FORM 10-Q. - QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________.
Commission File number: 000-23149
----------------------------------
SANDWICH BANCORP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-1806710
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Old Kings Highway
Sandwich, MA 02563
- --------------------------------------- ---------
(Address of principal executive office) (Zip Code)
(508) 888-0026
--------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
* Through appropriate filings made with the Federal Deposit
Insurance Corporation.
The number of shares outstanding of each of the registrant's
classes of common stock as of September 30, 1997:
Common Stock: $1.00 par value 1,918,695
- ----------------------------- -------------------
(Title of class) (Shares outstanding)
SANDWICH BANCORP, INC.
INDEX
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets at September 30, 1997
and December 31, 1996 3
Consolidated Statements of Operations for the
three months and nine months ended September 30,
1997 and 1996. 4
Consolidated Statements of Changes in Stockholders'
Equity at September 30, 1997 and 1996. 5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION 14
Signatures
2
SANDWICH BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
September 30,
1997 December 31,
(Unaudited) 1996
----------- -------------
(In thousands)
ASSETS
Cash and due from banks $ 6,099 $11,543
Federal funds sold 3,611 175
------- -------
Total cash and cash equivalents 9,710 11,718
------- -------
Other short-term investments 1,065 636
Investment securities:
Available for sale 7,810 13,312
Held to maturity 106,995 99,648
------- -------
Total investment securities 114,805 112,960
------- -------
Loans:
Mortgage loans 340,874 292,757
Other loans 26,195 28,087
-------- --------
Total loans 367,069 320,844
Less allowance for loan losses 3,909 3,741
-------- --------
Net loans 363,160 317,103
-------- --------
Stock in Federal Home Loan Bank of Boston,
at cost 3,749 2,670
Accrued interest receivable 2,832 2,680
The Co-operative Central Bank Reserve Fund 965 965
Real estate acquired by foreclosure 317 465
Investments in real estate 629 571
Office properties and equipment 5,776 6,015
Core deposit and other intangibles 1,578 1,966
Deferred income tax asset, net 2,490 2,469
Prepaid expenses and other assets 4,689 4,337
------- -------
Total assets $511,765 $464,555
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $413,309 $388,249
Borrowed funds 52,047 32,073
Escrow deposits of borrowers 1,680 915
Income taxes payable, net 99 282
Accrued expenses and other liabilities 4,026 4,403
-------- --------
Total liabilities 471,161 425,922
-------- --------
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; 1,918,695
and 1,901,565 issued and outstanding,
respectively 1,919 1,902
Additional paid-in capital 19,482 19,323
Retained earnings 19,092 17,381
Net unrealized gain on investment securities
available for sale, net 111 27
-------- --------
Total stockholders' equity 40,604 38,633
-------- --------
Total liabilities and stockholders'
equity $511,765 $464,555
======== ========
See accompanying notes to unaudited consolidated financial statements.
3
SANDWICH BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
(In thousands, except per share amounts)
INTEREST AND DIVIDEND INCOME
Interest on loans $ 7,259 $ 6,222 $20,753 $17,996
Interest and dividends on investment
securities available for sale 129 289 429 1,023
Interest on investment securities held
to maturity 1,771 1,642 5,148 4,504
Interest on short-term investments 75 80 187 166
------ ------ ------- -------
Total interest and dividend income 9,234 8,233 26,517 23,689
------ ------ ------- -------
INTEREST EXPENSE
Deposits 3,910 3,657 11,205 10,928
Borrowed funds 810 385 2,221 711
------ ------ ------- -------
Total interest expense 4,720 4,042 13,426 11,639
------ ------ ------- -------
Net interest and dividend income 4,514 4,191 13,091 12,050
Provision for loan losses 181 50 422 85
------ ------ ------- -------
Net interest and dividend income after
provision for loan losses 4,333 4,141 12,669 11,965
------ ------ ------- -------
NON-INTEREST INCOME
Service charges 423 429 1,261 1,329
Mortgage loan servicing fees 66 63 188 188
Gain on sale of loans, net 28 41 95 207
Other 145 186 354 402
------ ------ ------- -------
Total non-interest income 662 719 1,898 2,126
------ ------ ------- -------
Income before non-interest expense and
income taxes 4,995 4,860 14,567 14,091
------ ------ ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,535 1,528 4,616 4,537
Occupancy and equipment 381 395 1,131 1,193
FDIC deposit insurance 18 27 54 80
SAIF special assessment - 70 - 280
Advertising 97 90 290 269
Data processing service fees 162 165 478 510
Foreclosed property expense (income) (37) 26 (2) 71
Amortization of core deposit intangible 127 146 388 445
Other 706 711 2,086 2,026
------ ------ ------- -------
Total non-interest expense 2,989 3,158 9,041 9,411
------ ------ ------- -------
Income before income tax expense 2,006 1,702 5,526 4,680
Income tax expense 768 658 2,094 1,790
------ ------ ------- -------
Net income $1,238 $1,044 $ 3,432 $ 2,890
====== ====== ======= =======
Earnings per common and common equivalent share $ 0.62 $ 0.54 $ 1.73 $ 1.50
====== ====== ======= =======
Weighted average number of common and common
equivalent shares of stock outstanding 1,999 1,947 1,988 1,933
====== ====== ======= =======
See accompanying notes to unaudited financial statements.
4
SANDWICH BANCORP, INC.
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 nine months -- -- 2,890 -- 2,890
Dividends declared ($0.75 per share) -- -- (1,411) -- (1,411)
Stock options exercised 39 440 -- -- 479
Change in net unrealized gain on
investment securities available for
sale -- -- -- (49) (49)
------ ------- ------- ----- -------
Balance at September 30, 1996 $1,889 $19,072 $16,702 $ (10) $37,653
====== ======= ======= ===== =======
Balance at December 31, 1996 $1,902 $19,323 $17,381 $ 27 $38,633
Net income for nine months -- -- 3,432 -- 3,432
Dividends declared ($0.90 per share) -- -- (1,721) -- (1,721)
Stock options exercised 17 159 -- -- 176
Change in net unrealized gain on
investment securities available for
sale -- -- -- 84 84
------ ------- ------- ----- -------
Balance at September 30, 1997 $1,919 $19,482 $19,092 $ 111 $40,604
====== ======= ======= ===== =======
See accompanying notes to consolidated financial statements.
5
SANDWICH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-----------------
1997 1996
---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,432 $ 2,890
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 422 85
Provision for loss and writedowns of real
estate acquired by foreclosure 27 48
Depreciation and amortization 885 1,169
(Increase) decrease in:
Accrued interest receivable (152) 99
Deferred income tax asset, net (41) 8
Other assets (352) 2,627
Increase(decrease)in:
Escrow deposits of borrowers 765 (369)
Income tax payable (183) (171)
Accrued expenses and other liabilities (377) 459
Gain on sales of loans, net (95) (207)
Principal balance of loans originated
for sale (11,767) (16,862)
Principal balance of loans sold 11,984 17,029
Loss on sales of investment securities, net 6 --
Gain on sales of real estate acquired by
foreclosure (63) (6)
------- -------
Total adjustments 1,059 3,909
------- -------
Net cash provided by operating activities 4,491 6,799
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available
for sale (13) (3,638)
Purchases of investment securities held to
maturity (36,082) (20,800)
Proceeds from sales of investment securities
available for sale 2,527 --
Proceeds from maturities and paydowns of
investment securities available for sale 3,051 8,114
Proceeds from maturities and paydowns of
investment securities held to maturity 28,783 15,040
(Increase) decrease in:
Short-term investments (429) 289
Loans (47,243) (41,826)
Real estate acquired by foreclosure (20) --
Stock in Federal Home Loan Bank of Boston (1,079) --
Investments in real estate (58) 10
Proceeds from sale of real estate acquired by
foreclosure 846 1,161
Purchase of office properties and equipment (271) (436)
------- -------
Net cash used by investing activities (49,988) (42,086)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 25,060 8,852
Advances from the Federal Home Loan Bank
of Boston 168,500 46,000
Repayment of Federal Home Loan Bank advances (148,526) (22,319)
Cash dividends paid (1,721) (1,411)
Stock options exercised 176 479
------- -------
Net cash provided by financing activities 43,489 31,601
------- -------
Net decrease in cash and federal
funds sold (2,008) (3,686)
Cash and federal funds sold, beginning of
period 11,718 16,072
------- -------
Cash and federal funds sold, end of period $ 9,710 $12,386
======= =======
CASH PAID FOR
Interest on deposits $11,197 $10,928
======= =======
Interest on borrowed funds $ 2,123 $ 615
======= =======
Income taxes, net $ 2,316 $ 1,954
======= =======
OTHER NON-CASH ACTIVITIES
Deferred taxes on change in unrealized (gain)
loss on securities available for sale $ (20) $ 20
======= =======
Additions to real estate acquired by
foreclosure $ 642 $ 1,407
======= =======
See accompanying notes to unaudited consolidated financial statements.
6
SANDWICH BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
September 30, 1997 and 1996
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION
The unaudited consolidated financial statements of Sandwich
Bancorp, Inc.(the "Company") and its wholly owned subsidiary,
the Sandwich Co-operative Bank (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
nine months ended September 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 September 30, 1996 balances to conform
with September 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 September 30, 1997, the Registrant completed the acquisition
of the Sandwich Co-operative Company (the "Company") pursuant to
a Plan of Reorganization and Acquisition, dated January 27,
1997, pursuant to which the Company became a wholly owned
subsidiary of the Registrant, a newly formed holding company
incorporated by the Company 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
Company (the "Company'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
Company's Common Stock became the holders of all the outstanding
Common Stock. The holding company formation will result in no
change to the Company's business, management, office locations
or customer service.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1997, the Company 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 a material
impact on the Company'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 15, 1997. Earlier or retrospective
applications of this statement is not permitted. Management of
the Company does not expect that adoption of this statement will
have a material impact on the Company's financial statements.
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 Company does not expect that the adoption of
this statement will have a material effect on the Company's
earnings per share, results of operations or liquidity.
7
Also in February, 1997, the FASB issued SFAS No. 129,
"Disclosure of Information about Capital Structure", which will
be effective for 1997 financial statements. The company's
disclosures currently comply with the provisions of this
statement.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for
reporting and displaying comprehensive income, which is defined
as all changes to equity except investments by and distributions
to shareholders. Net income is a component of comprehensive
income, with all other components referred to in the aggregate
as other comprehensive income. This statement is effective for
1998 financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information", which
establishes standards for reporting information about operating
segments. An operating segment is defined as a component of a
business for which separate financial information is available
that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and evaluate
performance.
This statement requires a company to disclose certain income
statement and balance sheet information by operating segment, as
well as provide a reconciliation of operating segment
information to the company's consolidated balances. This
statement is effective for 1998 annual financial statements.
8
SANDWICH BANCORP, INC.
---------------------
Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
FINANCIAL CONDITION
The following is a discussion of the major changes and trends in
financial condition as of September 30, 1997 as compared to
December 31, 1996.
At September 30, 1997, the Company's total assets were
$511,765,000 as compared to $464,555,000 at December 31, 1996,
an increase of $47,210,000 or 10.2%. The increase is largely
attributable to an increase in loan production over the nine
month period. The continuing improvement in the New England and
local real estate markets in 1997 has had a positive impact on
the Company's loan portfolio. As evidence of this, the
Company's loan portfolio, net of allowance for loan losses,
increased $46,057,000 or 14.5% to $363,160,000 at September 30,
1997 compared to $317,103,000 at December 31, 1996, through loan
originations and purchases, partially offset by principal
amortization and early payoffs.
The Company's investment portfolio, including other short-term
investments, investment securities available for sale and
investment securities held to maturity increased $2,274,000 or
2.0% to $115,870,000 at September 30, 1997 compared to
$113,596,000 at December 31, 1996. The increase was the result
of the purchase of investment securities held to maturity.
These purchases were partially offset by maturities on
investment securities and cash flow from collateralized mortgage
obligations (CMOs) have been reinvested in loan originations and
purchases and in the purchase of investment securities.
The major components of investment securities at September 30,
1997 and December 31, 1996 are as follows:
September 30, December 31,
1997 1996
------------- -----------
(In thousands)
Available-for-sale:
US Government obligations $ --- $ 2,000
Mortgage-backed securities 7,332 8,418
Mortgage-backed mutual fund --- 2,520
Common and preferred stocks 324 324
Unrealized gain on investment
securities available for sale 154 50
-------- --------
7,810 13,312
-------- --------
Held-to-maturity:
US Government obligations 16,475 22,477
Collateralized mortgage obligations 54,573 64,780
Mortgage-backed securities 35,947 12,391
-------- --------
106,995 99,648
-------- --------
Total $114,805 $112,960
======== ========
Property acquired by the Company as the result of foreclosure or
repossession decreased to $317,000 at September 30, 1997 from
$465,000 at December 31, 1996. Foreclosed properties are
classified as "real estate acquired by foreclosure,"
representing the lower of the carrying value of the loan or the
fair value of the property less costs to sell until such time as
they are sold or otherwise disposed. During the nine months
ended September 30, 1997, the Company acquired five properties
through foreclosure or repossession, of which four were
residential mortgage loans totaling $229,000 and one was a
commercial mortgage loan totaling $413,000. During the same
period, the Company sold two foreclosed residential properties
totaling $282,000, two commercial properties totaling $519,000
and one lot of land totaling $45,000.
9
Although continued improvement in the 1997 economy is
anticipated, should the local real estate market soften, it
would have an impact on the Company's loan portfolio and could
result in an increase in, and reduced values of, properties
acquired by foreclosure. Accordingly, higher provisions for
loan losses and foreclosed property expense may be required
should economic conditions deteriorate or the levels of the
Company's non-performing assets increase. Management continues
to engage experienced outside consultants to assist in loan
reviews in an effort to minimize risk and control exposure.
Deposits increased by $25,060,000 or 6.5% to $413,309,000 at
September 30, 1997 compared to $388,249,000 at December 31,
1996. The increase in deposits reflects the seasonality effect
of the local market area. Borrowed funds increased by
$19,974,000 to $52,047,000 at September 30, 1997 compared to
$32,073,000 at December 31, 1996 due to an increase in advances
from the Federal Home Loan Company of Boston to finance loan
originations, loan purchases and the purchase of investment
securities.
Total stockholders' equity increased $1,971,000 or 5.1% since
December 31, 1996. Increases in stockholders' equity resulted
from net income of $3,432,000, stock options exercised of
$176,000 and an increase in net unrealized gain on investment
securities available for sale of $84,000, partially offset by
cash dividends paid of $0.90 per share or $1,721,000. The
Company is required to maintain certain levels of capital
(stockholders' equity) pursuant to FDIC regulations. At
September 30, 1997, the Company had a qualifying total capital
to risk-weighted assets ratio of 14.57%, of which 7.74%
constituted Tier 1 leverage capital, substantially exceeding the
FDIC qualifying total capital to risk-weighted assets
requirement of at least 8.00%, of which at least 4.00% must be
Tier 1 leverage capital.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
GENERAL
Operations for the three months ended September 30, 1997
resulted in net income of $1,238,000 compared with $1,044,000
for the three months ended September 30, 1996. The principal
reason for the increase was improvement in net interest and
dividend income resulting from growth in the residential loan
portfolio. Additionally, non-interest expense decreased as no
provision for the special, one-time deposit insurance assessment
from the Savings Association Insurance Fund (SAIF) was incurred
in the 1996 period. Decreases in net gains realized on the sale
of loans in the secondary market and service charges were also
realized for the three months ended September 30, 1997. The
Company's results of operations largely depend upon its net
interest margin which is the difference between the income
earned on loans and investments, and the interest expense paid
on deposits and borrowings divided by total interest earning
average assets. The net interest margin is affected by economic
and market factors which influence interest rate levels, loan
demand and deposit flows. The net interest margin decreased to
3.73% for the three months ended September 30, 1997 from 3.88%
for the three months ended September 30, 1996.
Trends in the real estate market locally and in New England
impact the Company because of its real estate loan portfolio.
If the local and New England real estate markets should show
signs of weakness, additional provisions for loan losses and
further write downs of properties acquired by foreclosure or
repossession may be necessary in the future. In addition,
various regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance
for loan losses. Such agencies may require the Company to
recognize additions to the allowance based on judgments
different from those of management.
10
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased by $1,001,000 or 12.2% to
$9,234,000 for the three months ended September 30, 1997 when
compared to three months ended September 30, 1996. Interest on
loans increased $1,037,000 or 16.7% as a result of an increase
in the average balance outstanding of $58,599,000, partially
offset by a decrease in the average rate earned on the portfolio
from 8.35% in the first quarter of 1996 to 8.15% for the same
period in 1997. Interest and dividends on total investments
decreased by $44,000 as a result of the decrease in the average
balance outstanding of $6,193,000. The yield on the Company's
investment portfolio increased to 6.21% for the September 30,
1997 period, as compared to 6.05% for September 30, 1996.
Non-accrual loans increased $996,000 to $3,764,000 when compared
to the September 30, 1996 balance of $2,768,000. Substantially
all of the increase was attributed to non-accrual residential
mortgage loans. Restructured loans at September 30, 1997 were
$105,000 compared to $358,000 at September 30, 1996. Typically,
restructured loans are modified to provide either a reduction of
the interest on the loan principal or an extension of the loan
maturity.
INTEREST EXPENSE
Total interest expense increased $678,000 to $4,720,000 for the
three months ended September 30, 1997, from $4,042,000 for the
three months ended September 30, 1996. Interest expense on
interest bearing deposits increased by $253,000 or 6.9%. The
increase reflects an increase in the average balance outstanding
of $21,666,000 and a slight increase in interest rates over the
three month period, from 4.19% in 1996 to 4.22% in 1997.
Interest expense on borrowed funds increased $425,000 primarily
due to an increase in the average balance outstanding of
$27,868,000, along with an increase in interest rates over the
three month period from 5.60% in 1996 to 5.78% in 1997.
Advances from the Federal Home Loan Company of Boston were used
to finance loan originations, loan purchases and the purchase of
investment securities. Interest rates on interest bearing
deposits and borrowed funds for the three months ended September
30, 1997 increased to 4.47% from 4.34% when compared to the same
period in 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses charged to earnings for the three
months ended September 30, 1997 was $181,000, compared to
$50,000 charged to earnings for the 1996 period. The increase
was the result of the overall increase in the loan portfolio for
the three months ended September 30, 1997. At September 30,
1997, total non-performing assets were $4,081,000 representing
0.80% of total assets, compared to $3,339,000 or 0.72% of total
assets at September 30, 1996. Management's analysis of the loan
portfolio considers risk elements by loan category, and also the
prevailing economic climate and anticipated future
uncertainties. Future adjustments to the allowance for loan
losses may be necessary if economic conditions differ
substantially from assumptions used in performing the analysis.
Non-performing assets and the percentage of such assets to total
loans and total assets are as follows:
(Dollars in thousands) September 30, December 31, September 30,
1997 1996 1996
------------ ----------- -------------
Non-performing assets:
Non-accrual loans:
Mortgage loans $3,409 $3,521 $2,484
Other loans 355 565 284
------ ------ ------
Total non-accrual loans 3,764 4,086 2,768
Real estate acquired by
foreclosure 317 465 571
------ ------ ------
Total non-performing assets $4,081 $4,551 $3,339
====== ====== ======
11
September 30, December 31, September 30,
1997 1996 1996
------------ ----------- -------------
Non-accrual loans as a
percentage of:
Total loans receivable 1.03% 1.27% 0.88%
==== ==== ====
Total assets 0.74% 0.88% 0.60%
==== ==== ====
Non-performing assets as a
percentage of:
Total assets 0.80% 0.98% 0.72%
==== ==== ====
NON-INTEREST INCOME
Non-interest income decreased $57,000 for the three months ended
September 30, 1997 when compared to the same period in 1996.
The principal reasons for the decrease were a decline of $13,000
in net gains realized on the sale of fixed rate loans in the
secondary market due to less favorable market interest rates, a
decline of $6,000 in service charges assessed and a decline in
other non-interest income.
NON-INTEREST EXPENSE
Non-interest expense decreased by $169,000 or 5.4% for the three
months ended September 30, 1997 compared to the three months
ended September 30, 1996. No provision for the one time special
assessment on SAIF-assessable deposits was incurred in the three
months ended September 30, 1997. During the three months ended
September 30, 1997, foreclosed property activities resulted in
income, net of expenses, of $37,000. This compares favorably to
the same period in 1996 where net foreclosed property expenses
were $26,000.
INCOME TAX EXPENSE
The Company incurred income tax expense of $768,000 for the
three months ended September 30, 1997 compared with $658,000 in
the 1996 period. Substantially all of the increase is due to
the increase in pre-tax earnings. Factors such as the Company's
earnings and equity securities gains or losses will affect
income taxes recorded in the financial statements.
12
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
GENERAL
Operations for the nine months ended September 30, 1997 resulted
in net income of $3,432,000 compared with $2,890,000 for the
nine months ended September 30, 1996. The principal reason for
the increase was improvement in the net interest income,
resulting from growth in the residential loan portfolio.
Additionally, non-interest expense decreased as no provision for
the special, one-time deposit insurance assessment from the
Savings Association Insurance Fund (SAIF) was incurred in the
1997 period. Decreases in net gains realized on the sale of
loans in the secondary market and service charges were also
realized for the nine months ended September 30, 1997. The
Company's results of operations largely depend upon its net
interest margin which is the difference between the income
earned on loans and investments, and the interest expense paid
on deposits and borrowings divided by total interest earning
average assets. The net interest margin is affected by economic
and market factors which influence interest rate levels, loan
demand and deposit flows. The net interest margin decreased to
3.73% for the nine months ended September 30, 1997 from 3.90%
for the nine months ended September 30, 1996.
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased by $2,828,000 or 11.9% to
$26,517,000 for the nine months ended September 30, 1997 when
compared to nine months ended September 30, 1996. Interest on
loans increased $2,757,000 or 15.3% as a result of an increase
in the average balance outstanding of $54,696,000, partially
offset by a decrease in the average rate earned on the portfolio
from 8.34% in 1996 to 8.08% in 1997. Interest and dividends on
total investments increased by $72,000 or 1.3% to $5,719,000 for
the nine months ended September 30, 1997 when compared to nine
months ended September 30, 1996. The increase was the result of
an increase in the average balance outstanding of $566,000,
along with an increase in the average rate earned on the
portfolio from 6.15% in 1996 to 6.20% in 1997.
INTEREST EXPENSE
Total interest expense increased $1,787,000 to $13,426,000 for
the nine months ended September 30, 1997, from $11,639,000 for
the nine months ended September 30, 1996. Interest expense on
interest bearing deposits increased by $277,000 or 2.5%. The
rise reflects the increase in the average balance outstanding of
$14,578,000, that resulted substantially from an increase in
deposit account balances, along with market interest rates
decreasing slightly over the same nine month period, from 4.24%
in 1996 to 4.19% in 1997. Interest expense on borrowed funds
increased $1,510,000 due to an increase in the average balance
outstanding of $33,759,000 and in the interest rate paid for the
nine months ended September 30, 1997 of 5.71% compared to 5.33%
for the same period in 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses charged to earnings for the nine
months ended September 30, 1997 was $422,000 compared to $85,000
for the same period in 1996. The Company increased its
provision for loan losses for the nine months ended September
30, 1997 as a result of the overall increase in the loan
portfolio for the nine months ended September 30, 1997.
NON-INTEREST INCOME
Non-interest income was $1,898,000 for the nine months ended
September 30, 1997 compared to $2,126,000 for the same period in
1996. The principal reasons for the decrease were a decline of
$112,000 in net gains realized on sale of fixed rate loans in
the secondary market due to less favorable market interest rates
and a decline of $68,000 in service charges assessed.
13
NON-INTEREST EXPENSE
Non-interest expense decreased by $370,000 or 3.9% for the nine
months ended September 30, 1997 compared to the nine months
ended September 30, 1996. No provision for the special, one-
time deposit insurance assessment from the Savings Association
Insurance Fund (SAIF) was incurred in the 1997 period. . During
the nine months ended September 30, 1997, foreclosed property
activities resulted in income, net of expenses, of $2,000. This
compares favorably to the same period in 1996 where net
foreclosed property expenses were $71,000. Additionally,
occupancy and equipment costs declined in the 1997 period due to
a mild winter season.
INCOME TAX EXPENSE
The Company incurred income tax expense of $2,094,000 for the
nine months ended September 30, 1997 compared with $1,790,000 in
the 1996 period. Both these amounts differ from the expected
tax expense of 34% of income before income taxes. The major
reason for these variances relate to the increase in pre-tax
earnings. Factors such as the Company's earnings and equity
securities gains or losses will affect income taxes recorded in
the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
Substantially all of the Company's funds are generated
through its Company's subsidiary, the Sandwich Co-operative
Bank. The Company's sources of funds are customer deposits,
amortization and payoffs of loans, advances from the Federal
Home Loan Bank of Boston, sale of loans in the secondary market,
maturities and sales of investment securities and positive cash
flows generated from operations. As a member of the Depositors'
Insurance Fund, the Company also has a right to borrow from the
Depositors Insurance Fund for short-term cash needs by pledging
certain assets, although it has never exercised this right. The
Company's liquidity management program is designed to assure
that sufficient funds are available to meet it's daily needs.
The Company believes its capital resources, including
deposits, scheduled loan repayments, revenue generated from the
sales of loans and investment securities, unused borrowing
capacity at the Federal Home Loan Company of Boston, and revenue
from other sources will be adequate to meet its funding
commitments.
At September 30, 1997 and December 31, 1996 the Company's and
the Bank's capital ratios were in excess of regulatory
requirements.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
The Company and its subsidiary are not involved in any
pending legal proceedings other than those involved in
the ordinary course of their businesses. Management
believes that the resolution of these matters will not
materially affect their businesses or the consolidated
financial condition of the Company and its subsidiary.
ITEM 2. CHANGES IN SECURITIES.
---------------------
On September 30, 1997, the Registrant completed the
Company holding company reorganization through the
issuance of 1,918,695 shares of common stock in
exchange for an equal number of shares of common stock
of the Sandwich Co-operative Company. For more
information, see the Current Report on Form 8-K, which
was filed on September 30, 1997.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION.
-----------------
A cash dividend of $0.30 per common share was declared
on July 28, 1997. The dividend was paid on August 25,
1997 to shareholders of record as of August 11, 1997.
Declaration of dividends by the Board of Directors
depends on a number of factors, including capital
requirements, regulatory limitations, the Company's
operating results and financial condition and general
economic conditions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
a. Exhibits - Exhibit 27 - Financial Data Schedule
b. Reports on Form 8-K - Form 8-K was filed during the
quarter ended September 30, 1997 announcing the
completion of the Company holding company
reorganization. For more information, see the
Current Report on Form 8-K, dated September 30,
1997.
15
SANDWICH BANCORP, INC.
Signatures
- ----------
In accordance with the requirements of the Securities
Exchange Act, the Registrant caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SANDWICH BANCORP, INC.
----------------------
(Registrant)
November 7, 1997 /s/ Frederic D. Legate
-------------------------------
Frederic D. Legate
President and Chief Executive Officer
November 7, 1997 /s/ George L. Larson
-------------------------------
George L. Larson
President and Chief Executive Officer