<PAGE>
 
 
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
  (Mark One)
  [XAnnual]report pursuant to section 13 or 15(d) of the Securities
    Exchange Act of 1934 for the fiscal year ended December 31, 1996 or
  [_Transition]report pursuant to section 13 or 15(d) of the Securities
    Exchange Act of 1934
 
                                   FORM 10-K
 
                       COMMISSION FILE NUMBER: 000-20809
 
                               ----------------
 
                               SIS BANCORP, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                               ----------------
 
             MASSACHUSETTS                           04-3303264
                                        (I.R.S. EMPLOYER IDENTIFICATION NO.)
    (STATE OR OTHER JURISDICTION OF
    INCORPORATION OR ORGANIZATION)
 
           1441 MAIN STREET                             01102
      SPRINGFIELD, MASSACHUSETTS                     (ZIP CODE)
    (ADDRESS OF PRINCIPAL EXECUTIVE
               OFFICES)
 
                                (413) 748-8000
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
  Securities registered pursuant to Section 12(b) of the Act:
 
                                     NONE
 
  Securities registered pursuant to Section 12(g) of the Act:
 
                    COMMON STOCK, PAR VALUE $0.01 PER SHARE
                              TITLE OF EACH CLASS
 
  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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
  The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing sale price of February 28, 1997, as reported
by NASDAQ, was $151,240,800.
 
  Indicate the number of shares outstanding of the registrant's common stock,
as of the latest practicable date: 5,707,200 shares as of February 28, 1997.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Portions of the SIS Bancorp, Inc. Proxy Statement for the Annual Meeting of
Stockholders to be held on April 30, 1997 are incorporated by reference into
Part III of this Form 10-K.
 
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<PAGE>
 
 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, 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 changes in interest rates; and (v) the effect of
changes in the business cycle and downturns in the local, regional or national
economies.
 
                                       2
<PAGE>
 
                                    PART I
 
ITEM 1: BUSINESS
 
OVERVIEW
 
  The Company, 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 sole
wholly-owned subsidiary of the Company and the Bank's former stockholders
became stockholders of the Company.
 
  Established in 1827, the Bank is a state chartered, stock savings bank
headquartered in Springfield, Massachusetts. The Company provides a wide
variety of financial services which include retail and commercial banking,
residential mortgage origination and servicing, commercial real estate lending
and consumer lending. Substantially all operations of the Company are
conducted through the Bank. The Company serves its primary market of Hampden
and Hampshire Counties through a network of 23 retail branches. The Company
opened three retail branch offices in 1996 and will continue to assess the
need to open additional branch locations to better serve its customers.
 
  The Company's revenues are derived principally from interest payments on its
loan portfolios and mortgage-backed and other investment securities. The
Company's primary sources of funds are deposits, borrowings and principal and
interest payments on loans and mortgage-backed securities.
 
BACKGROUND
 
  Historically, the Bank's principal business was attracting deposits from the
general public and investing those funds in residential mortgage loans. During
the 1980's, the Bank significantly increased its portfolio of commercial real
estate and real estate-related commercial loans both directly and through
certain of its wholly-owned direct and indirect real estate investment
subsidiaries, including Colebrook Corporation ("Colebrook"). As a result of
the national and regional economic recession, the Bank's levels of non-
performing assets increased from 1989 through 1992. The increase in non-
performing assets and regulatory concerns over the preservation of the Bank's
capital, together with other factors concerning the operations of the Bank,
resulted in the Bank entering into a Stipulation and Consent to the issuance
of an Order to Cease and Desist (the "Order") with the Federal Deposit
Insurance Corporation ("FDIC") and the Office of the Massachusetts
Commissioner of Banks (the "Commissioner of Banks") on May 12, 1992.
 
  In accordance with the Order, in March of 1994 the Bank submitted a capital
restoration plan to the FDIC and Commissioner of Banks, strengthened its
senior management team and developed and implemented new strategies to
accelerate the disposition of non-performing assets, to improve the Bank's
financial condition, and to enhance profitability. The Bank's capital
restoration plan called for the Bank to raise additional capital through the
issuance of common stock in a conversion from a mutual bank to a stockholder-
owned bank (the "Conversion"). Effective with the Conversion, which was closed
on February 7, 1995, there was a net increase to capital of $35.9 million. As
a result of the accelerated disposition of non-performing assets, the Bank has
significantly reduced its loan loss provision and foreclosed real estate
expenses which contributed to net income of $11.5 million in 1995 and $18.2
million in 1996. In light of improvements to capital and non-performing asset
levels, the Bank's return to profitability, and the Bank's satisfactory
resolution of all other regulatory concerns addressed by the Order, on April
24, 1995, the Bank was notified that the FDIC and Commissioner of Banks had
unconditionally terminated the Order. As of December 31, 1996, the Company has
total equity of $101.9 million or 7.56% of total assets, and the Bank is
considered "well capitalized" under the applicable regulatory definition.
 
 
                                       3
<PAGE>
 
  Since 1993, the Bank has been in the process of divesting its real estate
investment business that was largely conducted through Colebrook and the
Bank's other wholly-owned real estate investment subsidiaries (collectively
the "Real Estate Subsidiaries"). This divestment is required by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). In
accordance with the requirements of FDICIA, the Bank submitted a divestiture
plan for the Real Estate Subsidiaries to the FDIC, which approved the plan in
December, 1995. The Bank's divestment of all such real estate investment
activities is scheduled to be completed by December, 1997.
 
  On January 23, 1997, the Company announced the declaration of its first
quarterly cash dividend in the amount of $0.12 per share payable on February
20, 1997 to shareholders of record as of the close of business on February 3,
1997. In addition, on that same date, the Company announced its Board of
Directors had authorized a share repurchase program and adopted a shareholder
rights plan.
 
  Under the share repurchase program, the Board of Directors has authorized
the Company to purchase up to 286,180 of its own shares, or up to 5% of the
common stock issued and outstanding as of December 31, 1996. The repurchased
shares will be held in treasury and will be available for issuance in
connection with various employee and director benefit programs.
 
  Under the shareholder rights plan each shareholder of record as of the close
of business on February 3, 1997 received one right for each share of common
stock held by such shareholder to purchase, upon the occurrence of certain
triggering events, one one-hundredth of a share of Series A Junior
Participating Preferred Stock of the Company at a purchase price of $100.00.
Until and unless the rights are triggered, the rights will be evidenced by the
common stock certificates directly, and will transfer automatically with the
transfer of any common stock. The initial issuance of the rights has no
dilutive effect on the outstanding shares of the Company or the Company's
earnings, is not taxable to the Company or to the shareholders, and does not
otherwise affect the trading of the Company's shares. If the rights are not
triggered or otherwise redeemed by the Board of Directors, the rights will
expire on January 22, 2007.
 
INVESTMENT ACTIVITIES
 
  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 Federal Home Loan Mortgage
Corporation (FHLMC) in addition to publicly traded and rated mortgage-backed
securities issued by private financial intermediaries which are rated "AA" or
higher by rating agencies of national prominence.
 
  Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," and now holds both "available for sale" and "held
to maturity" portfolios. Securities which the Company has the intent and
ability to hold until maturity are classified as held to maturity and are
carried at amortized cost, while those securities which have been identified
as assets that may be sold prior to maturity or assets for which there is not
a positive intent to hold to maturity are classified as available for sale and
are carried at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity.
 
                                       4
<PAGE>
 
  The following table sets forth certain information regarding the amortized
cost and fair value of the Company's investment portfolio at the dates
indicated.
 
<TABLE>
<CAPTION>
                                                 DECEMBER 31, 1996
                                     -----------------------------------------
                                      AVAILABLE FOR SALE    HELD TO MATURITY
                                     -------------------- --------------------
                                              (DOLLARS IN THOUSANDS)
                                     AMORTIZED            AMORTIZED
                                       COST    FAIR VALUE   COST    FAIR VALUE
                                     --------- ---------- --------- ----------
<S>                                  <C>       <C>        <C>       <C>
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
                                     ========   ========  ========   ========
<CAPTION>
                                                 DECEMBER 31, 1995
                                     -----------------------------------------
                                      AVAILABLE FOR SALE    HELD TO MATURITY
                                     -------------------- --------------------
                                              (DOLLARS IN THOUSANDS)
                                     AMORTIZED            AMORTIZED
                                       COST    FAIR VALUE   COST    FAIR VALUE
                                     --------- ---------- --------- ----------
<S>                                  <C>       <C>        <C>       <C>
U.S. government and agency
 obligations........................ $  7,700   $  7,699  $    --    $    --
Mortgage-backed securities..........  222,673    224,101   161,168    161,481
Other bonds and short term
 obligations........................    9,300      9,300    11,625     11,449
Other securities....................    5,884      5,884       --         --
                                     --------   --------  --------   --------
  Total............................. $245,557   $246,984  $172,793   $172,930
                                     ========   ========  ========   ========
<CAPTION>
                                                 DECEMBER 31, 1994
                                     -----------------------------------------
                                      AVAILABLE FOR SALE    HELD TO MATURITY
                                     -------------------- --------------------
                                              (DOLLARS IN THOUSANDS)
                                     AMORTIZED            AMORTIZED
                                       COST    FAIR VALUE   COST    FAIR VALUE
                                     --------- ---------- --------- ----------
<S>                                  <C>       <C>        <C>       <C>
U.S. government and agency
 obligations........................ $ 23,953   $ 23,882  $ 17,350   $ 16,173
Mortgage-backed securities..........  112,452    109,455   136,901    125,096
Other bonds and short term
 obligations........................   23,229     23,169     3,992      3,992
Other securities....................    4,808      4,815       --         --
                                     --------   --------  --------   --------
  Total............................. $164,442   $161,321  $158,243   $145,261
                                     ========   ========  ========   ========
</TABLE>
 
  The Company's investment portfolio increased $221.7 million from $419.8
million at December 31, 1995 to $641.5 million at December 31, 1996. This
increase in investments was funded through an increase in deposits and
borrowings.
 
  In 1995, the Financial Accounting Standards Board ("FASB") issued a special
report, "Implementation of Statement 115," that provided additional guidance
related to the application of SFAS 115. In connection with the issuance of
this special report, the FASB allowed all organizations to review their
portfolio classifications and make a one-time reclassification of securities
between categories during the period from November 15, 1995 to December 15,
1995. On December 15, 1995, the Company transferred securities with an
amortized cost of $84.3 million and an unrealized loss of $1.2 million from
the held to maturity portfolio to the available for sale portfolio. In
addition, the Company transferred securities with an estimated fair value of
$47.3 million and an unrealized gain of $0.3 million from the available for
sale portfolio to the held to maturity portfolio. The remaining unrealized
gain of $0.2 million is included in a separate component of stockholders'
equity. Subsequent to the transfer of these securities, the Company sold $82.9
million of available for sale securities in December 1995 at a net loss of
$0.9 million.
 
 
                                       5
<PAGE>
 
  The following table sets forth the contractual maturity distribution of the
carrying value and the weighted average yields to contractual maturity of the
investment portfolio at December 31, 1996. Changes in interest rates will
affect actual maturities.
 
<TABLE>
<CAPTION>
                          WITHIN ONE YEAR       1-5 YEARS          5-10 YEARS       OVER 10 YEARS
                         ------------------ ------------------ ------------------ ------------------
                                   WEIGHTED           WEIGHTED           WEIGHTED           WEIGHTED          WEIGHTED
                         AMORTIZED AVERAGE  AMORTIZED AVERAGE  AMORTIZED AVERAGE  AMORTIZED AVERAGE           AVERAGE
                           COST     YIELD     COST     YIELD     COST     YIELD     COST     YIELD    TOTAL    YIELD
                         --------- -------- --------- -------- --------- -------- --------- -------- -------- --------
<S>                      <C>       <C>      <C>       <C>      <C>       <C>      <C>       <C>      <C>      <C>
AVAILABLE FOR SALE
------------------
U.S. government and
 agency obligations.....  $  --     0.00%    $28,601   7.11%    $1,300    6.92%   $    --    0.00%   $ 29,901  7.11%
Collateral mortgage
 obligations............     --     0.00%     28,965   6.58%       --     0.00%        --    0.00%     28,965  6.58%
Mortgage-backed
 securities.............   6,503    7.92%      1,143   8.11%       --     0.00%    364,275   7.27%    371,921  7.28%
Asset-backed
 securitites............     --     0.00%        --    0.00%       --     0.00%        --    0.00%        --   0.00%
Other bonds and short
 term obligations.......   1,681    5.39%        --    0.00%       --     0.00%        --    0.00%      1,681  5.39%
                          ------             -------            ------            --------           --------
 Total debt securities..  $8,184    7.40%    $58,709   6.87%    $1,300    6.92%   $364,275   7.27%   $432,468  7.22%
 Market Value...........  $8,193             $58,824            $1,294            $366,538           $434,849
HELD TO MATURITY
----------------
U.S. government and
 agency obligations.....  $  --     0.00%    $   --    0.00%    $  --     0.00%   $    --    0.00%   $    --   0.00%
Collateral mortgage
 obligations............     --     0.00%        --    0.00%       --     0.00%        --    0.00%        --   0.00%
Mortgage-backed
 securities.............   6,304    6.78%      5,221   6.79%     3,396    7.69%    134,935   7.27%    149,856  7.24%
Asset-backed
 securitites............     --     0.00%        --    0.00%       --     0.00%     42,118   6.96%     42,118  6.96%
Other bonds and short
 term obligations.......     100    5.15%        --    0.00%       100    8.40%        --    0.00%        200  6.78%
                          ------             -------            ------            --------           --------
 Total debt securities..  $6,404    6.75%    $ 5,221   6.79%    $3,496    7.71%   $177,053   7.20%   $192,174  7.18%
 Market Value...........  $6,392             $ 5,205            $3,543            $176,477           $191,617
</TABLE>
 
  As of December 31, 1996, approximately 97.3% of mortgage-backed securities
available for sale and 62.5% of mortgage-backed securities held to maturity
were adjustable rate.
 
                                       6
<PAGE>
 
LENDING ACTIVITIES
 
  Gross loans comprised $625.0 million or 46.3% of total assets at December
31, 1996, compared to $573.1 million or 53.5% of total assets at December 31,
1995. The following table sets forth information concerning the Company's loan
portfolio in dollar amounts and percentages, by type of loan at December 31,
1996, 1995, 1994, 1993, and 1992, respectively.
 
<TABLE>
<CAPTION>
                                                DECEMBER 31,
                         -------------------------------------------------------------
                                1996                 1995                 1994
                         -------------------- -------------------- -------------------
                                   PERCENT OF           PERCENT OF          PERCENT OF
                          AMOUNT     TOTAL     AMOUNT     TOTAL     AMOUNT    TOTAL
                         --------  ---------- --------  ---------- -------- ----------
                                           (DOLLARS IN THOUSANDS)
<S>                      <C>       <C>        <C>       <C>        <C>      <C>
Residential real estate
 loans.................. $242,410     38.79%  $263,551     45.99%  $257,623    50.17%
Commercial real estate
 loans..................  118,442     18.95%   118,005     20.59%   122,091    23.78%
Commercial loans........  155,808     24.93%   117,674     20.53%    80,296    15.64%
Home equity loans.......  104,206     16.67%    67,657     11.81%    46,593     9.07%
Consumer loans..........    4,132      0.66%     6,196      1.08%     6,883     1.34%
                         --------    ------   --------    ------   --------   ------
    Total loans
     receivable, gross..  624,998    100.00%   573,083    100.00%   513,486   100.00%
                         --------    ------   --------    ------   --------   ------
Less:
  Unearned income and
   fees.................   (1,196)                (566)                  60
  Allowance for loan
   losses...............   15,597               14,986               15,844
                         --------             --------             --------
    Total loans
     receivable, net.... $610,597             $558,663             $497,582
                         ========             ========             ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                      DECEMBER 31,
                                         ---------------------------------------
                                                1993                1992
                                         ------------------- -------------------
                                                  PERCENT OF          PERCENT OF
                                          AMOUNT    TOTAL     AMOUNT    TOTAL
                                         -------- ---------- -------- ----------
                                                 (DOLLARS IN THOUSANDS)
<S>                                      <C>      <C>        <C>      <C>
Residential real estate loans........... $264,011    41.21%  $299,705    41.78%
Commercial real estate loans............  227,313    35.49%   241,540    33.67%
Commercial loans........................  110,630    17.27%   125,923    17.56%
Home equity loans.......................   26,819     4.19%    26,469     3.69%
Consumer loans..........................   11,801     1.84%    23,664     3.30%
                                         --------   ------   --------   ------
    Total loans receivable, gross.......  640,574   100.00%   717,301   100.00%
                                         --------   ------   --------   ------
Less:
  Unearned income and fees..............      940               2,069
  Allowance for loan losses.............   18,367              12,176
                                         --------            --------
    Total loans receivable, net......... $621,267            $703,056
                                         ========            ========
</TABLE>
 
                                       7
<PAGE>
 
MATURITY OF LOAN PORTFOLIO
 
  The following table sets forth the Company's loan portfolio, before
allowance for loan losses and unearned discounts, based on contractual
maturities. The table does not consider prepayment assumptions. Principal
amortization is included based on scheduled payments. Demand loans, and loans
having no stated schedule of repayment and no stated maturity are reported as
due within one year. Actual maturities may be significantly shorter due to
changes in interest rates and economic conditions.
 
<TABLE>
<CAPTION>
                                                  DECEMBER 31, 1996
                                       -----------------------------------------
                                       LESS THAN     1 YEAR   MORE THAN
                                        1 YEAR     TO 5 YEARS  5 YEARS   TOTAL
                                       ---------   ---------- --------- --------
                                               (DOLLARS IN THOUSANDS)
<S>                                    <C>         <C>        <C>       <C>
Fixed rate loans (1):
  Residential real estate.............  $6,820 (2)  $  5,749  $ 26,231  $ 38,800
  Commercial real estate..............    7,881       16,235    12,991    37,107
  Commercial..........................    4,792       24,945    13,636    43,373
  Home equity.........................      948        4,843    10,549    16,340
  Consumer............................    3,580          286       266     4,132
                                        -------     --------  --------  --------
    Total fixed rate loans............   24,021       52,058    63,673   139,752
                                        -------     --------  --------  --------
Adjustable rate loans (1):
  Residential real estate.............    3,657       13,427   186,526   203,610
  Commercial real estate..............   16,191       30,833    34,311    81,335
  Commercial..........................   26,844       40,470    45,121   112,435
  Home equity.........................      247        1,591    86,028    87,866
  Consumer............................      --           --        --        --
                                        -------     --------  --------  --------
    Total adjustable rate loans.......   46,939       86,321   351,986   485,246
                                        -------     --------  --------  --------
    Total amounts due.................  $70,960     $138,379  $415,659  $624,998
                                        =======     ========  ========  ========
</TABLE>
--------
(1) Includes non-accrual loans.
(2) Loans held for sale of $5.2 million are included as maturing in less than
    one year.
 
DELINQUENCY
 
  The following table sets forth a summary of the Company's delinquent loans
at December 31, 1996, 1995, 1994, 1993, and 1992:
 
<TABLE>
<CAPTION>
                                                      DECEMBER 31, 1996
                                              ---------------------------------
                                                 60-89 DAYS    90 DAYS OR MORE
                                              ---------------- ----------------
                                              NUMBER PRINCIPAL NUMBER PRINCIPAL
                                                OF    BALANCE    OF    BALANCE
                                              LOANS  OF LOANS  LOANS  OF LOANS
                                              ------ --------- ------ ---------
   <S>                                        <C>    <C>       <C>    <C>
   Residential real estate loans.............   38    $1,627     44    $2,773
   Commercial real estate loans..............    1       139      4       731
   Commercial loans..........................    4        11      7       451
   Home equity loans.........................    4        46      6       129
   Consumer loans............................   93        80     65        34
                                               ---    ------    ---    ------
       Total delinquent loans................  140    $1,903    126    $4,118
                                               ===    ======    ===    ======
   Delinquent loans to total gross loans.....           0.30%            0.66%
</TABLE>
 
                                       8
<PAGE>
 
<TABLE>
<CAPTION>
                                                      DECEMBER 31, 1995
                                              ---------------------------------
                                                 60-89 DAYS    90 DAYS OR MORE
                                              ---------------- ----------------
                                              NUMBER PRINCIPAL NUMBER PRINCIPAL
                                                OF    BALANCE    OF    BALANCE
                                              LOANS  OF LOANS  LOANS  OF LOANS
                                              ------ --------- ------ ---------
   <S>                                        <C>    <C>       <C>    <C>
   Residential real estate loans.............    39   $ 2,472     75   $ 3,080
   Commercial real estate loans..............     2       171     19     2,067
   Commercial loans..........................     8       493      3        36
   Home equity loans.........................     5       147      7        71
   Consumer loans............................    24        13     12        14
                                               ----   -------   ----   -------
       Total delinquent loans................    78   $ 3,296    116   $ 5,268
                                               ====   =======   ====   =======
   Delinquent loans to total gross loans.....            0.58%            0.92%
<CAPTION>
                                                      DECEMBER 31, 1994
                                              ---------------------------------
                                                 60-89 DAYS    90 DAYS OR MORE
                                              ---------------- ----------------
                                              NUMBER PRINCIPAL NUMBER PRINCIPAL
                                                OF    BALANCE    OF    BALANCE
                                              LOANS  OF LOANS  LOANS  OF LOANS
                                              ------ --------- ------ ---------
   <S>                                        <C>    <C>       <C>    <C>
   Residential real estate loans.............    24   $   690     63   $ 2,686
   Commercial real estate loans..............     1       129      6     2,150
   Commercial loans..........................     3       203      3       165
   Home equity loans.........................    10       195     16       339
   Consumer loans............................    43        59     30        41
                                               ----   -------   ----   -------
       Total delinquent loans................    81   $ 1,276    118   $ 5,381
                                               ====   =======   ====   =======
   Delinquent loans to total gross loans.....            0.25%            1.05%
<CAPTION>
                                                      DECEMBER 31, 1993
                                              ---------------------------------
                                                 60-89 DAYS    90 DAYS OR MORE
                                              ---------------- ----------------
                                              NUMBER PRINCIPAL NUMBER PRINCIPAL
                                                OF    BALANCE    OF    BALANCE
                                              LOANS  OF LOANS  LOANS  OF LOANS
                                              ------ --------- ------ ---------
   <S>                                        <C>    <C>       <C>    <C>
   Residential real estate loans.............    40   $ 1,406    103   $ 8,296
   Commercial real estate loans..............     5     5,066      8     5,976
   Commercial loans..........................    21       575     34     5,143
   Home equity loans.........................     8       159     20       571
   Consumer loans............................    75        88    151       140
                                               ----   -------   ----   -------
       Total delinquent loans................   149   $ 7,294    316   $20,126
                                               ====   =======   ====   =======
   Delinquent loans to total gross loans.....            1.14%            3.14%
<CAPTION>
                                                      DECEMBER 31, 1992
                                              ---------------------------------
                                                 60-89 DAYS    90 DAYS OR MORE
                                              ---------------- ----------------
                                              NUMBER PRINCIPAL NUMBER PRINCIPAL
                                                OF    BALANCE    OF    BALANCE
                                              LOANS  OF LOANS  LOANS  OF LOANS
                                              ------ --------- ------ ---------
   <S>                                        <C>    <C>       <C>    <C>
   Residential real estate loans.............    59   $ 2,945    103   $ 9,104
   Commercial real estate loans..............    13     5,299     15    19,442
   Commercial loans..........................    37     5,950     64    12,004
   Home equity loans.........................     5       119     11       352
   Consumer loans............................   225       731    242       519
                                               ----   -------   ----   -------
       Total delinquent loans................   339   $15,044    435   $41,421
                                               ====   =======   ====   =======
   Delinquent loans to total gross loans.....            2.10%            5.77%
</TABLE>
 
 
                                       9
<PAGE>
 
ALLOWANCE FOR POSSIBLE LOAN LOSSES
 
  The allowance for possible loan losses reflects an amount that in
Management's judgment is adequate to provide for potential losses in the loan
portfolio. In addition, examinations of the adequacy of the loan loss reserve
are conducted periodically by various regulatory agencies.
 
  The Company's loan loss reserve methodology emphasizes an evaluation of non-
performing loans and those loans that have been identified as having a higher
risk of becoming non-performing loans. The overall analysis is a continuing
process that gives consideration to such factors as size and risk
characteristics of the loan portfolio, the risk rating of individual credits,
general economic conditions, historical delinquency and charge-off experience,
the borrowers' financial capabilities and the underlying collateral,
including, when appropriate, independent appraisals of real estate properties.
In addition, Management periodically reviews the methodology of allocating
reserves to the various loan categories based on similar factors.
 
  The Company's allowance for possible loan losses is decreased by loan
charge-offs and increased by provisions for possible loan losses and
recoveries on loans previously charged-off. When commercial and residential
real estate loans are foreclosed, the loan balance is compared with the fair
value of the property. If the net carrying value of the loan at the time of
foreclosure exceeds the fair value of the property less estimated selling
costs, the difference is charged to the allowance for possible loan losses and
the fair value of the property becomes the new cost basis of the real estate
owned. The Company has or obtains current appraisals on real estate owned at
the time it obtains possession of the property. Real estate owned is
subsequently carried at the lower of cost or fair value less estimated selling
costs with any further adjustments reflected as a charge against operations.
The Company assesses the value of real estate owned on a periodic basis.
 
  The allowance for possible loan losses at December 31, 1996 was $15.6
million, compared to $15.0 million at December 31, 1995. The activity in the
allowance for possible loan losses for the fiscal years ended December 31,
1996, 1995, 1994, 1993, and 1992 is set forth in the following table:
 
<TABLE>
<CAPTION>
                                 FOR THE YEARS ENDED DECEMBER 31,
                            --------------------------------------------------
                             1996      1995       1994       1993       1992
                            -------   -------   --------   --------   --------
                                      (DOLLARS IN THOUSANDS)
<S>                         <C>       <C>       <C>        <C>        <C>
Balance, beginning of
 period...................  $14,986   $15,844   $ 18,367   $ 12,176   $ 11,873
Provision for loan
 losses...................    2,950     4,359     25,742     15,740     13,219
Charge-offs:
  Residential real estate
   loans..................     (880)     (472)    (4,588)    (2,558)    (1,745)
  Commercial real estate
   loans..................   (2,834)   (4,632)   (20,430)    (3,693)    (8,888)
  Commercial loans........     (521)     (705)    (5,729)    (4,161)    (2,328)
  Home equity loans.......     (205)      (51)      (124)      (215)      (145)
  Consumer loans..........     (115)     (208)      (233)      (373)      (339)
                            -------   -------   --------   --------   --------
    Total charge-offs.....   (4,555)   (6,068)   (31,104)   (11,000)   (13,445)
Recoveries:
  Residential real estate
   loans..................      741       --         460        242        222
  Commercial real estate
   loans..................    1,103       379      1,199        558         27
  Commercial loans........      231       301      1,058        566        206
  Home equity loans.......      106        82         79         46         57
  Consumer loans..........       35        89         43         39         17
                            -------   -------   --------   --------   --------
    Total recoveries......    2,216       851      2,839      1,451        529
                            -------   -------   --------   --------   --------
Net charge-offs...........   (2,339)   (5,217)   (28,265)    (9,549)   (12,916)
Balance, end of period....  $15,597   $14,986   $ 15,844   $ 18,367   $ 12,176
                            =======   =======   ========   ========   ========
Ratio of net loan charge-
 offs during the period to
 average loans outstanding
 during the period........    (0.40)%   (0.96)%    (4.94)%    (1.36)%    (1.72)%
Ratio of allowance for
 possible loan losses to
 total loans at the end of
 the period...............     2.50%     2.61%      3.09%      2.87%      1.70%
Ratio of allowance for
 possible loan losses to
 non-performing loans at
 the end of the period....   223.61%   155.71%    106.71%     33.09%     17.51%
</TABLE>
 
                                      10
<PAGE>
 
  Effective January 1, 1995, the Company adopted No. SFAS 114, "Accounting by
Creditors for Impairment of a Loan." At December 31, 1996, the recorded
investment in loans that are considered impaired under SFAS No. 114 was $6.6
million. Included in this amount is $1.4 million of impaired loans for which
the related SFAS 114 allowance is $33 thousand and $5.2 million of impaired
loans for which the SFAS 114 allowance is zero. The average recorded
investment in impaired loans during the year ended December 31, 1996 was
approximately $8.2 million. For the year ended December 31, 1996, the Company
recognized interest income on these impaired loans of $0.3 million.
 
  The following table shows the allocation of the allowance for loan losses to
various types of loans.
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                         -----------------------------------------------------------------------------------------
                               1996              1995              1994              1993              1992
                         ----------------- ----------------- ----------------- ----------------- -----------------
                                   % OF              % OF              % OF              % OF              % OF
                                   TOTAL             TOTAL             TOTAL             TOTAL             TOTAL
                                 ALLOWANCE         ALLOWANCE         ALLOWANCE         ALLOWANCE         ALLOWANCE
                                    FOR               FOR               FOR               FOR               FOR
                                   LOAN              LOAN              LOAN              LOAN              LOAN
                         AMOUNT   LOSSES   AMOUNT   LOSSES   AMOUNT   LOSSES   AMOUNT   LOSSES   AMOUNT   LOSSES
                         ------- --------- ------- --------- ------- --------- ------- --------- ------- ---------
                                                          (DOLLARS IN THOUSANDS)
<S>                      <C>     <C>       <C>     <C>       <C>     <C>       <C>     <C>       <C>     <C>
Residential real estate
 loans.................. $ 1,540    9.87%  $ 1,881   12.55%  $ 4,377   27.63%  $ 1,949   10.61%  $ 1,506   12.37%
Commercial real estate
 loans..................   5,808   37.24%    6,784   45.27%    7,240   45.69%   10,568   57.54%    6,978   57.31%
Commercial loans........   6,711   43.03%    5,480   36.57%    3,101   19.57%    5,605   30.52%    3,376   27.73%
Home equity loans.......   1,207    7.74%      672    4.48%      906    5.72%      120    0.65%      134    1.10%
Consumer loans..........     331    2.12%      169    1.13%      220    1.39%      125    0.68%      182    1.49%
                         -------  -------  -------  -------  -------  -------  -------  -------  -------  -------
 Total allowance for
  loan losses........... $15,597  100.00%  $14,986  100.00%  $15,844  100.00%  $18,367  100.00%  $12,176  100.00%
                         =======  =======  =======  =======  =======  =======  =======  =======  =======  =======
</TABLE>
 
DEPOSIT DISTRIBUTION
 
  The principal source of funds for the Company are deposits from local
consumers and businesses. There were no brokered deposits at December 31,
1996. The Company's deposits consist of demand and NOW accounts, passbook and
statement savings accounts, money market accounts and time deposit accounts.
 
  Total deposits were $969.5 million at December 31, 1996 compared to $885.4
million at December 31, 1995, an increase of $84.1 million. This growth
occurred primarily in demand deposits, savings accounts, and time deposits.
From December 31, 1995 to December 31, 1996, the Company's demand and savings
account balances increased by approximately $38.9 million, with the greatest
proportion of growth in demand deposit accounts. This increase is attributed
to customers continuing to take advantage of free savings and checking
accounts offered by the Company in connection with its consumer deposit
strategy to attract and retain core deposits, which should provide the Company
with a lower cost source of funds. Also contributing to the growth of demand
deposit balances is an increase in business checking accounts of $13.1 million
resulting from the Company's focus on small business banking. From December
31, 1995 to December 31, 1996, the Company's time deposit balances have
increased $38.4 million, largely attributable to the introduction of new CD
products.
 
  The following table sets forth the distribution of the Company's deposit
accounts for each of the three years ended December 31, 1996, 1995 and 1994.
 
<TABLE>
<CAPTION>
                                              DECEMBER 31,
                          -----------------------------------------------------
                                1996              1995              1994
                          ----------------- ----------------- -----------------
                                   PERCENT           PERCENT           PERCENT
                           AMOUNT  OF TOTAL  AMOUNT  OF TOTAL  AMOUNT  OF TOTAL
                          -------- -------- -------- -------- -------- --------
<S>                       <C>      <C>      <C>      <C>      <C>      <C>
Demand deposits.......... $100,527  10.37%  $ 71,539   8.08%  $ 51,932   6.08%
NOW accounts.............   57,980   5.98%    57,271   6.47%    56,297   6.59%
Savings accounts.........  195,418  20.16%   185,555  20.96%   184,513  21.62%
Money market accounts....  209,523  21.61%   203,313  22.96%   235,168  27.55%
Time deposits............  406,069  41.88%   367,708  41.53%   325,723  38.16%
                          -------- -------  -------- -------  -------- -------
    Total deposits....... $969,517 100.00%  $885,386 100.00%  $853,633 100.00%
                          ======== =======  ======== =======  ======== =======
</TABLE>
 
                                      11
<PAGE>
 
  The Company does not actively solicit time deposit accounts in excess of
$100,000. The following table sets forth the remaining contractual maturities
of the Company's time deposit portfolio in amounts greater than $100,000 at
December 31, 1996.
<TABLE>
<CAPTION>
                                                               DECEMBER 31, 1996
                                                               -----------------
                                                                  (DOLLARS IN
                                                                  THOUSANDS)
       <S>                                                     <C>
       Three months or less...................................      $26,788
       Over three through six months..........................       10,547
       Over six through 12 months.............................        9,668
       Over 12 months.........................................        5,560
                                                                    -------
           Total..............................................      $52,563
                                                                    =======
</TABLE>
 
BORROWINGS
 
  Deposits are the primary source of funds for the Company. However, the
Company is able to borrow from the Federal Home Loan Bank ("FHLB") of Boston
and can enter into repurchase agreements. At December 31, 1996, the Company's
total outstanding FHLB advances and repurchase agreements were $68.5 million
and $176.6 million, respectively.
 
COMPETITION
 
  Vigorous competition exists in all areas in which the Company engages in
business. The Company faces intense competition in its market areas from major
banking and financial institutions, including many which have substantially
greater resources or market presence than the Company. Competitors of the
Company include commercial banks, savings banks, mutual funds, insurance
companies, finance companies, credit unions and mortgage companies.
 
SUPERVISION AND REGULATION
 
  The Company is a Massachusetts corporation and is a bank holding company
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") pursuant to the Bank Holding
Company Act of 1956, as amended, and files with the Federal Reserve Board an
annual report and such additional reports as the Federal Reserve Board may
require. The Company is also subject to the jurisdiction of the Massachusetts
Commissioner of Banks. As a bank holding company, the Company's activities are
limited to the business of banking and activities closely related or
incidental to banking. The Company may not directly or indirectly acquire the
ownership or control of more than 5 percent of any class of voting shares or
substantially all of the assets of any company, including a bank, without the
prior approval of the Federal Reserve Board.
 
  The Bank is a Massachusetts chartered savings bank subject to regulation and
supervision by the FDIC and Massachusetts Commissioner of Banks. Further, as a
member of Federal Home Loan Bank of Boston, the Bank must maintain certain
levels of liquidity and have collateral available to support borrowings, if
required.
 
  The Company is also subject to requirements and restrictions under federal
and state law, including requirements to maintain reserves against deposits,
restrictions on the types and amounts of loans that may be granted and the
interest that may be charged thereon, and limitations on the types of
investments that may be made and the types of services that may be offered.
Various federal and state consumer laws and regulations also affect the
operations of the Company.
 
  The federal and state regulatory authorities have broad enforcement powers
over depository institutions, including the power to impose substantial fines
and other civil and criminal penalties, to terminate deposit insurance, and to
appoint a conservator or receiver under a variety of circumstances. The
Federal Reserve Board
 
                                      12
<PAGE>
 
also has broad enforcement powers over bank holding companies including the
power to impose substantial fines and other civil and criminal penalties.
 
REGULATORY RESTRICTIONS ON DIVIDENDS
 
  The Company is a legal entity separate and distinct from the Bank and its
other subsidiaries. The Company's principal source of revenue consists of
dividends from the Bank. The payment of dividends by the Bank is subject to
various regulatory requirements.
 
  Massachusetts law generally provides that institutions such as the Bank may
pay cash dividends to stockholders from their undistributed earnings. The Bank
cannot declare or pay any dividend, however, which would reduce its capital
below (i) the amount required to be maintained by federal and state laws and
regulations, or (ii) the amount in the Bank's liquidation account established
in connection with the Conversion.
 
  The payment of dividends on common and preferred stock by a bank holding
company and its bank subsidiaries may also be limited by other factors,
including applicable regulatory capital requirements and broad enforcement
powers of the federal bank regulatory agencies. FDICIA generally prohibits a
depository institution from making any capital distribution (including payment
of a dividend) or paying any management fee to its holding company if the
depository institution would thereafter be undercapitalized.
 
CAPITAL REQUIREMENTS
 
  The Company and Bank are required to maintain regulatory capital as follows:
(i) Tier 1 capital of at least 4 percent of risk-weighted assets (including
off-balance sheet items); (ii) Total capital of at least 8 percent of risk-
weighted assets and (iii) Tier 1 capital of at least 4 percent of adjusted
quarterly average total assets. The capital ratios for the Company and Bank
are set forth in footnote 22 "Regulatory Capital" in the Notes to the
Financial Statements. Failure to meet applicable capital requirements could
subject a bank holding company or its subsidiary depository institutions to
various enforcement actions, including substantial restrictions on its
operations and activities, dividend limitations, issuance of a directive to
increase capital and, for a depository institution, termination of deposit
insurance and the appointment of a conservator or receiver.
 
PROMPT CORRECTIVE ACTION
 
  FDICIA requires the federal banking regulators to take prompt supervisory
and regulatory actions against undercapitalized depository institutions.
FDICIA establishes five capital categories: "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized", and
"critically undercap-italized". Under regulations a "well capitalized"
institution has a total capital to total risk-weighted assets ratio of at
least ten percent, a Tier 1 capital to total risk-weighted assets ratio of a
least six percent, a leverage ratio of at least five percent and is not
subject to any written order, agreement or directive; an "adequately
capitalized" institution has a total capital to total risk-weighted assets
ratio of at least eight percent, a Tier 1 capital to total risk-weighted
assets ratio of at least four percent, and a leverage ratio of at least four
percent (three percent if given the highest regulatory rating and not
experiencing significant growth), but does not qualify as "well capitalized".
An "undercapitalized" institution fails to meet one of the three minimum
capital requirements. A "significantly undercapitalized" institution has a
total capital to total risk-weighted assets ratio of less than six percent, a
Tier 1 capital to total risk-weighted assets ratio of less than three percent,
and a Tier 1 leverage ratio of less than three percent. A "critically
undercapitalized" institution has a ratio of tangible equity to assets of two
percent or less. Under certain circumstances, a "well capitalized",
"adequately capitalized" or "undercapitalized" institution may be required to
comply with supervisory actions as if the institution was in the next lowest
category.
 
 
                                      13
<PAGE>
 
  A bank generally must file a written capital restoration plan which meets
specified requirements, as well as a performance guaranty by each company that
controls the bank, with an appropriate federal banking regulator within 45
days of the date that the bank receives notice or is deemed to have notice
that it may become an "undercapitalized" institution. Immediately upon
becoming undercapitalized, a bank would become subject to statutory provisions
which, among other things, set forth various mandatory and discretionary
restrictions on the operations of such bank. The Company and Bank had capital
levels which qualified the Bank as a "well-capitalized" institution under the
applicable FDIC prompt corrective action regulations at December 31, 1996. For
more detail as to the capital requirements for the Company, please see
footnote 22 "Regulatory Capital" in the Notes to the Financial Statements.
 
EMPLOYEES
 
  As of December 31, 1996, the Company employed 460 persons (full-time
equivalent).
 
ITEM 2: PROPERTIES
 
  The Company conducts its business from its main office and other properties
listed below, all of which are considered to be in good condition and adequate
for the purposes for which they are used. The Company also serves customers
through three (3) off-site SISTEM24 Automated Teller Machines ("ATM") which
are on leased parcels and through its affiliation with the "NYCE"(C) and
CIRRUS ATM(C) networks. The following table sets forth certain information
relating to bank premises owned or used by the Company in conducting its
business:
 
<TABLE>
<CAPTION>
                                                                    OWN/LEASE
     LOCATION                                                    EXPIRATION DATE
     --------                                                    ---------------
     <S>                                                         <C>
     BANKING OFFICES
     40 Springfield Street, Agawam..............................       Own
     11 Amity Street, Amherst...................................   Lease/2006
     693 Memorial Drive, Chicopee...............................       Own
     153 Meadow Street, Chicopee................................       Own
     465 North Main Street, East Longmeadow.....................   Lease/2010
     1360 Carew Street, East Springfield........................   Lease/2004
     50 Holyoke Street, Holyoke.................................   Lease/2001
     724 Bliss Road, Longmeadow.................................   Lease/2002
     52 East Street, Ludlow.....................................   Lease/2002
     175 Main Street, Northampton...............................       Own
     501 Newton Street, South Hadley............................   Lease/2003
     412 Boston Road, Springfield...............................       Own
     1800 Boston Road, Springfield..............................       Own
     619 Chestnut Street, Springfield...........................       Own
     300 Cooley Street, Springfield.............................   Lease/2001
     441 Cooley Street, Springfield.............................       Own
     561 Sumner Avenue, Springfield.............................       Own
     1441 Main Street, Springfield..............................       Own
     807 Wilbraham Road, Springfield............................   Lease/1998
     958 State Street, Springfield..............................    No Lease
     968 Riverdale Road, West Springfield.......................   Lease/2006
     1425 Westfield Street, West Springfield....................   Lease/2002
     60 Main Street, Westfield..................................       Own
</TABLE>
 
                                      14
<PAGE>
 
ITEM 3: LEGAL PROCEEDINGS
 
  The Company is not involved in any pending litigation other than routine
legal proceedings occurring in the ordinary course of business. While the
legal responsibility and financial impact with respect to such litigation
cannot presently be ascertained, the Company does not anticipate that any of
these matters will result in the payment by the Company of damages, that, in
the aggregate, would be material in relation to the consolidated financial
position or operations of the Company.
 
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  Not applicable.
 
                                    PART II
 
ITEM 5: MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
 
  (a) The Company's Common Stock is traded on the NASDAQ National Market
system ("NASDAQ") under the symbol "SISB". The following table sets forth the
high and low last sale prices of the Common Stock or, prior to the
Reorganization, the common stock of the Bank as reported by NASDAQ.
 
<TABLE>
<CAPTION>
                                                                  HIGH     LOW
                                                                -------- -------
     <S>                                                        <C>      <C>
     1995
       First Quarter (1)....................................... $11 1/16 $ 9 5/8
       Second Quarter.......................................... $13 1/16 $10 7/8
       Third Quarter........................................... $16      $12 7/8
       Fourth Quarter.......................................... $17 1/8  $14 5/8
     1996
       First Quarter........................................... $18 3/4  $16 1/4
       Second Quarter (2)...................................... $18 5/8  $16 3/4
       Third Quarter........................................... $23 5/8  $17 1/2
       Fourth Quarter.......................................... $24 1/2  $22 1/8
</TABLE>
--------
(1) The Springfield Institution for Savings ("Bank") was a mutual bank in 1994
    and converted to a stockholder owned savings bank on February 7, 1995,
    when trading commenced on NASDAQ.
(2) On June 21, 1996, 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. Upon the
    effectiveness of such share-for-share exchange on June 21, 1996, the Bank
    became a wholly-owned subsidiary of the Company and the Bank's former
    stockholders became stockholders of the Company.
 
  (b) As of February 28, 1997, the most recent practicable date, the closing
sale price of the Company's Common Stock, as reported by NASDAQ, was $26 1/2
per share. As of February 28, 1997, the most recent practicable date, the
Company had 1,136 holders of record of the Company's Common Stock. The figure
does not reflect beneficial ownership of shares held in nominee names.
 
  (c) The Company announced its first quarterly cash dividend on January 23,
1997 of $0.12 per share to holders as of February 3, 1997 and payable on
February 20, 1997.
 
                                      15
<PAGE>
 
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
 
SELECTED BALANCE SHEET DATA:
 
<TABLE>
<CAPTION>
                                                DECEMBER 31,
                             --------------------------------------------------
                                1996       1995      1994     1993      1992
                             ---------- ---------- -------- -------- ----------
                                           (DOLLARS IN THOUSANDS)
<S>                          <C>        <C>        <C>      <C>      <C>
Total assets...............  $1,348,612 $1,070,978 $920,689 $969,904 $1,002,513
Investment securities......     641,497    419,777  319,564  231,565    156,279
Loans receivable, gross....     624,998    573,083  513,486  640,574    717,301
Allowance for possible loan
 losses....................      15,597     14,986   15,844   18,367     12,176
Investments in real estate
 and real estate
 partnerships..............       2,757      6,092    6,699    9,939     13,219
Deposits...................     969,517    885,386  853,633  874,906    898,050
Borrowings.................     247,896     78,071    2,392    6,063      6,240
Total stockholders'
 equity....................     101,917     81,469   28,503   58,531     72,762
Asset Quality:
  Non-accruing loans.......       6,547      9,037   14,472   52,308     63,865
  Loans past due 90 days
   and still accruing......         428        587      376    3,205      5,679
                             ---------- ---------- -------- -------- ----------
    Total non-performing
     loans.................       6,975      9,624   14,848   55,513     69,544
  Foreclosed real estate,
   net.....................         381      1,529    4,951   25,085     52,757
  Restructured loans on
   accrual status (1)......         198      2,732    6,114   15,845      1,544
                             ---------- ---------- -------- -------- ----------
    Total non-performing
     assets................  $    7,554 $   13,885 $ 25,913 $ 96,443 $  123,845
                             ========== ========== ======== ======== ==========
</TABLE>
--------
(1) Restructured loans are loans for which concessions, including reduction of
    interest rates or deferral of interest or principal payments, have been
    granted to acknowledge changes in the borrower's financial condition or
    changes in the underlying cash flows of the loan's collateral.
    Restructured loans on non-accrual status are reported in the non-accrual
    loan category. Restructured loans on accrual status are those that have
    complied with the terms of a restructuring agreement for a satisfactory
    period (generally six months).
 
 
                                      16
<PAGE>
 
SELECTED OPERATING DATA:
 
<TABLE>
<CAPTION>
                                     FOR THE YEARS ENDED DECEMBER 31,
                                ----------------------------------------------
                                 1996     1995      1994      1993      1992
                                -------  -------  --------  --------  --------
                                          (DOLLARS IN THOUSANDS)
<S>                             <C>      <C>      <C>       <C>       <C>
Interest and dividend income..  $84,277  $69,916  $ 57,913  $ 63,174  $ 72,187
Interest expense..............   41,173   32,556    23,792    27,175    36,537
                                -------  -------  --------  --------  --------
Net interest and dividend
 income.......................   43,104   37,360    34,121    35,999    35,650
Less: provision for possible
 loan losses..................    2,950    4,359    25,742    15,740    13,219
                                -------  -------  --------  --------  --------
Net interest and dividend
 income after provision for
 possible loan losses.........   40,154   33,001     8,379    20,259    22,431
Noninterest income:
  Net gain (loss) on sale of
   loans and securities.......      860     (643)     (553)    2,351     1,612
  Loan fees...................    3,259    3,221     3,213     3,776     3,822
  Deposit fees................    6,236    5,191     4,122     4,337     4,038
  Other fees..................    1,115      355     1,547     1,207       954
                                -------  -------  --------  --------  --------
      Total noninterest
       income.................   11,470    8,124     8,329    11,671    10,426
Noninterest expense:
  Operating expenses:
    Salaries and employee
     benefits.................   17,839   15,961    16,808    16,583    13,927
    Occupancy expense of bank
     premises, net............    3,291    3,459     3,410     3,502     3,575
    Furniture and equipment
     expense..................    2,240    1,943     1,830     1,696     1,929
    Other operating expenses..   14,199   13,768    15,109    13,442    11,274
                                -------  -------  --------  --------  --------
      Total operating
       expenses...............   37,569   35,131    37,157    35,223    30,705
  Foreclosed real estate
   expenses...................      440      521     5,470    11,734    13,272
  Net (income) expense of real
   estate operations..........     (272)    (227)      988     2,632     1,077
                                -------  -------  --------  --------  --------
      Total noninterest
       expense................   37,737   35,425    43,615    49,589    45,054
                                -------  -------  --------  --------  --------
Income (loss) before income
 taxes and cumulative effect
 of change in accounting
 principle....................   13,887    5,700   (26,907)  (17,659)  (12,197)
Income tax benefit............   (4,273)  (5,759)      --     (3,384)   (3,228)
                                -------  -------  --------  --------  --------
Income (loss) before
 cumulative effect of change
 in accounting principle......   18,160   11,459   (26,907)  (14,275)   (8,969)
Cumulative effect of change in
 accounting principle (1).....      --       --        --        --      1,295
                                -------  -------  --------  --------  --------
      Net income (loss).......  $18,160  $11,459  $(26,907) $(14,275) $(10,264)
                                =======  =======  ========  ========  ========
</TABLE>
--------
(1) Results from the January 1, 1992 adoption of SFAS No. 109, "Accounting for
    Income Taxes."
 
                                       17
<PAGE>
 
SELECTED FINANCIAL RATIOS AND OTHER DATA:
 
<TABLE>
<CAPTION>
                             AT OR FOR THE YEARS ENDED DECEMBER 31,
                          ----------------------------------------------------
                            1996       1995       1994       1993       1992
                          --------   --------   --------   --------   --------
<S>                       <C>        <C>        <C>        <C>        <C>
PERFORMANCE RATIOS: (1)
Return on average
 assets.................      1.52%      1.16%     (2.88)%    (1.46)%    (1.01)%
Return on average
 equity.................     20.91%     17.25%    (63.55)%   (20.85)%   (13.24)%
Net interest
 income/spread (2)......      3.37%      3.59%      3.72%      4.06%      3.92%
Net interest margin
 (3)....................      3.85%      4.00%      3.90%      4.13%      3.97%
Efficiency ratio (4)....     69.94%     76.16%     86.41%     77.72%     69.06%
Operating expenses to
 average assets.........      3.15%      3.55%      3.98%      3.60%      3.02%
Ratio of net loan
 charge-offs to average
 loans outstanding......     (0.40)%    (0.96)%    (4.94)%    (1.36)%    (1.72)%
ASSET QUALITY RATIOS:
Non-performing loans to
 total gross loans......      1.12%      1.68%      2.89%      8.67%      9.70%
Non-performing assets to
 total assets...........      0.56%      1.30%      2.81%      9.94%     12.35%
Allowance for possible
 loan losses to non-
 performing loans.......    223.61%    155.71%    106.71%     33.09%     17.51%
Allowance for possible
 loan losses to total
 gross loans............      2.50%      2.61%      3.09%      2.87%      1.70%
CAPITAL RATIOS:
Equity to total assets..      7.56%      7.61%      3.10%      6.03%      7.26%
Tier 1 leverage capital
 ratio..................      7.41%      7.57%      3.43%      6.02%      7.28%
Tier 1 risk-based
 capital ratio..........     12.79%     12.52%      6.07%      8.47%     10.13%
Total risk-based capital
 ratio..................     14.05%     13.77%      7.32%      9.72%     11.38%
OTHER DATA:
Number of deposit
 accounts...............   230,508    193,795    156,524    147,835    144,118
Residential loan
 originations ($000s)...  $ 95,445   $107,045   $176,355   $380,202   $392,045
Loans serviced for
 others ($000s).........  $792,376   $880,558   $935,066   $911,028   $792,243
Number of full time
 equivalent employees...       460        410        463        533        530
FACILITIES:
Full-service customer
 service facilities.....        23         20         19         19         20
Mortgage origination
 offices................       --         --           2          2          2
</TABLE>
--------
(1) With the exception of end of period ratios, all ratios are based on
    average daily balances during the indicated periods and are annualized
    where appropriate.
(2) Interest spread represents the difference between the weighted average
    yield on interest-earning assets and the weighted average cost of
    interest-bearing liabilities (which do include noninterest bearing demand
    accounts).
(3) Net interest margin represents the net interest income as a percent of
    average interest-earning assets, including the average daily balance
    amount of non-performing loans.
(4) The efficiency ratio represents operating expenses as a percentage of net
    interest income and noninterest income, excluding gains/(losses) on sales
    of loans and securities.
 
                                      18
<PAGE>
 
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
       RESULTS OF OPERATIONS
 
  The following discussion and analysis of the financial condition and results
of operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, which are included in
Item 8 of this report.
 
FINANCIAL CONDITION
 
 BALANCE SHEET CHANGES
 
  Total assets of $1.35 billion at December 31, 1996 increased $277.6 million
or 25.9% from $1.07 billion at December 31, 1995. This growth in total assets
occurred primarily in commercial and home equity loans and the investment
portfolio and was funded by an increase in deposits and borrowings.
 
  Commercial loans totaled $155.8 million as of December 31, 1996 compared to
$117.7 million as of December 31, 1995, an increase of $38.1 million or 32.4%.
This increase reflects the Company's continued focus on lending activities in
the local business market. Home equity loan balances grew from $67.7 million
as of December 31, 1995 to $104.2 million as of December 31, 1996, an increase
of $36.5 million or 54.0%. This increase is the result of the Company's
consumer strategy and the active promotion of this product. Investments
increased $221.7 million to a total of $641.5 million as of December 31, 1996
from the $419.8 million reported one year earlier.
 
  Total deposits were $969.5 million as of December 31, 1996 compared to
$885.4 million as of December 31, 1995, an increase of $84.1 million or 9.5%.
During this period, the Company continued to focus on increasing its share of
primary deposit relationships. Demand deposits and savings accounts increased
$29.0 million and $9.9 million, respectively, as customers continued to take
advantage of the Company's consumer deposit strategy to attract and retain
core deposits. Time deposit balances increased $38.4 million or 10.4%
primarily due to the introduction of new CD products.
 
 ASSET QUALITY/NON-PERFORMING ASSETS
 
  Non-performing assets declined $6.3 million from $13.9 million at December
31, 1995 to $7.6 million at December 31, 1996. Non-performing asset balances
have declined significantly since December 31, 1992 as a result of the
accelerated disposition program initiated by the Company in 1994, as well as
an improvement in economic conditions. The following table sets forth
information regarding the components of non-performing assets for the periods
presented.
 
<TABLE>
<CAPTION>
                                            DECEMBER 31,
                               -------------------------------------------
                                1996    1995     1994     1993      1992
                               ------  -------  -------  -------  --------
                                         (DOLLARS IN THOUSANDS)
<S>                            <C>     <C>      <C>      <C>      <C>    
Non-accrual loans (1):
  Residential real estate
   loans.....................  $1,287  $ 2,553  $ 2,651  $ 6,112  $  7,259
  Commercial real estate
   loans.....................   4,428    5,745   10,003   32,569    37,625
  Commercial loans...........     674      638    1,492   13,489    18,699
  Home equity loans..........     157       90      289      --        --
  Consumer loans.............       1       11       37      138       282
                               ------  -------  -------  -------  --------
    Total non-accrual loans..   6,547    9,037   14,472   52,308    63,865
                               ------  -------  -------  -------  --------
Loans past due 90 days still
 accruing (2)................     428      587      376    3,205     5,679
                               ------  -------  -------  -------  --------
    Total non-performing
     loans...................   6,975    9,624   14,848   55,513    69,544
Foreclosed real estate (3)...     381    1,529    4,951   25,085    52,757
Restructured loans on accrual
 status (4)..................     198    2,732    6,114   15,845     1,544
                               ------  -------  -------  -------  --------
    Total non-performing
     assets..................  $7,554  $13,885  $25,913  $96,443  $123,845
                               ======  =======  =======  =======  ========
Total non-performing loans to
 total gross loans...........    1.12%    1.68%    2.89%    8.67%     9.70%
Total non-performing assets
 to total assets.............    0.56%    1.30%    2.81%    9.94%    12.35%
Allowance for possible losses
 to non-performing loans.....  223.61%  155.71%  106.71%   33.09%    17.51%
</TABLE>
 
                                      19
<PAGE>
 
--------
(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 and contractual interest, in full, is not in doubt.
(3) Foreclosed real estate includes OREO, defined as real estate acquired
    through foreclosure or acceptance of a deed in lieu of foreclosure. The
    Company carries foreclosed real estate at net realizable value, which
    approximates fair value less estimated selling costs.
(4) Restructured loans are loans for which concessions, including reduction of
    interest rates or deferral of interest or principal payments have been
    granted due to the borrower's financial condition. Restructured loans on
    non-accrual status are reported in the non-accrual loan category.
    Restructured loans on accrual status are those loans that have complied
    with terms of a restructuring agreement for a satisfactory period
    (generally six months).
 
LIQUIDITY
 
  Liquidity measures the ability of the Company to meet its maturing
obligations and existing commitments, to withstand fluctuations in deposit
levels, to fund its operations and to provide for customer credit needs.
 
  The Company's principal sources of funds are deposits, advances from the
FHLB of Boston, repurchase agreements, repayments and maturities on loans and
securities, proceeds from the sale of securities in the available-for-sale
portfolio, and funds provided by operations. While scheduled loan and security
amortization and maturities are relatively predictable sources of funds,
deposit flows and loan and security prepayments are greatly influenced by
economic conditions and the general level of interest rates and competition.
The Company utilizes particular sources of funds based on comparative costs
and availability. The Company generally manages the pricing of its deposits to
maintain a steady deposit balance, but has from time to time decided not to
pay rates on deposits as high as its competition, and when necessary, will
supplement deposits with longer term and/or less expensive alternative sources
of funds such as advances from the FHLB and repurchase agreements.
 
  Liquidity management is both a daily and long-term responsibility of
Management. The Company adjusts its investments in cash and cash equivalents
based upon Management's assessment of expected loan demand, projected security
maturities, expected deposit flows, yields available on interest-bearing
deposits, and the objectives of its asset/liability management program. If the
Company requires funds beyond its ability to generate them internally, it has
additional borrowing capacity with the FHLB and collateral eligible for
repurchase agreements. Because the Company has a stable retail deposit base,
Management believes that significant borrowings will not be necessary to
maintain its current liquidity position.
 
  The Company's ongoing principal use of capital resources remains the
origination of single-family residential mortgage loans, commercial real
estate loans, commercial loans, and home equity loans secured by residential
real estate as well as the purchase of investment securities. 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.
 
CAPITAL RESOURCES/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 effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative
measures of the Bank'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
 
                                      20
<PAGE>
 
components, risk weightings, and other factors. As of December 31, 1996, the
Bank is considered well capitalized under the quantitative measures
established by its regulators. The Company's current capital position and its
regulatory requirements are discussed in greater detail in footnote 22
"Regulatory Capital" in the Notes to the Financial Statements.
 
INTEREST RATE RISK MANAGEMENT
 
  The operations of the Company are subject to the risk of interest rate
fluctuations to the extent that there is a substantial difference in the
amount of the Company's assets and liabilities that reprice or mature within
specific time periods. An asset-sensitive position indicates that there are
more rate-sensitive assets than rate-sensitive liabilities repricing or
maturing within specific time horizons, which would generally imply a
favorable impact on net interest income in periods of rising interest rates
and an unfavorable impact in periods of falling interest rates. A liability-
sensitive position would generally imply an unfavorable impact on net interest
income in periods of rising interest rates and a favorable impact in periods
of falling interest rates.
 
  The objective of the Company's interest rate risk management process is to
identify, manage, and control its interest rate risk within established limits
in order to produce consistent earnings that are not contingent upon favorable
trends in interest rates. This is attained by monitoring the levels of
interest rates, the relationships between the rates earned on assets and the
rates paid on liabilities, the absolute amount of assets and liabilities which
reprice or mature over similar periods, and the effect of all of these factors
on the estimated level of net interest income.
 
  There are a number of industry standards used to measure a financial
institution's interest rate risk position. Most common among these is the one-
year gap which is the difference between assets and liabilities that will
mature or reprice within one year expressed as a percentage of total assets.
Using Management's estimates of asset prepayments and core deposit decay in
its computation, the Company estimates that its cumulative one-year gap
position was liability sensitive by $7.5 million or 0.56% of total assets at
December 31, 1996. The Company also utilizes income simulation modeling in
measuring its interest rate risk and managing its interest rate sensitivity.
Income simulation not only considers the impact of changing market interest
rates on forecasted net interest income, but also takes into consideration
other factors such as yield curve relationships, the volume and mix of assets
and liabilities, customer preferences, and general market conditions.
 
                                      21
<PAGE>
 
  The following table sets forth the amounts of assets and liabilities
outstanding at December 31, 1996, which are anticipated by the Company to
mature or reprice in each of the future time periods shown using certain
assumptions based on its historical experience, the current interest rate
environment, and other data available to Management. Management believes that
these assumptions approximate actual experience and considers such assumptions
reasonable; however, the interest rate sensitivity of the Company's assets and
liabilities could vary substantially if different assumptions were used or
actual experience differs from the assumptions used. Management periodically
reviews and, when appropriate, changes assumptions used in evaluating the
Company's interest rate sensitivity.
 
<TABLE>
<CAPTION>
                                               GAP POSITION
                                           AT DECEMBER 31, 1996
                          ----------------------------------------------------------
                                      MORE THAN SIX
                          LESS THAN    MONTHS LESS     1-
                          SIX MONTHS  THAN ONE YEAR 5 YEARS    OVER 5 YRS   TOTAL
                          ----------  ------------- --------   ---------- ----------
                                          (DOLLARS IN THOUSANDS)
<S>                       <C>         <C>           <C>        <C>        <C>
Assets:
  Federal funds sold and
   interest bearing
   deposits.............   $ 10,045     $    --     $    --     $    --   $   10,045
  Investment
   securities...........    307,972      154,634     147,533      31,358     641,497
  Residential real
   estate loans.........     77,668       53,187      98,181      12,416     241,452
  Commercial real estate
   loans................     37,841       12,573      56,603       7,007     114,024
  Commercial loans......     63,914       11,698      72,571       7,228     155,411
  Home equity loans.....     82,978        1,148      13,055       7,495     104,676
  Consumer loans........      3,466           74         283         261       4,084
  Other assets..........        --           --          --       77,423      77,423
                           --------     --------    --------    --------  ----------
    Total assets........   $583,884     $233,314    $388,226    $143,188  $1,348,612
                           ========     ========    ========    ========  ==========
Liabilities &
 stockholders' equity:
  Savings accounts......   $ 29,312     $ 29,312    $136,794    $    --   $  195,418
  NOW accounts..........      8,698        8,698      40,584         --       57,980
  Money market
   accounts.............     62,856       62,856      83,811         --      209,523
  Time deposits.........    240,118      103,083      62,868         --      406,069
  Borrowed funds........    223,061       16,641       1,312       6,882     247,896
  Other liabilities &
   stockholders'
   equity...............     20,050       20,050      60,152     131,474     231,726
                           ========     ========    ========    ========  ==========
    Total liabilities &
     stockholders'
     equity.............   $584,095     $240,640    $385,521    $138,356  $1,348,612
                           ========     ========    ========    ========  ==========
Period GAP position.....   $   (211)    $ (7,326)   $  2,705    $  4,832
Net period GAP as a per-
 centage of total as-
 sets...................      (0.02)%      (0.54)%      0.20%       0.36%
Cumulative GAP..........   $   (211)    $ (7,537)   $ (4,832)        --
Cumulative GAP as a per-
 centage of total as-
 sets...................      (0.02)%      (0.56)%     (0.36)%       --
</TABLE>
 
  For purposes of the above interest sensitivity analysis:
 
    Residential loans held for sale at December 31, 1996 totaling $5.2
  million are in the less than six month interest sensitivity period.
 
    Fixed rate assets are scheduled by contractual maturity and adjustable
  rate assets are scheduled by their next repricing date. In both cases,
  assets that have prepayment optionality are adjusted for the Company's
  estimate of prepayments.
 
    Loans do not include non-accrual loans of $6.5 million.
 
    Loans do not include the allowance for loan loss of $15.6 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
 
                                      22
<PAGE>
 
  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%.
 
    --Noninterest bearing accounts of $100.5 million are included in other
     liabilities and are assumed to decay at an annual rate of 40%.
 
  Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, while certain assets and liabilities may have
similar contractual maturities or periods to repricing, they may react in
different ways to changes in market interest rates. Further, in the event of a
change in interest rates, prepayment and early withdrawal levels would likely
deviate significantly from those assumed in calculating the table.
Additionally, certain assets, such as adjustable rate mortgages, have features
which restrict changes in interest rates on a short-term basis and over the
life of the asset. Finally, the ability of borrowers to service their
adjustable rate mortgages may decrease in the event of an interest rate
increase.
 
                                      23
<PAGE>
 
RESULTS OF OPERATIONS
 
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
 
 GENERAL
 
  For the year ended December 31, 1996 the Company reported net income of
$18.2 million, or $3.26 per share fully diluted, as compared to net income of
$11.5 million, or $2.19 per share fully diluted, for the year ended December
31, 1995. The financial results for 1996 and 1995 were favorably affected by
nonrecurring tax events totaling $8.0 million and $6.0 million, respectively.
The Company also experienced improved results in core earnings primarily
attributed to increased net interest income and noninterest income as well as
lower provisions for possible loan losses, partially offset by higher
operating expenses.
 
 NET INTEREST INCOME
 
  Net interest income represents the difference between income earned 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.
 
                                      24
<PAGE>
 
  The following table sets forth, for the periods indicated, average balances,
interest income and expense, and yields earned or rates paid on the major
categories of assets and liabilities. Non-accrual loans have been included in
the appropriate average balance loan category, but unpaid interest on non-
accrual loans has not been included for purposes of determining interest
income. In addition, investment securities available for sale are reflected at
amortized cost.
<TABLE>
<CAPTION>
                                       FOR THE YEARS ENDED DECEMBER 31,
                          -------------------------------------------------------------
                                       1996                           1995
                          ------------------------------- -----------------------------
                           AVERAGE              AVERAGE   AVERAGE             AVERAGE
                           BALANCE    INTEREST YIELD/COST BALANCE   INTEREST YIELD/COST
                          ----------  -------- ---------- --------  -------- ----------
                                            (DOLLARS IN THOUSANDS)
<S>                       <C>         <C>      <C>        <C>       <C>      <C>
INTEREST-EARNING ASSETS:
Fed funds sold and in-
 terest-bearing depos-
 its....................  $   10,573  $   569     5.29%   $ 22,294  $ 1,316     5.82%
Investment securities
 held to maturity.......     188,224   12,833     6.82%    183,139   10,849     5.92%
Investment securities
 available for sale.....     337,085   22,218     6.59%    184,551   12,214     6.62%
Residential real estate
 loans..................     245,680   19,397     7.90%    266,276   20,970     7.88%
Commercial real estate
 loans..................     119,152   10,132     8.50%    116,957    9,671     8.27%
Commercial loans........     131,256   11,595     8.69%     96,246    9,050     9.27%
Home equity loans.......      82,960    6,927     8.35%     57,943    5,306     9.16%
Consumer loans..........       5,656      606    10.71%      6,482      540     8.33%
                          ----------  -------    -----    --------  -------     ----
    Total interest-earn-
     ing assets.........   1,120,586   84,277     7.52%    933,888   69,916     7.49%
Allowance for loan loss-
 es.....................     (15,391)                      (16,346)
Noninterest-earning as-
 sets...................      85,679                        71,341
                          ----------                      --------
    Total assets........  $1,190,874  $84,277             $988,883  $69,916
                          ==========  =======             ========  =======
INTEREST-BEARING LIABIL-
 ITIES:
Deposits
  Savings accounts......  $  194,593  $ 4,830     2.48%   $185,176  $ 4,616     2.49%
  NOW accounts..........      56,623      640     1.13%     53,955      727     1.35%
  Money market ac-
   counts...............     208,180    6,912     3.32%    212,272    6,945     3.27%
  Time deposit ac-
   counts...............     381,642   20,256     5.31%    349,950   18,136     5.18%
                          ----------  -------    -----    --------  -------     ----
Total deposits..........     841,038   32,638     3.88%    801,353   30,424     3.80%
Borrowed funds..........     150,919    8,535     5.56%     34,457    2,132     6.10%
                          ----------  -------    -----    --------  -------     ----
Total interest-bearing
 liabilities............     991,957   41,173     4.15%    835,810   32,556     3.90%
Noninterest-bearing lia-
 bilities...............     112,057                        86,632
                          ----------                      --------
    Total liabilities...   1,104,014                       922,442
Total stockholders' eq-
 uity...................      86,860                        66,441
                          ----------                      --------
    Total liabilities
     and stockholders'
     equity.............  $1,190,874  $41,173             $988,883  $32,556
                          ==========  =======             ========  =======
Net interest
 income/spread..........              $43,104     3.37%             $37,360     3.59%
                                      =======    =====              =======     ====
Net interest margin as a
 % of interest-earning
 assets.................                          3.85%                         4.00%
                                                 =====                          ====
</TABLE>
 
  Net interest income increased $5.7 million or 15.4% for the year ended
December 31, 1996 versus the same period last year. This increase was the
result of a $186.7 million increase in interest-earning assets partially
offset by a 15 basis point decrease in net interest margin.
 
  Total interest income was $84.3 million for the year ended December 31,
1996, an increase of $14.4 million or 21.0%. This increase is primarily
attributable to higher levels of interest-earning assets. Average interest-
earning assets totaled $1.12 billion for the year ended December 31, 1996
compared to $933.9 million for the
 
                                      25
<PAGE>
 
year ended December 31, 1995, an increase of $186.7 million or 20.0%. Average
investments increased $157.6 million and were funded by higher deposit levels
and borrowed funds. Average loans increased $40.8 million as the Company
continued to focus on the commercial and home equity market segments, which
grew by $35.0 million or 36.4% and $25.0 million or 43.2%, respectively.
Residential real estate loan balances declined $20.6 million or 7.7%,
reflecting significant refinancing activity to fixed rate products during the
first quarter of 1996, as well as a decline in production for adjustable rate
mortgage products. The Company originates long-term fixed rate mortgages for
sale in the secondary market and generally holds adjustable rate mortgages in
the Company's loan portfolio.
 
  Total interest expense was $41.2 million for the year ended December 31,
1996 compared to $32.6 million for the same period in 1995, an increase of
$8.6 million or 26.5%. This increase is primarily attributable to increases in
interest-bearing deposits and the use of borrowed funds. Interest-bearing
deposits totaled $841.0 million for the year ended December 31, 1996 compared
to $801.4 million for the same period in 1995, an increase of $39.6 million or
5.0%. This growth occurred primarily in time deposits, which increased $31.7
million largely attributable to the introduction of new CD products. Borrowed
funds averaged $150.9 million during 1996 reflecting the use of FHLB advances
and repurchase agreements to leverage a portion of the Company's capital.
 
 RATE/VOLUME ANALYSIS
 
  The following table presents the changes in net interest income resulting
from changes in interest rates or changes in the volume of interest-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.
 
<TABLE>
<CAPTION>
                                           FOR THE YEARS ENDED DECEMBER 31,
                                                   1996 VERSUS 1995
                                          ------------------------------------
                                              INCREASE (DECREASE) DUE TO
                                          ------------------------------------
                                            VOLUME        RATE         NET
                                          ------------ ----------  -----------
                                                (DOLLARS IN THOUSANDS)
<S>                                       <C>          <C>         <C>
INTEREST-EARNING ASSETS:
Federal funds sold and interest bearing
 deposits...............................  $      (661) $      (86) $      (747)
Investment securities held to maturity..          324       1,660        1,984
Investment securities available for
 sale...................................       10,075         (71)      10,004
Residential real estate loans...........       (1,624)         51       (1,573)
Commercial real estate loans............          184         277          461
Commercial loans........................        3,192        (647)       2,545
Home equity loans.......................        2,190        (569)       1,621
Consumer loans..........................          (79)        145           66
                                          -----------  ----------  -----------
    Total interest-earning assets.......       13,601         760       14,361
                                          -----------  ----------  -----------
INTEREST-BEARING LIABILITIES:
Deposits:
  Savings accounts......................          234         (20)         214
  NOW accounts..........................           33        (120)         (87)
  Money market accounts.................         (135)        102          (33)
  Time deposit accounts.................        1,663         457        2,120
                                          -----------  ----------  -----------
    Total deposits......................        1,795         419        2,214
Borrowed funds..........................        6,896        (493)       6,403
                                          -----------  ----------  -----------
    Total interest-bearing liabilities..        8,691         (74)       8,617
                                          -----------  ----------  -----------
    Change in net interest income.......  $     4,910  $      834  $     5,744
                                          ===========  ==========  ===========
</TABLE>
 
                                      26
<PAGE>
 
 PROVISION FOR LOAN LOSSES
 
  The Company recorded a $3.0 million provision for possible loan losses in
1996 compared to $4.4 million in 1995. The provision for possible loan losses
is based upon Management's judgment of the amount necessary to maintain the
allowance for possible loan losses at a level which is considered adequate.
For further discussion of this topic please refer to the section titled
"Allowance for Possible Loan Losses" in Item 1 of this document.
 
 NONINTEREST INCOME
 
  Noninterest income is composed of fee income for bank services and gains or
losses from the sale of assets. The components of noninterest income for the
periods represented are as follows:
 
<TABLE>
<CAPTION>
                                                          FOR THE YEARS ENDED
                                                              DECEMBER 31,
                                                         -----------------------
                                                            1996        1995
                                                         ----------- -----------
                                                         (DOLLARS IN THOUSANDS)
     <S>                                                 <C>         <C>
     Net gain (loss) on sale of loans................... $       604 $      243
     Net gain (loss) on sale of securities..............         256       (886)
     Loan charges and fees..............................       3,259      3,221
     Deposit related fees...............................       6,236      5,191
     Other charges and fees.............................       1,115        355
                                                         ----------- ----------
                                                         $    11,470 $    8,124
                                                         =========== ==========
</TABLE>
 
  Net gain on sale of loans increased $0.4 million due to an increase in the
amount of loans sold on a servicing released basis.
 
  Net gain on sale of securities increased $1.1 million in the year ended
December 31, 1996 compared to the same period in 1995. The $0.3 million gain
on sale of securities in 1996 is associated with the sale of preferred stocks
and mortgage-backed securities. The $0.9 million loss recorded in 1995 is
related to the sale of securities in connection with the restructuring of the
investment portfolio.
 
  Deposit related fees increased $1.0 million due primarily to fees associated
with the Company's larger noninterest bearing account base.
 
  Other charges and fees increased $0.8 million in the year ended December 31,
1996 compared to the same period in 1995 primarily as the result of an
increase in brokerage fee income as well as losses incurred in 1995 from the
disposition of fixed assets.
 
 NONINTEREST EXPENSE
 
  Salaries and Benefits Expense
 
  Salaries and benefits expense totaled $17.8 million for the year ended
December 31, 1996 compared to $16.0 million for the same period in 1995, an
increase of $1.8 million or 11.8% reflecting increased headcount, standard
wage increases, and higher employee stock ownership plan ("ESOP") restricted
stock and 401K plan expenses.
 
                                      27
<PAGE>
 
  Other Operating Expense
 
  The components of other operating expenses for the periods presented are as
follows:
 
<TABLE>
<CAPTION>
                                                       FOR THE YEARS ENDED
                                                          DECEMBER 31,
                                                       -------------------
                                                         1996      1995
                                                       --------- ---------
                                                      (DOLLARS IN THOUSANDS)
     <S>                                               <C>       <C>      
     Marketing........................................ $   1,976 $   1,107
     Insurance........................................       379     2,440
     Professional services............................     2,944     2,902
     Outside processing...............................     4,118     2,893
     Other............................................     4,782     4,426
                                                       --------- ---------
                                                       $  14,199 $  13,768
                                                       ========= =========
</TABLE>
 
  Marketing expense increased $0.9 million reflecting the expanded use of
television, billboards, radio and print advertising directed towards the
Company's consumer strategy and new branch openings.
 
  Insurance expense decreased $1.9 million due to a significant reduction in
FDIC premiums.
 
  Outside processing expenses increased $1.2 million due to higher transaction
and account volume associated with increased account activity resulting from
the Company's consumer banking strategy, as well as costs associated with the
outsourcing of the Company's item processing operations in 1996.
 
  Other operating expenses increased $0.4 million reflecting increased
supplies and postage costs associated with the growth in consumer deposit
accounts as a result of the Company's consumer strategy.
 
  Foreclosed Real Estate Expense
 
  Foreclosed real estate expense reflects losses on sales, writedowns and net
operating results of foreclosed properties. These expenses were $0.4 million
in 1996 compared to $0.5 million in 1995. This $0.1 million decrease reflects
lower levels of foreclosed properties.
 
  Net Expenses of Real Estate Operations
 
  The Company has certain subsidiaries that are engaged in various real estate
investments directly or in joint ventures with unaffiliated partners. The
Company has terminated its real estate development activities and is in the
process of selling its remaining real estate investments. Net expense of real
estate operations reflects the net operating results of these activities,
writedowns on real estate properties and gains/losses on sales of these
properties. Net income of real estate operations was $0.3 million and $0.2
million in 1996 and 1995, respectively.
 
 INCOME TAXES
 
  In accordance with SFAS 109, "Accounting for Income Taxes", Management
evaluated the income tax benefits associated with temporary differences, based
on the weight of available evidence, as to whether it is more likely than not
that the income tax benefits would be realized. As a result, a 100% valuation
allowance against the Company's net deferred tax asset was established at
December 31, 1994. Management reviews the valuation allowance on a periodic
basis, and, based upon all available facts and circumstances at that time, may
adjust the level of the allowance.
 
  During both the fourth quarter of 1995, and the third quarter of 1996,
Management's evaluation of the weight of currently available evidence resulted
in the conclusion that it was more likely than not that the Company would
realize a portion of its net deferred tax asset which was reserved for at
those times. At December 31, 1995, Management reduced the Company's 100%
valuation allowance from $15.9 million to $7.9 million, while at September 30,
1996, Management reduced the remaining valuation allowance at that date of
 
                                      28
<PAGE>
 
$5.2 million to zero. In both instances, Management's judgment was influenced
by factors including changes in the levels of actual and expected future
taxable income and anticipated reversals of net deductible temporary
differences.
 
  Also in the third quarter of 1996, pursuant to the enactment of the Small
Business Jobs Protection Act during 1996, the Company was required, for tax
purposes, to change its method of accounting for bad debts. The change
required the Company to change from the reserve method to the specific charge-
off method. The Company recognized a one-time tax benefit of $2.8 million
during the third quarter, representing the tax effects of pre-1988 loan loss
reserves not subject to recapture provisions. As a result of this third
quarter activity, the Company became fully taxable for financial reporting
purposes beginning in the fourth quarter of 1996. Certain future distributions
in excess of the Bank's current earnings and profits would require the
recapture of the taxes related to the pre-1988 loan loss reserves that were
not subject to recapture under the Small Business Job Protection Act. The
total tax liability that would be subject to recapture for which no deferred
tax liability has been recorded is $3.0 million.
 
 IMPACT OF INFLATION
 
  Monetary assets and liabilities are claims to receive or pay a sum of money,
the amount of which is fixed. Most assets and liabilities of a bank are
monetary in nature. In times of inflation, monetary assets lose purchasing
power and monetary liabilities gain purchasing power because the obligations
will be repaid with dollars that have less purchasing power than at the time
the assets and liabilities were recorded.
 
  Since the Company's primary source of earnings is net interest income,
interest rates have a more significant impact on the Company's financial
performance than the general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
 
 IMPACT OF ACCOUNTING CHANGES
 
  In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," which requires
that long-lived assets and certain identifiable intangibles to be held and
used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. SFAS 121 is effective prospectively for fiscal years beginning
after December 15, 1995, and was adopted by the Company effective January 1,
1996. The adoption of this statement did not have a material impact on the
Company's results of operations.
 
  In May 1995, the FASB issued SFAS 122, "Accounting for Mortgage Service
Rights." SFAS 122 amends certain provisions of SFAS 65, "Accounting for
Certain Mortgage Banking Activities," to eliminate the accounting distinction
between rights to service mortgage loans for others that are acquired through
loan origination activities and those acquired through purchase transactions.
SFAS 122 is effective prospectively for fiscal years beginning after December
15, 1995, and was adopted by the Company effective January 1, 1996. The
adoption of this statement did not have a material impact on the Company's
results of operations or financial position.
 
  In November 1995, the FASB issued SFAS 123, "Accounting for Stock Based
Compensation" which gives companies the option of employing intrinsic value
accounting under the guidelines of Accounting Principles Board (APB) No. 25 or
fair value accounting for stock based compensation. While SFAS 123 does not
require the adoption of fair value accounting, it does require certain
disclosures in the financial statements as if fair value accounting had been
adopted, including pro forma net income and earnings per share. The Company
adopted this accounting standard effective January 1, 1996 for disclosure
purposes only and will continue to apply APB 25 in accounting for stock based
compensation.
 
  In June 1996, the FASB issued SFAS 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", that
provides accounting and reporting standards which require that after a
 
                                      29
<PAGE>
 
transfer of financial assets, an entity recognizes the financial and servicing
asset 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 Company does not
believe its adoption of this Statement will have a material impact on its
results of operations or financial position.
 
COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1994
 
 GENERAL
 
  For the year ended December 31, 1995 the Company reported net income of
$11.5 million as compared to a net loss of $26.9 million for the year ended
December 31, 1994. This increase in earnings reflects growth in earning assets
as well as lower levels of loan loss provision and foreclosed real estate
expenses in 1995 versus 1994.
 
  During the year ended December 31, 1995 the Company recorded a number of
nonrecurring items. The Company released $6.0 million of the valuation
allowance on that portion of its net deferred tax asset associated with
temporary differences (principally loan loss reserves). In addition, the
Company recorded a $0.9 million loss on the sale of securities in connection
with the restructuring of its investment portfolio and a $0.5 million
severance accrual related to organizational changes. These items were offset
in part by a $0.4 million gain on the sale of a real estate investment and a
$0.6 million insurance rebate from the Federal Deposit Insurance Corporation.
The Company's core operating earnings, net of nonrecurring items, were
approximately $6.0 million for the year ended December 31, 1995.
 
 NET INTEREST INCOME
 
  Net interest income represents the difference between income earned on
interest-earning assets and expense paid on interest-bearing liabilities. Net
interest income is affected by the mix and volume of assets and liabilities,
and the movement and level of interest rates.
 
 
                                      30
<PAGE>
 
  The following table sets forth, for the periods indicated, average balances,
interest income and expense, and yields earned or rates paid on the major
categories of assets and liabilities. Non-accrual loans have been included in
the appropriate average balance loan category, but unpaid interest on non-
accrual loans has not been included for purposes of determining interest
income. For purposes of this table, investment securities available for sale
are reflected at amortized cost.
 
 
<TABLE>
<CAPTION>
                                      FOR THE YEARS ENDED DECEMBER 31,
                          -----------------------------------------------------------
                                      1995                          1994
                          ----------------------------- -----------------------------
                          AVERAGE             AVERAGE   AVERAGE             AVERAGE
                          BALANCE   INTEREST YIELD/COST BALANCE   INTEREST YIELD/COST
                          --------  -------- ---------- --------  -------- ----------
                                           (DOLLARS IN THOUSANDS)
<S>                       <C>       <C>      <C>        <C>       <C>      <C>
INTEREST-EARNING ASSETS:
Fed funds sold and in-
 terest-bearing depos-
 its....................  $ 22,294  $ 1,316     5.82%   $ 11,682  $   527     4.45%
Investment securities
 held to maturity.......   183,139   10,849     5.92%    147,943    8,173     5.52%
Investment securities
 available for sale.....   184,551   12,214     6.62%    143,801    6,576     4.57%
Residential real estate
 loans..................   266,276   20,970     7.88%    249,294   18,575     7.45%
Commercial real estate
 loans..................   116,957    9,671     8.27%    182,626   13,236     7.25%
Commercial loans........    96,246    9,050     9.27%     95,093    7,210     7.48%
Home equity loans.......    57,943    5,306     9.16%     32,890    2,651     8.06%
Consumer loans..........     6,482      540     8.33%     12,088      965     7.98%
                          --------  -------     ----    --------  -------     ----
    Total interest-earn-
     ing assets.........   933,888   69,916     7.49%    875,417   57,913     6.62%
Allowance for loan loss-
 es.....................   (16,346)                      (22,015)
Noninterest-earning as-
 sets...................    71,341                        80,574
                          --------                      --------
    Total assets........  $988,883  $69,916             $933,976  $57,913
                          ========  =======             ========  =======
INTEREST-BEARING LIABIL-
 ITIES:
Deposits
  Savings accounts......  $185,176  $ 4,616     2.49%   $188,125  $ 3,846     2.04%
  NOW accounts..........    53,955      727     1.35%     56,699      801     1.41%
  Money market ac-
   counts...............   212,272    6,945     3.27%    249,674    6,452     2.58%
  Time deposit ac-
   counts...............   349,950   18,136     5.18%    326,616   12,693     3.89%
                          --------  -------     ----    --------  -------     ----
Total Deposits..........   801,353   30,424     3.80%    821,114   23,792     2.90%
Borrowed funds..........    34,457    2,132     6.10%        --       --       --
                          --------  -------     ----    --------  -------     ----
Total interest-bearing
 liabilities............   835,810   32,556     3.90%    821,114   23,792     2.90%
Noninterest-bearing lia-
 bilities...............    86,632                        70,236
                          --------                      --------
    Total liabilities...   922,442                       891,350
Total stockholders' eq-
 uity...................    66,441                        42,626
                          --------                      --------
    Total liabilities
     and stockholders'
     equity.............  $988,883   32,556             $933,976  $23,792
                          ========  =======             ========  =======
Net interest
 income/spread..........             37,360     3.59%             $34,121     3.72%
                                    =======     ====              =======     ====
Net interest margin as a
 % of interest-earning
 assets.................                        4.00%                         3.90%
                                                ====                          ====
</TABLE>
 
  Net interest income increased $3.2 million or 9.5% for the year ended
December 31, 1995 versus the same period last year. This increase was the
result of an increase in interest-earning assets combined with an increase of
10 basis points in the net interest margin to 4.00% for the year ended
December 31, 1995 from 3.90% for the same period last year.
 
  Total interest income was $69.9 million for the year ended December 31,
1995, an increase of $12.0 million or 20.7%. This increase is attributable to
higher levels of interest-earning assets and weighted average yields as
 
                                      31
<PAGE>
 
well as lower levels of non-performing assets. Interest-earning assets
averaged $933.9 million for the year ended December 31, 1995 compared to
$875.4 million for the year ended December 31, 1994, an increase of $58.5
million or 6.7%. Average investments increased $75.9 million or 26.0%
reflecting the reinvestment of proceeds from the Conversion and leveraging a
portion of the Company's capital position. Average loans decreased $28.1
million reflecting bulk sales of loans, which occurred in 1994, partially
offset by increases in residential real estate loans as well as home equity
loans. The average yield on interest-earning assets was 7.49% for the year
ended December 31, 1995 compared to 6.62% for the same period in 1994, an
increase of 87 basis points or 13.1% reflecting the repricing of adjustable
rate loans and investment securities to market rates and lower levels of non-
accruing loans. These positive effects on interest income were partially
offset by a change in asset mix from higher yielding loans to lower yielding
investment securities.
 
  Total interest expense was $32.6 million for the year ended December 31,
1995 compared to $23.8 million for the same period in 1994, an increase of
$8.8 million or 36.8%. This increase is attributable to higher deposit rates
and the use of borrowings in 1995. The average rate paid on deposits was 3.80%
for the year ended December 31, 1995 compared to 2.90% for the same period in
1994, an increase of 90 basis points or 31.0% reflecting a higher interest
rate environment, continued competitive pricing pressures on consumer
deposits, and the introduction of the "Can't Lose CD" product, which paid a
rate equal to the prime rate less 350 basis points. Borrowings averaged $34.5
million during 1995 reflecting the Company's leveraged ESOP as well as the use
of FHLB Advances and repurchase agreements to leverage a portion of the
Company's capital position.
 
 RATE/VOLUME ANALYSIS
 
  The following table presents the changes in net interest income resulting
from changes in interest rates or changes in the volume of interest-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.
 
<TABLE>
<CAPTION>
                                            FOR THE YEARS ENDED DECEMBER 31,
                                                    1995 VERSUS 1994
                                            ----------------------------------
                                               INCREASE (DECREASE) DUE TO
                                            ----------------------------------
                                              VOLUME       RATE        NET
                                            ----------------------  ----------
                                                 (DOLLARS IN THOUSANDS)
<S>                                         <C>         <C>         <C>
INTEREST-EARNING ASSETS:
Federal funds sold and interest bearing
 deposits.................................  $      553  $      236  $      789
Investment securities held to maturity....       2,015         661       2,676
Investment securities available for sale..       2,280       3,358       5,638
Residential real estate loans.............       1,301       1,094       2,395
Commercial real estate loans..............      (5,095)      1,530      (3,565)
Commercial loans..........................          98       1,742       1,840
Home equity loans.........................       2,156         499       2,655
Consumer loans............................        (457)         32        (425)
                                            ----------  ----------  ----------
    Total interest-earning assets.........       2,851       9,152      12,003
                                            ----------  ----------  ----------
INTEREST-BEARING LIABILITIES:
Deposits:
Savings accounts..........................         (67)        837         770
NOW accounts..............................         (38)        (36)        (74)
Money market accounts.....................      (1,095)      1,588         493
Time deposit accounts.....................       1,058       4,385       5,443
                                            ----------  ----------  ----------
    Total deposits........................        (142)      6,774       6,632
Borrowed funds............................       1,066       1,066       2,132
                                            ----------  ----------  ----------
    Total interest-bearing liabilities....         924       7,840       8,764
                                            ----------  ----------  ----------
    Change in net interest income.........  $    1,927  $    1,312  $    3,239
                                            ==========  ==========  ==========
</TABLE>
 
 
                                      32
<PAGE>
 
 PROVISION FOR LOAN LOSSES
 
  The Company recorded a $4.4 million provision for possible loan losses in
the year ended December 31, 1995 compared to $25.7 million in the year ended
December 31, 1994. The loan loss provision in 1994 reflects the implementation
of an accelerated disposition program. The provision for possible loan losses
is based upon Management's judgment of the amount necessary to maintain the
allowance for possible loan losses at a level which is considered adequate.
For further discussion of this topic please refer to the section titled
"Allowance for Possible Loan Losses" in Item 1 of this document.
 
 NONINTEREST INCOME
 
  Noninterest income is composed of fee income for bank services and gains or
losses from the sale of assets. The components of noninterest income for the
periods represented are as follows:
 
<TABLE>
<CAPTION>
                                                         FOR THE YEARS ENDED
                                                             DECEMBER 31,
                                                       ------------------------
                                                          1995         1994
                                                       -----------  -----------
                                                       (DOLLARS IN THOUSANDS)
     <S>                                               <C>          <C>
     Net gain (loss) on sale of loans................. $       243        ($505)
     Net loss on sale of securities...................        (886)         (48)
     Loan charges and fees............................       3,221        3,213
     Deposit related fees.............................       5,191        4,122
     Other charges and fees...........................         355        1,547
                                                       -----------  -----------
                                                       $     8,124  $     8,329
                                                       ===========  ===========
</TABLE>
 
  Net loss on sale of loans declined $0.7 million reflecting mark to market
losses of $0.5 million on residential loans held for sale recorded in 1994.
 
  Net loss on sale of securities increased $0.9 million reflecting losses on
the sale of securities in connection with the restructuring of the investment
portfolio.
 
  Deposit related fees increased $1.1 million due primarily to fees associated
with the Company's larger non-interest bearing account base.
 
  Other charges and fees declined $1.1 million in the year ended December 31,
1995 compared to the same period in 1994 primarily as the result of losses
incurred in 1995 from the disposition of fixed assets and non-recurring income
recorded in 1994, specifically gains on sales of lease financing receivables
and tax abatements.
 
 NONINTEREST EXPENSE
 
  Salaries and Benefits Expense
 
  Salaries and benefits expense totaled $15.9 million for the year ended
December 31, 1995 compared to $16.8 million for the same period in 1994, a
decrease of $0.8 million or 5.0% reflecting a reduction in headcount partially
offset by standard wage increases as well as new employee benefit programs
instituted in 1995.
 
  Other Operating Expense
 
<TABLE>
<CAPTION>
                                                           FOR THE YEARS ENDED
                                                               DECEMBER 31,
                                                         -----------------------
                                                            1995        1994
                                                         ----------- -----------
                                                         (DOLLARS IN THOUSANDS)
     <S>                                                 <C>         <C>
     Marketing.......................................... $     1,107 $     1,405
     Insurance..........................................       2,440       3,270
     Professional services..............................       2,902       4,076
     Outside processing.................................       2,893       2,683
     Other..............................................       4,426       3,675
                                                         ----------- -----------
                                                         $    13,768 $    15,109
                                                         =========== ===========
</TABLE>
 
 
                                      33
<PAGE>
 
  Marketing expense decreased $0.3 million reflecting a lower level of
advertising expenses incurred in 1995.
 
  Insurance expense includes FDIC Insurance expense, which totaled $1.9
million in 1995 compared to $2.6 million in 1994, a decrease of $0.7 million.
This decrease reflects an insurance premium reduction of $0.6 million from the
FDIC in 1995.
 
  Professional services expense decreased $1.2 million for the year ended
December 31, 1995 compared to the same period last year primarily due to costs
incurred in 1994 related to the management and disposition of non-performing
assets.
 
  Outside processing expenses increased $0.2 million due to higher transaction
and account volume associated with increased account activity resulting from
the consumer banking strategy, partially offset by savings which resulted from
a renegotiated data processing contract.
 
  Other operating expenses increased $0.8 million primarily due to costs
associated with shareholder relation activities and costs associated with
significant growth in retail deposit accounts as a result of the consumer
strategy.
 
  Foreclosed Real Estate Expense
 
  Foreclosed real estate expense reflects losses on sales, writedowns and net
operating results of foreclosed properties. These expenses were $5.5 million
in 1994 compared to $0.5 million in 1995. The expenses in 1994 reflect the
Company's aggressive program of selling foreclosed properties as part of its
efforts to reduce the level of non-performing assets.
 
  Net Expenses of Real Estate Operations
 
  The Company has certain subsidiaries that are engaged in various real estate
investments directly or in joint ventures with unaffiliated partners. The
Company has terminated its real estate development activities and plans to
sell its remaining real estate investments by December 31, 1997 as part of a
divestiture plan submitted to the FDIC. The FDIC approved the plan in December
of 1995. The net expense of real estate operations reflects the net operating
results of these activities, writedowns on real estate properties and
gains/losses on sales of these properties. Net (income) expense of real estate
operations was ($0.2) million and $1.0 million in 1995 and 1994, respectively.
 
 INCOME TAXES
 
  In accordance with SFAS 109, "Accounting for Income Taxes," Management
evaluated the income tax benefits associated with temporary differences, based
on the weight of available evidence, as to whether it is more likely than not
that the income tax benefits would be realized. As a result, a 100% valuation
allowance was established at December 31, 1994. Management reviews the
valuation allowance on a periodic basis and, based upon all available facts
and circumstances at that time, may adjust the level of the allowance.
 
  At December 31, 1995, Management evaluated the weight of available evidence
and concluded that it was more likely than not that the Company will realize a
significant portion of the net deferred tax asset and has reduced the
valuation allowance from $15.9 million at December 31, 1994 to $7.9 million at
December 31, 1995. As part of that reduction, the Company released $6.0
million of its valuation allowance resulting in a tax benefit. Factors
influencing Management's judgment include among other things changes in the
level of actual and expected future taxable income and anticipated reversals
of net temporary differences. In addition, the Company recorded $0.2 million
of state and federal alternative minimum tax provision in 1995.
 
 
                                      34
<PAGE>
 
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  The following Consolidated Financial Statements and Notes are included
herein.
 
<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
Consolidated Balance Sheet as of December 31, 1996 and 1995..............  36
Consolidated Statement of Operations for the three years ended December
 31, 1996, 1995, and 1994................................................  37
Consolidated Statement of Changes in Stockholders' Equity for the three
 years ended December 31, 1996, 1995, and 1994...........................  38
Consolidated Statement of Cash Flows for the three years ended December
 31, 1996, 1995, and 1994................................................  39
Notes to Consolidated Financial Statements...............................  40
Report of Independent Accountants........................................  67
</TABLE>
 
  All schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes thereto.
 
                                       35
<PAGE>
 
                       SIS BANCORP, INC. AND SUBSIDIARIES
 
                           CONSOLIDATED BALANCE SHEET
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                      ------------------------
                                                         1996         1995
                                                      -----------  -----------
<S>                                                   <C>          <C>
ASSETS
Cash and due from banks.............................. $    31,902  $    30,377
Federal funds sold and interest-bearing deposits.....      10,045        8,045
Investment securities available for sale.............     449,323      246,984
Investment securities held to maturity (fair value:
 $191,617 at December 31, 1996 and $172,930 at
 December 31, 1995)..................................     192,174      172,793
Loans receivable, net of allowance for possible
 losses ($15,597 at December 31, 1996 and $14,986 at
 December 31, 1995)..................................     610,597      558,663
Accrued interest and dividends receivable............       8,982        7,109
Investments in real estate and real estate
 partnerships........................................       2,757        6,092
Foreclosed real estate, net..........................         381        1,529
Bank premises, furniture and fixtures, net...........      27,106       25,706
Other assets.........................................      15,345       13,680
                                                      -----------  -----------
    Total assets..................................... $ 1,348,612  $ 1,070,978
                                                      ===========  ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits............................................. $   969,517  $   885,386
Federal Home Loan Bank advances......................      68,471       41,500
Securities sold under agreements to repurchase.......     176,577       31,101
Loans payable........................................       2,848        5,470
Mortgage escrow deposits.............................       4,396        4,193
Accrued expenses and other liabilities...............      24,886       21,859
                                                      -----------  -----------
    Total liabilities................................   1,246,695      989,509
                                                      -----------  -----------
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 and outstanding:
   5,723,600 at December 31, 1996 and 5,710,700 at
   December 31, 1995)................................          57           57
  Unearned compensation..............................      (3,693)      (4,937)
  Additional paid-in capital.........................      42,665       41,790
  Retained earnings..................................      60,993       42,833
  Net unrealized gain on investment securities
   available for sale................................       1,895        1,726
                                                      -----------  -----------
    Total stockholders' equity.......................     101,917       81,469
                                                      -----------  -----------
Total liabilities and stockholders' equity........... $ 1,348,612  $ 1,070,978
                                                      ===========  ===========
</TABLE>
 
        See accompanying Notes to the Consolidated Financial Statements
 
                                       36
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENT OF OPERATIONS
                (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                            FOR THE YEARS ENDED DECEMBER 31,
                                            ----------------------------------
                                               1996        1995        1994
                                            ----------  ----------  ----------
<S>                                         <C>         <C>         <C>
Interest and dividend income
  Loans...................................  $   48,657  $   45,536  $   42,637
  Investment securities available for
   sale...................................      22,218      12,215       6,576
  Investment securities held to maturity..      12,833      10,849       8,173
  Federal funds sold and interest-bearing
   deposits...............................         569       1,316         527
                                            ----------  ----------  ----------
    Total interest and dividend income....      84,277      69,916      57,913
                                            ----------  ----------  ----------
Interest expense
  Deposits................................      32,638      30,424      23,792
  Borrowings..............................       8,535       2,132         --
                                            ----------  ----------  ----------
    Total interest expense................      41,173      32,556      23,792
                                            ----------  ----------  ----------
Net interest and dividend income..........      43,104      37,360      34,121
Less: Provision for possible loan losses..       2,950       4,359      25,742
                                            ----------  ----------  ----------
Net interest and dividend income after
 provision for possible loan losses.......      40,154      33,001       8,379
Noninterest income:
  Net gain (loss) on sale of loans........         604         243        (505)
  Net gain (loss) on sale of securities...         256        (886)        (48)
  Fees and other income...................      10,610       8,767       8,882
                                            ----------  ----------  ----------
    Total noninterest income..............      11,470       8,124       8,329
                                            ----------  ----------  ----------
Noninterest expense:
  Operating expenses:
    Salaries and employee benefits........      17,839      15,961      16,808
    Occupancy expense of bank premises,
     net..................................       3,291       3,459       3,410
    Furniture and equipment expense.......       2,240       1,943       1,830
    Other operating expenses..............      14,199      13,768      15,109
                                            ----------  ----------  ----------
      Total operating expenses............      37,569      35,131      37,157
                                            ----------  ----------  ----------
  Foreclosed real estate expense..........         440         521       5,470
  Net (income) expense of real estate op-
   erations...............................        (272)       (227)        988
                                            ----------  ----------  ----------
      Total noninterest expense...........      37,737      35,425      43,615
Income (loss) before income tax benefit...      13,887       5,700     (26,907)
Income tax benefit........................      (4,273)     (5,759)        --
                                            ----------  ----------  ----------
      Net income (loss)...................  $   18,160  $   11,459  $  (26,907)
                                            ==========  ==========  ==========
Earnings per share and pro forma earnings
 per share: (1)
  Primary.................................  $     3.29  $     2.21  $    (5.21)
  Fully diluted (2).......................  $     3.26  $     2.19  $    (5.21)
Weighted average and pro forma weighted
 average shares outstanding: (1)
  Primary.................................   5,522,594   5,174,037   5,174,037
  Fully diluted...........................   5,573,390   5,220,778   5,220,778
</TABLE>
--------
(1) Net income per share for the year ended December 31, 1996 is computed on
    weighted average shares outstanding for the period. Net income (loss) per
    share for the years ended December 31, 1995 and 1994 is computed on a pro
    forma basis as if the conversion of the Bank from mutual to stock form had
    been completed as of the beginning of the periods presented.
(2) For the year ended December 31, 1994 the fully diluted earnings per share
    calculation is anti-dilutive.
 
        See accompanying Notes to the Consolidated Financial Statements
 
                                      37
<PAGE>
 
                       SIS BANCORP, INC. AND SUBSIDIARIES
 
           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
             FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                     NET UNREALIZED
                                                                      GAIN (LOSS)
                                             ADDITIONAL              ON INVESTMENT
                         COMMON   UNEARNED    PAID-IN   RETAINED  SECURITIES AVAILABLE
                         STOCK  COMPENSATION  CAPITAL   EARNINGS        FOR SALE        TOTAL
                         ------ ------------ ---------- --------  -------------------- --------
<S>                      <C>    <C>          <C>        <C>       <C>                  <C>
Balance at December 31,
 1993................... $ --     $    --     $   --    $ 58,531        $   --         $ 58,531
Net loss................   --          --         --     (26,907)           --          (26,907)
Change in unrealized
 gain (loss) on
 investment securities
 available for sale.....   --          --         --         --          (3,121)         (3,121)
                         -----    --------    -------   --------        -------        --------
Balance at December 31,
 1994................... $ --     $    --     $   --    $ 31,624        $(3,121)       $ 28,503
                         =====    ========    =======   ========        =======        ========
Balance at December 31,
 1994................... $ --     $    --     $   --    $ 31,624        $(3,121)       $ 28,503
Net income..............   --          --         --      11,459            --           11,459
Issuance of common
 stock..................    56         --      39,665       (250)           --           39,471
Unearned compensation...     1      (5,375)     1,814        --             --           (3,560)
Decrease in unearned
 compensation...........   --          438        311        --             --              749
Change in unrealized
 gain (loss) on
 investment securities
 available for sale.....   --          --         --         --           4,847           4,847
                         -----    --------    -------   --------        -------        --------
Balance at December 31,
 1995................... $  57    $ (4,937)   $41,790   $ 42,833        $ 1,726        $ 81,469
                         =====    ========    =======   ========        =======        ========
Balance at December 31,
 1995................... $  57    $ (4,937)   $41,790   $ 42,833        $ 1,726        $ 81,469
Net income..............   --          --         --      18,160            --           18,160
Unearned compensation...   --         (315)       297        --             --              (18)
Decrease in unearned
 compensation...........   --        1,559        578        --             --            2,137
Change in unrealized
 gain (loss) on
 investment securities
 available for sale.....   --          --         --         --             169             169
                         -----    --------    -------   --------        -------        --------
Balance at December 31,
 1996................... $  57    $ (3,693)   $42,665   $ 60,993        $ 1,895        $101,917
                         =====    ========    =======   ========        =======        ========
</TABLE>
 
 
 
        See accompanying Notes to the Consolidated Financial Statements
 
                                       38
<PAGE>
 
                       SIS BANCORP, INC. AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                FOR THE YEARS ENDED DECEMBER
                                                             31,
                                                -------------------------------
                                                  1996       1995       1994
                                                ---------  ---------  ---------
<S>                                             <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).............................  $  18,160  $  11,459  $ (26,907)
Adjustments to reconcile net income (loss) to
 net cash provided by/ (used for) operating
 activities
 Provision for possible loan losses...........      2,950      4,359     25,742
 Provision for foreclosed real estate.........        --         836      6,034
 Depreciation.................................      3,003      3,026      3,605
 Amortization of premium on investment
  securities, net.............................      2,071        972      1,812
 ESOP and restricted stock expenses...........      1,890        749        --
 Investment security (gains) losses...........       (256)       886         48
 (Income) loss from equity investment in
  partnerships................................        (48)       133        987
 (Gain) loss on sale of loans.................       (604)      (243)       505
 Disbursements for mortgage loans held for
  sale........................................    (79,442)   (65,747)  (126,727)
 Receipts from mortgage loans held for sale...     80,046     65,989    126,161
 Loss (gain) on sale of fixed assets and real
  estate......................................         11        609     (4,306)
 Changes in assets and liabilities:
   (Increase) decrease in other assets, net...     (4,426)    (8,029)     1,382
   Decrease (increase) in accrued expenses and
    other liabilities.........................      3,257     (8,996)     5,677
                                                ---------  ---------  ---------
     Net cash provided by operating
      activities..............................     26,612      6,003     14,013
                                                ---------  ---------  ---------
CASH FLOWS FROM INVESTING ACTIVITIES
 Proceeds from sales of investment securities
  available for sale..........................     41,736    213,252     59,609
 Proceeds from maturities and principal
  payments received on investment securities
  available for sale..........................    115,764    135,076    406,369
 Purchase of investment securities available
  for sale....................................   (360,031)  (345,959)  (497,675)
 Proceeds from maturities and principal
  payments received on investment securities
  held to maturity............................     46,892     33,287     13,783
 Purchase of investment securities held to
  maturity....................................    (66,840)  (132,878)   (75,067)
 Net decrease in investments in real estate...        475        --       6,005
 Cash distributions from partnerships.........        --         --          63
 Capital contributions to partnerships........        --         --        (401)
 Net (increase) decrease in loans
  receivable..................................    (59,932)   (66,864)    20,685
 Net decrease in foreclosed real estate.......      2,132      2,928     16,437
 Principal payments received under leases.....        --         --         177
 Proceeds from sale of loans..................      4,064      1,081     74,925
 Proceeds from sale of fixed assets and
  leases......................................      2,328        --          27
 Purchase of fixed assets.....................     (3,834)    (5,454)    (1,967)
                                                ---------  ---------  ---------
   Net cash (used for)/provided by investing
    activities................................   (277,246)  (165,531)    22,970
                                                ---------  ---------  ---------
CASH FLOWS FROM FINANCING ACTIVITIES
 Net proceeds from stock conversion...........        --      35,911        --
 Net increase (decrease) in deposits..........     84,131     31,753    (21,273)
 Net increase (decrease) in borrowings........    169,825     75,679     (3,671)
 Net increase (decrease) in mortgagors'
  escrow deposits.............................        203     (1,113)        79
                                                ---------  ---------  ---------
   Net cash provided by/(used for) financing
    activities................................    254,159    142,230    (24,865)
                                                ---------  ---------  ---------
Increase (decrease) in cash and cash
 equivalents..................................      3,525    (17,298)    12,118
Cash and cash equivalents, beginning of year..     38,422     55,720     43,602
                                                ---------  ---------  ---------
Cash and cash equivalents, end of year........  $  41,947  $  38,422  $  55,720
                                                =========  =========  =========
Supplemental disclosures of cash flow
 information:
 Cash paid during the year for interest to
  depositors and interest on debt.............  $  40,813  $  32,456  $  23,751
Non-cash investing activities:
 Transfers to foreclosed real estate, net.....  $     984  $     342  $   2,337
</TABLE>
 
        See accompanying Notes to the Consolidated Financial Statements
 
                                       39
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            (DOLLARS IN THOUSANDS)
 
GENERAL
 
  SIS Bancorp, Inc., (the "Company") 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 sole 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, 1994.
 
  The Company provides a variety of financial services which include retail
and commercial banking, residential mortgage origination and servicing,
commercial real estate lending and consumer lending. The Company, which is
headquartered in Springfield, Massachusetts serves its primary market of
Hampden and Hampshire Counties of Massachusetts through a network of 23 retail
branches.
 
  The Company's revenues are derived principally from interest payments on its
loan portfolios and mortgage-backed and other investment securities. The
Company's primary sources of funds are deposits, borrowings and principal and
interest payments on loans and mortgage-backed securities.
 
1. ACCOUNTING POLICIES
 
  The accounting and reporting policies of the Company conform with generally
accepted accounting principles. The significant policies are summarized below.
 
  The consolidated financial statements of the Company are dependent on the
use of estimates, particularly with regard to the allowance for possible loan
losses and the value of other real estate. Estimates of loan collectability
and real estate values involve a high degree of judgment and the use of
appraisals and other information. Subsequent changes in general economic
conditions and the financial condition of borrowers may require changes in
such estimates.
 
 CONSOLIDATION
 
  The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany items have been
eliminated. Certain amounts in prior periods have been reclassified to conform
to the current year presentation.
 
 CASH AND CASH EQUIVALENTS
 
  For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, federal funds sold and interest bearing
deposits. Generally, federal funds are sold on an overnight basis.
 
 INVESTMENT SECURITIES
 
  Investment securities which management has the positive intent and ability
to hold until maturity are classified as held-to-maturity and carried at
amortized cost, adjusted for amortization of premiums and accretion of
discounts into interest income using the level yield method over the remaining
contractual life of the securities, adjusted for actual prepayments. Premiums
are amortized to the earlier of the call or maturity date and discounts
 
                                      40
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
are accreted to the maturity date. Investment securities which have been
identified as assets which may be sold prior to maturity or for which there is
not a positive intent to hold until maturity, based on foreseeable conditions,
including all marketable equity securities, are classified as available-for-
sale. FAS 115, "Accounting for Certain Investments in Debt and Equity
Securities," requires that available-for-sale securities be reported at fair
value with unrealized gains and losses excluded from earnings and reported as
a separate component of stockholders' equity, net of tax. The Company adopted
FAS 115 effective January 1, 1994.
 
  Gains and losses on sales of investment securities are computed under the
specific identification method. Investment securities which have experienced
an other than temporary decline in value are written down to fair value as a
new cost basis with the amount of the writedown included in earnings as a
realized loss. The new cost basis is not increased for subsequent recoveries
in fair value.
 
 INVESTMENTS IN REAL ESTATE AND REAL ESTATE PARTNERSHIPS
 
  Investments in real estate reflect the Company's interest in wholly owned
real estate properties. Investments in real estate properties are carried at
the lower of cost, including cost of improvements incurred subsequent to
acquisition, or fair value less costs to sell. Investments in partnerships
reflect the Company's interest in joint venture real estate developments.
Investments in partnerships which are greater than 50% owned by the Company
are accounted for using the equity method and are carried at the Company's
equity in the underlying assets.
 
 LOANS
 
  Loans are stated at the principal amount outstanding, net of unearned
income. Interest income on loans is accrued based on rates applied to amounts
outstanding. Unearned income on loans made or purchased on a discounted basis
are recognized in interest income over the lives of the loans using a method
that approximates a level yield. Loans held for sale are carried at the lower
of cost or market value.
 
  Loan origination and commitment fees and certain direct loan origination
costs are deferred and the net amount is amortized as a yield adjustment over
the average life of the loans using a method that approximates a level yield
method.
 
  Loans on which the accrual of interest has been discontinued are classified
as nonaccrual loans. Interest accruals on loans are normally discontinued
whenever the payment of interest or principal is more than 90 days past due or
when, in the opinion of management, such action is prudent. When a loan is
placed on nonaccrual status, all interest previously accrued in the current
year but not collected is reversed against current year interest income. Loans
are removed from nonaccrual status when they become current as to principal
and interest and when, in the opinion of management, the loans are estimated
to be fully collectible as to principal and interest. The Company may continue
to accrue interest on loans past due 90 days or more that are well secured and
in the process of collection.
 
  Restructured loans are loans for which concessions, including reduction of
interest rates or deferral of interest or principal payments, have been
granted to acknowledge changes in the borrower's financial condition or
changes in underlying cash flows of the loan's collateral. Interest income on
restructured loans is accrued at the modified rates after a satisfactory
period of performance (generally six months).
 
  Effective January 1, 1995 the Company adopted FAS 114, "Accounting by
Creditors for Impairment of a Loan". FAS 114 modifies the accounting for
impaired loans, defined as those loans, where, based on current information
and events, it is probable that a creditor will be unable to collect all
amounts due, both interest and principal, according to the contractual terms
of the loan agreement. Specifically, FAS 114 requires that the
 
                                      41
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
allowance for possible loan losses related to impaired loans be determined
based on the present value of expected cash flows discounted at the loan's
effective interest rate or, as a practical expedient, the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. The adoption of this statement did not have a material impact on
the Company's results of operations or financial position.
 
  Effective January 1, 1995, the Company also adopted FAS 118, "Accounting by
Creditors for an Impairment of a Loan--Income Recognition and Disclosure,"
which amends FAS 114 to permit a creditor to use existing methods for
recognizing interest income on impaired loans. Generally, interest income
received on impaired loans either continues to be applied by the Company
against principal or is realized as interest income, according to Management's
judgment as to the collectability of the principal.
 
 ALLOWANCE FOR POSSIBLE LOAN LOSSES
 
  The allowance for possible loan losses is established through charges
against income. Loans deemed uncollectable are charged against the allowance,
while recoveries of amounts previously charged-off are credited to the
allowance. The allowance represents an amount which, in Management's judgment,
will be adequate to absorb probable losses on existing loans that may become
uncollectable. Management's judgment in determining the adequacy of the
allowance is based on various factors influencing the collectability of the
loan. These factors include, but are not limited to, an analysis of the
borrower's ability to meet the repayment terms, the borrower's overall
financial condition, the estimated value of collateral supporting the credit,
the concentration of credit risk in the portfolio and judgments as to the
effect of current and anticipated economic conditions. Management's
determination of the allowance is, by necessity, dependent upon estimates,
appraisals and judgments, which may change because of changing economic
conditions and the Company's perception as to how these factors may affect the
financial condition of the borrowers.
 
 FORECLOSED REAL ESTATE
 
  Real estate acquired through foreclosure is transferred to foreclosed real
estate at the lower of the estimated fair value of the asset acquired or book
value. The excess if any, of the loan over the fair value of the property at
the time of transfer is charged to the Allowance for Possible Loan Losses.
Subsequent declines in the value of the property are reflected as a valuation
allowance and charged to operations. Subsequent to transfer, foreclosed real
estate is carried at the lower of cost or the estimated fair value less
expenses to dispose of the asset.
 
 PREMISES, FURNITURE AND FIXTURES
 
  Premises, furniture and fixtures are stated at cost less accumulated
depreciation and amortization. Depreciation is computed by use of the
straight-line method over the estimated useful lives of the related assets,
ranging from 3 to 30 years. Leasehold improvements are amortized over the
shorter of the lease terms or the useful life of the improvement.
 
 FAIR VALUES OF FINANCIAL INSTRUMENTS
 
  The Company follows FAS 107, "Disclosures about Fair Value of Financial
Instruments," which requires disclosure of fair value information about
financial instruments, whether or not recognized in the statement of financial
position, for which it is practicable to estimate that value. In cases where
quoted market prices are not available, fair values are based on estimates
using present value or other valuation techniques. In that regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in immediate settlement of
the instrument. The calculation of fair value estimates is dependent upon
certain subjective assumptions and involves significant uncertainties,
resulting in variability in estimates with changes in assumptions. Potential
taxes and other expenses that would be incurred in an actual sale or
settlement are not reflected in the fair value amounts disclosed. FAS 107
excludes certain financial
 
                                      42
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. In addition, the fair value
estimates are not intended to reflect the liquidation value of the financial
instruments. The following methods and assumptions were used by the Company to
estimate the fair value for each class of financial instruments for which it
is practicable to estimate that value.
 
  Cash and short-term investments--The carrying amounts for cash and short-
term investments are reasonable estimates of those assets' fair values.
 
  Investment securities--Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices for similar
securities.
 
  Loans receivable, net--For adjustable rate residential loans that reprice
frequently and with no significant change in credit risk, fair values are
based on the market prices for securities collateralized by similar loans. For
certain homogeneous categories of loans, such as some residential fixed rate
mortgages, fair value is estimated using the quoted market price for
securities backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is estimated by
discounting the future cash flows using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities.
 
  Accrued interest and dividends receivable--The carrying amount of interest
and dividends receivable approximates its fair value.
 
  Deposit liabilities--The fair value of demand deposits, savings accounts,
and certain money market deposits is the amount payable on demand at the
reporting date, that is, the carrying value. The fair value of fixed maturity
certificates of deposit is estimated using a discounted cash flow calculation
that applies interest rates currently offered for deposits of similar
remaining maturities on the future cash flows expected to be paid on the
deposits. In estimating the fair value of deposit liabilities, FAS 107
prohibits financial entities from taking into account the value of its long-
term relationships with depositors, commonly known as core deposit
intangibles.
 
  Federal Home Loan Bank advances--The fair value of advances from the Federal
Home Loan Bank of Boston is based on discounted values of contractual cash
flows using rates currently offered for instruments with similar terms and
maturities or, when available, quoted market prices.
 
  Securities sold under agreements to repurchase--The fair value of securities
sold under agreements to repurchase are based on the discounted value of
contractual cash flows using dealer quoted rates for agreements of similar
terms and maturities.
 
  Loans payable--The fair values of the Company's loans payable are estimated
using discounted cash flow analyses, based on rates currently available to the
Company for debt with similar terms and remaining maturities.
 
  Standby letters of credit--The estimated fair value of financial guarantees,
such as standby letters of credit, are based on fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the creditworthiness of the counterparties or on the estimated
cost to terminate them or otherwise settle the obligations with the
counterparties.
 
  Commitments to extend credit--The fair value of commitments to extend
credit, which includes unused lines of credit and commitments to fund loans,
is estimated using the fees currently charged to enter into similar
 
                                      43
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
agreements and the present creditworthiness of the counterparties. For fixed
rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The commitments to
extend credit have terms that are consistent with current market terms.
 
 LONG-LIVED ASSETS
 
  In March 1995, the Financial Accounting Standards Board ("FASB") issued FAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. FAS 121 is effective
prospectively for fiscal years beginning after December 15, 1995, and was
adopted by the Company effective January 1, 1996. The adoption of this
statement did not have a material impact on the Company's results of
operations.
 
 PENSION PLAN AND OTHER EMPLOYEE BENEFIT PLANS
 
  All eligible employees are covered by a non-contributory defined benefit
pension plan which is administered by the Savings Bank Employees' Retirement
Association. The pension plan is funded in an amount consistent with the
funding requirements of federal laws and regulations.
 
  The Company sponsors postretirement health care and life insurance benefit
plans that provide health care and life insurance benefits for retired
employees that have met certain age and service requirements. Postretirement
health care and life insurance benefits expense is based upon an actuarial
computation of current and future benefits to earnings for employees and
retirees. The Company accounts for its postretirement health care and life
insurance benefits in accordance with FAS 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions."
 
  The FASB has issued FAS 112, "Employers' Accounting for Postemployment
Benefits," which requires accrual of a liability for all types of benefits
paid to former or inactive employees after employment but before retirement.
Benefits subject to this accounting pronouncement include salary continuation,
supplemental unemployment benefits, severance benefits, disability-related
benefits (including workers' compensation), job training and counseling and
continuation of such benefits as health care and life insurance coverage. The
Company adopted this accounting standard beginning January 1, 1994. The
adoption of FAS 112 did not have a material impact on the Company's results of
operations or financial position.
 
  The Company sponsors a leveraged employee stock ownership plan ("ESOP") that
covers all full-time and part-time employees with more than one year of
service at the Company. The ESOP was formed with the completion of the Bank's
conversion from mutual to stock form (the "Conversion") on February 7, 1995.
The Company makes annual contributions to the ESOP equal to the ESOP's debt
service. The ESOP's shares initially were pledged as collateral for its debt.
As the debt is repaid, shares are released from collateral and allocated to
active employees, based on the proportion of debt service paid during the year
in excess of dividends on ESOP stock and other earnings applied to repayment
of the ESOP's debt. The Company accounts for its ESOP in accordance with
Statement of Position (SOP) 93-6. Accordingly, the debt of the ESOP is
recorded as long-term debt and the shares pledged as collateral are reported
as unearned compensation in the Company's Consolidated Balance Sheet. As
shares are released from collateral, the Company records compensation expense
equal to the current market price of the shares, and the shares are treated as
outstanding for purposes of calculating earnings per share.
 
  The FASB has issued FAS 123, "Accounting for Stock Based Compensation" which
gives companies the option of employing intrinsic value accounting under the
guidelines of Accounting Principles Board (APB) No. 25 or fair value
accounting for stock based compensation. While FAS 123 does not require the
adoption of fair
 
                                      44
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
value accounting, it does require certain disclosures in the financial
statements as if fair value accounting had been adopted, including pro forma
net income and earnings per share. The Company adopted this accounting
standard effective January 1, 1996 for disclosure purposes only and will
continue to apply APB 25 in accounting for stock based compensation.
 
  The Company's Stock Option Plan (the "Stock Option Plan") was approved by
the Bank's stockholders at its annual meeting on May 31, 1995 and was assumed
by the Company upon the completion of the Reorganization. The Stock Option
Plan provides for the granting of incentive and nonqualified stock options to
certain employees and non-employee directors of the Company and its wholly-
owned subsidiaries for the purchase of the Company's common stock at 100
percent of the fair market value at the date of grant. The maximum option term
is 10 years. Options granted to non-employee Directors of the Company or Bank
under the Stock Option Plan are exercisable in installments of 20% per year
commencing on the first anniversary of the date of grant. Options granted to
employees of the Company and its subsidiaries under the Stock Option Plan will
vest in accordance with the terms set by the Company's Compensation Committee
with the ratification of the Company's Board of Directors. Under the terms of
the Stock Option Plan, 806,250 shares of authorized but unissued common stock
were reserved for issuance under the Stock Option Plan. At December 31, 1996
and 1995, 594,300 and 415,600 stock options have been granted under the Stock
Option Plan, respectively.
 
  The Company's Restricted Stock Plan (the "Restricted Stock Plan") was
approved by the Bank's stockholders at its annual meeting on May 31, 1995 and
was assumed by the Company upon completion of the Reorganization. The
Restricted Stock Plan provides for the awarding of restricted stock to certain
employees and non-employee directors of the Company and its wholly-owned
subsidiaries. The restricted stock vests over a period of time provided that
the awardee continues to be employed by or serves as a director of the
Company. Under the terms of the Restricted Stock Plan, 222,500 shares of
restricted stock were reserved for awarding under the Restricted Stock Plan.
Each award of restricted stock to non-employee Directors of the Company or
Bank under the Restricted Stock Plan vest in installments of 20% per year
commencing on the first anniversary of the date of grant. Each award of
restricted stock to employees of the Company and its subsidiaries under the
Restricted Stock Plan will vest in accordance with the terms set by the
Company's Compensation Committee with ratification of the Company's Board of
Directors. At December 31, 1996 and 1995, 161,100 and 148,200 shares of
restricted stock have been awarded under the Restricted Stock Plan.
 
  The Company sponsors a defined contribution profit sharing plan (the
"Plan"), with cash or deferral arrangements permitted by Internal Revenue Code
subsection 401(k). The Plan was formed by the Company in 1995. Substantially
all employees are eligible to participate after satisfaction of the one year
service requirement under the Plan. Under the savings aspect of the Plan,
employees may contribute 1% to 12% of base compensation with up to 6% being
eligible for matching contributions, at 25%, from the Company. Contributions
to the Plan by the Company were $120 for the year ended December 31, 1996 as
compared to $52 for the year ended December 31, 1995.
 
 MORTGAGE BANKING ACTIVITIES
 
  Fees paid for the right to service mortgage loans are capitalized and
amortized in proportion to, and over the period of, estimated net servicing
income. Amortization is adjusted prospectively to reflect increases or
decreases in prepayment experience. Purchased mortgage servicing rights of
$412 and $405 at December 31, 1996 and 1995, respectively, are included in
other assets.
 
  Servicing income represents fees earned for servicing real estate mortgage
loans owned by outside investors. The fees are calculated on the outstanding
principal balances of the loans serviced and are recorded as income when
earned. The mortgage loans being serviced for outside investors are not
included in the consolidated
 
                                      45
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
financial statements because they are not assets of the Company. The Company
maintained a servicing portfolio for other investors of $792,376 and $880,558
at December 31, 1996 and 1995, respectively.
 
  In May 1995, the FASB issued FAS 122, "Accounting for Mortgage Service
Rights." FAS 122 amends certain provisions of FAS 65, "Accounting for Certain
Mortgage Banking Activities," to eliminate the accounting distinction between
rights to service mortgage loans for others that are acquired through loan
origination activities and those acquired through purchase transactions. FAS
122 is effective prospectively for fiscal years beginning after December 15,
1995, and was adopted by the Company effective January 1, 1996. The adoption
of this statement did not have a material impact on the Company's results of
operations or financial position.
 
 TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
LIABILITIES
 
  In June 1996, the FASB issued SFAS 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
asset 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 Company does not
believe its adoption of this Statement will have a material impact on its
results of operations or financial position.
 
 INCOME TAXES
 
  The Company accounts for income taxes in accordance with FAS 109,
"Accounting for Income Taxes." FAS 109 requires an asset and liability method
of accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates in effect for
the year in which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is recognized
in income in the period that includes the enactment date. Under the deferred
method, deferred taxes were recognized using the tax rate applicable to the
year of the calculation and were not adjusted for subsequent changes in tax
rates.
 
 PRO FORMA EARNINGS PER SHARE
 
  Net income (loss) per share for the years ended December 31, 1995 and 1994
is computed on a pro forma basis as if the stock issued in the Conversion had
been issued as of the beginning of each year presented and is adjusted for
common stock equivalents as appropriate.
 
2. CONVERSION AND REGULATORY MATTERS
 
  On May 12, 1992, the Bank entered into a Stipulation and Consent to the
issuance of an Order to Cease and Desist (the "Order") with the FDIC and the
Massachusetts Commissioner of Banks ("Commissioner of Banks"). The Bank had
previously entered into an informal agreement with the Commissioner of Banks.
The terms of this informal agreement, which was entered into in April 1991,
were similar to those of the Order. The Order placed certain restrictions on
the Bank's operations, made other actions subject to the approval of the FDIC
 
                                      46
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
and the Commissioner of Banks, and contained certain affirmative obligations.
In addition, the Order required the Bank to maintain a Tier 1 leverage capital
ratio of at least 2%, and further provided that in the event that the Bank's
Tier 1 leverage capital ratio fell below 6%, the Bank would submit a written
plan to the FDIC to increase such ratio to at least 6%, and, within 180 days
thereafter, achieve and thereafter maintain a Tier 1 leverage capital ratio of
at least 6%.
 
  As a consequence of the net losses incurred by the Bank during 1994, the
Bank's Tier 1 leverage capital ratio fell below the 6% minimum required by the
Order, and its total risk-based capital ratio fell below the 8% minimum
regulatory requirement. These net losses resulted primarily from the Bank's
efforts to reduce the level of its non-performing assets through accelerated
dispositions, which included bulk sales, and the adoption of new loan loss
reserve methodologies and charge-off requirements. In accordance with the
Order, the Bank submitted a capital restoration plan (the "Capital Restoration
Plan") to the FDIC in May 1994, which plan, as subsequently modified following
discussions with the FDIC, satisfied the FDIC's directive to raise capital.
The Capital Restoration Plan, which was accepted by the Regional Office of the
FDIC in August 1994, called for the Bank to raise the additional capital
necessary to comply with the required capital ratios through the issuance of
common stock in a conversion from a mutal bank to a stock bank (the
"Conversion").
 
  The Conversion was successfully completed on February 7, 1995. The Bank
issued 5,562,500 shares of common stock at a price of $8.00 per share. After
deducting net expenses of approximately $5,029 relating to underwriting fees
and other costs of the conversion process, and amounts relating to the ESOP of
$3,560, the Bank received net proceeds of $35,911. With the infusion of the
net proceeds from the Conversion, the Bank immediately satisfied the capital
requirements of the Order and all minimum regulatory requirements. The Bank
presently maintains the requisite capital levels to qualify for treatment as a
"well capitalized" institution under the FDIC Improvement Act ("FDICIA").
 
  Effective April 24, 1995, the Bank received notification from both the FDIC
and the Commissioner of Banks that the Order had been terminated, which
unconditionally released the Bank from its obligations under the Order.
 
3. CASH AND DUE FROM BANKS
 
  Under provisions of the Federal Reserve Act, depository institutions are
required to maintain certain average balances in the form of cash or
noninterest-bearing balances with a Federal Reserve Bank. Reserve balances of
$5,645 and $4,794 at December 31, 1996 and 1995, respectively, were maintained
in accordance with these requirements.
 
4. INVESTMENT SECURITIES
 
  The amortized cost, unrealized gains and losses and approximate fair values
of investment securities were as follows:
 
 Securities Available for Sale
 
<TABLE>
<CAPTION>
                                                DECEMBER 31, 1996
                                     ----------------------------------------
                                     AMORTIZED UNREALIZED UNREALIZED   FAIR
                                       COST      GAINS      LOSSES    VALUE
                                     --------- ---------- ---------- --------
   <S>                               <C>       <C>        <C>        <C>
   U.S. Government and agency
    obligations..................... $ 29,901    $   58     $ (16)   $ 29,943
   Collateralized mortgage
    obligations.....................   28,965       104       (62)     29,007
   Mortgage-backed securities.......  371,921     2,684      (387)    374,218
   Other bonds and short-term
    obligations.....................    1,681       --        --        1,681
   Other securities.................   14,276       199        (1)     14,474
                                     --------    ------     -----    --------
       Total........................ $446,744    $3,045     $(466)   $449,323
                                     ========    ======     =====    ========
</TABLE>
 
                                      47
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Securities Held to Maturity
 
<TABLE>
<CAPTION>
                                                 DECEMBER 31, 1996
                                      ----------------------------------------
                                      AMORTIZED UNREALIZED UNREALIZED   FAIR
                                        COST      GAINS      LOSSES    VALUE
                                      --------- ---------- ---------- --------
   <S>                                <C>       <C>        <C>        <C>
   Mortgage-backed securities........ $149,856    $  563    $(1,167)  $149,252
   Asset-backed securities...........   42,118       118        (71)    42,165
   Other bonds and short-term
    obligations......................      200       --         --         200
                                      --------    ------    -------   --------
       Total......................... $192,174    $  681    $(1,238)  $191,617
                                      ========    ======    =======   ========
 
 Securities Available for Sale
 
<CAPTION>
                                                 DECEMBER 31, 1995
                                      ----------------------------------------
                                      AMORTIZED UNREALIZED UNREALIZED   FAIR
                                        COST      GAINS      LOSSES    VALUE
                                      --------- ---------- ---------- --------
   <S>                                <C>       <C>        <C>        <C>
   U.S. Government and agency
    obligations...................... $  7,700    $    5    $    (6)  $  7,699
   Mortgage-backed securities........  222,673     1,562       (134)   224,101
   Other bonds and short-term
    obligations......................    9,300       --         --       9,300
   Other securities..................    5,884       --         --       5,884
                                      --------    ------    -------   --------
       Total......................... $245,557    $1,567    $  (140)  $246,984
                                      ========    ======    =======   ========
 
 Securities Held to Maturity
 
<CAPTION>
                                                 DECEMBER 31, 1995
                                      ----------------------------------------
                                      AMORTIZED UNREALIZED UNREALIZED   FAIR
                                        COST      GAINS      LOSSES    VALUE
                                      --------- ---------- ---------- --------
   <S>                                <C>       <C>        <C>        <C>
   Mortgage-backed securities........ $161,168    $  779    $  (466)  $161,481
   Other bonds and short-term
    obligations......................   11,625        43       (219)    11,449
                                      --------    ------    -------   --------
       Total......................... $172,793    $  822    $  (685)  $172,930
                                      ========    ======    =======   ========
</TABLE>
 
  At December 31, 1996, the net unrealized gain, net of tax effect, on
available for sale securities that was included as a separate component of
stockholders' equity was $1,895. At December 31, 1995, the net unrealized
gain, net of tax effect, on available for sale securities was $1,427.
 
  Proceeds from the sale of available for sale investment securities were
$41,736 and $213,252 during 1996 and 1995, respectively. Gross realized gains
on sales of investment securities were $271 in 1996 and $13 in 1995, while
gross realized losses were $15 in 1996 and $899 in 1995.
 
  In 1995, the FASB issued a special report, "Implementation of Statement
115," that provided additional guidance related to the application of FAS 115.
In connection with the issuance of this special report, the FASB allowed all
organizations to review their portfolio classifications and make a one-time
reclassification of securities between categories during the period from
November 15, 1995 to December 15, 1995. On December 15, 1995, the Company
transferred securities with an amortized cost of $84,299 and an unrealized
loss of $1,177 from the held to maturity portfolio to the available for sale
portfolio. In addition, the Company also transferred securities with an
estimated fair value of $47,280 and an unrealized gain of $299 from the
available for sale portfolio to the held to maturity portfolio. The remaining
unrealized gain of $204 is included in a separate component of stockholder's
equity. Subsequent to the transfer of these securities, the Company sold
$82,900 of available for sale securities in December 1995 at a net loss of
$899.
 
                                      48
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  At December 31, 1996, investment securities having a carrying value of
$202,140 and an estimated fair value of $203,247 were pledged to collateralize
securities sold under agreements to repurchase and other items.
 
  The amortized cost and estimated fair value of debt securities are shown
below by contractual maturity. Actual maturities may differ from contractual
maturities because borrowers have the right to call or prepay obligations with
or without call or prepayment penalties.
 
<TABLE>
<CAPTION>
                                                   DECEMBER 31, 1996
                                       -----------------------------------------
                                        SECURITIES AVAILABLE   SECURITIES HELD
                                              FOR SALE           TO MATURITY
                                       ---------------------- ------------------
                                        AMORTIZED     FAIR    AMORTIZED   FAIR
                                          COST       VALUE      COST     VALUE
                                       ---------------------- --------- --------
     <S>                               <C>         <C>        <C>       <C>
     Within 1 year.................... $    8,184  $    8,193 $  6,404  $  6,392
     1-5 years........................     58,709      58,824    5,221     5,205
     5-10 years.......................      1,300       1,294    3,496     3,543
     over ten years...................    364,275     366,538  177,053   176,477
                                       ----------  ---------- --------  --------
         Total........................ $  432,468  $  434,849 $192,174  $191,617
                                       ==========  ========== ========  ========
<CAPTION>
                                                   DECEMBER 31, 1995
                                       -----------------------------------------
                                        SECURITIES AVAILABLE   SECURITIES HELD
                                              FOR SALE           TO MATURITY
                                       ---------------------- ------------------
                                        AMORTIZED     FAIR    AMORTIZED   FAIR
                                          COST       VALUE      COST     VALUE
                                       ---------------------- --------- --------
     <S>                               <C>         <C>        <C>       <C>
     Within 1 year.................... $    9,300  $    9,300 $    --   $    --
     1-5 years........................     13,187      13,251   10,593    10,625
     5-10 years.......................      3,000       2,997   10,063    10,131
     over ten years...................    214,186     215,552  152,137   152,174
                                       ----------  ---------- --------  --------
         Total........................ $  239,673  $  241,100 $172,793  $172,930
                                       ==========  ========== ========  ========
</TABLE>
 
  As of December 31, 1996, approximately 97.3% of mortgage-backed securities
available for sale and 62.5% of mortgage-backed securities held to maturity
were adjustable rate.
 
5. INVESTMENTS IN REAL ESTATE AND REAL ESTATE PARTNERSHIPS
 
  The Company has certain subsidiaries that are engaged in various real estate
activities individually or in joint ventures with unaffiliated partners.
Investments in real estate and real estate partnerships are composed of the
following:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                  -------------
                                                                   1996   1995
                                                                  ------ ------
     <S>                                                          <C>    <C>
     Operating properties
       Land...................................................... $  688 $1,320
       Buildings and improvements, net of accumulated
        depreciation of $2,832 and $4,133, respectively..........  2,042  4,318
                                                                  ------ ------
     Total investments in real estate............................  2,730  5,638
     Investments in real estate partnerships.....................     27    454
                                                                  ------ ------
         Investments in real estate and real estate
          partnerships........................................... $2,757 $6,092
                                                                  ====== ======
</TABLE>
 
                                      49
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Net (income) expense of real estate operations is summarized as follows:
 
<TABLE>
<CAPTION>
                                          FOR THE YEARS ENDED DECEMBER 31,
                                         ------------------------------------
                                            1996        1995         1994
                                         ----------  ----------  ------------
     <S>                                 <C>         <C>         <C>
     Net (income) expenses of operating
      real estate....................... $      (26) $       (3) $        303
     Writedowns on real estate..........        447           6         5,011
     Net (gain)/loss on sale of real
      estate............................       (693)       (230)       (4,326)
                                         ----------  ----------  ------------
         Net (income) expenses of real
          estate operations............. $     (272) $     (227) $        988
                                         ==========  ==========  ============
</TABLE>
 
  Depreciation expense of $299 in 1996, $381 in 1995, and $912 in 1994 is
included in net (income) expenses of real estate operations. Losses recorded
from the real estate partnerships under the equity method were $110, $69 and
$987 for the same three year period and are also included in net (income)
expenses of real estate operations. Loans to these partnerships at December
31, 1996 and 1995 amounted to $150 and $339, respectively.
 
6. LOANS RECEIVABLE, NET
 
  Loans receivable, net, is composed of the following:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                             ------------------
                                                               1996      1995
                                                             --------  --------
     <S>                                                     <C>       <C>
     Residential real estate loans.......................... $242,410  $263,551
     Commercial real estate loans...........................  118,442   118,005
     Commercial loans.......................................  155,808   117,674
     Home equity loans......................................  104,206    67,657
     Consumer loans.........................................    4,132     6,196
                                                             --------  --------
     Total loans receivable.................................  624,998   573,083
     Less:
     Unearned discounts.....................................   (1,196)     (566)
     Allowance for possible loan losses.....................   15,597    14,986
                                                             --------  --------
         Loans receivable, net.............................. $610,597  $558,663
                                                             ========  ========
</TABLE>
 
  At December 31, 1996 and December 31, 1995, residential real estate loans
included loans held for sale of $5,171 and $6,724, respectively.
 
RISK ELEMENTS
 
  The Company grants commercial and residential loans to customers primarily
in New England. Although the Company has a diversified portfolio, its debtors'
ability to honor their contracts is substantially dependent upon the general
economic conditions of the region. The Company manages its loan portfolio to
avoid concentration by industry or loan size to minimize its credit exposure.
Commercial loans may be collateralized by the assets underlying the borrowers'
business such as accounts receivable, equipment, inventory and real property.
Residential mortgage and home equity loans are generally secured by the real
property financed. Commercial real estate loans are generally secured by the
underlying real property and lease agreements.
 
                                      50
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following table shows the components of non-performing assets:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                 --------------
                                                                  1996   1995
                                                                 ------ -------
     <S>                                                         <C>    <C>
     Non-accruing loans......................................... $6,547 $ 9,037
     Loans past due 90 days and still accruing..................    428     587
                                                                 ------ -------
     Total non-performing loans.................................  6,975   9,624
     Foreclosed real estate, net................................    381   1,529
     Restructured loans on accrual status.......................    198   2,732
                                                                 ------ -------
         Total non-performing assets............................ $7,554 $13,885
                                                                 ====== =======
</TABLE>
 
  The principal amount of non-performing loans, excluding non-performing
restructured loans, aggregated approximately $6,975 and $9,422 at December 31,
1996 and 1995, respectively. Interest income that would have been recorded if
the loans had been performing in accordance with their original terms
aggregated $963, $1,196 and $1,683 for the years ended December 31, 1996, 1995
and 1994, respectively. Interest income recorded on these loans during the
three years ended December 31, 1996, 1995 and 1994 was $774, $983 and $1,203,
respectively.
 
  The principal amount of restructured loans aggregated $198 at December 31,
1996, and $2,934 at December 31, 1995. Interest income that would have been
recorded if the loans had been performing in accordance with their original
terms aggregated $20, $378 and $704 for the years ended December 31, 1996,
1995 and 1994, respectively. Interest income recorded on these loans amounted
to $2, $180 and $570 for the years ended December 31, 1996, 1995 and 1994,
respectively.
 
LOANS TO RELATED PARTIES
 
  At December 31, 1996, and 1995, the amount of loans outstanding to
directors, officers and other related parties (including real estate
partnerships) was approximately $7,328 and $9,854, respectively. There were no
non-accrual loans included in the loans to related parties at December 31,
1996 and 1995. During 1996 and 1995, new loans aggregating $1,080 and $791,
respectively, were made or added and deductions and repayments totaled $3,606
and $6,304, respectively. There were no charge-offs made against these loans
in 1996 and 1995. Changes in the composition of the related parties resulted
in additions to or deductions from loans outstanding to related parties.
 
7. ALLOWANCE FOR POSSIBLE LOAN LOSSES
 
  Changes in the allowance for possible loan losses are summarized as follows:
 
<TABLE>
<CAPTION>
                                          FOR THE YEARS ENDED DECEMBER 31,
                                          -----------------------------------
                                             1996        1995        1994
                                          ----------  ----------  -----------
     <S>                                  <C>         <C>         <C>
     Balance, beginning of year.......... $   14,986  $   15,844  $    18,367
     Provision charged to operating
      expense............................      2,950       4,359       25,742
     Loan charge-offs....................     (4,555)     (6,068)     (31,104)
     Loan recoveries.....................      2,216         851        2,839
                                          ----------  ----------  -----------
         Balance, end of year............ $   15,597  $   14,986  $    15,844
                                          ==========  ==========  ===========
</TABLE>
 
  As discussed in Note 1, the Company adopted FAS 114 effective January 1,
1995. The FAS 114 analysis is applied only to the commercial and commercial
real estate loan portfolios. Because of their homogeneous nature,
 
                                      51
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
the Company's residential mortgage, home equity and consumer portfolios are
evaluated collectively for impairment and a reserve requirement is developed
under the historical loss method.
 
  Impaired loans are those loans for which, based on current information, it
is probable that the Company will be unable to collect all amounts due
according to the contractual terms of the loan agreement. All commercial and
commercial real estate non-accrual loans are considered impaired loans,
however the impaired classification may also include other loans which in
Management's judgment meet the criteria described above.
 
  At December 31, 1996, the recorded investment in loans that are considered
impaired under FAS 114 was $6,600 as compared to $8,036 at December 31, 1995.
Included in this amount as of December 31, 1996 is $1,449 of impaired loans
for which the related FAS 114 allowance is $33 and $5,151 of impaired loans
for which the FAS 114 allowance is zero. At December 31, 1995 there were $857
of impaired loans for which the related FAS 114 allowance was $305 and $7,180
of impaired loans for which the FAS 114 allowance was zero. The average
recorded investment in impaired loans during the year ended December 31, 1996
was approximately $8,157 as compared to $9,789 during the year ended December
31, 1995. For the years ended December 31, 1996 and 1995, the Company
recognized interest income on these impaired loans of $313 and $254,
respectively.
 
8. FORECLOSED REAL ESTATE, NET
 
  Foreclosed real estate, net consists of the following:
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                  -------------
                                                                  1996   1995
                                                                  -------------
     <S>                                                          <C>   <C>
     Residential................................................. $ 438 $   231
     Commercial..................................................   --    2,073
                                                                  ----- -------
                                                                    438   2,304
     Less valuation allowance....................................    57     775
                                                                  ----- -------
     Foreclosed real estate, net................................. $ 381 $ 1,529
                                                                  ===== =======
</TABLE>
 
  Changes in the allowance for foreclosed real estate are summarized as
follows:
 
<TABLE>
<CAPTION>
                                          FOR THE YEARS ENDED DECEMBER 31,
                                         ------------------------------------
                                            1996        1995         1994
                                         ----------  ----------  ------------
     <S>                                 <C>         <C>         <C>
     Balance, beginning of year......... $      775  $      542  $      3,420
     Provision charged to expense.......        --          836         6,034
     Dispositions, net..................       (718)       (603)       (8,912)
                                         ----------  ----------  ------------
         Balance, end of year........... $       57  $      775  $        542
                                         ==========  ==========  ============
 
  Foreclosed real estate expense is summarized as follows:
 
<CAPTION>
                                          FOR THE YEARS ENDED DECEMBER 31,
                                         ------------------------------------
                                            1996        1995         1994
                                         ----------  ----------  ------------
     <S>                                 <C>         <C>         <C>
     Net expense (income) of operating
      foreclosed real estate............ $      149  $     (225) $        547
     Writedowns and net loss on
      foreclosed real estate, net.......        291         746         4,923
                                         ----------  ----------  ------------
         Foreclosed real estate
          expense....................... $      440  $      521  $      5,470
                                         ==========  ==========  ============
</TABLE>
 
                                      52
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
9. BANK PREMISES, FURNITURE AND FIXTURES, NET
 
  Major categories of fixed assets are as follows:
 
<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                                ---------------
                                                                 1996    1995
                                                                ------- -------
     <S>                                                        <C>     <C>
     Buildings and improvements................................ $29,746 $27,529
     Leasehold improvements....................................   7,189   6,114
     Furniture and fixtures....................................  15,350  14,828
                                                                ------- -------
                                                                 52,285  48,471
     Less accumulated depreciation.............................  25,179  22,765
                                                                ------- -------
     Bank premises, furniture and fixtures, net................ $27,106 $25,706
                                                                ======= =======
</TABLE>
 
  Depreciation expense aggregated $2,698, $2,646 and $2,693 for the years
ended December 31, 1996, 1995 and 1994, respectively, and is included in
occupancy expense and furniture and equipment expense. Rental income of
$1,503, $1,393 and $1,368 for the years ended December 31, 1996, 1995, and
1994, respectively, is included in occupancy expense.
 
10. DEPOSITS
 
  Deposits consist of the following:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                                1996     1995
                                                              -------- --------
   <S>                                                        <C>      <C>
   Demand deposits........................................... $100,527 $ 71,539
   NOW accounts..............................................   57,980   57,271
   Savings accounts..........................................  195,418  185,555
   Money market accounts.....................................  209,523  203,313
   Time deposits
     Time deposits under $100................................  353,506  337,099
     Time deposits of $100 or more...........................   52,563   30,609
                                                              -------- --------
       Total deposits........................................ $969,517 $885,386
                                                              ======== ========
</TABLE>
 
                                      53
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
11. FEDERAL HOME LOAN BANK ADVANCES
 
  Pursuant to a blanket pledge agreement with the Federal Home Loan Bank
("FHLB") of Boston, advances are secured by the Company's stock in the FHLB,
certain qualifying first mortgage loans, mortgage-backed and mortgage-related
securities, and other securities not otherwise pledged.
 
  Advances from the FHLB at December 31, 1996 and 1995 are summarized as
follows:
 
<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                               ---------------------------------
                                                     1996             1995
                                               ---------------- ----------------
                                                       WEIGHTED         WEIGHTED
                                                       AVERAGE          AVERAGE
   YEAR OF MATURITY                            AMOUNT    RATE   AMOUNT    RATE
   ----------------                            ------- -------- ------- --------
   <S>                                         <C>     <C>      <C>     <C>
   1996....................................... $   --     --    $40,000   5.75%
   1997.......................................  60,000   5.55%      --     --
   2001.......................................   1,100   6.23%      --     --
   2006.......................................   1,200   6.39%      --     --
   2011.......................................   1,690   6.97%      --     --
   2015.......................................   1,484   6.23%    1,500   6.23%
   2021.......................................   2,997   7.18%      --     --
                                               -------   ----   -------   ----
                                               $68,471   5.70%  $41,500   5.76%
                                               =======   ====   =======   ====
</TABLE>
 
  The FHLB advances above which mature in the year 2001 and beyond are
amortizing borrowings. The outstanding balances for each amortizing advance at
December 31, 1996 and 1995 are listed above by their contractual maturities.
 
  At December 31, 1996 there was a commitment for a Community Investment
Program Plus advance from the FHLB for $1,880 at 6.38% for settlement on
January 15, 1997. There were no commitments for additional advances from the
FHLB as of December 31, 1995.
 
12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
 
  At December 31, 1996 and December 31, 1995, securities sold under agreements
to repurchase totaled $176,577 and $31,101 respectively. These agreements are
treated as financings, and the obligations to repurchase securities sold are
reflected as a liability in the Consolidated Balance Sheet.
 
  An analysis of securities sold under agreements to repurchase identical
securities for the years ended December 31, 1996, 1995 and 1994 is summarized
as follows:
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       ------------------------
                                                         1996     1995    1994
                                                       --------  -------  -----
   <S>                                                 <C>       <C>      <C>
   Maximum month-end balance during the period........ $176,577  $39,552  $ --
   Average balance during the period.................. $101,073  $19,297  $ --
   Weighted average interest rate during the period...     5.47%    5.87%   --
   Weighted average interest rate at end of period....     5.49%    5.49%   --
</TABLE>
 
  At December 31, 1996, securities sold under agreements to repurchase had
maturity ranges from January 1997 to November 1999 with a weighted average
maturity at December 31, 1996 of 218 days.
 
                                      54
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  At December 31, 1996, mortgage-backed securities with carrying values
totaling $182,787 and estimated fair values totaling $183,831 were pledged as
collateral for securities sold under agreements to repurchase. It is the
Company's policy to enter into repurchase agreements only with major brokerage
firms that are primary dealers in government securities.
 
13. LOANS PAYABLE
 
  Loans payable consist of the following:
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                                -------------
                                                                 1996   1995
                                                                ------ ------
<S>                                                             <C>    <C>
Mortgage note payable, principal and interest are payable in
 equal monthly installments of $18. This fully amortizing
 mortgage note bears an interest rate of 7.5% and matures on
 October 25, 2015. Mortgage-backed securities with carrying
 values of $2,151 and estimated fair values of $2,201 were
 pledged as collateral for this mortgage note as of December
 31, 1995. This note was satisfied in full in January of
 1996..........................................................    --  $2,266
Note issued by the Company's Employee Stock Ownership Plan
 ("ESOP"), and guaranteed by the Company. This note is subject
 to mandatory redemption through the operation of a sinking
 fund commencing on the last business day of June 1995 and
 continuing on the last business day of each June and December
 thereafter. The note bears interest at a variable rate per
 annum equal to the Prime Rate as published from time to time
 in the Wall Street Journal. The interest rate at December 31,
 1996 was 8.25%. The proceeds for the issuance of the note were
 used by the Company's ESOP solely for the purpose of
 purchasing 445,000 shares of the Company's common stock.......  2,848  3,204
                                                                ------ ------
                                                                $2,848 $5,470
                                                                ====== ======
</TABLE>
 
  Aggregate required principal payments on the loans payable at December 31,
1996 for the next five years and thereafter are as follows:
 
<TABLE>
             <S>                                <C>
             1997.............................. $  356
             1998..............................    356
             1999..............................    356
             2000..............................    356
             2001..............................    356
             2002 and thereafter...............  1,068
                                                ------
                                                $2,848
                                                ======
</TABLE>
 
  At December 31, 1996, investment securities having a carrying value of
$3,400 and an estimated fair value of $3,423 were pledged to collateralize a
letter of credit supporting the ESOP note, which honors demands for payment by
the Note Trustee presented in accordance with the terms of the letter of
credit.
 
  At December 31, 1996, the Company had an available, but unused, line of
credit in the amount of $22,000 with the FHLB of Boston and an available, but
unused, line of credit in the amount of $10,000 with another financial
institution.
 
 
                                      55
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
14. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
 
  The following table presents the Company's assets, liabilities, and
unrecognized financial instruments at both their respective carrying or
notional amounts and fair values.
 
<TABLE>
<CAPTION>
                                           DECEMBER 31, 1996 DECEMBER 31, 1995
                                           ----------------- -----------------
                                           CARRYING   FAIR   CARRYING   FAIR
                                            AMOUNT   VALUE    AMOUNT   VALUE
                                           -------- -------- -------- --------
   <S>                                     <C>      <C>      <C>      <C>
   Financial Assets:
     Cash and due from banks.............. $ 31,902 $ 31,902 $ 30,377 $ 30,377
     Federal funds sold and interest-
      bearing deposits....................   10,045   10,045    8,045    8,045
     Investment securities................  641,497  640,940  419,777  419,914
     Loans receivable net.................  610,597  626,546  558,663  577,772
     Accrued interest and dividends
      receivable..........................    8,982    8,982    7,109    7,109
   Financial Liabilities:
     Deposits............................. $969,517 $969,933 $885,386 $886,529
     Federal Home Loan Bank advances......   68,471   68,599   41,500   41,543
     Securities sold under agreements to
      repurchase..........................  176,577  176,544   31,101   31,189
     Loans payable........................    2,848    2,848    5,470    5,746
<CAPTION>
                                           NOTIONAL   FAIR   NOTIONAL   FAIR
                                            AMOUNT   VALUE    AMOUNT   VALUE
                                           -------- -------- -------- --------
   <S>                                     <C>      <C>      <C>      <C>
   Unrecognized Financial Instruments:
     Standby letters of credit............ $  4,233 $     42 $    252 $      3
     Commitments to extend credit.........  184,238      --   133,084      --
</TABLE>
 
  Certain assets, which are not financial instruments and, accordingly, are
not included in the above fair values, contribute substantial value to the
Company in excess of the related amounts recognized in the balance sheet.
These include the core deposit intangibles and the related retail banking
network, and mortgage servicing rights.
 
  A discussion of the methodologies and assumptions used by the Company in
determining these fair values is included in Note 1 under the subheading "Fair
Values of Financial Instruments."
 
15. PENSION PLAN AND OTHER EMPLOYEE BENEFIT PLANS
 
  The Company's pension plan covers all employees who meet certain age and
service requirements. Vested benefits, paid at retirement, are computed based
upon a formula considering length of service and average compensation. Plan
assets consist of marketable equity securities and United States Government
and agency obligations. Net periodic pension cost for 1996, 1995 and 1994
included the following components:
 
<TABLE>
<CAPTION>
                                                        FOR THE YEARS ENDED
                                                           DECEMBER 31,
                                                       -----------------------
                                                        1996     1995    1994
                                                       -------  -------  -----
   <S>                                                 <C>      <C>      <C>
     Service cost--current period..................... $   786  $   631  $ 847
     Interest cost on projected benefit obligation....     712      725    680
     Actual return on assets..........................  (1,330)  (1,549)  (474)
     Net amortization and deferral....................     532      799   (213)
                                                       -------  -------  -----
     Net periodic pension cost........................ $   700  $   606  $ 840
                                                       =======  =======  =====
</TABLE>
 
                                      56
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Assumptions used in the accounting for pension cost in 1996, 1995, and 1994
were as follows:
 
<TABLE>
<CAPTION>
                                                       FOR THE YEARS ENDED
                                                           DECEMBER 31,
                                                    --------------------------
                                                      1996     1995     1994
                                                    -------- -------- --------
   <S>                                              <C>      <C>      <C>
   Discount rate...................................     7.5%     7.0%     8.0%
   Average remaining service....................... 28 years 28 years 28 years
   Expected long-term rate of return on plan
    assets.........................................     8.0%     8.0%     8.0%
</TABLE>
 
  The discount rate is the estimated rate at which the obligation for pension
benefits could effectively be settled. The average wage increase assumption of
5% reflects the Company's best estimate of the future compensation levels of
the individual employees covered by the plan. The expected long-term rate of
return on plan assets reflects the average rate of earnings that the Company
estimates will be generated on the assets of the plan.
 
  The funded status of the plan for its most recent fiscal years is as
follows:
 
<TABLE>
<CAPTION>
                                                              OCTOBER 31,
                                                            -----------------
                                                             1996      1995
                                                            -------  --------
   <S>                                                      <C>      <C>
   Accumulated benefit obligation
     Vested benefits....................................... $ 5,027  $  6,292
     Nonvested benefits....................................     336       278
                                                            -------  --------
   Accumulated benefit obligation.......................... $ 5,363  $  6,570
                                                            =======  ========
   Projected benefit obligation............................ $(8,464) $(10,170)
   Plan assets at fair value...............................   8,357     8,808
                                                            -------  --------
   Projected benefit obligation in excess of plan assets...    (107)   (1,362)
   Unrecognized net (gain)/loss............................  (4,076)   (2,103)
   Unrecognized net transition asset being recognized over
    25 years...............................................    (297)     (316)
                                                            -------  --------
   Accrued pension cost.................................... $(4,480) $ (3,781)
                                                            =======  ========
</TABLE>
 
  As discussed in Note 1, the Company formed an ESOP with the completion of
the Conversion in February, 1995. ESOP compensation expense for the year ended
December 31, 1996 was $1,065 as compared to expense of $749 for the year ended
December 31, 1995. The ESOP shares as of December 31, 1996 and 1995 were as
follows (dollars in thousands except share amounts):
<TABLE>
<CAPTION>
                                                                FOR THE YEARS
                                                                    ENDED
                                                                DECEMBER 31,
                                                              -----------------
                                                                1996     1995
                                                              -------- --------
   <S>                                                        <C>      <C>
   Allocated shares, net.....................................   53,549      --
   Shares released for allocation............................   53,829   54,812
   Unreleased shares.........................................  336,359  390,188
                                                              -------- --------
     Total ESOP shares.......................................  443,737  445,000
                                                              ======== ========
     Fair value of unreleased shares......................... $  7,694 $  6,389
                                                              ======== ========
</TABLE>
 
 
16. STOCK PLANS
 
  As discussed in Note 1, the Company has two stock-based compensation plans,
which are described below. The Company applies APB Opinion 25 and related
interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plan. Had compensation cost for
the Company's
 
                                      57
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
Stock Option Plan been determined based on the fair value at the grant dates
for awards under that plan consistent with the method of FASB Statement 123,
the Company's net income and earnings per share would have changed to the pro
forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                                 1996    1995
                                                                ------- -------
   <S>                                              <C>         <C>     <C>
   Net income...................................... As reported $18,160 $11,459
                                                    Pro forma   $17,567 $11,311
   Primary earnings per share...................... As reported $  3.29 $  2.21
                                                    Pro forma   $  3.22 $  2.22
   Fully diluted earnings per share................ As reported $  3.26 $  2.19
                                                    Pro forma   $  3.18 $  2.19
</TABLE>
 
 STOCK OPTION PLAN
 
  Under the Company's Stock Option Plan, the Company may grant stock options
to certain employees and non-employee directors of the Company for the
purchase of the Company's common stock. Under this plan, the exercise price of
each option equals the market price of the Company's stock on the date of
grant and the maximum term of the option is 10 years.
 
  The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yield of
2.5% for both years; expected volatility of 24% and 25%; risk-free interest
rates of 6.42% and 5.57%; and expected lives of 5 years for both periods.
 
  A summary of the status of the Company's Stock Option Plan as of December
31, 1996 and 1995 and changes during the years ending on those dates is
presented below:
 
<TABLE>
<CAPTION>
                                       FOR THE YEARS ENDED DECEMBER 31,
                                 ----------------------------------------------
                                          1996                    1995
                                 ----------------------- ----------------------
                                            WEIGHTED-              WEIGHTED-
                                             AVERAGE                AVERAGE
                                 SHARES   EXERCISE PRICE SHARES  EXERCISE PRICE
                                 -------  -------------- ------- --------------
   <S>                           <C>      <C>            <C>     <C>
   Options outstanding,
    beginning of year..........  415,600       $12           --       $--
     Granted...................  194,700        18       415,600        12
     Exercised.................      --        --            --        --
     Cancelled.................  (16,000)       12           --        --
                                 -------                 -------
       Options outstanding, end
        of year................  594,300       $14       415,600      $ 12
                                 =======                 =======
   Options exercisable at year-
    end........................  187,280                     --
   Weighted-average fair value
    of options granted during
    the year...................    $4.50                   $3.06
</TABLE>
 
  The following table summarizes information regarding stock options
outstanding at December 31, 1996:
 
<TABLE>
<CAPTION>
                                       OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                            ----------------------------------------- ---------------------
                                                            WEIGHTED-             WEIGHTED-
                                NUMBER     WEIGHTED-AVERAGE  AVERAGE    NUMBER     AVERAGE
   RANGE OF                 OUTSTANDING AT    REMAINING     EXERCISE  EXERCISABLE EXERCISE
   EXERCISE PRICES             12/31/96    CONTRACTUAL LIFE   PRICE   AT 12/31/96   PRICE
   ---------------          -------------- ---------------- --------- ----------- ---------
   <S>                      <C>            <C>              <C>       <C>         <C>
   $10 to $15..............    399,600        8.1 years        $12      156,280      $12
   $16 to $23..............    194,700        9.2 years        $18       31,000      $18
                               -------                                  -------
   $10 to $23..............    594,300        8.5 years        $14      187,280      $13
                               =======                                  =======
</TABLE>
 
                                      58
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 RESTRICTED STOCK PLAN
 
  The Company's Restricted Stock Plan provides for the granting of restricted
stock to certain employee and non-employee directors of the Company. The fair
market value of the stock allocations, based on the market price at date of
grant, is recorded as unearned compensation. Unearned compensation is
amortized over the periods to be benefited. The Company recorded compensation
cost related to the Restricted Stock Plan of $848 and $230 for 1996 and 1995,
respectively.
 
  A summary of the Company's Restricted Stock Plan as of December 31, 1996 and
1995 and changes during the years ending on those dates is presented below:
 
<TABLE>
<CAPTION>
                                                          FOR THE YEARS ENDED
                                                             DECEMBER 31,
                                                          --------------------
                                                            1996       1995
                                                          ---------  ---------
   <S>                                                    <C>        <C>
   Balance, beginning of year............................   148,200        --
     Granted.............................................    18,900    148,200
     Cancelled...........................................    (6,000)       --
                                                          ---------  ---------
   Balance, end of year..................................   161,100    148,200
                                                          =========  =========
   Weighted-average fair value of restricted shares
    granted during the year..............................       $18        $12
</TABLE>
 
17. FEES AND OTHER INCOME
 
  Fees and other income are composed of the following:
 
<TABLE>
<CAPTION>
                                              FOR THE YEARS ENDED DECEMBER 31,
                                              ---------------------------------
                                                 1996        1995       1994
                                              ----------- ---------- ----------
   <S>                                        <C>         <C>        <C>
   Loan charges and fees..................... $     3,259     $3,221     $3,213
   Deposit related fees......................       6,236      5,191      4,122
   Other charges and fees....................       1,115        355      1,547
                                              ----------- ---------- ----------
                                                  $10,610     $8,767     $8,882
                                              =========== ========== ==========
</TABLE>
 
18. OTHER OPERATING EXPENSES
 
  Other operating expenses are composed of the following:
 
<TABLE>
<CAPTION>
                                                FOR THE YEARS ENDED DECEMBER 31,
                                                --------------------------------
                                                   1996       1995       1994
                                                ---------- ---------- ----------
   <S>                                          <C>        <C>        <C>
   Marketing................................... $    1,976 $    1,107 $    1,405
   Insurance...................................        379      2,440      3,270
   Professional services.......................      2,944      2,902      4,076
   Outside processing..........................      4,118      2,893      2,683
   Other.......................................      4,782      4,426      3,675
                                                ---------- ---------- ----------
                                                $   14,199    $13,768    $15,109
                                                ========== ========== ==========
</TABLE>
 
                                      59
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
19. INCOME TAXES
 
  The components of the income tax benefit for the years ended December 31 are
as follows:
 
<TABLE>
<CAPTION>
                                             FOR THE YEARS ENDED DECEMBER 31,
                                             ------------------------------------
                                                1996         1995        1994
                                             -----------  -----------  ----------
   <S>                                       <C>          <C>          <C>
   Current
     Federal................................ $       334  $       136  $     --
     State..................................         896           99        --
   Deferred
     Federal................................      (6,323)      (6,363)       --
     State..................................         820          369        --
                                             -----------  -----------  ---------
                                             $    (4,273) $    (5,759) $     --
                                             ===========  ===========  =========
</TABLE>
 
  A reconciliation of the statutory income tax rate to the consolidated
effective income tax rate as well as a reconciliation of expected income tax
benefit, computed at the applicable statutory rate, to the actual income tax
benefit for the three years ended December 31, 1996, 1995, and 1994 follows:
 
<TABLE>
<CAPTION>
                                      FOR THE YEARS ENDED DECEMBER 31,
                          ------------------------------------------------------------
                                 1996                1995                 1994
                          ------------------- -------------------  -------------------
                                   PERCENTAGE          PERCENTAGE           PERCENTAGE
                                   OF PRETAX           OF PRETAX            OF PRETAX
                          AMOUNT     INCOME   AMOUNT     INCOME    AMOUNT      LOSS
                          -------  ---------- -------  ----------  -------  ----------
<S>                       <C>      <C>        <C>      <C>         <C>      <C>
Federal income tax at
 statutory rate.........  $ 4,722     34.00 % $ 1,938     34.00 %  $(9,148)   (34.00)%
Change in valuation
 allowance..............   (7,867)   (56.65)%  (8,002)  (140.38)%    9,952     36.99 %
State income taxes......    1,133      8.16 %     309      5.42 %      --        --
Tax bad debt recapture..   (2,790)   (20.09)%     --        --         --        --
Employee stock ownership
 plan...................      207      1.49 %     --        --         --        --
Other...................      322      2.31 %      (4)    (0.07)%     (804)    (2.99)%
                          -------    ------   -------   -------    -------    ------
                          $(4,273)   (30.78)% $(5,759)  (101.03)%  $   --      (0.00)%
                          =======    ======   =======   =======    =======    ======
</TABLE>
 
  The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                                1996     1995
                                                              --------  -------
   <S>                                                        <C>       <C>
   Deferred tax assets:
     Allowance for loan losses............................... $  3,783  $ 5,622
     Accrued pension.........................................    2,023    1,720
     Employee stock awards...................................      190      132
     Net operating loss carryforwards........................    5,448    4,261
     Alternative minimum tax credit carryforwards............      430      298
     Investment tax credit carryforwards.....................    1,721    1,721
     Other...................................................      956    1,549
                                                              --------  -------
       Total gross deferred tax assets.......................   14,551   15,303
                                                              --------  -------
   Deferred tax liabilities:
     Investment in real estate and bank premises.............   (2,754)  (1,442)
     Other...................................................     (888)     --
                                                              --------  -------
       Total gross deferred tax liabilities..................   (3,642)  (1,442)
                                                              --------  -------
   Net deferred tax asset prior to valuation allowance.......   10,909   13,861
   Valuation allowance.......................................      --    (7,867)
                                                              --------  -------
   Net deferred tax asset after valuation allowance.......... $ 10,909  $ 5,994
                                                              ========  =======
</TABLE>
 
                                      60
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  In accordance with SFAS 109, "Accounting for Income Taxes", Management
evaluated the income tax benefits associated with deductible temporary
differences, based on the weight of available evidence, as to whether it is
more likely than not that the income tax benefits would be realized. As a
result, a 100% valuation allowance against the Company's net deferred tax
asset was established at December 31, 1994. Management reviews the valuation
allowance on a periodic basis, and, based upon all available facts and
circumstances at that time, may adjust the level of the allowance.
 
  During both the fourth quarter of 1995, and the third quarter of 1996,
Management's evaluation of the weight of currently available evidence resulted
in the conclusion that it was more likely than not that the Company would
realize a portion of its net deferred tax asset which was reserved for at
those times. At December 31, 1995, Management reduced the Company's 100%
valuation allowance from $15,869 to $7,867, while at September 30, 1996,
Management reduced the remaining valuation allowance at that date of $5,229 to
zero. In both instances, Management's judgment was influenced by factors
including changes in the levels of actual and expected future taxable income
and anticipated reversals of net deductible temporary differences. As a result
of these adjustments the net change in the total valuation allowance for the
years ended December 31, 1996 and 1995 was a net decrease of $7,867 and
$8,002, respectively.
 
  Also in the third quarter of 1996, pursuant to the enactment of the Small
Business Jobs Protection Act during 1996, the Company was required, for tax
purposes, to change its method of accounting for bad debts. The change
required the Company to change from the reserve method to the specific charge-
off method. The Company recognized a one-time tax benefit of $2,790 during the
third quarter, representing the tax effects of pre-1988 loan loss reserves not
subject to recapture provisions. As a result of this third quarter activity,
the Company became fully taxable for financial reporting purposes beginning in
the fourth quarter of 1996. Certain future distribution in excess of the
Company's current earnings and profits would require the recapture of the
taxes related to the pre-1988 loan loss reserves that were not subject to
recapture under the Small Business Jobs Protection Act. The total tax
liability that would be subject to recapture for which no deferred tax
liability has been recorded is $2,790.
 
  At December 31, 1996, the Company had investment tax credit carryforwards of
approximately $1,721 which expire in years from 1998 through 2008. In
addition, the Company had alternative minimum tax credit carryforwards of
approximately $430 which have an indefinite utilization period. At December
31, 1996, the Company had federal net tax operating loss carryforwards of
approximately $5,223 which will expire in the years 2009 through 2010. The
Company has $225 of state net operating loss carryforwards as of December 31,
1996, which will expire in 1999.
 
  If certain substantial direct or indirect changes in the Company's ownership
should occur, there would be an annual limitation on the amount of
carryforwards (including certain net unrealized built-in losses) which can be
utilized for regular and alternative minimum tax purposes.
 
20. COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK
 
 OFF-BALANCE SHEET INSTRUMENTS
 
  The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk which are not reflected in the Balance Sheet.
The contract or notional amounts of these instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
 
                                      61
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company uses the same credit policies in making commitments and standby
letters of credit as it does for on-balance sheet instruments.
 
  Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary upon extension of credit, is based on
Management's credit evaluation of the counterparty. The Company's commitments
to extend credit, which includes unused lines of credit and commitments to
fund loans, were approximately $184,238 and $133,084 at December 31, 1996 and
1995, respectively.
 
  Standby letters of credit are conditional commitments issued to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Company's commitments under
standby letters of credit were $4,233 and $252 at December 31, 1996 and 1995,
respectively.
 
  Commitments to sell loans are contracts for delayed delivery of loans in
which the Company agrees to make delivery at a specific future date of a
specified instrument, at a specific price or yield. Risks arise from the
possible inability to meet the terms of the contracts and from movements in
interest rates. The Company had commitments to sell $11,603 and $16,054 of
loans at December 31, 1996 and 1995, respectively.
 
 LEASES
 
  The Company leases certain of its branch office facilities and equipment
under nonfinancing leases having various maturities to 2010. Certain of the
leases require payment of real estate taxes, insurance and maintenance. The
future minimum rental payments required under these leases are approximately
as follows:
 
<TABLE>
<CAPTION>
             YEAR ENDED DECEMBER 31,
             -----------------------
             <S>                                <C>
             1997.............................. $  576
             1998..............................    571
             1999..............................    576
             2000..............................    585
             2001..............................    510
             2002--2010........................  1,805
                                                ------
                                                $4,623
                                                ======
</TABLE>
 
  Total rental expense for 1996, 1995, and 1994 amounted to approximately
$475, $431, and $461, respectively.
 
 LITIGATION
 
  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.
 
                                      62
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
21. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
 
  Following is the quarterly financial information of the Company for 1996 and
1995:
 
<TABLE>
<CAPTION>
                          FIRST QUARTER  SECOND QUARTER  THIRD QUARTER   FOURTH QUARTER
                          -------------  --------------  --------------- --------------
                           1996   1995    1996    1995    1996     1995   1996    1995
                          ------ ------  ------- ------  -------  ------ ------- ------
<S>                       <C>    <C>     <C>     <C>     <C>      <C>    <C>     <C>
Net interest and divi-
 dend income............  $9,571 $9,260  $10,457 $9,251  $11,245  $9,439 $11,831 $9,410
Provision for possible
 loan losses............     700  1,153      750  1,202      750   1,002     750  1,002
Net gain (loss) on sale
 of loans...............     270     (6)     162     (4)     105      72      67    180
Net gain (loss) on sale
 of securities..........       2      4      --      10       62     --      192   (899)
Fees and other income...   2,309  2,048    2,575  2,188    2,761   2,099   2,965  2,432
Noninterest expense.....   8,836  9,325    9,122  8,888    9,643   8,746  10,137  8,466
Income tax expense (ben-
 efit)..................     212     39      278     74   (6,421)     50   1,658 (5,922)
                          ------ ------  ------- ------  -------  ------ ------- ------
Net income..............  $2,404 $  789  $ 3,044 $1,281  $10,201  $1,812 $ 2,510 $7,577
                          ====== ======  ======= ======  =======  ====== ======= ======
Earnings per share and
 pro forma earnings per
 share
Primary.................  $ 0.45 $ 0.15  $  0.56 $ 0.25  $  1.85  $ 0.35 $  0.45 $ 1.43
Fully diluted...........  $ 0.45 $ 0.15  $  0.56 $ 0.25  $  1.84  $ 0.34 $  0.45 $ 1.43
</TABLE>
 
22. 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 effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific capital guidelines that involve quantitative
measures of the Bank'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. As of
December 31, 1996, the Bank is considered well capitalized under the FDIC's
applicable prompt corrective action regulations.
 
  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 average assets. Management believes, as of December 31, 1996, that
the Company meets all capital adequacy requirements to which it is subject.
 
  As of December 31, 1996 the most recent notification from the FDIC
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage
ratios as set forth in the table below. There are no conditions or events
since that notification that management believes have changed the
institution's category.
 
                                      63
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  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.
 
<TABLE>
<CAPTION>
                                                                MINIMUM
                                                MINIMUM      REQUIREMENTS
                                             REQUIREMENTS     TO BE WELL
                                              FOR CAPITAL  CAPITALIZED UNDER
                                               ADEQUACY    PROMPT CORRECTIVE
                                  ACTUAL       PURPOSES    ACTION PROVISIONS
                              -------------- ------------- -------------------
                               AMOUNT  RATIO AMOUNT  RATIO  AMOUNT     RATIO
                              -------- ----- ------- ----- ---------- --------
<S>                           <C>      <C>   <C>     <C>   <C>        <C>
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%         N/A
  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%         N/A
  Bank....................... $105,300 14.0% $60,220 8.0%     $75,275    10.0%
AS OF DECEMBER 31, 1995:
Tier I Capital (to Average
 Assets)
  Bank....................... $ 79,197  7.6% $41,682 4.0%     $52,103     5.0%
Tier I Capital (to Risk
 Weighted Assets)
  Bank....................... $ 79,197 12.5% $25,343 4.0%     $38,015     6.0%
Total Capital (to Risk
 Weighted Assets)
  Bank....................... $ 87,101 13.8% $50,493 8.0%     $63,116    10.0%
</TABLE>
 
23. PARENT COMPANY FINANCIAL INFORMATION
 
  The following condensed balance sheet at December 31, 1996 and condensed
statements of operations and of cash flows for the period June 21, 1996 (date
of parent company formation) to December 31, 1996 for SIS Bancorp, Inc.
(parent company only) reflect the Company's investment in its wholly owned
subsidiary using the equity method of accounting. The company had no results
prior to June 21, 1996.
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
     CONDENSED BALANCE SHEET                                       1996
     -----------------------                              ----------------------
                                                          (DOLLARS IN THOUSANDS)
     <S>                                                  <C>
     ASSETS
     Cash and due from banks.............................        $    --
     Investment securities available for sale............             206
     Due from subsidiaries...............................             398
     Investment in subsidiaries..........................         101,416
                                                                 --------
       Total assets......................................        $102,020
                                                                 ========
     LIABILITIES AND STOCKHOLDERS' EQUITY
     Borrowings from subsidiaries........................        $    --
     Other liabilities...................................             103
                                                                 --------
       Total liabilities.................................             103
     Stockholders' equity................................         101,917
                                                                 --------
       Total liabilities and stockholders' equity........        $102,020
                                                                 ========
</TABLE>
 
 
                                      64
<PAGE>
 
                       SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
<TABLE>
<CAPTION>
                                                              FOR THE PERIOD FROM
                                                                JUNE 21, 1996 TO
     CONDENSED STATEMENT OF INCOME                             DECEMBER 31, 1996
     -----------------------------                           ----------------------
                                                             (DOLLARS IN THOUSANDS)
     <S>                                                     <C>
     Revenues
       Interest income on investments available for sale....        $     7
       Other income.........................................            --
                                                                    -------
         Total income.......................................              7
     Expenses
       Interest expense.....................................            --
       Other expenses.......................................            155
                                                                    -------
         Total expenses.....................................            155
     Income before income taxes and equity in undistributed
      income of subsidiaries................................           (148)
       Income taxes.........................................            --
                                                                    -------
     Income before equity in undistributed income of
      subsidiaries..........................................           (148)
     Equity in undistributed income of subsidiaries.........         18,308
                                                                    -------
     Net income.............................................        $18,160
                                                                    =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                              FOR THE PERIOD FROM
                                                                JUNE 21, 1996 TO
     CONDENSED STATEMENT OF CASH FLOWS                         DECEMBER 31, 1996
     ---------------------------------                       ----------------------
                                                             (DOLLARS IN THOUSANDS)
     <S>                                                     <C>
     CASH FLOWS FROM OPERATING ACTIVITIES
       Net income...........................................        $ 18,160
       Equity in undistributed earnings of subsidiaries.....         (18,308)
       Other, net...........................................             --
                                                                    --------
         Net cash used in operating activities..............            (148)
                                                                    --------
     CASH FLOWS FROM INVESTING ACTIVITIES
       Investment in subsidiaries...........................         (86,297)
       Purchases of investment securities...................            (257)
       Sale of investment securities........................              51
       Other, net...........................................             --
                                                                    --------
         Net cash used in investing activities..............         (86,503)
                                                                    --------
     CASH FLOWS FROM FINANCING ACTIVITIES
       Proceeds from issuance of common stock...............          86,547
       Advances from subsidiaries...........................             155
       Repayments of advances from subsidiaries.............             (51)
       Dividends paid.......................................             --
       Other, net...........................................             --
                                                                    --------
         Net cash provided by financing activities..........          86,651
                                                                    --------
     Net Increase in cash and due from banks................             --
     Beginning balance: cash and due from banks.............             --
                                                                    --------
     Ending balance: cash and due from banks................        $    --
                                                                    ========
</TABLE>
 
 
                                       65
<PAGE>
 
                      SIS BANCORP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
24. SUBSEQUENT EVENTS
 
  On January 23, 1997, the Company announced the declaration of its first
quarterly cash dividend in the amount of $0.12 per share payable on February
20, 1997 to shareholders of record as of the close of business on February 3,
1997. In addition, on that same date, the Company announced its Board of
Directors had authorized a share repurchase program and adopted a shareholder
rights plan.
 
  Under the share repurchase program, the Board of Directors has authorized
the Company to purchase up to 286,180 of its own shares, or up to 5% of the
common stock issued and outstanding as of December 31, 1996. The repurchased
shares will be held in treasury and will be available for issuance in
connection with various employee and director benefit programs.
 
  Under the shareholder rights plan each shareholder of record as of the close
of business on February 3, 1997 received one right for each share of common
stock held by such shareholder to purchase, upon the occurrence of certain
triggering events, one one-hundredth of a share of Series A Junior
Participating Preferred Stock of the Company at a purchase price of $100.00.
Until and unless the rights are triggered, the rights will be evidenced by the
common stock certificates directly, and will transfer automatically with the
transfer of any common stock. The initial issuance of the rights has no
dilutive effect on the outstanding shares of the Company or the Company's
earnings, is not taxable to the Company or to the shareholders, and does not
otherwise affect the trading of the Company's shares. If the rights are not
triggered or otherwise redeemed by the Board of Directors, the rights will
expire on January 22, 2007.
 
 
                                      66
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders of SIS Bancorp, Inc.
 
  In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, changes in stockholders' equity, and of
cash flows present fairly, in all material respects, the financial position of
SIS Bancorp, Inc. and its subsidiaries at December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
 
Price Waterhouse LLP
Boston, Massachusetts
January 23, 1997
 
 
                                      67
<PAGE>
 
                                   PART III
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURES
 
  None
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  (a) INFORMATION REGARDING DIRECTORS: The Directors of the Registrant are
listed below. The other information required by the response to this Item is
contained in the discussion under the caption "Information Regarding Directors
and Nominees" contained on pages 3 through 6 of the Proxy Statement filed as
Schedule 14A with the SEC, which is incorporated by reference herein.
 
<TABLE>
<CAPTION>
     NAME & PRINCIPAL OCCUPATION          POSITION HELD WITH COMPANY
     ---------------------------          --------------------------
     <S>                                  <C>
     Sr. Mary Caritas (Geary), S.P.       Director
      Retired, former President & CEO of
      Mercy Hospital
     John M. Naughton                     Chairman of the Board of Directors
      Retired, former Executive
      VicePresident,
      Massachusetts Mutual Life
      Insurance Co.
     Charles L. Johnson                   Director
      Consultant--Associated Energy
      Managers,
      investment management firm
     F. William Marshall, Jr.             Director, President and Chief
      President & CEO, SIS Bancorp, Inc.   Executive Officer
      and SIS Bank
     Thomas O'Brien                       Director
      Dean, School of Management
      University of Massachusetts
     William B. Hart, Jr.                 Director
      President, the Dunfey Group,
      an investment corporation
     Stephen A. Shatz                     Director
      Attorney, partner in Shatz,
      Schwartz & Fentin, P.C.
</TABLE>
 
  (b) PRINCIPAL OFFICERS OF THE COMPANY: The following table sets forth
certain information regarding the executive officers and other principal
officers of the Company and its subsidiaries. The other information required
by the response to this Item regarding those persons who are executive
officers of the Company is contained in the discussion under the caption
"Executive Officers of the Company and its Subsidiaries" contained on page 7
of the Proxy Statement filed as Schedule 14A with the SEC, which is
incorporated by reference herein.
 
<TABLE>
<CAPTION>
 NAME                     POSITION AND OFFICE WITH THE COMPANY
 ----                     ------------------------------------
 <C>                      <S>
 F. William Marshall, Jr. President & Chief Executive Officer, Director--SIS Bancorp,
                           Inc. and SIS Bank
 Frank W. Barrett         Executive Vice President/Credit & Commercial Lending Group--
                           SIS Bank
 B. John Dill             Executive Vice President--SIS Bank; President of Colebrook
                           Corporation
</TABLE>
 
                                      68
<PAGE>
 
<TABLE>
<CAPTION>
         NAME                       POSITION AND OFFICE WITH THE COMPANY
         ----                       ------------------------------------
 <C>                   <S>
 John F. Treanor       Executive Vice President, Treasurer & Chief Financial
                        Officer--SIS Bancorp, Inc. and SIS Bank
 Gilbert F. Ehmke      Senior Vice President & Chief Investment Officer--SIS Bancorp,
                        Inc. and SIS Bank
 Henry J. McWhinnie    Senior Vice President/Human Resources Group--SIS Bank
 Jeanne Rinaldo        Senior Vice President/Residential Mortgage Group-SIS Bank
 Christopher A. Sinton Senior Vice President/Retail Banking Group--SIS Bank
 Michael E. Tucker     Senior Vice President, General Counsel & Clerk--SIS Bancorp,
                        Inc. and SIS Bank
 Ting Chang            Vice President, Investor Relations & Corporate Planning-- SIS
                        Bancorp, Inc. and SIS Bank
 Laura Sotir Katz      Vice President & Controller--SIS Bancorp, Inc. and SIS Bank
 Brian Schwartz        Vice President & Director of Internal Auditing--SIS Bank
</TABLE>
 
  (c) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT: The information
required by the response to this Item is contained in the discussion under the
caption "Section 16(a) Compliance" contained on page 22 of the Proxy Statement
filed as Schedule 14A with the SEC, which is incorporated by reference herein.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The response to this Item is contained in the discussion under the captions
"Executive Compensation", "Employment Agreements", "Benefits Under Plans",
contained on Pages 8 through 20 of the Proxy Statement, which is incorporated
by reference herein.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The response to this Item is incorporated by reference from the discussion
under the headings "Stock owned by Directors and Management" on Page 4 of the
Proxy Statement, which is incorporated by reference herein.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
 
  The response to this Item is contained in the discussion under the captions
"Transactions with Certain Related Persons" and "Certain Business
Relationships" contained on Page 20 of the Proxy Statement, which is
incorporated by reference herein.
 
                                    PART IV
 
ITEM 14: EXHIBITS, FINANCIAL SCHEDULES AND REPORTS ON FORM 8-K
 
  (a) CONTENTS:
 
    (1) FINANCIAL STATEMENTS: All Financial Statements are included as Part
  II, Item 8 of this Report. The index is on page 35 of this Report.
 
    (2) FINANCIAL STATEMENT SCHEDULES: None
 
  (b) REPORTS ON FORM 8-K: None were filed during the fourth quarter of 1996.
 
                                      69
<PAGE>
 
  (c) EXHIBITS:
 
<TABLE>
<CAPTION>
    EXHIBIT NO.                          EXHIBIT                           LOCATION
    -----------                          -------                           --------
    <C>         <S>                                                        <C>
    (3)(a).     Articles of Organization of SIS Bancorp, Inc.                 (1)
    (3)(b).     By-laws of SIS Bancorp, Inc.                                  (1)
    4(a).       Specimen Common Stock Certificate
    10.         Material Contracts
    (a)         Employment agreements for Messrs. F. William Marshall,
                 Jr., Frank W. Barrett, B. John Dill, John F. Treanor,
                 Henry J. McWhinnie, Ms. Jeanne Rinaldo, Mr. Michael E.
                 Tucker                                                       (1)
    (b)         Employment agreements for Messrs. Gilbert F. Ehmke and
                 Christopher A. Sinton.                                       (2)
    (c)         Director and Management Stock Option Plan, as amended.        (2)
    (d)         Director and Management Restricted Stock Plan, as
                 amended.                                                     (2)
    (e)         Rights Agreement dated January 22, 1997 by and between
                 the Company and Chase Mellon Shareholder Services, as
                 Rights Agent                                                 (3)
    11.         Statement Regarding Computation of Per Share Earnings
    21.         Subsidiaries of the Registrant
    23.         Consent of Price Waterhouse, LLP.
</TABLE>
--------
Locations of Exhibits if not attached hereto:
(1) Exhibit is incorporated by reference to the Form 8-A Registration
    Statement filed by the Company with the Securities and Exchange Commission
    ("SEC") on June 21, 1996.
(2) Exhibit is incorporated by reference to the Form 10-Q for the quarter
    ending June 30, 1996.
(3) Exhibit is incorporated by reference to the Form 8-A Registration
    Statement filed by the Company with the SEC on January 23, 1997.
 
 
                                      70
<PAGE>
 
                                   SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF THE SECTION 13 OF THE SECURITIES EXCHANGE ACT
OF 1934, THE BANK HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
February 26, 1997
 
                                          Springfield Institution for Savings
 
                                              
                                          By: /s/ F. William Marshall, Jr. 
                                              --------------------------------
                                              F. William Marshall, Jr.,
                                              President and
                                              Chief Executive Officer
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE COMPANY
AND IN THE CAPACITIES ON THE DATES INDICATED.
 
 
SIGNATURE                            TITLE                        DATE
---------                            -----                        ----
 
By: /s/ F. William Marshall, Jr.     President, Chief             February 26, 
   -----------------------------      Executive Officer and       1997
   F. William Marshall, Jr.            Director
 
                                                                  
By: /s/ John F. Treanor              Executive Vice               February 26,
   -----------------------------      President, Chief            1997         
   John F. Treanor                    Financial Officer and            
                                      Treasurer              
 
                                     
By: /s/ Laura Sotir Katz             Vice President,              February 26,
   -----------------------------      Controller (Chief           1997        
   Laura Sotir Katz                   Accounting Officer)

                                     
By: /s/ John M. Naughton             Director, Chairman of        February 26,
   -----------------------------      the Board                   1997         
   John M. Naughton
 
                                     
By: /s/ Sr. Mary Caritas Geary       Director                     February 26,
   -----------------------------                                  1997         
   Sister Mary Caritas Geary, S.P.

                                     
By: /s/ Charles L. Johnson           Director                     February 26,
   -----------------------------                                  1997         
   Charles L. Johnson


By: /s/ Stephen A. Shatz             Director                     February 26,
   -----------------------------                                  1997         
   Stephen A. Shatz


By: /s/ Thomas O'Brien               Director                     February 26,
   -----------------------------                                  1997         
   Thomas O'Brien
                                                                  

By: /s/ William B. Hart, Jr.         Director                     February 26,
   -----------------------------                                  1997 
   William B. Hart, Jr.                                                    
 
                                       71