SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
September 30, 1997
SANDWICH BANCORP, INC.
________________________
(Exact name of registrant as specified in its charter)
Massachusetts Requested upon filing Applied for
______________ ______________________ ___________________
State or other (Commission File (I.R.S. Employer
jurisdiction Number) Identification No.
100 Old Kings Highway, Sandwich, Massachusetts 02563
______________________________________________ _____
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(508) 888-0026
Not Applicable
_________________________
(Former name or former address, if changed since last report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
_____________________________________________
On September 30, 1997, the Registrant completed the
acquisition of The Sandwich Co-operative Bank (the "Bank")
pursuant to a Plan of Reorganization and Acquisition, dated
January 27, 1997, and the Supplement Thereto, pursuant to which
the Bank became a wholly owned subsidiary of the Registrant, a
newly formed holding company incorporated by the Bank for that
purpose. Under the terms of the Plan of Reorganization and
Acquisition, each outstanding share of the common stock, $1.00
par value per share, of the Bank (the "Bank's Common Stock") was
converted into one share of the common stock, $1.00 par value
per share, of the Registrant (the "Common Stock") and the former
holders of the Bank's Common Stock became the holders of all the
outstanding Common Stock. The Registrant has thereby become the
successor issuer to the Bank.
DESCRIPTION OF CAPITAL STOCK
____________________________
The Articles of Organization of the Registrant authorize
the issuance of up to 15,000,000 shares of Common Stock and up
to 5,000,000 shares of serial preferred stock, $1.00 par value
per share. Effective upon consummation of the holding company
reorganization there were 1,918,695 shares of Common Stock
outstanding. Each share of the Common Stock has the same
relative rights and is identical in all respects with every
other share of Common Stock.
COMMON STOCK
Voting Rights. The holders of the Common Stock possess
exclusive voting rights in the Registrant, except to the extent
that shares of serial preferred stock issued in the future may
have voting rights, if any. Each holder of shares of the Common
Stock is entitled to one vote for each share held of record on
all matters submitted to a vote of holders of shares of the
Common Stock, without any right to cumulate voting in the
election of directors.
The Articles of Organization of the Registrant require the
holders of at least two-thirds of the Registrant's outstanding
shares of voting stock to approve certain "Business
Combinations," as defined therein, and related transactions.
The approval of the holders of at least two-thirds of the
outstanding voting stock of the Registrant is required in
connection with any such transaction involving a "Related
Person," except in cases where the proposed transaction has been
approved in advance by a majority of those members of the
Registrant's Board of Directors who were directors prior to the
time when the "Related Person" became a "Related Person" and are
unaffiliated with the "Related Person." The term "Related
Person" is defined to include any individual, corporation,
partnership or other entity which together with its affiliates
owns beneficially or controls, directly or indirectly, 10% or
more of the outstanding shares of voting stock of the
Registrant. These provisions apply to any "Business Combination"
which is defined to include (1) any merger or consolidation of
the Registrant with or into any Related Person; (2) any sale,
lease, exchange, transfer or other disposition, including
without limitation a mortgage, or any other security device, of
all or any substantial part of the assets of the Registrant
(including without limitation any voting securities of a
subsidiary) or of a subsidiary, to a "Related Person" (the term
"substantial part" is defined to include more than 25% of the
fair market value of the Registrant's total assets as of the end
of its most recent fiscal year); (3) any merger or consolidation
of a "Related Person" with or into the Registrant or a subsidiary
of the Registrant; (4) any sale, lease, exchange,
or transfer or other disposition of all or a substantial part of
the assets of a "Related Person" to the Registrant or a
subsidiary of the Registrant; (5) the issuance of any securities
of the Registrant or a subsidiary of the Registrant to a Related
Person; (6) the acquisition by the Registrant or a subsidiary of
the Registrant of any securities of the "Related Person"; (7) any
reclassification of the Common Stock or any recapitalization
involving Stock; and (8) any agreement, contract or other
arrangement providing for any of the previously described
transactions.
Amendments to certain provisions of the Registrant's
Articles of Organization require the affirmative vote of at
least two-thirds of the outstanding shares entitled to vote
thereon.
Amendments to the Registrant's Bylaws require the
affirmative vote of at least two-thirds of the outstanding
shares entitled to vote thereon. Additionally, the Bylaws may
be amended by the Registrant's Board of Directors upon the
affirmative vote of not less than two-thirds of the directors
then in office.
LIMITATIONS ON ACTIONS BY STOCKHOLDERS. The Registrant's
Articles of Organization provide that special meetings of the
stockholders may only be called by the Board of Directors, the
President or a duly constituted committee of the board, and no
action may be taken by consent of the stockholders without a
meeting, unless all of the stockholders entitled to vote on the
matter consent in writing and the written consents are filed
with the records of the meetings of stockholders. The Articles
of Organization provide that stockholder nominations for
directors must be delivered to the Clerk of the Registrant, not
less than 30 nor more than 60 days prior to a meeting of
stockholders to elect directors.
CLASSIFIED BOARD OF DIRECTORS. The Articles of
Organization of the Registrant provide for a classified Board of
Directors, consisting of three substantially equal classes of
directors, each serving for a three-year term.
REMOVAL OF DIRECTORS. The Registrant's Articles of
Organization provide generally that a director may be removed
for cause as defined therein only by the affirmative vote of the
holders of at least a majority of the outstanding shares of
stock entitled to vote generally in the election of directors at
a meeting of stockholders called for that purpose. The
Registrant's Articles of Organization also permit removal of
directors without cause, but only by vote of at least two-thirds
of the outstanding shares of Common Stock entitled to vote
generally in the election of directors at a meeting of
stockholders called for that purpose.
DIVIDENDS. The Registrant may, from time to time, declare
dividends out of funds legally available therefor to the holders
of the Common Stock who will be entitled to share equally in any
such dividends.
PREEMPTIVE RIGHTS. The stockholders of the Registrant will
not have preemptive rights.
LIQUIDATION. In the event of any liquidation, dissolution
or winding up of the Registrant, each holder of shares of the
Common Stock would be entitled to receive, after payment of all
debts and liabilities of the Registrant, a pro rata portion of
the remaining assets of the Registrant available for
distribution, in cash or in kind, to holders of the Common
Stock. If any shares of serial preferred stock are issued, the
holders thereof may have a priority in liquidation or
dissolution over the holders of the Common Stock.
OTHER CHARACTERISTICS. The Common Stock is not subject to
call for redemption, and, assuming receipt of sufficient
consideration by the Registrant, the shares of the Common Stock
are fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR. Registrar and Transfer
Company acts as transfer agent and registrar for the Common
Stock.
SERIAL PREFERRED STOCK
The Board of Directors of the Registrant is authorized to
issue up to 5,000,000 shares of preferred stock (which may be
issued in series) and to fix the powers, designations and
preferences, or other rights, of the shares of each series and
the qualifications, limitations and restrictions thereof. Each
share of each series of serial preferred stock must have the
same relative rights as and be identical in all respects with
all the other shares of the same series. The serial preferred
stock may rank prior to the Common Stock as to dividend rights,
liquidation preferences, or both, and may have full or limited
voting rights (including multiple voting rights and voting
rights as a class), and may be convertible into shares of Common
Stock. None of the 5,000,000 authorized shares of serial
preferred stock of the Registrant has been issued.
Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits
__________________________________________________
Listed below are the financial statements filed as a part
of this report.
(a)(1) Financial Statements of Business Acquired.
Independent Auditors' Report
Consolidated Financial Statements as of December
31, 1996 and 1995
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Stockholders'
Equity for the Years Ended December 31, 1996, 1995
and 1994
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements for the
Years Ended December 31, 1996, 1995 and 1994
Consolidated Balance Sheets as of December 31, 1996
and the Six Months Ended June 30, 1997 (unaudited)
Consolidated Statements of Operations for the Three
and Six Month Periods Ended June 30, 1997 and 1996
(unaudited)
Consolidated Statements of Changes in Stockholders'
Equity for the Year Ended December 31, 1996 and
the Six Months Ended June 30, 1997 (unaudited)
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1997 and 1996 (unaudited)
Notes to Consolidated Financial Statements for the
Six Months Ended June 30, 1997 and 1996 (unaudited)
Prior to the consummation of the holding company
reorganization, the Registrant did not have any significant
assets or liabilities. Accordingly no financial statements of
the Registrant are presented and the pro forma consolidated
financial statements of the Registrant would reflect no material
differences from the consolidated financial statements of the
Bank for the years ended December 31, 1996, 1995 and 1994 and
the six months ended June 30, 1997 set forth below.
Independent Auditors' Report
================================================================
The Board of Directors
The Sandwich Co-operative Bank
We have audited the accompanying consolidated balance sheets of
The Sandwich Co-operative Bank and subsidiaries as of December
31, 1996 and 1995 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for
each of the years in the three year period ended December 31,
1996. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is
to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with generally accepting
auditing standards. Those standards 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. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of The Sandwich Co-operative Bank and subsidiaries at
December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three year
period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 24, 1997
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
December 31, December 31,
1996 1995
----------- ------------
Assets (In thousands, except share and per share data)
Cash and due from banks (note 14) $ 11,543 $ 14,061
Federal funds sold 175 2,011
Total cash and cash equivalents 11,718 16,072
-------- --------
Other short-term investments (note 2) 636 910
Investment securities (notes 3 and 9):
Available for sale (amortized cost of $13,262
and $25,693, at December 31, 1996 and
December 31, 1995, respectively) 13,312 25,770
Held to maturity (fair value of $99,128 and
$89,388, at December 31, 1996 and
December 31, 1995, respectively) 99,648 89,468
-------- --------
Total investment securities 112,960 115,238
-------- --------
Loans, less allowance for loan losses of
$3,741 in 1996 and $3,674 in 1995
(notes 4, 5, 9 and 14) 317,103 270,421
Stock in Federal Home Loan Bank of Boston,
at cost (notes 7 and 9) 2,670 2,670
Accrued interest receivable 2,680 2,741
The Co-operative Central Bank
Reserve Fund 965 965
Real estate acquired by foreclosure 465 367
Investments in real estate 571 585
Office properties and equipment (note 6) 6,015 6,167
Core deposit intangible 1,966 2,550
Deferred income tax asset, net (note 10) 2,469 2,463
Prepaid expenses and other assets 4,337 5,366
-------- --------
Total assets $464,555 $426,515
======== ========
Liabilities and Stockholders' Equity
Liabilities
Deposits (note 8) $388,249 $377,973
Borrowed funds (note 9) 32,073 8,148
Escrow deposits of borrowers 915 1,579
Income taxes payable, net (note 10) 282 250
Accrued expenses and other liabilities 4,403 2,821
-------- --------
Total liabilities 425,922 390,771
-------- --------
Commitments and contingencies (notes 4, 13 and 14)
Stockholders' equity (notes 3, 11 and 12)
Preferred stock, par value $1.00 per share;
authorized 5,000,000 shares; none issued
or outstanding -- --
Common stock, par value $1.00 per share;
authorized 15,000,000 shares;
1,901,565 and 1,850,299 issued and outstanding,
respectively 1,902 1,850
Additional paid-in capital 19,323 18,632
Retained earnings 17,381 15,223
Net unrealized gain on investment securities
available for sale 27 39
Total stockholders' equity 38,633 35,744
-------- --------
Total liabilities and stockholders' equity $464,555 $426,515
======== ========
See accompanying notes to consolidated financial statements.
/TABLE
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended
December 31,
1996 1995 1994
---- ---- ----
(In thousands, except per share amounts)
Interest and dividend income
Interest on loans $24,680 $22,218 $17,397
Interest and dividends on investment
securities available for sale 1,562 1,719 1,612
Interest on investment securities held
to maturity 5,833 6,027 4,684
Interest on short-term investments 166 640 294
The Co-operative Central Bank Reserve Fund 68 69 90
------- ------- -------
Total interest and dividend income 32,309 30,673 24,077
------- ------- -------
Interest expense
Deposits:
Savings accounts 3,660 4,338 3,898
Certificates of deposit 10,973 9,940 5,476
------- ------- -------
Total deposits 14,633 14,278 9,374
Borrowed funds 1,159 555 1,198
------- ------- -------
Total interest expense 15,792 14,833 10,572
------- ------- -------
Net interest and dividend income 16,517 15,840 13,505
Provision for loan losses (note 5) 265 597 340
------- ------- -------
Net interest and dividend income after
provision for loan losses 16,252 15,243 13,165
------- ------- -------
Non-interest income
Service charges 1,781 1,740 1,530
Mortgage loan servicing fees 252 248 224
Gain on sale of branch deposits -- 214 --
Gain on sale of loans 250 40 194
Other 556 476 283
------- ------- -------
Total non-interest income 2,839 2,718 2,231
------- ------- -------
Non-interest expense
Salaries and employee benefits 5,999 5,757 5,245
Occupancy and equipment 1,587 1,325 1,214
FDIC deposit insurance 112 469 693
SAIF Special Assessment 280 -- --
Advertising 357 358 321
Data processing service fees 702 665 633
Foreclosed property expense 46 152 173
Loss on writedown of real estate
investments -- 305 91
Amortization of core deposit intangible 584 660 529
Other 2,666 2,665 2,517
------- ------- -------
Total non-interest expense 12,333 12,356 11,416
------- ------- -------
Income before income tax expense 6,758 5,605 3,980
Income tax expense (note 10) 2,621 2,169 1,396
------- ------- -------
Net income $ 4,137 $ 3,436 $ 2,584
======= ======= =======
Net income per common and common equivalent share $ 2.13 $ 1.82 $ 1.38
======= ======= =======
Average common and common equivalent shares
outstanding 1,940 1,891 1,876
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders' Equity
Net
Net unrealized
unrealized loss on
loss on investment
Additional marketable securities
Common paid-in Retained equity available
Stock capital earnings securities for sale, net Total
------ ---------- -------- ----------- ------------- -----
Balance at December 31, 1993 $1,823 $18,406 $11,021 $(53) $ -- $31,197
Implementation of change in accounting
for investment securities -- -- -- 53 59 112
Net income -- -- 2,584 -- -- 2,584
Dividends declared ($0.29 per share) -- -- (530) -- -- (530)
Stock options exercised 10 42 -- -- -- 52
Increase in net unrealized loss on
investment securities available for
sale -- -- -- -- (596) (596)
------ ------- ------- ---- ------ -------
Balance at December 31, 1994 1,833 18,448 13,075 -- (537) 32,819
Net income -- -- 3,436 -- -- 3,436
Dividends declared ($0.70 per share) -- -- (1,288) -- -- (1,288)
Stock options exercised 17 184 -- -- -- 201
Decrease in net unrealized loss on
investment securities available for
sale -- -- -- -- 576 576
------ ------- ------- ---- ------ -------
Balance at December 31, 1995 1,850 18,632 15,223 -- 39 35,744
Net income -- -- 4,137 -- -- 4,137
Dividends declared ($1.05 per share) -- -- (1,979) -- -- (1,979)
Stock options exercised 52 691 -- -- -- 743
Decrease in net unrealized gain on
investment securities available for
sale -- -- -- -- (12) (12)
------ ------- ------- ---- ------ -------
Balance at December 31, 1996 $1,902 $19,323 $17,381 $ -- $ 27 $38,633
====== ======= ======= ==== ====== =======
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Years ended
December 31,
1996 1995 1994
---- ---- ----
(In thousands)
Cash flows from operating activities
Net income $ 4,137 $ 3,436 $ 2,584
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 265 597 340
Provision for loss and writedowns of real
estate acquired by foreclosure 48 96 145
Depreciation and amortization 1,422 1,592 1,809
(Increase) decrease in:
Accrued interest receivable 61 (47) (548)
Deferred income tax asset, net 9 (528) (442)
Other assets 1,029 (3,626) (280)
Increase(decrease)in:
Escrow deposits of borrowers (664) 914 (5)
Income tax payable 32 (455) 232
Accrued expenses and other liabilities 1,582 (398) 1,078
Gain on sales of loans, net (250) (40) (194)
Principal balance of loans originated for sale (20,827) (14,752) (20,336)
Principal balance of loans sold 20,999 14,363 20,142
Gain on sales of investment securities, net -- -- (6)
Gain on sales of real estate acquired by
foreclosure (65) (16) (187)
------- ------- -------
Total adjustments 3,641 (2,300) 1,748
------- ------- -------
Net cash provided by operating activities 7,778 1,136 4,332
------- ------- -------
Cash flows from investing activities
Purchases of investment securities available
for sale (145) (8,718) (11,884)
Purchases of investment securities held to
maturity (29,948) (6,054) (53,091)
Proceeds from sales of investment securities
available for sale -- -- 367
Proceeds from maturities and paydowns of
investment securities available for sale 12,495 6,457 7,891
Proceeds from maturities and paydowns of
investment securities held to maturity 19,675 15,120 23,642
(Increase) decrease in:
Short-term investments 274 773 (1,463)
Loans (48,276) (20,405) (43,184)
Real estate acquired by foreclosure -- (52) (108)
Stock in Federal Home Loan Bank of Boston -- -- (1,092)
Investments in real estate 14 229 244
Proceeds from sale of real estate acquired by
foreclosure 1,326 983 2,134
Purchase of office properties and equipment (512) (1,009) (518)
------- ------- -------
Net cash used by investing activities (45,097) (12,676) (77,062)
------- ------- -------
Cash flows from financing activities
Net cash received in branch purchases -- -- 44,362
Net increase in deposits 10,276 11,830 31,633
Advances from the Federal Home Loan Bank
of Boston 69,884 11,047 53,578
Repayment of Federal Home Loan Bank advances (45,959) (15,764) (55,013)
Cash dividends paid (1,979) (1,288) (530)
Net cash paid for deposits sold -- 8,134 --
Stock options exercised 743 201 52
------- ------- -------
Net cash provided by financing activities 32,965 14,160 74,082
------- ------- -------
Net increase (decrease) in cash and federal
funds sold (4,354) 2,620 1,352
Cash and federal funds sold, beginning of year 16,072 13,452 12,100
------- ------- -------
Cash and federal funds sold, end of year $11,718 $16,072 $13,452
======= ======= =======
Cash paid for
Interest on deposits $14,635 $14,606 $ 9,270
======= ======= =======
Interest on borrowed funds $ 615 $ 582 $ 1,212
======= ======= =======
Income taxes, net $ 2,481 $ 3,152 $ 1,605
======= ======= =======
Other non-cash activities
Deferred taxes on change in unrealized (gain)
loss on securities available for sale $ 15 $ (296) $ 259
======= ======= =======
Additions to real estate acquired by
foreclosure $ 1,407 $ 409 $ 86
======= ======= =======
Assets and liabilities acquired in branch
purchases
Loans -- -- $ 99
Office properties and equipment -- -- 38
Core deposit and other intangibles -- -- 1,776
Other assets -- -- 136
Deposits -- -- 46,411
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Years ended December 31, 1996, 1995 and 1994
(1) Basis of Presentation and Summary of Significant Accounting
Policies
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of Sandwich Co-operative Bank (the Bank ) and its
wholly owned subsidiaries, The Sextant Corporation, Redeil
Corporation, Sandwich Securities Corporation and Sextant
Securities Corporation. All significant intercompany accounts
and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have
been prepared in conformity with generally accepted accounting
principles and general practices within the banking industry. In
preparing the financial statements, management is required to
make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the period. Actual results could
differ from those estimates.
Material estimates that are particularly susceptible to
change relate to the determination of the allowance for loan
losses, the valuation of real estate acquired by foreclosure and
realizability of the net deferred tax asset. These
estimates are dependent on future economic and overall business
conditions.
Certain reclassifications have been made to previously
reported balances to conform with the current period s
presentation.
On January 28, 1997 Sandwich Co-operative Bank announced
that its Board of Directors had approved a plan providing for
the formation of a holding company with the Bank as the
principal subsidiary. Under the plan, each existing share of the
Bank's Common Stock would be converted into one share of Common
Stock in the new holding company. As a result of this
reorganization, the Bank's stockholders would become the owners
of the newly formed holding company, which in turn would own all
of the outstanding stock of the Bank. Implementation of the plan
is subject to regulatory and stockholder approval. The holding
company formation will result in no change to the Bank's
business, management, office locations or customer service, and
the holding company's corporate documents are not expected to
include any additional anti-takeover provisions.
General
The Sandwich Co-operative Bank (the "Bank") was organized as a
Massachusetts chartered co-operative bank in 1885. The Bank
merged with Wareham Co-operative Bank in May 1982. In July 1986,
the Bank converted from mutual to stock form through the sale
and issuance of 1,820,833 shares of common stock, par value
$1.00 per share (the "Common Stock"). Since 1986, the Bank's
deposits have been insured by the Federal Deposit Insurance
Corporation ("FDIC"), an agency of the federal government, up to
$100,000 per insured depositor, with additional insurance to the
total amount of the deposit provided by the Share Insurance Fund
of The Co-operative Central Bank (the "Central Bank"), a deposit
insuring entity chartered by the Commonwealth of Massachusetts.
The Bank is subject to regulation by the Massachusetts
Commissioner of Banks ("Commissioner") and the FDIC.
Investment Securities
Investment securities that the Bank has the positive intent and
ability to hold to maturity are classified as held-to-maturity
and reported at amortized cost; debt and equity securities that
are bought and held principally for the purpose of selling in
the near term are classified as trading and reported at fair
value, with unrealized gains and losses included in earnings;
and debt and equity securities not classified as either
held-to-maturity or trading are classified as available-for-sale
and reported at fair value, with unrealized gains and losses
excluded from earnings and reported as a separate component of
stockholders equity, net of applicable taxes.
Securities held to maturity, including bonds,
mortgage-backed securities & CMOs are stated at cost, adjusted
for amortization of premiums or accretion of discounts,
calculated using a method which approximates the interest
method. The basis for valuation reflects management s intention
and ability to hold these securities to maturity.
Securities available for sale consisting of government
bonds, adjustable rate mortgage-backed securities and marketable
equity securities are stated at fair value, with unrealized
gains and losses, net of tax, excluded from earnings and
reported as a separate component of stockholders equity until
realized. Fair value is based upon quoted market prices or
dealer quotes as of the reporting date.
Gains and losses on the sale of investment securities are
recognized at the time of sale on a specific identification
basis. Unrealized losses deemed to be other than temporary
declines in value are charged to operations.
Loans
Loans are reported at their principal amount outstanding, net of
any unearned discount and deferred loan fees. Interest income on
loans is credited to income based on loan principal amounts
outstanding at appropriate interest rates.
Unearned discount and premium on loans is credited or
charged to income on a basis which approximates the interest
method.
Notes to Consolidated Financial Statements
Accrual of interest income on loans is discontinued and
unpaid accrued interest is reversed when management determines
that borrowers will be unable to meet contractual obligations
and/or when loans are ninety days or more in arrears, except in
certain instances where management believes that collateral
held by the Bank is clearly sufficient for full satisfaction of
both principal and interest. Loans will be removed from
non-accrual when the principal and interest become current and
the loan is considered fully collectable.
Loan origination fees and certain direct origination costs
are offset and the resulting net amount is deferred and
amortized as an adjustment of the yield on the related loans.
Loans held for sale are carried at the lower of cost or
estimated fair value. Fair value is determined based on
outstanding investor commitments or, in the absence of such
commitments, current investor yield requirements.
The Bank accounts for impaired loans, except loans
accounted for at fair value or at the lower of cost or fair
value, at the present value of the expected future cash flows
discounted at the loans effective interest rate or the fair
value of the collateral if the loan is collateral dependent.
Impaired loans include commercial, commercial real estate and
individually significant mortgage or consumer loans for which it
is probable the Bank will not collect all amounts due according
to the terms of the loan agreement. Impairment on troubled debt
restructurings is measured using the premodification rate of
interest.
On January 1, 1996 the bank adopted, the Financial
Accounting Standards Board's Statements of Financial Accounting
Standards (SFAS No. 122, Accounting for Mortgage Servicing
Rights, an Amendment of FASB Statement No. 65 ). The statement
requires the Bank to recognize as separate assets rights to
service mortgage loans for others, however those servicing
rights are acquired. The adoption did not have a material impact
on the Bank s financial statements.
In June 1996, the Financial Accounting Standards Board
issues SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS No.
125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December
31, 1996 and is to be applied prospectively. However, SFAS No.
127 "Deferral of the Effective Date of Certain Provisions of
SFAS No. 125," requires the deferral of implementation as it
relates to repurchase agreements, dollar-rolls, securities
lending and similar transactions until years beginning after
December 31, 1997. Earlier or retrospective applications of this
statement is not permitted. This Statement provides accounting
and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent
application of a financial-components approach that
focuses on control. It distinguishes transfers of financial
assets that are sales from transfers that are secured
borrowings. Management of the Bank does not expect that adoption
of these statements will have a material impact on the Bank's
financial position, results of operations, or liquidity.
Allowance for Loan Losses
The allowance for loan losses is available for future credit
losses inherent in the loan portfolio. The allowance is
increased by provisions charged to operations on the basis of
many factors including the risk characteristics of the
portfolio, current economic conditions and trends in loan
delinquencies and charge-offs. Realized losses, net of
recoveries, are charged directly to the allowance.
While management uses the information available in
establishing the allowance for loan losses, future adjustments
to the allowance may be necessary if economic conditions differ
substantially from the assumptions used in making the
evaluation. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review
the Bank s allowance for loan losses. Such agencies may require
the Bank to recognize additions to the allowance based on
judgments different from those of management.
Investments in Real Estate
The Bank s subsidiary, The Sextant Corporation, has an
investment in a real estate partnership. The Bank accounts for
its investment under the equity method of accounting. A summary
of financial condition and results of operations for this
investment has not been presented since such amounts are not
material to the consolidated financial statements of the Bank.
Real Estate Acquired by Foreclosure
Real estate acquired by foreclosure is comprised of properties
acquired through foreclosure proceedings or acceptance of a deed
in lieu of foreclosure. Real estate acquired by foreclosure is
initially recorded at the lower of the carrying value of the
loan or the fair value of the property minus costs to sell. Fair
value is based upon a market appraisal prepared by a State
certified appraiser not more than 30 days prior to the date
of the foreclosure. Losses arising from the acquisition of such
properties are charged against the allowance for loan losses.
Operating expenses and any subsequent provisions to reduce
the carrying value to fair value minus cost to sell are charged
to current period earnings. Gains upon disposition are reflected
in earnings as realized. Realized losses are charged to the
valuation allowance.
Office Properties and Equipment
Office properties and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and
amortization are computed on the straight-line method over the
estimated useful lives of the related assets or terms of leases.
Pension Costs
The Bank accounts for pension benefits on the net periodic cost
method for financial reporting purposes. This method recognizes
the compensation cost of an employees pension benefit over that
employee s approximate service period.
Notes to Consolidated Financial Statements
Core Deposit Intangible
Core deposit and other intangibles are amortized to expense over
a period of ten years using an accelerated method. The
unamortized balance of these intangibles are evaluated
periodically for their recoverability.
Income Taxes
The Bank recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities
are established for the temporary differences between the
accounting basis and the tax basis of the Bank s assets and
liabilities at enacted tax rates expected to be in effect when
the amounts related to such temporary differences are realized
or settled. The Bank s deferred tax asset is reviewed quarterly
and adjustments to such asset are recognized as deferred income
tax expense or benefit based on management s judgments relating
to the realizability of such asset. The deferred tax asset is
adjusted for changes in the federal and state tax
rate.
Earnings Per Share
Earnings per share is determined by dividing net income by the
average number of common shares and common stock equivalents
outstanding, net of shares assumed to be repurchased using the
treasury stock method. Common stock equivalents arise from the
assumed exercise of outstanding stock options, if dilutive.
(2) Other Short-term Investments
A comparative summary of other short-term investments follows:
(In thousands) December 31, December 31,
1996 1995
------------ ------------
Tax anticipation notes $570 $756
Money market funds 66 154
---- ----
$636 $910
==== ====
(3) Investment Securities
A comparative summary of investment securities follows
(mortgage-backed securities and CMOs are shown at their final
maturity, but are expected to have shorter average lives); the
Bank does not own Callable securities.
December 31, 1996
-------------------------------------------
Held to maturity Available for sale
-------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------- -------------------
U.S. Government obligations:
Maturing within 1 year . . . . . . . . . . $12,015 $12,035 $ 2,000 $ 1,994
Maturing after 1 year
but within 5 years . . . . . . . . . . . 10,462 10,492 -- --
------- ------- -------- --------
22,477 22,527 2,000 1,994
------- ------- -------- --------
Collateralized mortgage obligations (CMOs):
Maturing within 1 year . . . . . . . . . . 1,436 1,436 -- --
Maturing after 1 year
but within 5 years . . . . . . . . . . . 6,384 6,312 -- --
Maturing after 5 years
but within 10 years. . . . . . . . . . . 740 753 -- --
Maturing after 10 years. . . . . . . . . . 56,220 55,708 -- --
------- ------- -------- --------
64,780 64,209 -- --
------- ------- -------- --------
Mortgage-backed securities:
Maturing after 1 year
but within 5 years . . . . . . . . . . . -- -- 147 147
Maturing after 10 years. . . . . . . . . . 12,391 12,392 8,271 8,343
------- ------- -------- --------
12,391 12,392 8,418 8,490
------- ------- -------- --------
Other bonds and obligations:
Maturing within one year . . . . . . . . . -- -- -- --
Maturing after 1 year
but within 5 years . . . . . . . . . . . -- -- -- --
------- ------- -------- --------
-- -- -- --
------- ------- -------- --------
Marketable equity securities:
Mortgage-backed mutual fund. . . . . . . . -- -- 2,520 2,510
Common and preferred stocks. . . . . . . . -- -- 324 318
------- ------- -------- --------
-- -- 2,844 2,828
------- ------- -------- --------
$99,648 $99,128 $ 13,262 $ 13,312
======= ======= ======== ========
December 31, 1995
-------------------------------------------
Held to maturity Available for sale
-------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------- -------------------
U.S. Government obligations:
Maturing within 1 year . . . . . . . . . . $ 2,522 $ 2,534 $ 8,758 $ 8,828
Maturing after 1 year
but within 5 years . . . . . . . . . . . 12,072 12,172 4,007 4,005
------- ------- -------- -------
14,594 14,706 12,765 12,833
------- ------- -------- -------
Collateralized mortgage obligations (CMOs):
Maturing within 1 year . . . . . . . . . . -- -- -- --
Maturing after 1 year
but within 5 years . . . . . . . . . . . 7,547 7,609 -- --
Maturing after 5 years
but within 10 years. . . . . . . . . . . 6,022 6,001 -- --
Maturing after 10 years. . . . . . . . . . 57,385 57,077 -- --
------- ------- -------- -------
70,954 70,687 -- --
------- ------- -------- --------
Mortgage-backed securities:
Maturing after 1 year
but within 5 years . . . . . . . . . . . -- -- 152 152
Maturing after 10 years. . . . . . . . . . 1,358 1,390 10,031 10,062
------- ------- -------- -------
1,358 1,390 10,183 10,214
------- ------- -------- -------
Other bonds and obligations:
Maturing within one year . . . . . . . . . 707 707 -- --
Maturing after 1 year
but within 5 years . . . . . . . . . . . 1,853 1,898 -- --
------- ------- -------- --------
2,562 2,605 -- --
------- ------- -------- --------
Marketable equity securities:
Mortgage-backed mutual fund. . . . . . . . -- -- 2,375 2,369
Common and preferred stocks. . . . . . . . -- -- 370 354
------- ------- -------- --------
-- -- 2,745 2,723
------- ------- -------- --------
$89,468 $89,388 $ 25,693 $ 25,770
======= ======= ======== ========
Notes to Consolidated Financial Statements
A comparative summary of mortgage-backed securities and CMO's
follows:
(In thousands) December 31, 1996 December 31, 1995
--------------------- ---------------------
Amortized Fair Amortized Fair
cost value cost value
---------------------- ---------------------
FHLMC. . . . . . . . . . . . . . . $18,820 $18,720 $17,006 $16,859
FNMA . . . . . . . . . . . . . . . 24,586 24,408 24,028 24,095
GNMA . . . . . . . . . . . . . . . 3,982 4,068 1,358 1,390
Non-agency . . . . . . . . . . . . 38,201 37,895 40,103 39,947
------- ------- ------- -------
$85,589 $85,091 $82,495 $82,291
======= ======= ======= =======
A comparative summary of gross unrealized gains and losses
pertaining to investment securities are summarized as follows:
December 31, 1996
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------
Held to Maturity
U.S. Government obligations. . . . . . . $22,477 $ 50 $ -- $22,527
Collateralized mortgage
obligations. . . . . . . . . . . . . . 64,780 209 (780) 64,209
Mortgage-backed securities . . . . . . . 12,391 88 (87) 12,392
Other bonds and obligations. . . . . . . -- -- -- --
------- ---- ----- -------
$99,648 $347 $(867) $99,128
======= ==== ===== =======
December 31, 1995
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------
Held to Maturity
U.S. Government obligations. . . . . . . $14,594 $112 $ -- $14,706
Collateralized mortgage
obligations. . . . . . . . . . . . . . 70,954 313 (580) 70,687
Mortgage-backed securities . . . . . . . 1,358 32 -- 1,390
Other bonds and obligations. . . . . . . 2,562 47 (4) 2,605
------- ---- ----- -------
$89,468 $504 $(584) $89,388
======= ==== ===== =======
December 31, 1996
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------
Available for Sale
U.S. Government obligations. . . . . . . $ 2,000 $ -- $ (6) $ 1,994
Mortgage-backed securities . . . . . . . 8,418 112 (40) 8,490
Marketable equity securities . . . . . . 2,844 20 (36) 2,828
------- ---- ----- -------
$13,262 $132 $(82) $13,312
======= ==== ===== =======
/TABLE
December 31, 1995
-------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------------------------------
Available for Sale
U.S. Government obligations. . . . . . . $12,765 $ 91 $ (23) $12,833
Mortgage-backed securities . . . . . . . 10,183 73 (42) 10,214
Marketable equity securities . . . . . . 2,745 7 (29) 2,723
------- ---- ----- -------
$25,693 $171 $(94) $25,770
======= ==== ===== =======
There were no sales of securities for the years ended December
31, 1996 and 1995. The Bank had approximately $367,000 in
proceeds from sales of securities available for sale
for the year ended December 31, 1994. Gross realized gains and
gross realized losses on securities available for sale for the
year ended December 31, 1994 were $25,000 and $19,000
respectively.
(4) Loans
The Bank's lending activities are conducted principally in the
Southeastern and Cape Cod areas of Massachusetts. The Bank
grants single-family and multi-family residential loans,
commercial real estate loans and a variety of consumer loans. In
addition, the Bank grants loans for the construction of
residential homes, multi-family properties, commercial real
estate properties and for land development. Most loans granted
by the Bank are either collateralized by real estate or
guaranteed by Federal and local governmental authorities. The
loans are expected to be repaid from borrower s earnings
and cash flow or proceeds from the sale of the related assets.
State banking regulations generally limit the amount of
loans that may be outstanding to one borrower to 20% of
stockholders' equity. At December 31, 1996, the Bank had no
loans outstanding to one borrower in an aggregate amount
exceeding this limitation.
Notes to Consolidated Financial Statements
A comparative summary of loans follows:
(In thousands) December 31, December 31,
1996 1995
------------ ------------
Residential mortgage:
Fixed rate . . . . . . . . . . $ 16,020 $ 18,725
Adjustable rate. . . . . . . . 186,012 144,249
Commercial real estate. . . . . . 61,088 59,597
Construction. . . . . . . . . . . 34,332 21,331
Land. . . . . . . . . . . . . . . 4,526 5,155
Other loans:
Home equity. . . . . . . . . . 12,278 13,188
Consumer . . . . . . . . . . . 5,393 6,032
Secured by deposits. . . . . . 1,160 992
Commercial . . . . . . . . . . 7,933 9,671
Education. . . . . . . . . . . 1,123 1,660
-------- --------
329,865 280,600
Less:
Allowance for loan losses
(note 5) . . . . . . . . . . (3,741) (3,674)
Unadvanced portion of
construction loans . . . . . (9,763) (6,573)
Deferred loan origination
costs. . . . . . . . . . . . 742 239
Unearned discount. . . . . . . -- (171)
-------- --------
$317,103 $270,421
======== ========
Non-accrual loans totaled approximately $4,086,000, $4,671,000,
and $2,063,000 at December 31, 1996, 1995, and 1994,
respectively. Restructured loans totaled approximately $258,000,
$1,062,000, and $1,531,000 at December 31, 1996, 1995, and
1994, respectively.
The reduction in interest income associated with non-accrual and
restructured loans at the end of the periods was as follows:
(In thousands)
Year ended December 31,
--------------------------------
1996 1995 1994
--------------------------------
Income in accordance with original terms . . . . $403 $551 $336
Income recognized. . . . . . . . . . . . . . . . 203 312 205
---- ---- ----
Reduction in interest income. . . . $200 $239 $131
==== ==== ====
Included in non-accrual loans are impaired loans totaling
$1,429,000 at December 31, 1996 and $1,309,000 at December 31,
1995. The reduction in interest income associated with impaired
loans at the end of the periods was as follows:
(In thousands) Year ended December 31,
-----------------------
1996 1995
-----------------------
Income in accordance with original terms $148 $141
Income recognized 84 72
---- ----
Reduction in interest income $ 64 $ 69
==== ====
The Bank granted mortgage loans to executive officers and to
Directors and their related interests in the normal course of
business. The outstanding amount of such loans at December 31,
1996, 1995 and 1994 was approximately $714,000, $820,000, and
$831,000, respectively. No such loans were on non-accrual.
Currently, the Bank grants only loans secured by deposits to
executive officers and Directors.
Mortgage loans serviced by the Bank for others amounted to
approximately $108,756,000, $100,902,000, and $94,478,000, at
December 31, 1996, 1995 and 1994, respectively. The Bank had
loans held for sale totaling $221,000, $389,000, and
$194,000 at December 31, 1996, 1995 and 1994, respectively. At
December 31, 1996, the Bank had commitments to sell loans
totaling approximately $1,232,000.
As discussed in note 1, the Bank adopted SFAS No. 122 as of
January 1, 1996. As a result of the adoption of this
pronouncement, mortgage servicing rights amounting to
$207,000 were capitalized during 1996 and are included in gain
on sale of loans. The related amortization of those rights of
$13,000 was recorded as an offset to mortgage loan servicing
fees in 1996. As of December 31, 1996, the fair value of
capitalized mortgage servicing rights amounted to $194,000.
Notes to Consolidated Financial Statements
(5) Allowance for Loan Losses
An analysis of the allowance for loan losses follows:
(In thousands)
Year ended December 31,
-------------------------------
1996 1995 1994
--------------------------------
1994
Balance at beginning of period . . . . . . . . . $3,674 $3,255 $2,983
Provision charged to operations . . . . . . . 265 597 340
Recoveries on accounts previously
charged off . . . . . . . . . . . . . . . . 67 183 116
Loans charged off . . . . . . . . . . . . . . (265) (361) (184)
------ ------ ------
Balance at end of period . . . . . . . . . . . . $3,741 $3,674 $3,255
====== ====== ======
(6) Office Properties and Equipment
A summary of office properties and equipment follows:
(In thousands) December 31, December 31,
1996 1995
------------ ------------
Land . . . . . . . . . . . . . . . . . . . $ 870 $ 870
Buildings. . . . . . . . . . . . . . . . . 4,395 4,418
Furniture, fixtures and equipment. . . . . 3,923 3,603
Leasehold improvements . . . . . . . . . . 392 209
------ -------
9,580 9,100
Less accumulated depreciation and
amortization . . . . . . . . . . . . . . (3,565) (2,933)
------ ------
$6,015 $6,167
====== ======
(7) Stock in Federal Home Loan Bank of Boston
As a member of the Federal Home Loan Bank of Boston ( FHLB of
Boston ), the Bank is required to invest in $100 par value stock
of the FHLB of Boston in an amount equal to 1% of its
outstanding home loans or 5% of its outstanding advances from
the FHLB of Boston, or 1% of 30% of total assets, whichever is
highest. If such stock is redeemed, the Bank will receive from
the FHLB of Boston an amount equal to the par value of the
stock. As of December 31, 1996 the Bank was required to have an
investment of at least $2,143,000.
(8) Deposits
A summary of deposits follows:
December 31, 1996 December 31, 1995
-------------------------------------------
Interest Interest
Balances Rate Balances Rate
------------------------------------------
Non-interest bearing accounts:
Demand . . . . . . . . . . . . $ 38,459 -- % $ 33,402 -- %
Official checks. . . . . . . . 1,336 -- 1,840 --
-------- --------
Total non-interest bearing
accounts . . . . . . . . . 39,795 35,242
-------- --------
Savings accounts:
Regular. . . . . . . . . . . . 23,321 2.00 23,614 2.00
NOW, Super NOW and Special Notice 40,488 1.25 - 1.50 39,796 1.25 - 1.50
Money market . . . . . . . . . 92,441 1.25 - 3.00 95,030 2.75 - 4.30
-------- --------
Total savings accounts . . . . . . 156,250 158,440
-------- --------
Certificates of deposit:
Term . . . . . . . . . . . . . 147,265 3.75 - 8.75 138,816 3.36 - 8.00
IRA. . . . . . . . . . . . . . 44,939 2.52 - 11.20 45,475 3.50 -11.20
-------- --------
Total certificates of deposit 192,204 184,291
-------- --------
$388,249 $377,973
======== ========
Weighted average interest rates:
Savings accounts . . . . . . . 2.32% 2.53%
Certificates of deposit. . . . 5.87 5.80
Total interest bearing deposits 4.24 4.17
Notes to Consolidated Financial Statements
The weighted average interest rate on certificates of deposit,
by periods of maturity,
is summarized below:
December 31, 1996 December 31, 1995
-------------------------------------------
Weighted Weighted
average average
interest interest
Amount rate Amount rate
------------------------------------------
Within one year. . . . . . . . . . . . $122,255 5.23% $110,363 5.43%
From one to two years. . . . . . . . . 42,250 5.47 41,001 5.59
From two to three years. . . . . . . . 15,798 6.42 11,208 5.81
From three to five years . . . . . . . 11,844 6.20 21,658 6.60
Over five years. . . . . . . . . . . . 57 6.68 61 7.00
-------- ---- -------- ----
$192,204 5.44% $184,291 5.63%
======== ==== ======== ====
Individual certificates of deposit of $100,000 or more, by
periods of maturity, are
summarized below:
(In thousands) December 31, December 31,
1996 1995
------------ ------------
Within three months. . . . . . . $ 8,945 $ 6,261
From three to six months . . . . 3,675 2,779
From six to twelve months. . . . 4,823 9,507
Thereafter . . . . . . . . . . . 18,391 14,986
------- -------
$35,834 $33,533
======= =======
(9) Borrowed Funds
Advances from the Federal Home Loan Bank of Boston are
summarized as follows:
(Dollars in thousands)
Maturing in December 31, December 31,
Interest rate year ending 1996 1995
------------ ------------ ------------
4.19 - 5.61% . . . . . . . . . . . . . 1996 $ -- $6,407
4.53 - 5.78%%. . . . . . . . . . . . . 1997 26,026 694
6.47%. . . . . . . . . . . . . . . . . 1998 5,000 --
6.83%. . . . . . . . . . . . . . . . . 1999 1,000 1,000
8.32%. . . . . . . . . . . . . . . . . 2015 47 47
------- ------
$32,073 $8,148
======= ======
Weighted average rate. . . . . . . . . 5.70% 5.21%
======= ======
The advances are secured by the Bank s stock in the FHLB of
Boston and certain qualifying assets of the Bank, which include
mortgage loans on residential property and investments with a
market value in excess of 125% of outstanding advances. The Bank
has a line of credit with the FHLB aggregating $8,146,000 of
which $7,762,000 is available at December 31, 1996.
(10) Income Taxes
The components of income tax expense are as follows:
(In thousands)
Year ended December 31,
-------------------------------
1996 1995 1994
--------------------------------
Current tax expense:
Federal. . . . . . . . . . . . . . . $2,070 $1,928 $1,451
State. . . . . . . . . . . . . . . . 539 674 508
------ ------ ------
2,609 2,602 1,959
Deferred tax benefit:
Federal. . . . . . . . . . . . . . . (2) (423) (349)
State. . . . . . . . . . . . . . . . 14 (10) (214)
12 (433) (563)
------ ------ ------
Total income tax expense . . . . . . $2,621 $2,169 $1,396
====== ====== ======
Tax expense for 1995 has been increased to reflect the
adjustment to the deferred tax asset for the tax impact of the
Massachusetts tax rate reduction as part of the Bank
Tax Reform law signed by the Governor of Massachusetts on July
27, 1995.
Notes to Consolidated Financial Statements
The difference between income tax expense computed by applying
the statutory Federal income tax rate of 34% to income before
income taxes and the reported income tax expense (benefit) is
explained as follows:
(In thousands)
Year ended December 31,
-------------------------------
1996 1995 1994
--------------------------------
Expected income tax expense
at statutory rate . . . . . . . . . . . . . . $2,298 $1,906 $1,353
Increase (decrease) resulting from:
Dividend received deduction and
municipal income . . . . . . . . . . . . . (7) (16) (12)
State income taxes, net of
Federal benefit. . . . . . . . . . . . . . 365 436 264
Change in valuation allowance. . . . . . . . (142) (100) (200)
Expiration of capital loss carryforward. . . 98 -- --
Other, net . . . . . . . . . . . . . . . . . 9 (57) (9)
------ ------ ------
Total income tax expense . . . . . . . . . $2,621 $2,169 $1,396
====== ====== ======
Effective income tax rate . . . . . . . . . . . 38.8% 38.7% 35.1%
====== ====== ======
The Bank had gross deferred tax assets and gross deferred tax
liabilities as follows:
(In thousands) December 31, December 31,
1996 1995
------------ ------------
Gross deferred tax assets:
Allowance for loan losses . . . . . $1,269 $1,288
Capital loss carryforward . . . . . 490 588
Other securities losses . . . . . . -- 47
Deferred compensation . . . . . . . 966 847
Non-accrual loan interest . . . . . 21 50
Losses on foreclosed real estate. . 148 148
Subsidiary state net operating loss
carryforward. . . . . . . . . . . 34 33
Purchase accounting . . . . . . . . 498 362
------ ------
Gross deferred tax assets. . . . . . . 3,426 3,363
Valuation allowance. . . . . . . . . . (632) (783)
------ ------
Gross deferred tax assets, net. . 2,794 2,580
------ ------
Gross deferred tax liabilities:
Mortgage servicing rights . . . . . (80) --
Unrealized gains on securities
available for sale. . . . . . . . (17) (26)
Depreciation. . . . . . . . . . . . (112) (5)
Loan origination costs. . . . . . . (71) (70)
Miscellaneous . . . . . . . . . . . (45) (16)
------ ------
Gross deferred tax liabilities. . (325) (117)
------ ------
Net deferred tax asset . . . . . . . . $2,469 $2,463
====== ======
A valuation allowance is provided when it is more likely than
not that some portion of the gross deferred tax asset will not
be realized. Management has established a valuation allowance
principally for the tax effect of the capital loss carry forward
and the state income tax benefit derived from the gross
deductible temporary differences. The primary sources of
recovery of the deferred tax asset are taxes paid
that are available for carryback of $5.4 million in 1996, 1995
and 1994, and the expectation that the deductible temporary
differences will reverse during periods in which the Bank
generates taxable income. As of December 31, 1996, the capital
loss carryforward approximates $1,412,000 and expires in 1997.
In August, 1996, the provisions repealing the current
thrift bad debt rules were passed by Congress as part of "The
Small Business Job Protection Act of 1996." The new rules
eliminate the 8% of taxable income method for deducting
additions to the tax bad debt reserves for all thrifts beginning
after December 31, 1995. These rules also require that all
thrift institutions recapture all or a portion of their bad debt
reserves added since the base year (last taxable year beginning
before January 1, 1988). The Bank has previously recorded a
deferred tax liability equal to the bad debt recapture and as
such, the new rules will have no effect on net income or federal
income tax expense.
The unrecaptured base year reserves will not be subject to
recapture as long as the institution continues to carry on the
business of banking. In addition, the balance of the pre-1988
bad debt reserves continue to be subject to provision of present
law that require recapture in the case of certain excess
distributions to shareholders. The tax effect of pre-1988 bad
debt reserves subject to recapture in the case of certain excess
distributions is approximately $2,300,000.
Notes to Consolidated Financial Statements
(11) Retained Earnings
Current Federal Deposit Insurance Corporation (FDIC) regulations
regarding capital requirements of FDIC-insured institutions
require banks to maintain a leverage capital ratio of 4% to 5%
and qualifying total capital to risk-weighted assets of at least
8%, of which at least 4% must be Tier 1 capital. Assets and
off-balance sheet items are assigned to four risk categories,
each with appropriate weights. The resulting capital
ratio represents equity as a percentage of risk-weighted assets
and off-balance-sheet items. The risk-based capital rules are
designed to make regulatory capital more sensitive to
differences in risk profiles among banks and bank holding
companies, to account for off-balance sheet exposure and to
minimize disincentives for holding liquid assets.
The Bank's actual capital amounts and ratios are also
presented in the table. No amounts were deducted from capital
for interest-rate risk in 1996 and 1995, respectively.
To be well
capitalized under
For capital prompt corrective
(In thousands) Actual adequacy purposes: action provisions
--------------- ------------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1996: (at least) (at least)
Total Capital
(to Risk weighted assets) $38,633 14.14% >$21,851 >8.0% >$27,314 >10.0%
- - - -
Tier I Capital
(to Risk weighted assets) 36,694 13.43 > 10,925 >4.0 > 15,147 > 6.0
- - - -
Tier I Capital
(to Average assets) 36,694 8.35 >17,572 >4.0 >20,927 >5.0
- - - -
As of December 31, 1995:
Total Capital
(to Risk weighted assets) $35,744 14.16 >20,196 >8.0 >25,245 >10.0
- - - -
Tier I Capital
(to Risk weighted assets) 33,233 13.16 >10,098 >4.0 >15,147 >6.0
- - - -
Tier I Capital
(to Average assets) 33,233 7.94 >16,742 >4.0 >20,927 >5.0
The Bank may not declare or pay dividends on its stock if the
effect would cause stockholders equity to be reduced below
applicable regulatory capital requirements or
if such declaration and payment would otherwise violate
regulatory requirements.
(12) Employee Benefits
Postretirement Benefits
The Bank provides postretirement medical benefits for employees
that were hired before July 1, 1993. The Bank accrued
postretirement benefits other than pensions (medical
benefits) over the periods during which employees render
service. The Bank amortizes the transition obligation from
January 31, 1993 into operations over a 20 year period.
Expense for the years ended December 31, 1996 and 1995 was
approximately $53,000 and $51,000, respectively.
Pension Plan
The Bank provides pension benefits for its employees through
membership in the Co-operative Banks Employees Retirement
Association. The Plan is a multiple employer, noncontributory,
defined-benefit plan. Bank employees become eligible after
attaining age 21 and one year of service. The Plan is funded by
the Bank and benefits become fully vested after six years of
eligible service.
Pension expense was approximately $309,000, $224,000 and
$174,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Notes to Consolidated Financial Statements
Stock Option Plan
During 1986, the Board of Directors adopted a Stock Option Plan
for the benefit of officer and non-officer employees and
reserved 182,083 shares of authorized but unissued common stock.
Similarly, in 1994, the Board of Directors instituted the 1994
Stock Option and Incentive Plan and reserved 90,000 shares of
common stock. Under terms of the Plans, the exercise price of
any option granted will not be less than the fair market value
of the common stock on the date of grant of the option and
options may not have a maximum term of more than ten years.
A summary of the activity under the Plan follows:
Number of Average
shares exercise price
--------- --------------
Balance outstanding at December 31, 1993 . . . . . . 179,556 $10.41
Options granted . . . . . . . . . . . . . . . . . 0 0.00
Options exercised ($2.63 - $7.00) . . . . . . . . (9,250) 5.58
Options canceled ($9.00 - $11.55) . . . . . . . . (1,301) 10.96
------- -----
Balance outstanding at December 31, 1994 . . . . . . 169,005 10.67
Options granted ($16.75). . . . . . . . . . . . . 28,500 16.75
Options exercised ($7.00 - $12.00). . . . . . . . (17,716) 11.37
------- -----
Balance outstanding at December 31, 1995 . . . . . . 179,789 11.56
Options granted ($21.1875). . . . . . . . . . . . 28,600 21.19
Options exercised ($7.00 - $16.75). . . . . . . . (51,266) 12.49
Options canceled ($11.55 - $16.75). . . . . . . . (450) 16.17
------- ------
Balance outstanding at December 31, 1996 . . . . . . 156,673 $13.00
======= ======
Stock options outstanding and exercisable:
At December 31, 1996
-------------------------------------------------------------------------
Options outstanding Options exercisable
-------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Number remaining exercise Number exercise
outstanding contractual life price outstanding exercise price
-------------------------------------------------------------------------
Range of exercise prices
$7.00 - $14.875 100,473 5.2 years $ 9.64 100,473 $ 9.64
$16.75 - $21.1875 56,200 8.8 years 19.01 8,864 16.75
There are 34,628 options available for future grant at December
31, 1996.
At December 31, 1996, the per share weighted average fair
value of stock options granted during 1996 and 1995 was $7.39
and $5.20 on the date of grant using the Black Scholes
option-pricing model with the following weighted average
assumptions for 1996 and 1995: expected dividend yield of 3.69%,
risk-free interest rate of 6.56%, volatility of the Bank's
common stock of 45% and an expected life of ten years.
The Bank applies APB Opinion No. 25 in accounting for its
Plan and, accordingly, no compensation cost has been recognized
for its stock options in the financial statements. Had the Bank
determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Bank's
net income would have been reduced to the pro forma amounts
indicated below:
(Dollars in thousands)
except per share data) 1996 1995
-------- -------
Net income As reported $4,137 $3,436
Pro forma 4,102 3,422
Earnings per share As reported 2.13 1.82
Pro forma 2.11 1.81
Pro forma net income reflects only options granted in 1996 and
1995. Therefore, the full impact of calculating compensation
cost for stock options under SFAS No. 123 is not reflected in
the pro forma net income amounts presented above because
compensation cost is reflected over the options' vesting period
of three years and compensation cost for options granted prior
to January 1, 1995 is not considered.
Notes to Consolidated Financial Statements
Employee Bonus Plan
The Bank has an employee bonus and management incentive
compensation plan in which employees are eligible to
participate. The Plan provides for awards based upon a
combination of Bank and individual performance measured against
predetermined annual goals, based on specific performance
objectives. The Plan is administered by the Bank s president
under the direction of the Board of Directors.
Incentive compensation expense of $188,000, $235,000 and
$168,000 was charged to expense for the years ended December 31,
1996, 1995 and 1994, respectively.
Employee Stock Ownership Plan
Effective May 1, 1989, the Bank established an Employee Stock
Ownership Plan ( ESOP ) for the exclusive benefit of
participating employees, defined as age 21 or older who
have completed one year of service. Under the plan, the Bank
reviews its profitability and determines what contribution, if
any, will be made to the ESOP. ESOP expense of $171,000,
$134,000 and $99,000 was charged to expense for the years ended
December 31, 1996, 1995 and 1994, respectively.
Executive Supplemental Retirement Agreements
The Bank entered into executive supplemental retirement
agreements with certain executive officers. These agreements
provide retirement benefits designed to supplement benefits
available through the Bank s retirement plan for employees.
Total expense for benefits payable under the agreements amounted
to $78,000, $73,000 and $52,000 for the years ended December 31,
1996, 1995 and 1994, respectively. At December 31, 1996, the
Bank's liability for these arrangements, included in accrued
expenses and other liabilities, was approximately $286,000.
Director Deferred Compensation Arrangements
Starting in 1983, the Bank entered into deferred compensation
arrangements with certain directors whereby in consideration for
the deferral of directors fees, those directors will receive in
the future a fixed amount of cash compensation. Expensed under
these arrangements for the years ended December 31, 1996, 1995
and 1994 was approximately $238,000, $148,000 and $220,000,
respectively. At December 31, 1996, the Bank s liability for
these arrangements, included in accrued expenses and other
liabilities, was approximately $1,561,000.
(13) Estimated Fair Value of Financial Instruments
The following disclosure of the estimated fair value of
financial instruments have been determined by using available
quoted market information or other appropriate valuation
methodologies at year-end, and are not indicative of the fair
value of those instruments at the date this report is published.
These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Bank s
entire holdings of a particular financial instrument. Because no
market exists for a portion of the Bank s financial instruments,
fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on- and
off-balance sheet financial instruments without attempting to
estimate the value of anticipated future business and the value
of assets and liabilities that are not considered financial
instruments. Significant assets and liabilities that are not
considered financial instruments include real estate acquired by
foreclosure, the deferred income tax asset, office properties
and equipment, and core deposit and other intangibles. In
addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered.
The estimation methodologies used, book values and estimated
fair values for the Bank s financial instruments follows.
Financial instruments actively traded in a secondary market have
been valued using quoted available market prices as follows:
December 31, 1996 December 31, 1995
-------------------------------------------
Book Estimated Book Estimated
Value fair value value fair value
------------------------------------------
Loans held for sale. . . . . . . . . . . . $ 221 $ 216 $ 389 $ 393
Investment securities:
Available for sale. . . . . . . . . . . 4,822 4,822 15,552 15,552
Held to maturity. . . . . . . . . . . . 22,477 22,527 17,156 17,311
Mortgage-backed securities:
Available for Sale. . . . . . . . . . . 8,490 8,490 10,218 10,218
Held to maturity. . . . . . . . . . . . 77,171 76,601 72,312 72,077
/TABLE
Notes to Consolidated Financial Statements
The fair value of financial instruments with stated
maturities have been estimated by discounting cash flows with a
discount rate approximately equal to the current market rate for
similar instruments as follows:
December 31, 1996 December 31, 1995
-------------------------------------------
Book Estimated Book Estimated
Value fair value value fair value
------------------------------------------
Loans, net . . . . . . . . . . . . . . . . . $317,103 $321,473 $270,421 $272,397
Certificates of deposit. . . . . . . . . . . 192,204 193,236 184,291 185,906
Federal Home Loan Bank advances. . . . . . . 32,073 32,169 8,148 8,200
The fair value of financial instruments with no maturity or
short-term maturities approximates its carrying value as
follows:
December 31, 1996 December 31, 1995
-------------------------------------------
Book Estimated Book Estimated
Value fair value value fair value
------------------------------------------
Cash and cash equivalents. . . . . . . . . . $11,718 $11,718 $16,072 $16,072
Other short-term investments . . . . . . . . 636 636 910 910
Accrued interest receivable. . . . . . . . . 2,680 2,680 2,741 2,741
Stock in FHLB of Boston. . . . . . . . . . . 2,670 2,670 2,670 2,670
Co-operative Central Bank Reserve Fund . . . 965 965 965 965
Demand deposit accounts. . . . . . . . . . . 39,795 39,795 35,242 35,242
NOW, Super NOW and
Special Notice accounts . . . . . . . . . 40,488 40,488 39,796 39,796
Regular savings accounts . . . . 23,321 23,321 23,614 23,614
Money market deposit accounts. . . . . . . . 92,441 92,441 95,030 95,030
Escrow deposits of borrowers accounts. . . . 915 915 1,579 1,579
Accrued interest payable . . . . . . . . . . 121 121 25 25
The fair value of commitments to extend credit have been
estimated using fees charged to enter into similar agreements,
taking into account the remaining terms of the agreements and
the present creditworthiness of the counterparties. The fair
value of commitments to sell loans are estimated as the cost to
cancel such agreements. The fair value of financial instruments
with off-balance sheet risk have been estimated as follows:
(In thousands) December 31, 1996 December 31, 1995
--------------------------- ---------------------------
Contract or Estimated Contract or Estimated
notional amount fair value notional amount fair value
--------------------------- ---------------------------
Commitments to extend credit . . . $51,976 $ 539 $37,385 $ 482
Commitments to sell loans. . . . . 1,232 0 1,995 5
(14) Commitments and Contingencies
Legal Proceedings
The Bank has been named a defendant in various legal proceedings
arising in the normal course of business. In the opinion of
management, based on the advice of legal counsel, the ultimate
resolution of these proceedings will not have a material effect
on the Bank s consolidated financial statements.
Off-balance Sheet Risk
The Bank is party to financial instruments with off-balance
sheet risk in the normal course of business to meet the
financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. These financial
instruments include commitments to originate or purchase loans,
unadvanced portions of construction loans, unused lines of
credit, standby letters of credit and forward commitments to
sell loans. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The
contract or notional amounts of those instruments reflect the
extent of involvement the Bank has in particular classes of
financial instruments.
Notes to Consolidated Financial Statements
The Bank s exposure to credit loss in the event of
nonperformance by the other party to the financial instrument
for loan commitments and standby letters of credit is
represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet
instruments. For forward commitments, the contract or notional
amounts do not represent exposure to credit loss. The Bank
controls the credit risk of forward commitments through credit
approvals, limits and monitoring procedures.
Financial instruments with off-balance sheet risk are as
follows:
Contract or
notional amount
--------------------------
(In thousands) December 31, December 31,
1996 1995
--------------------------
Financial instruments whose contract amounts
represent credit risk:
Unused lines of credit and commitments to
originate loans. . . . . . . . . . . . . . . . . .$41,926 $30,608
Unadvanced portions of construction loans . . . . . 9,764 6,573
Standby letters of credit . . . . . . . . . . . . . 286 204
Financial instruments whose notional or contract
amounts exceed the amount of credit risk:
Commitments to sell loans . . . . . . . . . . . . . 1,232 1,995
Unused lines of credit, commitments to originate or purchase
loans and unadvanced portions of construction loans are
agreements to lend to a customer provided 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. For all
lines of credit and loans, the Bank evaluates each customer s
creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank
upon extension of credit, is based on management s credit
evaluation of the borrower.
Commitments to sell loans are contracts which the Bank
enters into for the purpose of reducing the market risk
associated with originating and selling residential
mortgage loans. In order to fulfill the commitment, the Bank
must deliver loans under contract or must pay a cash penalty as
determined by the investor. The Bank does not
sell loans with recourse.
Standby letters of credit are conditional commitments
issued by the Bank to guarantee the performance by 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 Bank is required to maintain certain reserves of vault
cash and/or deposits with the Federal Reserve Bank of Boston.
The amount of this reserve requirement included in
cash and due from banks was $2,018,000 at December 31, 1996.
Regulatory Developments
A portion of the Bank s deposits acquired in prior years were
previously insured by the Savings Association Insurance Fund (
SAIF ). Final legislation on the re-capitalization of the SAIF
fund was signed by President Clinton on September 30, 1996.
Under the new law, an assessment of 65.7 basis points on all
SAIF deposits was levied. The impact to the Bank of the one-time
special assessment was $280,000.
(15) Quarterly Results of Operations (Unaudited)
(In thousands, except per share amounts)
1996 Quarters
Three months ended
-----------------------------------------
Periods ended Dec. 31, Sept. 30, June 30, Mar. 31,
-----------------------------------------
Interest and dividend income $8,616 $8,233 $7,754 $7,706
Interest expense . . . . . . . . . . . 4,155 4,042 3,805 3,790
------ ------ ------- ------
Net interest and dividend income . 4,461 4,191 3,949 3,916
Provision for loan losses. . . . . . . (180) (50) (35) --
Non-interest income. . . . . . . . . . 712 719 702 706
Non-interest expense . . . . . . . . . (2,915) (3,158) (3,116) (3,144)
------ ------ ------- ------
Income before income taxes . . . . . . 2,078 1,702 1,500 1,478
Income tax expense . . . . . . . . . . 831 658 563 569
------ ------ ------- ------
Net income . . . . . . . . . . . . . . $1,247 $1,044 $ 937 $ 909
====== ====== ======= ======
Net income per common and
common equivalent share . . . . . . $ 0.63 $ 0.54 $ 0.48 $ 0.47
====== ====== ======= ======
1995 Quarters
Three months ended
-----------------------------------------
Periods ended Dec. 31, Sept. 30, June 30, Mar. 31,
-----------------------------------------
Interest and dividend income $6,019 $7,646 $7,775 $7,233
Interest expense . . . . . . . . . . . 3,881 3,898 3,697 3,357
------ ------ ------- ------
Net interest and dividend income . 4,138 3,748 4,078 3,876
Provision for loan losses. . . . . . . (33) (290) (168) (106)
Non-interest income. . . . . . . . . . 899 668 612 540
Non-interest expense . . . . . . . . . (3,345) (2,803) (3,151) (3,058)
------ ------ ------- ------
Income before income taxes . . . . . . 1,659 1,323 1,371 1,252
Income tax expense . . . . . . . . . . 600 514 546 509
------ ------ ------- ------
Net income . . . . . . . . . . . . . . $1,059 $ 809 $ 825 $ 743
====== ====== ======= ======
Net income per common and
common equivalent share . . . . . . $ 0.56 $ 0.43 $ 0.44 $ 0.39
====== ====== ======= ======
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
(Unaudited) (In thousands)
----------- -------------
Assets
Cash and due from banks $11,831 $11,543
Federal funds sold 1,443 175
------- -------
Total cash and cash equivalents 13,274 11,718
Other short-term investments 1,625 636
Investment securities:
Available for sale 8,176 13,312
Held to maturity 108,503 99,648
Total investment securities 116,679 112,960
Loans:
Mortgage loans 322,373 292,757
Other loans 29,057 28,087
-------- --------
Total loans 351,430 320,844
Less allowance for loan losses 3,841 3,741
-------- --------
Net loans 347,589 317,103
-------- --------
Stock in Federal Home Loan Bank of Boston,
at cost 3,749 2,670
Accrued interest receivable 3,025 2,680
The Co-operative Central Bank Reserve Fund 965 965
Real estate acquired by foreclosure 267 465
Investments in real estate 564 571
Office properties and equipment 5,886 6,015
Core deposit and other intangibles 1,706 1,966
Deferred income tax asset, net 2,490 2,469
Income taxes receivable, net 146 --
Prepaid expenses and other assets 3,929 4,337
Total assets $501,894 $464,555
======== ========
Liabilities and Stockholders' Equity
Liabilities
Deposits $401,781 $388,249
Borrowed funds 55,547 32,073
Escrow deposits of borrowers 978 915
Income taxes payable, net -- 282
Accrued expenses and other liabilities 3,694 4,403
-------- --------
Total liabilities 462,000 425,922
-------- --------
Stockholders' equity
Preferred stock, par value $1.00 per share;
authorized 5,000,000 shares; none issued
or outstanding -- --
Common stock, par value $1.00 per share;
authorized 15,000,000 shares; 1,915,213
and 1,901,565 issued and outstanding,
respectively 1,915 1,902
Additional paid-in capital 19,446 19,323
Retained earnings 18,430 17,381
Net unrealized gain on investment securities
available for sale 103 27
-------- --------
Total stockholders' equity 39,894 38,633
-------- --------
Total liabilities and stockholders'
equity $501,894 $464,555
======== ========
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
(In thousands, except per share amounts)
Interest and dividend income
Interest on loans $ 6,986 $ 5,936 $13,493 $11,774
Interest and dividends on investment
securities available for sale 134 343 301 734
Interest on investment securities held
to maturity 1,758 1,448 3,377 2,862
Interest on short-term investments 80 27 112 85
------ ------ ------- -------
Total interest and dividend income 8,958 7,754 17,283 15,455
------ ------ ------- -------
Interest expense
Deposits 3,714 3,606 7,295 7,271
Borrowed funds 870 199 1,412 325
------ ------ ------- -------
Total interest expense 4,584 3,805 8,707 7,596
------ ------ ------- -------
Net interest and dividend income 4,374 3,949 8,576 7,859
Provision for loan losses 132 35 241 35
------ ------ ------- -------
Net interest and dividend income after
provision for loan losses 4,242 3,914 8,335 7,824
------ ------ ------- -------
Non-interest income
Service charges 432 452 838 900
Mortgage loan servicing fees 58 64 122 126
Gain on sale of loans 27 73 67 166
Other 103 113 210 216
------ ------ ------- -------
Total non-interest income 620 702 1,237 1,408
------ ------ ------- -------
Income before non-interest expense and
income taxes 4,862 4,616 9,572 9,232
------ ------ ------- -------
Non-interest expense
Salaries and employee benefits 1,552 1,516 3,080 3,009
Occupancy and equipment 378 390 750 798
FDIC deposit insurance 18 27 36 53
Data processing service fees 160 157 316 345
Foreclosed property expense 19 39 35 45
Amortization of core deposit intangible 130 149 261 299
Other 789 838 1,573 1,705
------ ------ ------- -------
Total non-interest expense 3,046 3,116 6,051 6,254
------ ------ ------- -------
Income before income tax expense 1,816 1,500 3,521 2,978
Income tax expense 699 563 1,327 1,132
------ ------ ------- -------
Net income $1,147 $ 937 $ 2,194 $ 1,846
====== ====== ======= =======
Net income per common and common equivalent share $ 0.58 $ 0.48 $ 1.11 $ 0.96
====== ====== ======= =======
Average common and common equivalent shares
outstanding 1,987 1,937 1,984 1,929
====== ====== ======= =======
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Net
unrealized
gain on
investment
Additional securities
Common paid-in Retained available
Stock capital earnings for sale, net Total
------ ---------- -------- -------------- --------
(In thousands)
Balance at December 31, 1995 $1,850 $18,632 $15,223 $ 39 $35,744
Net income for six months -- -- 1,937 -- 1,937
Dividends declared ($0.50 per share) -- -- (1,030) -- (1,030)
Stock options exercised 31 363 -- -- 394
Decrease in net unrealized gain on
investment securities available for
sale -- -- -- (20) (20)
------ ------- ------- ----- -------
Balance at June 30, 1996 $1,881 $18,995 $16,130 $ 19 $37,025
====== ======= ======= ===== =======
Balance at December 31, 1996 $1,902 $19,323 $17,381 $ 27 $38,633
Net income for six months -- -- 2,194 -- 2,194
Dividends declared ($0.60 per share) -- -- (1,145) -- (1,145)
Stock options exercised 13 123 -- -- 136
Increase in net unrealized gain on
investment securities available for
sale -- -- -- 76 76
------ ------- ------- ----- -------
Balance at June 30, 1997 $1,915 $19,446 $18,430 $ 103 $39,894
====== ======= ======= ===== =======
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-----------------
1997 1996
---- ----
(In thousands)
Cash flows from operating activities
Net income $ 2,194 $ 1,846
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 241 35
Provision for loss and writedowns of real
estate acquired by foreclosure 20 18
Depreciation and amortization 582 789
(Increase) decrease in:
Accrued interest receivable (345) 26
Deferred income tax asset, net (39) (3)
Income tax receivable (146) --
Other assets 408 2,114
Increase(decrease)in:
Escrow deposits of borrowers 63 (917)
Income tax payable (282) (69)
Accrued expenses and other liabilities (709) 210
Gain on sales of loans, net (67) (166)
Principal balance of loans originated for sale (8,209) (14,134)
Principal balance of loans sold 8,430 13,911
Gain on sales of investment securities, net 6 --
Gain on sales of real estate acquired by
foreclosure (20) 2
------- -------
Total adjustments (67) 1,816
------- -------
Net cash provided by operating activities 2,127 3,662
------- -------
Cash flows from investing activities
Purchases of investment securities available
for sale (13) (3,601)
Purchases of investment securities held to
maturity (28,733) (15,321)
Proceeds from sales of investment securities
available for sale 2,527 --
Proceeds from maturities and paydowns of
investment securities available for sale 2,686 3,934
Proceeds from maturities and paydowns of
investment securities held to maturity 19,918 8,579
(Increase) decrease in:
Short-term investments (989) (77)
Loans (31,405) (20,844)
Real estate acquired by foreclosure (20) --
Stock in Federal Home Loan Bank of Boston (1,079) --
Investments in real estate 7 7
Proceeds from sale of real estate acquired by
foreclosure 742 422
Purchase of office properties and equipment (209) (337)
------- -------
Net cash used by investing activities (36,568) (27,238)
------- -------
Cash flows from financing activities
Net increase in deposits 13,532 2,476
Advances from the Federal Home Loan Bank
of Boston 126,500 23,873
Repayment of Federal Home Loan Bank advances (103,026) (3,480)
Cash dividends paid (1,145) (939)
Stock options exercised 136 394
------- -------
Net cash provided by financing activities 35,997 22,324
------- -------
Net increase (decrease) in cash and federal
funds sold 1,556 (1,252)
Cash and federal funds sold, beginning of
period 11,718 16,072
------- -------
Cash and federal funds sold, end of period $13,274 $14,820
======= =======
Cash paid for
Interest on deposits $ 7,296 $ 7,271
======= =======
Interest on borrowed funds $ 1,338 $ 257
======= =======
Income taxes, net $ 1,791 $ 1,204
======= =======
Other non-cash activities
Deferred taxes on change in unrealized (gain)
loss on securities available for sale $ (18) $ 11
======= =======
Additions to real estate acquired by
foreclosure $ 524 $ 1,253
======= =======
THE SANDWICH CO-OPERATIVE BANK AND SUBSIDIARIES
Financial Statements
--------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
June 30, 1997 and 1996
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of the Sandwich
Co-operative Bank and Subsidiaries ("the Bank") presented herein
should be read in conjunction with the consolidated financial
statements of the Bank as of and for the year ended December 31,
1996. In the opinion of management, the interim financial
statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the
six months ended June 30, 1997 and 1996. Interim results are
not necessarily indicative of results to be expected for the
entire year. Certain reclassifications have been made to the
December 31, 1996 and the June 30, 1996 balances to conform with
June 30, 1997 presentation. Management is required to make
estimates and assumptions that effect amounts reported in the
financial statements. Actual results could differ significantly
from those estimates.
GENERAL
On January 28, 1997 Sandwich Co-operative Bank announced that
its Board of Directors had approved a plan providing for the
formation of a holding company with the Bank as the principal
subsidiary. Under the plan, each existing share of the Bank's
Common Stock would be converted into one share of Common Stock
in the new holding company. As a result of the reorganization,
the Bank's stockholders would become the owners of the newly
formed holding company, which in turn would own all of the
outstanding stock of the Bank. At the Bank's Annual Meeting,
held May 14, 1997 stockholders approved the formation of the
holding company with the Bank as the principal subsidiary.
Implementation of the plan is subject to regulatory approval
which is expected in the third quarter of 1997. The holding
company formation will result in no change to the Bank's
business, management, office locations or customer service, and
the holding company's corporate documents are not expected to
include any additional anti-takeover provisions.
LOANS
Effective January 1, 1997, the Bank adopted SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. This Statement provides
accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach
that focuses on control. It distinguishes transfer of financial
assets that are sales from transfers that are secured
borrowings. The adoption of SFAS No. 125 has not had an impact
on the Bank's financial position, results of operations, or
liquidity.
In December 1996, the Financial Accounting Standards Board
issued SFAS No. 127, Deferral of the Effective Date of
Certain Provisions of SFAS No. 125, which requires the deferral
of implementation as it relates to repurchase agreements,
dollar-rolls, securities lending and similar transactions until
years beginning after December 31, 1997. Earlier or
retrospective applications of this statement is not permitted.
Management of the Bank does not expect that adoption of this
statement will have a material impact on the Bank's financial
statements.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, Earnings per Share. This statement
establishes standards for computing and presenting earnings per
share (EPS). It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires the presentation of
basic and diluted EPS on the face of the financial statements
for all entities. The statement is effective for financial
statements issued for periods ending after December 15, 1997.
Management of the Bank does not expect that the adoption of this
statement will have a material effect on the Bank's financial
position, results of operations or liquidity.
The following exhibits are filed with this report:
_________________________________________________
Number Description
______ ___________
4 Specimen Common Stock Certificate of
Sandwich Bancorp, Inc.
99.1 Sandwich Co-operative Bank Plan of
Reorganization and Acquisition and
Supplement Thereto
99.2 Press Release
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SANDWICH BANCORP, INC.
DATE: September 29, 1997 By: /s/ Frederic D. Legate
_____________________________
Frederic D. Legate
President