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 06/30/98
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 000-20809
SIS BANCORP, INC.
(Exact Name of Issuer as Specified in its Charter)
Massachusetts 04-3303264
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SIS BANCORP, INC.
1441 Main Street
Springfield, Massachusetts 01102
(Address of Principal Executive Offices) (Zip Code)
(413) 748-8000
(Issuers Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
Indicate the number of shares outstanding of the registrant's common
stock, as of the latest practicable date: 7,017,235 shares as of August 6, 1998.
CAUTIONARY STATEMENT FOR PURPOSES OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Report contains certain "forward-looking statements" including statements
concerning plans, objectives, future events or performance and assumptions and
other statements which are other than statements of historical fact. SIS
Bancorp, Inc. and its subsidiaries (the "Company") wishes to caution readers
that the following important factors, among others, may have affected and could
in the future affect the Company's actual results and could cause the Company's
actual results for subsequent periods to differ materially from those expressed
in any forward-looking statement made by or on behalf of the Company herein: (i)
the effect of changes in laws and regulations, including federal and state
banking laws and regulations, with which the Company must comply, and the
associated costs of compliance with such laws and regulations either currently
or in the future as applicable; (ii) the effect of changes in accounting
policies and practices, as may be adopted by the regulatory agencies as well as
by the Financial Accounting Standards Board; (iii) the effect on the Company's
competitive position within its market area of the increasing consolidation
within the banking and financial services industries, including the increased
competition from larger regional and out-of-state banking organizations as well
as nonbank providers of various financial services; (iv) the effect of changes
in interest rates; (v) the effect of changes in the business cycle and downturns
in the local, regional or national economies; (vi) the effect of the "year 2000"
issue (i.e. that current computer programs use only two digits to identify a
year in the date field and cannot reflect a change in the century) on the
Company's financial condition or results of operations; and (vii) the impact of
pending litigation on the Company's financial condition or results of
operations.
SIS BANCORP, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PAGE
NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet
at June 30, 1998 and December 31, 1997.................................. 1
Condensed Consolidated Statement of Operations for the
three and six months ended June 30, 1998 and 1997....................... 2
Condensed Consolidated Statement of Cash Flows for the
six months ended June 30, 1998 and 1997................................. 3
Condensed Consolidated Statement of Changes in Stockholders' Equity
for the six months ended June 30, 1998 and 1997......................... 5
Notes to the Unaudited Financial Statements............................. 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 28
Item 2. Changes in ecurities........................................ 28
Item 3. Default upon Senior ecurities............................... 28
Item 4. Submission of Matters to a Vote of Security olders.......... 28
Item 5. Other Information........................................... 28
Item 6. Exhibits and Reports on Form -K............................. 28
SIGNATURES................................................................. 29
SIS BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars In Thousands)
(Unaudited)
June 30, December 31,
1998 1997
------------ -------------
ASSETS
Cash and due from banks $ 56,578 $ 50,297
Federal funds sold and short term investments 42,765 17,317
Investment securities available for sale 566,945 576,108
Investment securities held to maturity (fair value: $234,404
at June 30, 1998 and $193,396 at December 31, 1997) 233,767 193,007
Loans receivable, net of allowance for possible losses
($23,482 at June 30, 1998 and $22,724 at December 31, 1997) 870,145 828,761
Accrued interest and dividends receivable 11,220 10,749
Investments in real estate and real estate partnerships 2,425 2,903
Foreclosed real estate, net 841 1,209
Bank premises, furniture and fixtures, net 37,541 35,843
Other assets 19,435 17,424
----------- -----------
Total assets $ 1,841,662 $ 1,733,618
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 1,326,895 $ 1,267,298
Federal Home Loan Bank advances 202,452 184,121
Securities sold under agreements to repurchase 131,276 113,299
Loans payable 2,314 2,492
Mortgage escrow deposits 6,501 5,642
Accrued expenses and other liabilities 40,687 35,294
----------- -----------
Total liabilities 1,710,125 1,608,146
----------- -----------
Commitments and contingent liabilities -- --
Stockholders' equity:
Preferred stock ($.01 par value; 5,000,000 shares
authorized: no shares issued and outstanding) -- --
Common stock ($.01 par value; 25,000,000 shares authorized; shares
issued: 7,059,974 at June 30, 1998 and 7,081,187 at December 31, 1997;
shares outstanding: 6,961,724 at June 30, 1998 and 6,947,787 at
December 31, 1997) 71 71
Unearned compensation (2,943) (3,123)
Additional paid-in capital 54,473 54,755
Retained earnings 81,321 75,153
Accumulated other comprehensive income -
net unrealized gain on investment securities available for sale 1,205 2,133
Treasury stock, at cost (98,250 and 133,400 shares at June 30, 1998 and
December 31, 1997, respectively) (2,590) (3,517)
----------- -----------
Total stockholders' equity 131,537 125,472
----------- -----------
Total liabilities and stockholders' equity $ 1,841,662 $ 1,733,618
=========== ===========
See accompanying Notes to the Unaudited Financial Statements
1
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,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Interest and dividend income:
Loans $ 18,128 $ 16,694 $ 36,029 $ 32,942
Investment securities available for sale 8,424 9,184 16,941 17,686
Investment securities held to maturity 3,694 3,691 7,166 7,469
Investment securities held for trading -- 3 -- 5
Federal funds sold and short term investments 530 134 1,091 429
----------- ----------- ----------- -----------
Total interest and dividend income 30,776 29,706 61,227 58,531
----------- ----------- ----------- -----------
Interest expense:
Deposits 10,992 10,294 21,569 20,350
Borrowings 4,547 4,348 9,022 8,204
----------- ----------- ----------- -----------
Total interest expense 15,539 14,642 30,591 28,554
----------- ----------- ----------- -----------
Net interest and dividend income 15,237 15,064 30,636 29,977
Less: Provision for possible loan losses 252 465 503 965
----------- ----------- ----------- -----------
Net interest and dividend income after provision
for possible loan losses 14,985 14,599 30,133 29,012
Noninterest income:
Net gain on sale of loans 369 86 624 192
Net gain on sale of securities available for sale 2 60 2 60
Net gain on sale of securities held for trading -- 30 -- 19
Fees and other income 4,158 3,696 7,879 6,994
----------- ----------- ----------- -----------
Total noninterest income 4,529 3,872 8,505 7,265
----------- ----------- ----------- -----------
Noninterest expense:
Operating expenses:
Salaries and employee benefits 6,634 6,141 12,855 12,055
Occupancy expense of bank premises, net 1,320 1,159 2,540 2,359
Furniture and equipment expense 932 790 1,895 1,563
Other operating expenses 4,401 4,170 8,482 8,371
----------- ----------- ----------- -----------
Total operating expenses 13,287 12,260 25,772 24,348
----------- ----------- ----------- -----------
Foreclosed real estate (income) expense -- (11) 68 (85)
Net (income) expense of real estate operations (578) 58 (591) 479
----------- ----------- ----------- -----------
Total noninterest expense 12,709 12,307 25,249 24,742
Income before income tax expense 6,805 6,164 13,389 11,535
Income tax expense 2,580 2,449 5,088 4,540
----------- ----------- ----------- -----------
Net income $ 4,225 $ 3,715 $ 8,301 $ 6,995
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.63 $ 0.56 $ 1.24 $ 1.06
Diluted $ 0.60 $ 0.53 $ 1.17 $ 1.01
Weighted average shares outstanding:
Basic 6,691,200 6,634,841 6,676,786 6,623,541
Diluted 7,096,211 6,948,283 7,082,651 6,922,180
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,
----------------------
1998 1997
--------- ---------
Cash Flows From Operating Activities
Net income $ 8,301 $ 6,995
Adjustments to reconcile net income to net cash provided by
operating activities
Provision for possible loan losses 503 965
Depreciation 2,244 1,960
Amortization of premium on investment securities, net 2,540 1,357
ESOP and restricted stock expenses 1,413 868
Investment security gains (2) (49)
Increase in assets held for trading -- (91)
Income from equity investment in partnerships -- (2)
Gain on sale of loans (624) (192)
Disbursements for mortgage loans held for sale (84,858) (26,746)
Receipts from mortgage loans held for sale 85,482 26,938
Gain on sale of fixed assets and real estate (57) (145)
Changes in assets and liabilities:
Increase in other assets, net (1,794) (1,508)
Decrease in accrued expenses and other liabilities 4,505 6,601
--------- ---------
Net cash provided by operating activities 17,653 16,951
--------- ---------
Cash Flows From Investing Activities
Proceeds from sale of investment securities available for sale 2,358 7,148
Proceeds from maturities and principal payments received
on investment securities available for sale 149,196 65,616
Purchase of investment securities available for sale (146,206) (139,786)
Proceeds from maturities and principal payments received
on investment securities held to maturity 40,765 24,124
Purchase of investment securities held to maturity (81,846) (15,415)
Net decrease in investments in real estate 419 --
Net increase in loans receivable (42,019) (43,932)
Net decrease in foreclosed real estate 500 459
Proceeds from sale of loans -- 92
Proceeds from sale of fixed assets 72 89
Purchase of fixed assets (3,898) (2,735)
--------- ---------
Net cash used for investing activities (80,659) (104,340)
--------- ---------
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,
---------------------
1998 1997
--------- --------
Cash Flows from Financing Activities
Net increase in deposits 59,597 53,735
Net increase in borrowings 36,130 35,216
Net increase in mortgagors' escrow deposits 859 637
Net proceeds from exercise of stock options 282 121
Repurchase/retirement of common stock -- (4,193)
Cash dividends paid (2,133) (1,574)
-------- --------
Net cash provided by financing activities 94,735 83,942
-------- --------
Increase in cash and cash equivalents 31,729 (3,447)
Cash and cash equivalents, beginning of period 67,614 68,090
-------- --------
Cash and cash equivalents, end of period $ 99,343 $ 64,643
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest to depositors
and interest on debt $ 30,221 $ 27,914
Income taxes paid $ 5,844 $ 2,699
Non-cash investing activities:
Transfers to foreclosed real estate, net $ 132 $ 28
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, 1998 and 1997
(Dollars In Thousands)
Accumulated
other
comprehensive
income:
Net unrealized
gain (loss)
on investment
Additional securities Treasury
Common Unearned Paid-In Retained available for Stock
Stock Compensation Capital Earnings sale at Cost Total
-------- ------------ --------- ---------- -------------- ----------- ----------
Balance at December 31, 1997 $ 71 $ (3,123) $ 54,755 $ 75,153 $ 2,133 $ (3,517) $ 125,472
Net income -- -- -- 8,301 -- -- 8,301
Cash dividends declared
-- -- -- (2,133) -- -- (2,133)
Net issuance of common stock in connection
with employee and non-employee directors
benefit programs -- (567) (948) -- -- 927 (588)
Decrease in unearned compensation -- 747 666 -- -- -- 1,413
Change in unrealized gain on investment
securities available for sale -- -- -- -- (928) -- (928)
------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1998 $ 71 $ (2,943) $ 54,473 $ 81,321 $ 1,205 $ (2,590) $ 131,537
======= ========= ========= ========= ========= ========= =========
Balance at December 31, 1996 $ 71 $ (3,693) $ 53,836 $ 67,119 $ 1,453 $ -- $ 118,786
Net income -- -- -- 6,995 -- -- 6,995
Cash dividends declared -- -- -- (1,573) -- -- (1,573)
Net issuance of common stock in connection
with employee and non-employee directors
benefit programs -- (98) (10) -- -- 228 120
Decrease in unearned compensation -- 485 383 -- -- -- 868
Change in unrealized gain on investment
securities available for sale -- -- -- -- 233 -- 233
Treasury stock purchased -- -- -- -- -- (4,193) (4,193)
------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1997 $ 71 $ (3,306) $ 54,209 $ 72,541 $ 1,686 $ (3,965) $ 121,236
======= ========= ========= ========= ========= ========= =========
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. Condensed Consolidated Financial Statements
The Condensed Consolidated Financial Statements of the Company included herein
are unaudited, and in the opinion of management all adjustments, consisting only
of normal recurring adjustments necessary for a fair presentation of the
financial condition, results of operations and cash flows, as of and for the
periods covered herein, have been made. The Company's historical financial
statements have been restated to reflect the combination with Glastonbury Bank &
Trust Company. Certain information and note disclosures normally included in
Condensed Consolidated Financial Statements have been omitted as they are
included in the most recent Securities and Exchange Commission ("SEC") Form 10-K
and accompanying Notes to the Financial Statements (the "Form 10-K") filed by
the Company for the year ended December 31, 1997. Management believes that the
disclosures contained herein are adequate to make a fair presentation.
These unaudited condensed consolidated financial statements should be read in
conjunction with the Form 10-K.
The results for the three and six month interim periods covered hereby are not
necessarily indicative of the operating results for a full year.
2. New Accounting Pronouncements
In June 1997, the FASB issued SFAS 130 "Reporting Comprehensive Income" which
establishes standards for disclosure of comprehensive income. Comprehensive
income represents net income for a period plus the change in equity of a
business during a period from non-shareholder sources. Excluding net income, the
Company's only other source of comprehensive income is its unrealized gain
(loss) on investment securities available for sale, net of tax. SFAS 130
requires the restatement of prior periods for comparative purposes. The Company
adopted SFAS 130 on January 1, 1998. Adoption of this Statement did not have a
material impact on the Company's financial position or results of operations.
Total comprehensive income for the three and six months ended June 30, 1998 was
$5.5 million and $9.7 million, respectively compared to $5.9 million and $8.4
million, respectively for the three and six months ended June 30, 1997.
In June 1997, the FASB issued SFAS 131 "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for the way that
public business enterprises report financial and descriptive information about
operating segments. SFAS 131 defines an operating segment as components of an
enterprise about which separate financial information is available that is
evaluated by management in deciding how to allocate resources and in assessing
performance. The Company adopted SFAS 131 on January 1, 1998. Adoption of this
Statement did not have a material impact on the Company's financial position or
results of operations.
In February 1998, the FASB issued SFAS 132 "Employers' Disclosures about
Pensions and Other Postretirement Benefits - an amendment of FASB Statements No.
87, 88 and 106" (SFAS 132) which revises employers' disclosures about pension
and other postretirement benefit plans, though it does not change the
measurement or recognition of those plans. The Company adopted SFAS 132
effective January 1, 1998. Adoption of this Statement did not have a material
impact on the Company's financial position or results of operations.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes a new model for accounting for
derivatives and hedging activities and supersedes and amends a number of
existing standards. SFAS 133 is effective for fiscal years beginning after June
15, 1999, but earlier application is permitted as of the beginning of any fiscal
quarter subsequent to June 1998. Upon initial application, all derivatives are
required to be recognized in the statement of financial position as either
assets or liabilities and measured at fair value. In addition, all hedging
relationships must be reassessed and documented pursuant to the provisions of
SFAS 133. Management is currently assessing the impact of SFAS 133 on the
Company's financial position and results of operations.
6
3. Earnings Per Share
Basic and diluted net income per share and weighted average shares outstanding
follow (dollars in thousands, except per share amounts):
(Unaudited) (Unaudited)
Three months ended Six months ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net income $ 4,225 $ 3,715 $ 8,301 $ 6,995
Weighted average shares outstanding:
Basic 6,691,200 6,634,841 6,676,786 6,623,541
Effect of dilutive securities:
Stock options 350,049 251,146 340,747 241,114
Restricted stock 54,962 62,296 65,118 57,525
---------- ---------- ---------- ----------
Diluted 7,096,211 6,948,283 7,082,651 6,922,180
========== ========== ========== ==========
Net income per share:
Basic $ 0.63 $ 0.56 $ 1.24 $ 1.06
Diluted $ 0.60 $ 0.53 $ 1.17 $ 1.01
4. Dividend Policy
The Company paid a cash dividend in the amount of $0.16 per share on May 26,
1998. On July 23, 1998 the Company declared a dividend of $0.16 per share
payable on August 24, 1998 to shareholders of record as of the close of business
on August 3, 1998.
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 has essentially completed the sale of its remaining real estate
investments. In the first quarter of 1997, the Company established a reserve of
$1.0 million relating to the divestment of its real estate investment and
brokerage subsidiaries, Colebrook Inc. and subsidiaries ("Colebrook"). The $1.0
million reserve consisted of $0.7 million in severance and benefit accruals and
$0.3 million for professional and other expenses.
With the exception of two real estate investments (one with a book value of $2.4
million and one with a book value of $0.1 million), the divestment of Colebrook
was completed in June, 1998. One of the two remaining real estate investments,
with a book value of $2.4 million was sold in the third quarter of 1998. Based
upon final terms of the divestment, related expenses were $0.6 million through
June 30, 1998 consisting of $0.3 million in severance and benefits and $0.3
million in professional and other expenses. The remaining reserve balance of
$0.4 million, primarily related to unused severance, was reversed in June 1998
and is reflected in net income of real estate operations.
6. Subsequent Events
On July 20, 1998 the Company announced that it had entered into a definitive
agreement to merge with Peoples Heritage Financial Group, Inc. ("PHFG"). Under
the terms of the agreement, the Company will merge into a wholly owned
subsidiary of PHFG and the Company's shareholders will receive, subject to
statutory dissenters' rights, shares in PHFG. The transaction is expected to be
accounted for as a pooling of interests and is structured as a tax-free exchange
of 2.25 shares of PHFG common stock for each outstanding share of the Company's
common stock. The transaction is scheduled to be completed by year-end 1998, and
is subject to the approval of the Company's shareholders and various federal and
state regulatory agencies. PHFG is a multi-bank and financial services holding
company headquartered in Portland, Maine. PHFG has assets of approximately $10
billion and operates 194 branches through its three banking subsidiaries:
Peoples Heritage Bank of Maine, Bank of New Hampshire, and Family Bank, FSB of
Massachusetts.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
Overview
SIS Bancorp, Inc. (the "Company") is a Massachusetts corporation formed in 1996
and serves as the bank holding company for Springfield Institution for Savings
("SIS Bank"), and Glastonbury Bank & Trust Company ("GBT"). The Company was
formed for the purpose of reorganizing SIS Bank into a holding company structure
("the Reorganization"). Upon the effectiveness of the Reorganization, SIS Bank
became a wholly-owned subsidiary of the Company and SIS Bank's former
stockholders became stockholders of the Company. The Company acquired GBT on
December 17, 1997.
Established in 1827, SIS Bank is a Massachusetts chartered stock savings bank
headquartered in Springfield, Massachusetts. GBT, with its headquarters located
in Glastonbury, Connecticut, is a Connecticut chartered commercial bank founded
in 1919. Substantially all of the Company's operations are conducted through its
subsidiary banks.
The Company provides a wide variety of financial services through both SIS Bank
and GBT (the "Banks"), including retail and commercial banking, residential
mortgage origination and servicing, commercial and consumer lending, and
merchant processing. The Banks serve the consumers and businesses located in
western Massachusetts and central Connecticut through a network of 33 full
service branches.
The Company's revenues are derived principally from dividend payments received
from the Banks, which in turn derive their revenues principally from interest
payments on their loan portfolios and mortgage-backed and other investment
securities. The Banks' primary sources of funds are deposits, borrowings and
principal and interest payments on loans and mortgage-backed securities.
Year 2000
The Year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date-sensitive systems will recognize the Year 2000 as 1900, or
not at all. This inability to recognize or properly treat the Year 2000 issue
may cause systems to process critical financial and operational information
incorrectly.
During 1997, the Company conducted a review of its computer systems to identify
those areas that could be affected by the Year 2000 issue. The Company is
addressing this issue in accordance with the guidance set forth in various
statements that have been issued by the Federal Financial Institutions
Examination Counsel. The Company has completed the remedial phases associated
with awareness and assessment and is currently in the validation phase of
critical systems testing.
The Company has developed an implementation plan to resolve its Year 2000
issues. A timely resolution of the Year 2000 issues depends largely upon the
expertise and advice of outside vendors retained by the Company to both modify
the Company's existing software and develop new software to address current
internal systems deficiencies. All of the Company's third party vendors with
non-compliant systems have also been identified and notified. The Company is in
the process of validating and testing critical internal systems and verifying
that critical third party vendors have adequately addressed their own systems
issues. Test plans have been completed as of June 30, 1998 with the Company's
internal systems testing to be completed by December 31, 1998 and external
testing of third party vendor systems to be completed by March 31, 1999.
Additionally, the Company is currently assessing the potential impact of Year
2000 on its larger commercial borrowers. The Company is presently unaware of any
situation where any vendor will not be able to modify its products and systems
in a timely manner. The Company is also monitored in its Year 2000 efforts by
reports to, and examinations by, various regulators, including the Federal
Deposit Insurance Corporation, the Federal Reserve Board, and the Massachusetts
and Connecticut Commissioners of Banks.
The primary costs associated with the Year 2000 issue consist of expenses for
the replacement or upgrade of third party systems, the replacement of personal
computers, as well as professional services costs. The Company may also incur
expenses related to the repair or replacement of non-computer equipment with
embedded technology such as elevators and bank vaults. The Company presently
estimates the total cost relating to the Year 2000 issue to be
8
approximately $0.7 million. It is anticipated that a substantial portion of the
total cost will be incurred over the next 18 months and will be expensed as
incurred.
The Company is not aware of any obstacles or issues that are presently
anticipated in connection with the resolution of Year 2000 issues that are
likely to cause significant operational problems or are otherwise expected to
have a material adverse effect on the Company's financial condition or results
of operations.
While the Company is not aware of any Year 2000 problems for which a solution is
not available, other unanticipated Year 2000 issues could arise and there can be
no assurance that actual results will be comparable to expected results. These
unanticipated issues may include the ability to identify and correct all
relevant computer codes, the ability of the Company's vendors and suppliers to
adequately address the Year 2000 issue, the impact of Year 2000 on our borrowers
and other uncertainties.
Results of Operations for the Three Months Ended June 30, 1998 and June 30, 1997
The Company reported net income of $4.2 million, or $0.60 per diluted share for
the three months ended June 30, 1998 as compared to net income of $3.7 million,
or $0.53 per diluted share for the same period last year. These results reflect
an increase in noninterest income, net income of real estate operations and
lower provisions for possible loan losses, partially offset by an increase in
operating 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.
9
Three Months Ended June 30,
----------------------------------------------------------------------------------
1998 1997
---------------------------------------- ----------------------------------------
Average Average Average Average
Balance (3) Interest (1) Yield/Cost (1) Balance Interest (1) Yield/Cost (1)
----------- ------------ -------------- ---------- ------------ --------------
(Dollars In Thousands)
Interest-earning assets:
Fed funds sold and short-term investments $ 41,749 $ 530 5.02% $ 14,587 $ 158 4.29%
Investment securities held to maturity 226,187 3,694 6.53% 217,249 3,692 6.80%
Investment securities available for 574,749 8,674 6.04% 545,456 9,287 6.81%
Investment securities held for trading -- -- -- 484 5 4.09%
Residential real estate loans 255,233 5,125 8.03% 289,371 5,774 7.98%
Commercial real estate loans 182,091 4,038 8.87% 168,432 3,787 8.99%
Commercial loans 235,000 5,200 8.75% 197,885 4,384 8.76%
Home equity loans 166,627 3,480 8.38% 128,525 2,555 7.97%
Consumer loans 12,387 315 10.17% 9,314 245 10.52%
---------- ---------- ----- ---------- ---------- -----
Total interest-earning assets 1,694,023 31,056 7.33% 1,571,303 29,887 7.61%
Allowance for loan losses (23,298) (20,512)
Non-interest-earning assets 131,266 114,006
---------- ----------
Total assets $1,801,991 $ 31,056 $1,664,797 $ 29,887
========== ========== ========== ==========
Interest-bearing liabilities:
Deposits
Savings accounts $ 220,882 $ 1,097 1.99% $ 267,255 $ 1,561 2.34%
NOW accounts (2) 42,996 140 1.31% 81,040 236 1.17%
Money manager accounts (2) 49,067 141 1.15% -- -- --
Money market accounts 255,322 2,067 3.25% 205,782 1,703 3.32%
Time deposit accounts 566,645 7,547 5.34% 514,137 6,794 5.30%
---------- ---------- ----- ---------- ---------- ----
Total interest-bearing deposits 1,134,912 10,992 3.88% 1,068,214 10,294 3.87%
Borrowed funds 314,189 4,547 5.73% 299,363 4,348 5.75%
---------- ---------- ----- ---------- ---------- ----
Total interest-bearing liabilities 1,449,101 15,539 4.30% 1,367,577 14,642 4.29%
Non-interest-bearing liabilities 224,771 178,390
---------- ----------
Total liabilities 1,673,872 1,545,967
Total stockholders' equity 128,119 118,830
---------- ----------
Total liabilities and stockholders' equity $1,801,991 $ 15,539 $1,664,797 $ 14,642
========== ========= ========== ==========
Net interest income/spread $ 15,517 3.03% $ 15,245 3.32%
========= ===== ========== =====
Net interest margin as a % of interest-
earning assets 3.66% 3.88%
===== =====
Tax equivalent adjustment $ 280 $ 181
--------- ----------
Net interest income/spread per Condensed Consolidated
Statement of Operations $ 15,237 $ 15,064
========= ==========
<FN>
(1) On a fully taxable equivalent basis. Calculated using a Federal income tax rate of 35% for 1998 and 34% for 1997.
(2) During July 1997, the Company implemented a program which converted certain NOW accounts to money manager accounts. This
program has no effect on the Company's depositors, but has provided additional investable funds to the Company by substantially
reducing the reserve balances required to be maintained at the Federal Reserve Bank of Boston.
(3) A reclassification of some savings accounts to money market accounts affecting average balance outstanding was made in
connection with the GBT acquisition.
</FN>
Net interest income on a fully taxable equivalent basis for the three months
ended June 30, 1998 was $15.5 million compared to $15.2 million for the three
months ended June 30, 1997, an increase of $0.3 million or 1.8%. This increase
was the result of a $122.7 million increase in interest-earning assets partially
offset by an 22 basis point decrease in the net interest margin.
Total interest income was $31.1 million on a fully taxable equivalent basis for
the three months ended June 30, 1998, an increase of $1.2 million or 3.9% from
the same period last year. This increase is attributable to higher levels of
interest-earning assets, partially offset by lower yields on interest-earning
assets. Average interest-earning assets totaled $1.7 billion in the second
quarter of 1998 compared to $1.6 billion in the second quarter of 1997, an
increase of $122.7 million or 7.8%. Average investments increased $37.7 million
or 4.9% and were funded by higher deposit levels and borrowed funds. Average
loans increased $57.8 million as the Company continued to focus on the
commercial and home equity market segments, which grew by $37.1 million or 18.8%
and $38.1 million or 29.6%, respectively. Commercial real estate loans increased
$13.7 million or 8.1% reflecting growth in commercial construction lending.
Residential real estate loan balances declined $34.1 million or 11.8% for the
three months ended June 30, 1998,
10
reflecting amortization and prepayments of the existing loan portfolio. Yields
on interest-earning assets declined 28 basis points from the second quarter of
1997 primarily reflecting a lower level of interest rates on the Company's
investment securities as well as accelerated amortization and prepayments of
mortgage-backed securities which result in the faster write-off of premiums.
Accelerated prepayment speeds were the result of lower long-term interest rates
which significantly increased refinancing activity.
Total interest expense was $15.5 million for the three months ended June 30,
1998 compared to $14.6 million during the same period in 1997, an increase of
$0.9 million or 6.1%. This increase is attributable to increases in
interest-bearing deposits and borrowed funds. Average interest-bearing deposits
increased $66.7 million or 6.2%. This growth occurred primarily in time deposits
which increased $52.5 million or 10.2% largely due to growth in time deposits
with local municipalities. Borrowed funds averaged $314.2 million for the three
months ended June 30, 1998 compared to $299.4 million for the same period in
1997. These borrowings were used to match fund fixed rate assets and to extend
the maturity of the Company's liabilities.
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,
1998 versus 1997
----------------------------------------
Increase (Decrease) Due to
----------------------------------------
Volume Rate Net
-------- -------- --------
(Dollars In Thousands)
Interest-earning assets:
Federal funds sold and
interest bearing deposits $ 320 $ 52 $ 372
Investment securities held to maturity 149 (147) 2
Investment securities available for sale 470 (1,083) (613)
Investment securities held for trading (3) (2) (5)
Residential real estate loans (683) 34 (649)
Commercial real estate loans 305 (54) 251
Commercial loans 822 (6) 816
Home equity loans 777 148 925
Consumer loans 79 (9) 70
------- ------- -------
Total interest-earning assets 2,236 (1,067) 1,169
------- ------- -------
Interest-bearing liabilities:
Deposits:
Savings accounts (251) (213) (464)
NOW accounts (117) 21 (96)
Money manager account 70 71 141
Money market accounts 406 (42) 364
Time deposit accounts 697 56 753
------- ------- -------
Total deposits 805 (107) 698
Borrowed funds 215 (16) 199
------- ------- -------
Total interest-bearing liabilities 1,020 (123) 897
------- ------- -------
Change in net interest income $ 1,216 $ (944) $ 272
======= ======= =======
Provision for Possible Loan Losses
The Company's provision for possible loan losses was $0.3 million for the second
quarter of 1998 compared to $0.5 million in the second quarter of 1997. The
provision for possible loan losses is based upon management's judgment of the
amount necessary to maintain the allowance for possible loan losses at a level
which is considered adequate. For further information see "Balance Sheet
Analysis - Non-performing Assets" and "Allowance for Possible Loan Losses".
11
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,
------------------------
1998 1997
--------- ---------
Net gain on sale of loans $ 369 $ 86
Net gain on sale of securities 2 60
Net loss on securities held fortrading -- 30
Loan charges and fees 798 756
Deposit related fees 2,186 1,839
Merchant processing fees 472 542
Other charges and fees 702 559
------ ------
$4,529 $3,872
====== ======
Non-interest income totaled $4.5 million for the second quarter of 1998 compared
to $3.9 million for the same period in 1997, an increase of $0.7 million or
17.0%. Net gain on sale of loans increased $0.3 million due to an increase in
mortgage production and corresponding sale of loans to the secondary market.
Deposit service charges and fees increased $0.3 million due to fees associated
with the Company's larger non-interest bearing deposit base.
Non-interest Expense
Salaries and Benefits Expense
Salaries and benefits expense totaled $6.6 million for the second quarter of
1998 compared to $6.1 million for the same period in 1997. This increase of $0.5
million reflects increased staffing related to new branch openings,
branch-related support as well as support needed to meet increased residential
origination volumes, and higher benefit costs associated with employee
stock-related compensation plans including ESOP.
Occupancy Expense of Bank Premises
Occupancy expense totaled $1.3 million for the second quarter of 1998 compared
to $1.2 million for the same period in 1997, an increase of $0.1 million which
is attributed to the expense of new branch openings.
Furniture and Equipment Expense
Furniture and equipment expense increased $0.1 million reflecting new branch
openings as well as investments in new technology.
Other Operating Expense
The components of other operating expense for the periods presented are as
follows:
Three months ended
June 30,
-----------------------------
1998 1997
-------- -------
Marketing $ 572 $ 458
Insurance 152 186
Professional services 454 734
Outside processing 1,409 1,203
Other 1,814 1,589
------ ------
$4,401 $4,170
====== ======
12
Other operating expenses totaled $4.4 million for the second quarter of 1998
compared to $4.2 million for the second quarter of 1997, an increase of $0.2
million. Professional services decreased $0.3 million due to lower levels of
legal and consulting expenses. Both outside processing charges and other
operating expenses increased $0.2 million from the comparable period, reflecting
costs associated with higher transaction and account volume resulting from the
Company's consumer strategy. Marketing increased $0.1 million due to additional
radio and print advertisement as well as branch displays and brochures for GBT.
Net Expense of Real Estate Operations
The Company's real estate investment and brokerage subsidiary, Colebrook,
engages 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 has essentially completed the sale of its
remaining real estate investments. At June 30, 1998, with the exception of two
real estate investments (one with a book value of $2.4 million and with a book
value $0.1 million), the divestment of Colebrook has been completed. One of the
two remaining real estate investments, with a book value of $2.4 million was
sold in the third quarter of 1998
Net income of real estate operations for the second quarter of 1998 was $0.6
million compared to expense of $0.1 million for the same period in 1997. Results
for the second quarter of 1998 were influenced by a $0.4 million reversal of the
remaining Colebrook divestment reserve, based upon the final terms of the
Colebrook divestment, as well as $0.2 million of normal operating earnings.
Income Taxes
For the three months ended June 30, 1998 the Company recorded income tax expense
of $2.6 million compared to expense of $2.4 million for the three months ended
June 30, 1997. This increase is attributable to a 10.4% increase in pre-tax
earnings, partially offset by a lower overall effective rate resulting from
state tax planning strategies.
Results of Operations for the Six Months Ended June 30, 1998 and June 30, 1997
The Company reported net income of $8.3 million, or $1.17 per diluted share for
the six months ended June 30, 1998 as compared to net income of $7.0 million, or
$1.01 per diluted share for the same period last year. These results reflect an
increase in net interest income, noninterest income, net income of real estate
operations and lower provisions for possible loan losses, partially 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.
13
Six Months Ended June 30,
----------------------------------------------------------------------------------
1998 1997
---------------------------------------- ----------------------------------------
Average Average Average Average
Balance (3) Interest (1) Yield/Cost (1) Balance Interest (1) Yield/Cost (1)
----------- ------------ -------------- ---------- ------------ --------------
(Dollars In Thousands)
Interest-earning assets:
Fed funds sold and short-term investments $ 42,678 $ 1,091 5.08% $ 20,509 $ 470 4.56%
Investment securities held to maturity 216,203 7,166 6.63% 220,892 7,469 6.76%
Investment securities available for sale 562,535 17,388 6.18% 520,637 17,897 6.88%
Investment securities held for trading -- -- -- 481 7 2.89%
Residential real estate loans 263,657 10,540 8.00% 290,233 11,530 7.95%
Commercial real estate loans 185,326 8,261 8.92% 168,425 7,620 9.05%
Commercial loans 226,186 9,843 8.66% 193,267 8,460 8.71%
Home equity loans 163,061 6,807 8.42% 124,254 4,928 8.00%
Consumer loans 12,415 608 9.79% 9,198 490 10.65%
---------- ---------- ---- ---------- ---------- -----
Total interest-earning assets 1,672,061 61,704 7.38% 1,547,896 58,871 7.61%
Allowance for loan losses (23,167) (20,200)
Non-interest-earning assets 125,880 112,875
---------- -----------
Total assets $1,774,774 $ 61,704 $ 1,640,571 $ 58,871
========== ========== =========== ==========
Interest-bearing liabilities:
Deposits
Savings accounts $ 230,086 $ 2,330 2.04% $ 262,263 $ 3,040 2.34%
NOW accounts (2) 41,519 291 1.41% 80,386 465 1.17%
Money manager accounts (2) 48,866 284 1.17% -- -- --
Money market accounts 245,601 4,005 3.29% 205,511 3,381 3.32%
Time deposit accounts 553,427 14,659 5.34% 513,701 13,464 5.29%
---------- ---------- ---- ---------- ---------- ----
Total interest-bearing deposits 1,119,499 21,569 3.89% 1,061,861 20,350 3.86%
Borrowed funds 312,346 9,022 5.75% 289,241 8,204 5.64%
---------- ---------- ---- ---------- ---------- ----
Total interest-bearing liabilities 1,431,845 30,591 4.31% 1,351,102 28,554 4.26%
Non-interest-bearing liabilities 217,065 171,026
---------- ----------
Total liabilities 1,648,910 1,522,128
Total stockholders' equity 125,864 118,443
---------- ----------
Total liabilities and stockholders' equity $1,774,774 $ 30,591 $1,640,571 $ 28,554
========== ========== ========== ==========
Net interest income/spread $ 31,113 3.07% $ 30,317 3.35%
========== ==== ========== =====
Net interest margin as a % of interest-
earning assets 3.72% 3.92%
===== =====
Tax equivalent adjustment $ 477 $ 340
---------- ----------
Net interest income/spread per Condensed Consolidated
Statement of Operations $ 30,636 $ 29,977
========== ==========
<FN>
(1) On a fully taxable equivalent basis. Calculated using a Federal income tax rate of 35% for 1998 and 34% for 1997.
(2) During July 1997, the Company implemented a program which converted certain NOW accounts to money manager accounts. This
program has no effect on the Company's depositors, but has provided additional investable funds to the Company by substantially
reducing the reserve balances required to be maintained at the Federal Reserve Bank of Boston.
(3) A reclassification of some savings accounts to money market accounts affecting average balance outstanding was made in
connection with the GBT acquisition.
</FN>
Net interest income on a fully taxable equivalent basis for the six months ended
June 30, 1998 was $31.1 million compared to $30.3 million for the six months
ended June 30, 1997, an increase of $0.8 million or 2.6%. This increase was the
result of a $124.2 million increase in interest-earning assets partially offset
by an 20 basis point decrease in the net interest margin.
Total interest income was $61.7 million on a fully taxable equivalent basis for
the six months ended June 30, 1998, an increase of $2.8 million or 4.8% from the
same period last year. This increase is attributable to higher levels of
interest-earning assets, partially offset by lower yields on interest-earning
assets. Average interest-earning assets totaled $1.7 billion for the six months
ended June 30, 1998 compared to $1.5 billion for the six months ended June 30,
1997, an increase of $124.2 million or 8.0%. Average investments increased $36.7
million or 4.9% and were funded by higher deposit levels and borrowed funds.
Average loans increased $65.3 million as the Company continued to focus on the
commercial and home equity market segments, which grew by $32.9 million or 17.0%
and $38.8 million or 31.2%, respectively. Commercial real estate loans increased
$16.9 million or 10.0% reflecting growth in commercial construction lending.
Residential real estate loan balances declined $26.6 million or 9.2% for the six
months ended June 30, 1998, reflecting amortization and prepayments of the
existing loan portfolio. Yields on interest-earning assets declined 23 basis
points from the six months ended June 30, 1997 primarily reflecting lower level
of interest rates on the Company's investment securities as well as accelerated
amortization and prepayments of mortgage-backed
14
securities which result in the accelerated write off of the premiums.
Accelerated prepayment speeds were the result of lower long-term interest rates
which significantly increased refinancing activity.
Total interest expense was $30.6 million for the six months ended June 30, 1998
compared to $28.6 million during the same period in 1997, an increase of $2.0
million or 7.1%. This increase is attributable to increases in interest-bearing
deposits and borrowed funds. Average interest-bearing deposits increased $57.6
million or 5.4%. This growth occurred primarily in time deposits which increased
$39.7 million or 7.7% largely due to growth in time deposits with local
municipalities. Borrowed funds averaged $312.3 million for the six months ended
June 30, 1998 compared to $289.2 million for the same period in 1997. These
borrowings were used to match fund fixed rate assets and to extend the maturity
of the Company's liabilities.
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,
1998 versus 1997
------------------------------------------------
Increase (Decrease) Due to
------------------------------------------------
Volume Rate Net
----------- ---------- ---------
(Dollars In Thousands)
Interest-earning assets:
Federal funds sold and
short term investments $ 537 $ 84 $ 621
Investment securities held to maturity (157) (146) (303)
Investment securities available for sale 1,368 (1,877) (509)
Investment securities held for trading (4) (3) (7)
Residential real estate loans (1,059) 69 (990)
Commercial real estate loans 759 (118) 641
Commercial loans 1,437 (53) 1,383
Home equity loans 1,580 299 1,879
Consumer loans 164 (46) 118
------- ------- -------
Total interest-earning assets 4,625 (1,792) 2,833
------- ------- -------
Interest-bearing liabilities:
Deposits:
Savings accounts (349) (361) (710)
NOW accounts (249) 75 (174)
Money manager accounts 142 142 284
Money market accounts 657 (33) 624
Time deposit accounts 1,047 148 1,195
------- ------- -------
Total deposits 1,248 (29) 1,219
Borrowed funds 661 157 818
------- ------- -------
Total interest-bearing liabilities 1,909 128 2,037
------- ------- -------
Change in net interest income $ 2,716 $(1,920) $ 796
======= ======= =======
15
Provision for Possible Loan Losses
The Company's provision for possible loan losses was $0.5 million for the six
months ended June 30, 1998 compared to $1.0 million for the same period in 1997.
The provision for possible loan losses is based upon management's judgment of
the amount necessary to maintain the allowance for possible loan losses at a
level which is considered adequate. For further information see "Balance Sheet
Analysis - Non-performing Assets" and "Allowance for Possible Loan Losses".
Non-interest Income
Non-interest income is composed of fee income for bank services and gains or
losses from the sale of assets. The components of non-interest income for the
periods presented are as follows:
Six months ended
June 30,
---------------------------
1998 1997
---------- ---------
(Dollars in Thousands)
Net gain on sale of loans $ 624 $ 192
Net gain on sale of securities 2 60
Net loss on securities held for trading -- 19
Loan charges and fees 1,543 1,501
Deposit related fees 4,075 3,602
Merchant processing fees 910 909
Other charges and fees 1,351 982
------ ------
$8,505 $7,265
====== ======
Non-interest income totaled $8.5 million for the six months ended June 30, 1998
compared to $7.3 million for the same period in 1997, an increase of $1.2
million or 17.1%. Deposit service charges and fees increased $0.5 million due to
fees associated with the Company's larger non-interest bearing deposit base. Net
gain on sale of loans increased $0.4 million due to an increase in mortgage
production and corresponding sale of loans to the secondary market. Other
charges and fees increased $0.4 million due to increases in brokerage service
fees as well as fees associated with Business Manager, a commercial cash
management product introduced by the Company in 1997, which involves the funding
and management of accounts receivable for small-to-medium-sized business
customers.
Non-interest Expense
Salaries and Benefits Expense
Salaries and benefits expense totaled $12.9 million for the six months ended
June 30, 1998 compared to $12.1 million for the same period in 1997, an increase
of $0.8 million reflecting standard wage increases, increased staffing related
to new branch openings, branch-related support, as well as support needed to
meet increased residential origination volumes, and higher benefit costs
associated with employee stock-related compensation plans including ESOP.
Occupancy Expense of Bank Premises
Occupancy expense totaled $2.5 million for the six months ended June 30, 1998
compared to $2.4 million for the same period in 1997, and increase of $0.1
million which is attributed to the expense of new branch openings.
Furniture and Equipment Expense
Furniture and equipment expense increased $0.3 million reflecting new branch
openings as well as investments in new technology.
16
Other Operating Expense
The components of other operating expense for the periods presented are as
follows:
Six months ended
June 30,
------------------------------
1998 1997
-------- -------
(Dollars in Thousands)
Marketing $1,132 $1,098
Insurance 305 374
Professional services 1,124 1,590
Outside processing 2,696 2,388
Other 3,225 2,921
------ ------
$8,482 $8,371
====== ======
Other operating expenses totaled $8.5 million for the six months ended June 30,
1998 compared to $8.4 million for the same period in 1997, an increase of $0.1
million. Professional services decreased $0.5 million due to lower levels of
legal and consulting expenses. Both outside processing charges and other
operating expenses increased $0.3 million from the comparable period, reflecting
costs associated with higher transaction and account volumes resulting from the
Company's consumer strategy.
Foreclosed Real Estate Expense
Foreclosed real estate expense reflects gains or losses on sales, writedowns and
net operating results of foreclosed properties. Foreclosed real estate expense
was $0.1 million for the six months ended June 30, 1998 compared to income of
$0.1 million for the same period in 1997. The results reflect $0.1 million in
gains on the sale of foreclosed properties during the first quarter of 1997
compared to losses and writedowns of $0.1 million in foreclosed properties in
the first quarter of 1998.
Net Expense of Real Estate Operations
The Company's real estate investment and brokerage subsidiary, Colebrook,
engages 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 has essentially completed the sale of its
remaining real estate investments. At June 30, 1998, with the exception of two
real estate investments (one with a book value of $2.4 million and one with a
book value of $0.1 million), the divestment of Colebrook has been completed. One
of the two remaining real estate investments, with a book value of $2.4 million
was sold in the third quarter of 1998.
Net income of real estate operations for the six months ended June 30, 1998 was
$0.6 million compared to expense of $0.5 million for the same period in 1997. In
the first quarter of 1997, the Company established a reserve of $1.0 million
relating to the divestment of Colebrook which was partially offset by a $0.6
million gain on the sale of real estate property. Results for the six months
ended June 30, 1998 were influenced by a $0.4 million reversal of the remaining
Colebrook divestment reserve, based upon the final terms of the Colebrook
divestment, as well as income of $0.2 million representing normal operating
earnings.
Income Taxes
For the six months ended June 30, 1998 the Company recorded income tax expense
of $5.1 million compared to expense of $4.5 million for the six months ended
June 30, 1997. This increase is attributable to a 16.1% increase in pre-tax
earnings, partially offset by a lower overall effective rate resulting from
state tax planning strategies.
17
Balance Sheet Analysis - Comparison Of June 30, 1998 To December 31, 1997
Total assets increased from $1.7 billion at December 31, 1997 to $1.8 billion at
June 30, 1998. This increase primarily reflects growth in investment securities
and loans funded through an increase in deposits and wholesale borrowings.
Investments
The Company's investment portfolio increased $31.6 million from $769.1 million
at December 31, 1997 to $800.7 million at June 30, 1998.
The Company engages in investment activities for both investment and liquidity
purposes. The Company maintains an investment securities portfolio which
consists primarily of U.S. Government and Agency securities, corporate
obligations, asset-backed securities, collateralized mortgage obligations, FHLB
stock, and marketable equity securities. Other short-term investments held by
the Company periodically include interest-bearing deposits and federal funds
sold. The Company also maintains a mortgage-backed securities portfolio
consisting of securities issued and guaranteed by the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and
the Government National Mortgage Association ("GNMA") in addition to publicly
traded mortgage-backed securities issued by private financial intermediaries
which are rated "AA" or higher by rating agencies of national prominence.
Securities which the Company has the intent and ability to hold until maturity
are classified as held-to-maturity and are carried at amortized cost, while
those securities which have been identified as assets that may be sold prior to
maturity or assets for which there is not a positive intent to hold to maturity
are classified as available-for-sale and are carried at fair value, with
unrealized gains and losses excluded from earnings and reported net of tax as
accumulated other comprehensive income as a separate component of stockholders'
equity.
During 1997 GBT held trading securities however, concurrent with the acquisition
of GBT, the Company sold its position in these instruments. At June 30, 1998 and
December 31, 1997, the Company held no trading securities.
The table below sets forth certain information regarding the amortized cost and
fair value of the Company's investment portfolio at the dates indicated.
June 30, 1998
-------------------------------------------------------------------
Available for Sale Held to Maturity
------------------------------ ------------------------------
(Dollars In Thousands)
Amortized Amortized
Cost Fair Value Cost Fair Value
---------- ---------- ---------- ------------
U.S. Government and Agency obligations $ 14,021 $ 14,028 $ -- $ --
Collateralized mortgage obligations 49,224 49,190 14,633 14,732
Mortgage-backed securities 447,279 447,118 154,083 154,280
Asset-backed securities -- -- 64,771 65,114
Other bonds and short term obligations 8,968 9,316 280 278
Other securities 45,574 47,293 -- --
-------- -------- -------- --------
Total $565,066 $566,945 $233,767 $234,404
======== ======== ======== ========
December 31, 1997
-------------------------------------------------------------------
Available for Sale Held to Maturity
------------------------------ ------------------------------
(Dollars In Thousands)
Amortized Amortized
Cost Fair Value Cost Fair Value
---------- ---------- ---------- ------------
U.S. Government and Agency obligations $ 15,608 $ 15,636 $ 2,400 $ 2,391
Collateralized mortgage obligations 51,273 51,415 2,934 2,953
Mortgage-backed securities 458,659 460,478 141,282 141,563
Asset-backed securities -- -- 46,046 46,143
Other bonds and short term obligations 8,966 9,355 345 346
Other securities 38,128 39,224 -- --
-------- -------- -------- --------
Total $572,634 $576,108 $193,007 $193,396
======== ======== ======== ========
18
Loan Portfolio Composition
Gross loans comprised $891.0 million or 48.4% of total assets as of June 30,
1998. The following table sets forth information concerning the Company's loan
portfolio in dollar amounts and percentages, by type of loan at June 30, 1998
and at December 31, 1997.
June 30, 1998 December 31, 1997
------------------------ ------------------------
Percent of Percent of
Amount Total Amount Total
---------- ---------- --------- ----------
(Dollars In Thousands)
Residential real estate loans $256,591 28.80% $281,457 33.13%
Commercial real estate loans 182,239 20.46% 185,226 21.80%
Commercial loans 267,587 30.03% 212,869 25.06%
Home equity loans 169,839 19.06% 158,753 18.69%
Consumer loans 14,716 1.65% 11,189 1.32%
-------- ------ -------- ------
Total loans receivable, gross 890,972 100.00% 849,494 100.00%
-------- ------ -------- ------
Less:
Unearned income and fees (2,655) (1,991)
Allowance for loan losses 23,482 22,724
-------- --------
Total loans receivable, net $870,145 $828,761
======== ========
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, 1998, the
Company experienced an increase in prepayments in its adjustable rate mortgage
portfolio. These prepayments offset new originations and resulted in a $24.9
million decrease in residential real estate balances between December 31, 1997
and June 30, 1998.
During the six months ended June 30, 1998, commercial loan balances increased
$54.7 million, reflecting the Company's continued focus on lending activities in
the local business market. Home equity loans increased $11.1 million from
December 31, 1997 to June 30, 1998 as the Company continues to actively promote
home equity products.
19
Non-performing Assets
Non-performing assets declined from $8.1 million at December 31, 1997 to $5.0
million at June 30, 1998. The decline is attributed to the movement of
non-accrual loans to accrual status. The following table sets forth information
regarding the components of non-performing assets for the periods presented:
June 30, December 31,
1998 1997
--------- -----------
(Dollars In Thousands)
Non-accrual loans (1):
Residential real estate loans $1,067 $1,211
Commercial real estate loans 684 1,542
Commercial loans 1,599 2,414
Home equity loans 238 181
Consumer loans 10 4
------ ------
Total non-accrual loans 3,598 5,352
------ ------
Loans past due 90 days still accruing (2) 109 431
------ ------
Total non-performing loans 3,707 5,783
Foreclosed real estate (3) 841 1,209
Restructured loans on accrual status (4) 433 1,124
------ ------
Total non-performing assets $4,981 $8,116
====== ======
Total non-performing loans to total
gross loans 0.42% 0.68%
Total non-performing assets to total
assets 0.27% 0.47%
Allowance for possible losses to
non-performing loans 633.45% 392.94%
(1) Non-accrual loans are loans that are contractually past due in excess of 90
days, for which the Company has stopped the accrual of interest, or loans which
are not past due but on which the Company has stopped the accrual of interest
based on management's assessment of the circumstances surrounding
these loans.
(2) Accruing loans past due 90 days or more are loans which have not been placed
on non-accrual status as, in management's opinion, the collection of the loan,
in full, is not in doubt.
(3) Foreclosed real estate includes OREO, defined as real estate acquired
through foreclosure or acceptance of a deed in lieu of foreclosure. The Company
carries foreclosed real estate at the lower of cost or net realizable value,
which approximates fair value less estimated selling costs.
(4) Restructured loans are loans for which concessions, including reduction of
interest rates or deferral of interest or principal payments, have been granted
due to the borrower's financial condition. Restructured loans on non-accrual
status are reported in the non-accrual loan category. Restructured loans on
accrual status are those loans that have complied with terms of a restructuring
agreement for a satisfactory period (generally six months).
20
The principal amount of non-performing loans aggregated $3.7 million at June 30,
1998 and $5.8 million at December 31, 1997. Interest income that would have been
recorded if the loans had been performing in accordance with their original
terms aggregated $0.2 million and $0.3 million for the six months ended June 30,
1998 and 1997, respectively. Interest income recorded on these loans for the six
months ended June 30, 1998 and 1997 was $0.1 million and $0.2 million,
respectively.
The principal amount of restructured loans aggregated $0.4 million at June 30,
1998 compared to $1.1 million at December 31, 1997, a decrease of $0.7 million.
Interest income that would have been recorded if the loans had been performing
within their original terms aggregated $20 thousand and $0.1 million for the
periods ended June 30, 1998 and 1997, respectively. Interest income recorded on
these loans amounted to $26 thousand and $0.1 million for the six months ended
June 30, 1998 and 1997, respectively.
Watch List Loans
The Company maintains a "watch list" of loans, which represents performing loans
that have potential weaknesses that require management's attention. These
potential weaknesses may stem from a variety of factors including, among other
things, economic or market conditions, adverse conditions in the obligor's
operations or financial condition weaknesses. Watch list loans totaled $17.7
million and $24.1 million at June 30, 1998 and December 31, 1997, respectively.
Classified Loans
The Company's Credit Grade Policy (the "Policy") provides for the classification
of loans considered to be of lesser quality as "substandard", "doubtful", or
"loss" loans. A loan is considered substandard under the Policy if it is
inadequately protected by the current sound worth and paying capacity of the
obligor or of the collateral pledged, if any. Substandard loans include those
characterized by the "distinct possibility" that the Company will sustain "some
loss" if the deficiencies are not corrected. Loans classified as doubtful, of
which the Company has none, have all of the weaknesses inherent in those
classified as substandard with the added characteristic that the weaknesses
present make "collection or liquidation in full" on the basis of currently
existing facts, conditions and values, "improbable." Loans characterized as
loss, of which the Company has none, are those considered "uncollectible" and of
such little value that their continuance as bankable assets is not warranted.
Classified loans, all of which are categorized substandard, totaled $9.7 million
and $6.2 million at June 30, 1998 and December 31, 1997, respectively. Included
in these amounts are $3.6 million and $5.4 million of loans which have been
reported as non-performing assets at June 30, 1998 and December 31, 1997,
respectively.
Allowance for Possible Loan Losses
The allowance for possible loan losses reflects an amount that, in management's
judgment, is adequate to provide for potential losses in the loan portfolio. In
addition, examinations of the adequacy of the loan loss reserve are conducted
periodically by various regulatory agencies. The allowance for possible loan
losses at June 30, 1998 was $23.5 million, compared to $20.4 million at June 30,
1997.
21
The activity in the allowance for possible loan losses for the six months ended
June 30, 1998 and 1997 was as follows:
Six Months Ended
June 30,
----------------------
1998 1997
-------- ---------
(Dollars In Thousands)
Balance, beginning of period $ 22,724 $ 19,549
Provision for loan losses 503 965
Charge-offs:
Residential real estate loans (193) (126)
Commercial real estate loans (194) (300)
Commercial loans (116) (200)
Home equity loans (31) (38)
Consumer loans (132) (126)
Merchant processing (51) (50)
-------- --------
Total charge-offs (717) (840)
Recoveries:
Residential real estate loans -- 1
Commercial real estate loans 870 542
Commercial loans 76 119
Home equity loans 4 73
Consumer loans 22 25
Merchant processing -- --
-------- --------
Total recoveries 972 760
-------- --------
Net recoveries (charge-offs) 255 (80)
Balance, end of period $ 23,482 $ 20,434
======== ========
Ratio of net loan recoveries (charge-offs) during the period to
average loans outstanding during the period 0.03% (0.01%)
Ratio of allowance for possible loan losses to total loans
at the end of the period 2.64% 2.50%
Ratio of allowance for possible loan losses to non-performing
loans at the end of the period 633.45% 263.12%
At June 30, 1998, the recorded investment in loans that are considered impaired
under SFAS 114 "Accounting by Creditors for Impairment of a Loan" was $9.1
million. Included in this amount is $1.2 million of impaired loans for which the
related SFAS 114 allowance is $0.4 million and $7.9 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, 1998 was
approximately $9.7 million and $8.8 million, respectively. For the three and six
month periods ended June 30, 1998, the Company recognized interest income on
these impaired loans of $0.1 million and $0.2 million, respectively.
22
The following table shows the allocation of the allowance for possible loan
losses to the various types of loans as well as the percentage of allowance for
possible loan losses in each category to total allowance for possible loan loss.
June 30, 1998 December 31, 1997
--------------------------- ----------------------------
% of % of
Total Total
Allowance for Allowance for
Amount Loan Losses Amount Loan Losses
-------- -------------- --------- --------------
(Dollars In Thousands)
Residential real estate loans $ 2,716 11.57% $ 3,664 16.12%
Commercial real estate loans 7,275 30.98% 5,632 24.78%
Commercial loans 8,781 37.40% 8,328 36.65%
Home equity loans 2,490 10.60% 3,183 14.01%
Consumer loans 1,034 4.40% 1,274 5.61%
Merchant processing 1,186 5.05% 643 2.83%
------- ------ ------- ------
Total allowance for possible loan losses $23,482 100.00% $22,724 100.00%
======= ====== ======= ======
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, 1998 or December 31,
1997. The Company's deposits consist of demand and NOW accounts, money manager
accounts, passbook and statement savings accounts, money market accounts and
time deposits. The following table presents the composition of deposits at the
dates indicated:
June 30, 1998 December 31, 1997
------------------------ -----------------------
Percent Percent
of of
Amount Total Amount Total
----------- ------- ---------- -------
(Dollars In Thousands)
Demand deposits $ 191,951 14.47% $ 171,343 13.52%
NOW accounts 51,415 3.87% 51,412 4.06%
Money manager accounts (1) 36,983 2.79% 39,447 3.11%
Savings accounts 222,097 16.74% 263,449 20.79%
Money market accounts 256,387 19.32% 211,286 16.67%
Time deposits 568,062 42.81% 530,361 41.85%
---------- ------ ---------- ------
Total deposits $1,326,895 100.00% $1,267,298 100.00%
========== ====== ========== ======
(1) Money manager accounts represent NOW account balances which have been
transferred to money market accounts to provide additional investable funds
to the Company by substantially reducing the reserve balances required to
be maintained at the Federal Reserve Bank of Boston. This program has no
effect on the Company's depositors.
Total deposits were $1.3 billion at both June 30, 1998 and December 31, 1997.
Deposits increased $59.6 million with growth occurring primarily in demand
deposits and time deposits. The $41.4 million decrease in savings accounts is
offset by a comparable increase in money market accounts, which is attributable
to the conversion of some savings accounts in connection with the GBT
acquisition. Demand deposits increased $20.6 million reflecting growth in
business deposits, as a result of active solicitation of these accounts, and
consumer deposits, as customers continue to take advantage of free checking
accounts offered as a result of the Company's consumer deposit strategy. The
$37.7 million increase in time deposits is primarily attributable to growth in
deposits with local municipalities.
23
Borrowings
Borrowings consist of FHLB advances, securities sold under agreements to
repurchase, and loans payable related to the Company's ESOP. The Company
generally uses borrowings to fund loan growth and to leverage a portion of its
capital position. Borrowings increased $36.1 million from $299.9 million at
December 31, 1997 to $336.0 million at June 30, 1998 reflecting a portion of the
funding for the growth in loans and investments.
Regulatory Capital
The Company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material adverse effect
on the Company's financial statements. Under applicable capital adequacy
requirements the Company must meet specific minimum capital requirements that
involve quantitative measures of the Company's assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital to risk-weighted assets and Tier 1
capital to total average assets. Management believes, as of June 30, 1998, that
the Company meets all capital adequacy requirements to which it is subject.
Under the FDIC's regulatory framework for prompt corrective action, both SIS
Bank and GBT are considered well capitalized as of June 30, 1998. To be
categorized as well capitalized the Banks must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table below. As of June 30, 1998 the Company also qualified as well capitalized
under the applicable Federal Reserve Board regulations.
Capital amounts and ratios are monitored by management for the Company, SIS Bank
and GBT to ensure qualification as well capitalized. In order to maintain GBT's
qualification as well capitalized the Company has discontinued GBT dividend
payments to the parent company and has changed the mix of certain asset
categories for risk weighting purposes.
24
The actual capital amounts and ratios for the Company, SIS Bank and GBT are
presented in the table below, no deductions were made from capital for
interest-rate risk.
Minimum Minimum
Requirements Requirements
For Capital To Qualify As
Actual Adequacy Purposes Well Capitalized
-------------------- -------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ------- ---------- ------- ---------- ------
(Dollars In Thousands)
As of June 30, 1998:
Tier I Capital (to Average Assets)
Company $130,333 7.2% $ 72,080 4.0% N/A
SIS Bank $110,581 7.3% $ 60,357 4.0% $ 75,447 5.0%
GBT $ 18,233 6.2% $ 11,716 4.0% $ 14,645 5.0%
Tier I Capital (to Risk Weighted Assets)
Company $130,333 11.1% $ 46,914 4.0% $ 70,372 6.0%
SIS Bank $110,581 11.5% $ 38,603 4.0% $ 57,904 6.0%
GBT $ 18,233 8.8% $ 8,317 4.0% $ 12,476 6.0%
Total Capital (to Risk Weighted Assets)
Company $145,090 12.4% $ 93,829 8.0% $117,286 10.0%
SIS Bank $122,734 12.7% $ 77,206 8.0% $ 96,507 10.0%
GBT $ 20,837 10.0% $ 16,635 8.0% $ 20,793 10.0%
As of December 31, 1997:
Tier I Capital (to Average Assets)
Company $123,340 7.2% $ 68,834 4.0% N/A
SIS Bank $103,780 7.1% $ 58,358 4.0% $ 72,947 5.0%
GBT $ 17,291 6.6% $ 10,422 4.0% $ 13,028 5.0%
Tier I Capital (to Risk Weighted Assets)
Company $123,340 11.9% $ 41,568 4.0% $ 62,352 6.0%
SIS Bank $103,780 11.9% $ 35,044 4.0% $ 52,565 6.0%
GBT $ 17,291 10.6% $ 6,507 4.0% $ 9,761 6.0%
Total Capital (to Risk Weighted Assets)
Company $136,438 13.1% $ 83,137 8.0% $103,921 10.0%
SIS Bank $114,825 13.1% $ 70,087 8.0% $ 87,609 10.0%
GBT $ 19,344 11.9% $ 13,014 8.0% $ 16,268 10.0%
Interest Rate Risk Management
Using management's estimates of asset prepayments and core deposit decay in its
computation, the Company estimates that its cumulative one-year gap position was
liability sensitive by $51.4 million or 2.79% of total assets at June 30, 1998.
The following table sets forth the amounts of assets and liabilities outstanding
at June 30, 1998, which are anticipated by the Company to mature or reprice in
each of the future time periods shown using certain assumptions based on its
historical experience, the current interest rate environment, and other data
available to management. Management believes that these assumptions approximate
actual experience and considers such assumptions reasonable, however, the
interest rate sensitivity of the Company's assets and liabilities could vary
substantially if different assumptions were used or actual experience differs
from the assumptions used. Management periodically reviews and, when
appropriate, changes the assumptions used in creating this table.
25
GAP Position
At June 30, 1998
---------------------------------------------------------------------------
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 $ 42,765 $ -- $ -- $ -- $ 42,765
Investment securities 304,377 159,363 269,917 67,055 800,712
Residential real estate loans 78,483 47,228 103,050 27,011 255,772
Commercial real estate loans 42,222 18,575 105,004 15,675 181,476
Commercial loans 102,993 19,017 138,220 6,390 266,620
Home equity loans 109,122 4,296 33,203 24,840 171,461
Consumer loans 7,816 1,568 5,061 254 14,699
Other assets -- -- -- 108,157 108,157
---------- ---------- ---------- ---------- ----------
Total assets $ 687,778 $ 250,047 $ 654,455 $ 249,382 $1,841,662
========== ========== ========== ========== ==========
Liabilities & stockholders' equity:
Savings accounts $ 33,342 $ 33,342 $ 155,413 $ -- $ 222,097
NOW accounts 13,260 13,260 61,878 -- 88,398
Money market accounts 82,880 74,322 99,185 -- 256,387
Time deposits 384,051 122,318 60,411 1,282 568,062
Borrowed funds 132,561 22,777 138,287 42,417 336,042
Other liabilities & stockholders' equity 38,544 38,544 115,626 177,962 370,676
---------- ---------- ---------- ---------- ----------
Total liabilities & stockholders' equity $ 684,638 $ 304,563 $ 630,800 $ 221,661 $1,841,662
========== ========== ========== ========== ==========
Period GAP position $ 3,140 $ (54,516) $ 23,655 $ 27,721
Net period GAP as a percentage of total
assets 0.17% (2.96%) 1.28% 1.51%
Cumulative GAP $ 3,140 $ (51,376) $ (27,721) --
Cumulative GAP as a percentage of total
assets 0.17% (2.79%) (1.51%) --
Cumulative GAP as a percentage of total
interest-earning assets 0.18% (2.96%) (1.60%) --
Cumulative interest-earning assets as a
percentage of cumulative interest-bearing
liabilities 106.45% 102.82% 111.56% 117.85%
For purposes of the above interest sensitivity analysis:
Residential loans held for sale at June 30, 1998 totaling $19.6
million are in the less than six month interest sensitivity period.
Fixed rate assets are scheduled by contractual maturity and
adjustable rate assets are scheduled by their next repricing date.
In both cases, assets that have prepayment optionality are adjusted
for the Company's estimate of prepayments.
Loans do not include non-accrual loans of $3.6 million.
Loans do not include the allowance for loan loss of $23.5 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 $192.0 million are included
in other liabilities and are assumed to decay at an annual
rate of 40%.
26
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.
Market Risk
As a financial institution, the Company's chief market risk is interest rate
risk. The Company has no exposure to foreign currency or commodity prices. Its
exposure to equity prices is limited to marketable equity securities contained
within its available for sale investment portfolio. At June 30, 1998 the Company
did not have a trading portfolio.
Interest rate risk is the sensitivity of income to variations in interest rates
over defined time horizons. The primary goal of interest rate risk management is
to control this risk within limits and guidelines approved by the Company's
Asset/Liability Management Committee (ALCO). These limits and guidelines reflect
the Company's tolerance for interest rate risk.
The Company attempts to control interest rate risk by identifying exposures,
quantifying them, and identifying their impact on income. The Company quantifies
its interest rate risk exposures using simulation models as well as gap
analyses. The Company manages its interest rate exposures using a combination of
on-balance sheet instruments, consisting principally of fixed and variable rate
securities, deposit pricing and FHLB borrowings. See the GAP Position analysis
under this Item 2 and the notes to the Consolidated Financial Statements under
Item 8 in the Company's Form 10-K for the year ended December 31, 1997 for
further information regarding market risk of these instruments.
At June 30, 1998 and December 31, 1997, the Company had no outstanding exposures
to off-balance sheet interest rate instruments such as swaps, forwards or
futures. GBT held derivative financial instruments during 1997. However, in
December, 1997 concurrent with the acquisition of GBT, the Company sold its
position in these instruments. At June 30, 1998 the Company held no derivative
financial instruments.
27
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
Not applicable
Item 3. Default upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Exhibit Location
2. Plan of Acquisition, Reorganization, Arrangement, Liquidation,
or Succession
2.1 Agreement and Plan of Merger, dated as of July 20, 1998,
among People's Heritage Financial Group, Inc. ("PHFG")
and SIS Bancorp, Inc. (the "Company"). (1)
10. Material Contracts
10.1 Stock Option Agreement, dated as of July 20, 1998, between
the Company and PHFG (1)
10.2 Amendment, dated as of July 20, 1998, to Rights Agreement,
dated as of January 12, 1997, between the Company and
ChaseMellon Shareholder Services L.L.C., as Rights Agent (1)
10.3 Amendment to Employment Agreement with John F. Treanor dated
July 15, 1998.
10.4 Form of Severance Agreement for certain Vice Presidents
(Messrs. Prybylo, Merenda, Oleksak, Ms. Jatkevicius,
Ms. Bourque, Ms. Bigda Parent, Ms. Sotir Katz, Ms.Chang)
of SIS Bank, a wholly owned subsidiary of the Company.
10.5 Severance Agreement for David Glidden, Senior Vice
President of SIS Bank, a wholly owned subsidiary of the Company.
Locations of Exhibits if not attached hereto:
(1) Incorporated by reference to PHFG's Current Report on Form 8-K
dated July 20, 1998, as amended.
(b) Reports on Form 8-K
On July 21, 1998, the Company filed a Current Report on Form 8-K
reporting the signing of an Agreement and Plan for Merger dated July
20, 1998 between the Company and People's Heritage Financial
Corporation.
28
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, 1998 /s/ F. William Marshall, Jr.
Date F . William Marshall, Jr.
President and Chief Executive Officer
August 14, 1998 /s/ John F. Treanor
Date John F. Treanor
Executive Vice President, Chief Operating
Officer and Chief Financial Officer
29