of impaired loans for which the
related SFAS 114 allowance is $0.1 million and $9.3 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, 1997 was
approximately $9.5 million and $9.0 million, respectively. For the three and six
month periods ended June 30, 1997, the Company recognized interest income on
these impaired loans of $0.2 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 allowance for
possible loan losses in each category to total allowance for possible loan
losses.
June 30, 1997 December 31, 1996
-------------------------- -------------------------
% of % of
Total Total
Allowance for Allowance for
Amount Loan Losses Amount Loan Losses
-------- ------------ ---------- ----------------
Residential real estate loans $ 2,295 14.00% $ 1,540 9.87%
Commercial real estate loans 4,945 30.17% 5,808 37.24%
Commercial loans 6,744 41.14% 6,711 43.03%
Home equity loans 1,776 10.83% 1,207 7.74%
Consumer loans 632 3.86% 331 2.12%
------- ------ ------- ------
Total allowance for possible loan losses $16,392 100.00% $15,597 100.00%
======= ====== ======= ======
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, 1997. The Company's
deposits consist of demand and NOW accounts, passbook and statement savings
accounts, money market accounts and time deposits.
Total deposits were $1.0 billion at June 30, 1997 compared to $969.5 million at
December 31, 1996, an increase of $45.9 million. This growth occurred primarily
in demand deposits, savings accounts and time deposits. Demand deposits and
savings accounts increased $20.1 million and $11.1 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. The $17.0 million growth in time deposits is primarily attributable to
the introduction of new CD products.
The following table presents the composition of deposits at the dates indicated:
June 30, 1997 December 31, 1996
------------------------- ------------------------
Percent Percent
of of
Amount Total Amount Total
---------- -------- ---------- ---------
(Dollars In Thousands)
Demand deposits $ 120,604 11.88% $ 100,527 10.37%
NOW accounts 60,318 5.94% 57,980 5.98%
Savings accounts 206,521 20.34% 195,418 20.16%
Money market accounts 204,913 20.18% 209,523 21.61%
Time deposits 423,048 41.66% 406,069 41.88%
---------- ------ ---------- ------
Total deposits $1,015,404 100.00% $ 969,517 100.00%
========== ====== ========== ======
21
Borrowings
Borrowings consist of FHLB advances, securities sold under agreements to
repurchase, and loans payable related to the Company's employee stock ownership
plan. The Company generally uses borrowings to fund loan growth and to leverage
a portion of its capital position. Borrowings increased $32.5 million from
$247.9 million at December 31, 1996 to $280.4 million at June 30, 1997
reflecting a portion of the funding for the growth in loans and investments.
Regulatory Capital
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material adverse effect
on the Company's financial statements. Under applicable capital adequacy
requirements the Company must meet specific minimum capital requirements that
involve quantitative measures of the Company's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require both the Company and the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital to risk-weighted
assets and Tier 1 capital to average assets. As of June 30, 1997 both the
Company and the Bank exceed all capital adequacy requirements to which they are
subject and qualify as "well capitalized" under applicable regulations of the
Board of Governors of the Federal Reserve System and the FDIC.
The Company's and Bank's actual capital amounts and ratios are presented in the
table. No deductions were made from capital for interest-rate risk.
Minimum Minimum
Requirements Requirements
For Capital To Qualify As
Actual Adequacy Purposes Well Capitalized
----------------------- ---------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ---------- ---------- --------- ----------- --------
As of June 30, 1997:
Tier I Capital (to Average Assets)
Company $ 98,451 7.0% $ 56,368 4.0% N/A
Bank $ 95,797 6.8% $ 56,292 4.0% $ 70,365 5.0%
Tier I Capital (to Risk Weighted Assets)
Company $ 98,451 11.9% $ 33,157 4.0% $ 49,736 6.0%
Bank $ 95,797 11.6% $ 33,076 4.0% $ 49,614 6.0%
Total Capital (to Risk Weighted Assets)
Company $108,862 13.1% $ 66,314 8.0% $ 82,893 10.0%
Bank $106,208 12.8% $ 66,152 8.0% $ 82,690 10.0%
As of December 31, 1996:
Tier I Capital (to Average Assets)
Company $ 96,317 7.4% $ 52,007 4.0% N/A
Bank $ 95,816 7.4% $ 51,999 4.0% $ 64,999 5.0%
Tier I Capital (to Risk Weighted Assets)
Company $ 96,317 12.8% $ 30,118 4.0% $ 45,177 6.0%
Bank $ 95,816 12.7% $ 30,110 4.0% $ 45,165 6.0%
Total Capital (to Risk Weighted Assets)
Company $105,804 14.1% $ 60,236 8.0% $ 75,296 10.0%
Bank $105,300 14.0% $ 60,220 8.0% $ 75,275 10.0%
22
Interest Rate Risk Management
Using management's estimates of asset prepayments and core deposit decay in its
computation, the Company estimates that its cumulative one-year gap position was
a positive $22.8 million or 1.59% of total assets at June 30, 1997. The
following table sets forth the amounts of assets and liabilities outstanding at
June 30, 1997, which are anticipated by the Company to mature or reprice in each
of the future time periods shown using certain assumptions based on its
historical experience, the current interest rate environment, and other data
available to management. Management believes that these assumptions approximate
actual experience and considers such assumptions reasonable, however, the
interest rate sensitivity of the Company's assets and liabilities could vary
substantially if different assumptions were used or actual experience differs
from the assumptions used. Management periodically reviews and, when
appropriate, changes assumptions used in creating this table.
23
GAP Position
At June 30, 1997
------------------------------------------------------------------------------
More than six
Less than months less
six months than one year 1 - 5 Years Over 5 Yrs TOTAL
---------------- -------------- -------------- ------------- --------------
(Dollars In Thousands)
Assets:
Federal funds sold and
interest bearing deposits $ 10,585 $ -- $ -- $ -- $ 10,585
Investment securities 330,091 141,589 183,474 23,701 678,855
Residential real estate loans 63,885 50,683 109,638 13,092 237,298
Commercial real estate loans 31,921 9,666 69,046 6,516 117,149
Commercial loans 80,780 10,359 74,064 8,013 173,216
Home equity loans 75,867 21,173 15,742 10,118 122,900
Consumer loans 5,797 58 151 221 6,227
Other assets -- -- -- 88,315 88,315
---------- ---------- ---------- ---------- ----------
Total assets $ 598,926 $ 233,528 $ 452,115 $ 149,976 $1,434,545
========== ========== ========== ========== ==========
Liabilities & stockholders' equity:
Savings accounts $ 30,978 $ 30,978 $ 144,565 $ -- $ 206,521
NOW accounts 9,048 9,048 42,222 -- 60,318
Money market accounts 61,474 61,474 81,965 -- 204,913
Time deposits 236,702 115,000 71,346 -- 423,048
Borrowed funds 166,741 40,272 64,031 9,313 280,357
Other liabilities & stockholders' equity 23,966 23,966 71,899 139,557 259,388
---------- ---------- ---------- ---------- ----------
Total liabilities & stockholders' equity $ 528,909 $ 280,738 $ 476,028 $ 148,870 $1,434,545
========== ========== ========== ========== ==========
Period GAP position $ 70,017 $ (47,210) $ (23,913) $ 1,106
Net period GAP as a percentage of total assets 4.88% (3.29%) (1.67%) 0.08%
Cumulative GAP $ 70,017 $ 22,807 $ (1,106) --
Cumulative GAP as a percentage of total
assets 4.88% 1.59% (0.08%) --
<FN>
For purposes of the above interest sensitivity analysis:
Residential loans held for sale at June 30, 1997 totaling $4.3 million
are in the less than six month interest sensitivity period.
Fixed rate assets are scheduled by contractual maturity and adjustable
rate assets are scheduled by their next repricing date. In both cases,
assets that have prepayment optionality are adjusted for the Company's
estimate of prepayments.
Loans do not include non-accrual loans of $5.5 million.
Loans do not include the allowance for loan loss of $16.4 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 $120.6 million are included in
other liabilities and are assumed to decay at an annual rate of
40%.
</FN>
24
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.
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.
Liquidity
Liquidity measures the ability of the Company to meet its maturing obligations
and existing commitments, to withstand fluctuations in deposit levels, to fund
its operations and to provide for customer credit needs. If the Company requires
funds beyond its ability to generate them internally, it has additional
borrowing capacity with the FHLB and collateral eligible for repurchase
agreements. Because the Company has a stable retail deposit base, management
believes that significant borrowings will not be necessary to maintain its
current liquidity position. Management intends to continue seeking opportunities
for expansion and believes that the Company's liquidity, capital resources and
borrowing capabilities are adequate for its current and intended operations.
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. Default upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) On April 30, 1997, the Annual Meeting of the Stockholders of SIS
Bancorp, Inc. was held at the Springfield Marriott Hotel, Springfield,
Massachusetts.
(b) Directors elected at the Annual Meeting (Term to Expire in 2000)
Sister Mary Caritas, S.P.
Retired; former President and Chief Executive Officer of
Mercy Hospital
John M. Naughton
Retired, former Executive Vice President, Massachusetts
Mutual Life Insurance Co.
Continuing Directors (Term to Expire in 1998)
Charles L. Johnson
Consultant- Associated Energy Managers,
Investment Management Firm
F. William Marshall,Jr.
President and Chief Executive Officer, SIS Bancorp, Inc.
and SIS Bank
Continuing Directors (Term to Expire in 1999)
William B. Hart, Jr.
President, The Dunfey Group
an investment corporation
Thomas O'Brien
Dean, University of Massachusetts
School of Management
Stephen A. Shatz
Attorney, Partner in Shatz, Schwartz & Fentin, P.C.
(c) The matters voted on at the meeting and the results included the
following proposals:
1. To elect two Directors for a three-year term ending in the Year 2000
(Proposal 1);
Votes For (shares) Votes Withheld (shares)
------------------ -----------------------
Sr. Mary Caritas (Geary) 4,956,015 17,053
John Naughton 4,958,288 14,780
Item 5. Other Information
Not applicable
26
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Exhibit Location
10. Material Contracts
10.1 Form of "Second Addendum to Form of Employment
and Severance Agreement for Senior Vice
President and Executive Vice Presidents" of SIS Bank
executed by Messrs. Barrett, Dill, Treanor, Ehmke,
McWhinnie, Sinton, Tucker, and Ms. Rinaldo.
10.2 Amended and Restated Employment Agreement
between SIS Bank and F. William Marshall, Jr.
dated June 30, 1997
(b) Reports on Form 8-K
None
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)
August 14, 1997 /s/ F. William Marshall, Jr.
Date F. William Marshall, Jr.
President and Chief Executive Officer
August 14, 1997 /s/ John F. Treanor
Date John F. Treanor
Executive Vice President
and Chief Financial Officer
28