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 June 30, 1998
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 04-3394368
------------------------------- --------------------
(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 June 30, 1998:
Common Stock: $1.00 par value 2,043,475
- ----------------------------- -------------------
(Title of class) (Shares outstanding)
SANDWICH BANCORP, INC.
INDEX
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets at June 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the
three and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Changes in Stockholders'
Equity at June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Liquidity and Capital Resources 14
Impact of the Year 200 Issue 14
Quantitative and Qualitative Disclosures
about Market Risk 15
PART II - OTHER INFORMATION 16
Signatures
2
SANDWICH BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
June 30,
1998 December 31,
(Unaudited) 1997
----------- -------------
(In thousands)
ASSETS
Cash and due from banks $15,771 $ 9,949
Federal funds sold 8,001 6,018
------- -------
Total cash and cash equivalents 23,772 15,967
------- -------
Other short-term investments 2,149 101
Investment securities:
Available for sale 58,180 10,995
Held to maturity 64,792 99,577
------- -------
Total investment securities 122,972 110,572
------- -------
Loans:
Mortgage loans 336,646 346,062
Other loans 23,971 24,680
-------- --------
Total loans 360,617 370,742
Less allowance for loan losses 4,167 4,100
-------- --------
Net loans 356,450 366,642
-------- --------
Stock in Federal Home Loan Bank of Boston,
at cost 3,749 3,749
Accrued interest receivable 2,748 2,836
The Co-operative Central Bank Reserve Fund 965 965
Real estate held for sale 442 457
Real estate acquired by foreclosure 271 596
Office properties and equipment 4,510 4,641
Leased property under capital lease 1,721 1,738
Core deposit and other intangibles 1,237 1,459
Income taxes receivable, net 350 103
Deferred income tax asset, net 2,929 2,948
Prepaid expenses and other assets 6,748 5,923
------- -------
Total assets $531,013 $518,697
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $444,750 $423,014
Borrowed funds 33,601 45,601
Capital lease obligation 1,721 1,738
Escrow deposits of borrowers 1,382 1,604
Accrued expenses and other liabilities 5,003 4,726
-------- --------
Total liabilities 486,457 476,683
-------- --------
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; 2,043,475
and 1,942,159 issued and outstanding,
respectively 2,043 1,942
Additional paid-in capital 21,540 20,139
Retained earnings 20,811 19,848
Accumulated other comprehensive income 162 85
-------- --------
Total stockholders' equity 44,556 42,014
-------- --------
Total liabilities and stockholders'
equity $531,013 $518,697
======== ========
See accompanying notes to unaudited consolidated financial statements.
3
SANDWICH BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1998 1997 1998 1997
------ ------ ------ ------
INTEREST AND DIVIDEND INCOME
Interest on loans $7,168 $6,986 $14,512 $13,493
Interest on dividends on investment
securities available for sale 440 134 649 301
Interest on investment securities
held to maturity 1,230 1,758 2,744 3,377
Interest on short-term investments 271 80 388 112
------ ------ ------- -------
Total interest and dividend income 9,109 8,958 18,293 17,283
------ ------ ------- -------
INTEREST EXPENSE
Deposits 4,185 3,714 8,215 7,295
Borrowed funds 624 870 1,357 1,412
------ ------ ------- -------
Total interest expense 4,809 4,584 9,572 8,707
------ ------ ------- -------
Net interest and dividend income 4,300 4,374 8,721 8,576
Provision for loan losses -- 132 57 241
------ ------ ------- -------
Net interest and dividend income
after provision for loan losses 4,300 4,242 8,664 8,335
------ ------ ------- -------
NON-INTEREST INCOME
Service charges 411 432 813 838
Mortgage loan servicing fees 71 58 138 122
Gain on sale of loans, net 146 27 304 67
Other 139 103 119 210
------ ------ ------- -------
Total non-interest income 767 620 1,374 1,237
------ ------ ------- -------
Income before non-interest expense
and income taxes 5,067 4,862 10,038 9,572
------ ------ ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,646 1,552 3,243 3,080
Occupancy and equipment 359 378 721 750
FDIC deposit insurance 27 18 46 36
Advertising 103 101 221 202
Data processing service fees 184 160 345 316
Foreclosed property expense 12 19 28 35
Amortization of core deposit intangible 110 130 223 261
Other 818 688 1,465 1,371
------ ------ ------- -------
Total non-interest expense 3,259 3,046 6,292 6,051
------ ------ ------- -------
Income before income tax expense 1,808 1,816 3,746 3,521
Income tax expense 646 669 1,404 1,327
------ ------ ------- -------
Net income $1,162 $1,147 $ 2,342 $ 2,194
====== ====== ======= =======
Basic earnings per share $ 0.59 $ 0.60 $ 1.19 $ 1.15
====== ====== ======= =======
Diluted earnings per share $ 0.56 $ 0.58 $ 1.14 $ 1.10
====== ====== ======= =======
Average basic shares outstanding 1,979 1,912 1,962 1,908
Dilutive effect of outstanding stock options 79 78 89 81
------ ------ ------- -------
Average diluted shares outstanding 2,058 1,990 2,051 1,989
====== ====== ======= =======
See accompanying notes to unaudited financial statements.
4
SANDWICH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Additional other
Common paid-in Retained comprehensive
Stock capital earnings income Total
------ ---------- -------- ---------------- --------
(In thousands)
Balance at December 31, 1996 $1,902 $19,323 $17,381 $ 27 $38,633
Net income for six months -- -- 2,194 -- 2,194
Other comprehensive income, net of tax
Unrealized gains on securities, net
of reclassification adjustment 76 76
-------
Comprehensive income 2,270
Dividends declared ($0.60 per share) -- -- (1,145) -- (1,145)
Stock options exercised 13 123 -- -- 136
------ ------- ------- ----- -------
Balance at June 30, 1997 $1,915 $19,446 $18,430 $ 103 $39,894
====== ======= ======= ===== =======
Balance at December 31, 1997 $1,942 $20,139 $19,848 $ 85 $42,014
Comprehensive income:
Net income for six months -- -- 2,342 -- 2,342
Other comprehensive income, net of tax
Unrealized gains on securities, net
of reclassification adjustment 77 77
-------
Comprehensive income 2,419
Dividends declared ($0.70 per share) -- -- (1,379) -- (1,379)
Stock options exercised 101 1,401 -- -- 1,502
------ ------- ------- ----- -------
Balance at June 30, 1998 $2,043 $21,540 $20,811 $ 162 $44,556
====== ======= ======= ===== =======
DISCLOSURE OF RECLASSIFICATION AMOUNT:
Unrealized holding gains arising during
period $ 77
Less: reclassification adjustment for
gains included in net income --
-----
Net unrealized gains on securities $ 77
=====
See accompanying notes to consolidated financial statements.
5
SANDWICH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-----------------
1998 1997
---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,342 $ 2,194
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 57 241
Provision for loss and writedowns of real
estate acquired by foreclosure 13 20
Depreciation and amortization 498 322
(Increase) decrease in:
Accrued interest receivable 88 (345)
Deferred income tax asset, net (27) (39)
Other assets (825) 408
Income taxes receivable (247) (146)
Core deposit intangible 222 260
Increase(decrease)in:
Escrow deposits of borrowers (222) 63
Income tax payable -- (282)
Accrued expenses and other liabilities 277 (709)
Gain on sales of loans, net (304) (67)
Principal balance of loans originated
for sale (39,028) (8,209)
Principal balance of loans sold 39,232 8,430
Loss on sales of investment securities, net -- 6
Gain on sales of real estate acquired by
foreclosure (25) (20)
------- -------
Total adjustments (291) (67)
------- -------
Net cash provided by operating
activities 2,051 2,127
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available
for sale (49,475) (13)
Purchases of investment securities held to
maturity -- (28,733)
Proceeds from sales of investment securities
available for sale -- 2,527
Proceeds from maturities and paydowns of
investment securities available for sale 2,382 2,686
Proceeds from maturities and paydowns of
investment securities held to maturity 34,620 19,918
(Increase) decrease in:
Short-term investments (2,048) (989)
Loans 10,105 (31,405)
Real estate acquired by foreclosure -- (20)
Real estate held for sale 15 --
Stock in Federal Home Loan Bank of Boston -- (1,079)
Investments in real estate -- 7
Proceeds from sale of real estate acquired by
foreclosure 467 742
Purchase of office properties and equipment (171) (209)
------- -------
Net cash used by investing activities (4,105) (36,568)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 21,736 13,532
Advances from the Federal Home Loan Bank
of Boston 16,000 126,500
Repayment of Federal Home Loan Bank advances (28,000) (103,026)
Cash dividends paid (1,379) (1,145)
Stock options exercised 1,502 136
------- -------
Net cash provided by financing activities 9,859 35,997
------- -------
Net increase in cash and federal funds sold 7,805 1,556
Cash and federal funds sold, beginning of
period 15,967 11,718
------- -------
Cash and federal funds sold, end of period $23,772 $13,274
======= =======
CASH PAID FOR
Interest on deposits $ 8,221 $ 7,296
======= =======
Interest on borrowed funds $ 1,432 $ 1,338
======= =======
Income taxes, net $ 1,689 $ 1,791
======= =======
OTHER NON-CASH ACTIVITIES
Deferred taxes on change in unrealized (gain)
loss on securities available for sale $ (46) $ (18)
======= =======
Additions to real estate acquired by
foreclosure $ 130 $ 524
======= =======
See accompanying notes to unaudited consolidated financial statements.
6
SANDWICH BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
June 30, 1998 and 1997
(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 Company as of and for the year ended December
31, 1997. In the opinion of management, the interim financial
statements reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the
three months and the six months ended June 30, 1998 and 1997.
Interim results are not necessarily indicative of results to be
expected for the entire year. Certain reclassifications have
been made to the December 31, 1997 and the June 30, 1997
balances to conform with June 30, 1998 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB)
issued Financial Accounting Standard No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded
in other contracts, (collectively referred to as derivatives)
and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair market value. Under
this statement, an entity that elects to apply hedge accounting
is required to establish at the inception of the hedge the
method it will use for assessing the effectiveness of the
hedging derivative and the measurement approach for determining
the ineffective aspect of the hedge. This Statement is effective
for all fiscal quarters of FY's beginning after June 15, 1999.
This statement should not have an immaterial effect on the
Company's consolidated financial statements.
RECENT EVENTS
On February 2, 1998, the Company and the Bank entered into a
definitive agreement under which the 1855 Bancorp, the parent
company of Compass Bank for Savings of New Bedford,
Massachusetts will acquire Sandwich Bancorp, Inc. Prior to the
Company's consideration and approval of its definitive agreement
with the 1855 Bancorp, the Company had contacted and received
expressions of interest from three other parties who had an
interest in an acquisition of the Company.
On February 24, 1998, the Company announced that its Board of
Directors, consistent with the exercise of its fiduciary duties,
determined that it was appropriate to request additional
information and a clarification of the renewed expressions of
interest that it had recently received subsequent to February 2
from the three other parties.
Following a comprehensive review of the other expressions of
interests for the Company, the Company and Compass Bank jointly
announced on March 23, 1998, that they had signed an amendment
to their previously announced agreement of February 2, 1998 by
which Compass Bank would acquire Sandwich Bancorp, Inc. Under
the terms of the amended agreement, Compass Bank's parent
company, The 1855 Bancorp will convert to a 100% publicly owned
stock holding company and thereafter issue stock having a value
of $64.00 per share to Sandwich Bancorp shareholders in a tax-
free exchange of common stock. The value to be received by
Sandwich Bancorp shareholders is subject to adjustment pursuant
to a formula based on the value of the stock of The 1855 Bancorp
near the transaction date. Based on 1855 Bancorp's assumed
initial public offering price of $10.00 per share, each Sandwich
Bancorp share will be exchanged for 1855 Bancorp stock having a
value of $64.00 per share so long as 1855 Bancorp stock trades
at an average price of between $10.00 and $13.50 per share
during a designated trading period following the initial public
offering date. If this
7
average price exceeds $13.50 per share,
the value to be received by Sandwich Bancorp shareholders will
increase proportionately up to a maximum value of $71.11 until
1855 Bancorp's average price reaches or exceeds $15.00 per
share. If this average price is equal to or less than $10.00 per
share, Sandwich Bancorp shares will be exchanged for 6.4 shares
of 1855 Bancorp stock.
Sandwich Bancorp and The 1855 Bancorp also entered into a Stock
Option Agreement, granting to The 1855 Bancorp an option to
acquire up to 19.9% of Sandwich's common stock under certain
circumstances. The transaction, which is subject to all
necessary regulatory and shareholder approvals, is expected to
close in the fourth quarter of 1998.
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 June 30, 1998 as compared to December
31, 1997.
At June 30, 1998, the Company's total assets were $531,013,000
as compared to $518,697,000 at December 31, 1997, an increase of
$12,316,000 or 2.4%. The increase is largely attributable to
increases in cash and cash equivalents, other short-term
investments and investment securities available for sale,
partially offset by a decrease in investment securities held to
maturity and in loans. Total cash and cash equivalents at June
30, 1998 totaled $23,772,000 compared to $15,967,000 at December
31, 1997, an increase of $7,805,000. The increase was the direct
result of cash flow from loan repayments. The Company's
investment portfolio, including other short-term investments,
investment securities available for sale and investment
securities held to maturity increased $14,448,000 or 11.5% to
$125,121,000 at June 30, 1998 compared to $110,673,000 at
December 31, 1997. Maturities on investment securities and cash
flow from mortgage-backed securities were reinvested into
investment securities available for sale.
The major components of investment securities at June 30, 1998
and December 31, 1997 are as follows:
June 30, December 31,
1998 1997
-------- -----------
(In thousands)
Available-for-sale:
US Government obligations $ 4,993 $ ---
Mortgage-backed securities 53,181 10,989
Common and preferred stocks 6 6
-------- --------
58,180 10,995
-------- --------
Held-to-maturity:
US Government obligations 9,989 15,480
Collateralized mortgage obligations 37,235 50,209
Mortgage-backed securities 17,568 33,888
-------- --------
64,792 99,577
-------- --------
Total $122,972 $110,572
======== ========
The New England and local real estate markets have been
positively impacted by a decline in market interest rates,
occurring late in the fourth quarter of 1997 and continuing
through the first six months of 1998. The decline has created a
significant increase in loan refinances and thirty-year fixed
rate loan originations, which the Company sells in the secondary
market. As evidence of this, the Company's loan portfolio, net
of allowance for loan losses, decreased to $356,450,000 at June
30, 1998 compared to $366,642,000 at December 31, 1997. In
addition, property acquired by the Company as the result of
foreclosure or repossession decreased to $271,000 at June 30,
1998 from $596,000 at December 31, 1997. 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 six months ended
June 30, 1998, the Company acquired two properties through
foreclosure or repossession, of which one was a land loan
totaling $30,000 and one, a commercial mortgage loan totaling
$100,000. During the same period, the Company sold four
foreclosed residential properties totaling $457,000, thereby
incurring a net gain of $25,000 and have accepted deposits
totaling $10,000 on pending sales of three additional
properties.
9
Management anticipates continued stability in the economy in
1998. However, the local real estate market continues to
represent a risk to 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 worsen or the levels of the Company's non-
performing assets increase.
Deposits increased by $21,736,000 or 5.1% to $444,750,000 at
June 30, 1998 compared to $423,014,000 at December 31, 1997.
Substantially all of the increase was realized in money market
deposit accounts, passbook savings and checking accounts.
Borrowed funds decreased by $12,000,000 to $33,601,000 at June
30, 1998 compared to $45,601,000 at December 31, 1997. Cash flow
from loan repayments and mortgage-backed securities were used to
pay down maturing advances from the Federal Home Loan Bank of
Boston.
Total stockholders' equity increased $2,542,000 or 6.1% since
December 31, 1997. Increases in stockholders' equity resulted
from net income of $2,342,000, stock options exercised of
$1,502,000 and an increase in net unrealized gains on investment
securities available for sale of $77,000, partially offset by
cash dividends paid of $0.70 per share or $1,379,000. The
Company is required to maintain certain levels of capital
(stockholders' equity) pursuant to FDIC regulations. At June 30,
1998, the Company had a qualifying total capital to risk-
weighted assets ratio of 16.46%, of which 8.29% 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.
As a result of the amendment to the Merger Agreement of February
2, 1998, which was signed on March 23, 1998, the new terms,
being a stock-for-stock transaction, will allow the Company to
record the transaction under the pooling-of-interest method.
Under the pooling-of-interest method, the Company is allowed to
defer all merger-related expenses (versus expensing as
incurred). During the first six months of 1998, the Company
incurred approximately $1,003,000 of merger-related expenses,
which have been deferred and will be recognized by the merged
entity during the quarter when the merger is complete.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND 1997
GENERAL
Operations for the three months ended June 30, 1998 resulted in
net income of $1,162,000 compared with $1,147,000 for the three
months ended June 30, 1997. Non-interest income increased
$147,000 or 23.7% to $767,000 for the three months ended June
30, 1998 as compared to $620,000 for the three months ended June
30, 1997. The principal reason for the increase was an increase
in gains on sale of fixed rate loans in the secondary market. No
provision for loan losses was recorded as a result of a decline
in non-performing assets and total loans. Non-interest expenses
increased by $213,000 or 7.0% to $3,259,000 for the three months
ended June 30, 1998 as compared to $3,046,000 for the three
months ended June 30, 1997. The major areas of increase in non-
interest expense were in salaries and employee benefits, data
processing service fees and other non-interest expenses. Market
interest rates have remained low over the three month period, a
continuance from the initial decline experienced late in the
fourth quarter of 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 3.46% for the three months
ended June 30, 1998 from 3.70% for the three months ended June
30, 1997. As a result of this decrease, net interest and
dividend income decreased $74,000 from $4,374,000 for the three
months ended June 30, 1997 to $4,300,000 for the three months
ended June 30, 1998.
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 information
available at the time of their review.
10
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased by $151,000 to $9,109,000
for the three months ended June 30, 1998 when compared to three
months ended June 30, 1997. Interest on loans increased $182,000
or 2.6% as a result of an increase in the average balance
outstanding of $19,419,000, partially offset by a decrease in
the average rate earned on the portfolio from 8.12% in the
second quarter of 1997 to 7.88% for the same period in 1998.
Interest and dividends on total investments decreased by $31,000
as a result of the decrease in the yield on the Company's
investment portfolio from 6.19% for the June 30, 1997 period, to
5.88% for June 30, 1998, partially offset by an increase in the
average balance outstanding of $4,272,000.
INTEREST EXPENSE
Total interest expense increased $225,000 to $4,809,000 for the
three months ended June 30, 1998, from $4,584,000 for the three
months ended June 30, 1997. Interest expense on interest bearing
deposits increased by $471,000 or 12.7%. The increase reflects
an increase in the average balance outstanding of $36,553,000
and an increase in interest rates over the three month period,
from 4.19% in 1997 to 4.28% in 1998. Interest expense on
borrowed funds decreased $246,000 primarily due to a decrease in
the average balance outstanding of $17,039,000, along with a
slight decrease in interest rates over the three month period
from 5.64% in 1997 to 5.61% in 1998. Cash flow from loan
repayments and mortgage-backed securities were used to pay down
maturing advances from the Federal Home Loan Bank of Boston.
Interest rates on interest bearing deposits and borrowed funds
for the three months ended June 30, 1998 increased slightly to
4.41% from 4.40% when compared to the same period in 1997.
PROVISION FOR LOAN LOSSES
No provision for loan losses was recorded for the three months
ended June 30, 1998 as a result of a decline in non-performing
assets, specific loan charge-offs and total loans, compared to
$132,000 charged to earnings for the 1997 period. At June 30,
1998, total non-performing assets were $2,962,000 representing
0.56% of total assets, compared to $3,958,000 or 0.79% of total
assets at June 30, 1997. 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,
or the levels of the Company's non-performing assets increase
significantly.
Non-accrual loans as of June 30, 1998 decreased $1,000,000 to
$2,691,000 when compared to the June 30, 1997 balance of
$3,691,000. Substantially all of the decrease was attributed to
a reduction in non-accrual residential mortgage loans. There
were no restructured loans at June 30, 1998 compared to $106,000
at June 30, 1997. Typically, restructured loans are modified to
provide either a reduction of the interest on the loan principal
or an extension of the loan maturity.
Non-performing assets and the percentage of such assets to total
loans and total assets are as follows:
(Dollars in thousands)
June 30, December 31, June 30,
1998 1997 1997
------- ------------ -------
Non-performing assets:
Non-accrual loans:
Mortgage loans $2,309 $3,283 $3,159
Other loans 382 298 532
------ ------ ------
Total non-accrual loans 2,691 3,581 3,691
Real estate acquired by
foreclosure 271 596 267
------ ------ ------
Total non-performing
assets $2,962 $4,177 $3,958
====== ====== ======
11
Non-accrual loans as a
percentage of:
Total loans receivable 0.75% 0.97% 1.05%
==== ==== ====
Total assets 0.51% 0.69% 0.74%
==== ==== ====
Non-performing assets as a
percentage of:
Total assets 0.56% 0.81% 0.79%
==== ==== ====
NON-INTEREST INCOME
Non-interest income increased $147,000 for the three months
ended June 30, 1998 when compared to the same period in 1997.
Substantially all of the increase was due to an increase in gain
on sale of fixed rate loans in the secondary market. Gain on
sale of loans, net as of three months ended June 30, 1998
totaled $146,000 compared to $27,000 as of three months ended
June 30, 1997, an increase of $119,000. Other non-interest
income as of three months ended June 30, 1998 increased $36,000
to $139,000 when compared to $103,000 as of three months ended
June 30, 1997.
NON-INTEREST EXPENSE
Non-interest expense increased by $213,000 or 7.0% for the three
months ended June 30, 1998 compared to the three months ended
June 30, 1997. Increases in salaries and employee benefits, data
processing service fees and other non-interest expenses were
incurred.
INCOME TAX EXPENSE
The Company incurred income tax expense of $646,000 for the
three months ended June 30, 1998 and $669,000 in the comparable
period of 1997. Both these amounts differ from the expected tax
expense of 34% of income before income taxes. The major reasons
for these variances relate to state income tax expense (net of
the federal tax benefit), tax exempt income and dividend
received deduction.
12
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
GENERAL
Operations for the six months ended June 30, 1998 resulted in
net income of $2,342,000 compared with $2,194,000 for the six
months ended June 30, 1997. The principal reason for the
increase was improvement in the net interest income, resulting
from growth in the residential loan portfolio. Substantial
increases in net gains realized on the sale of loans in the
secondary market were also realized for the six months ended
June 30, 1998. The provision for loan losses charged to earnings
for the six months ended June 30, 1998 was $57,000, compared to
$241,000 charged to earnings for the 1997 period. Total non-
interest expense increased by $241,000 or 4.0% to $6,292,000 for
the six months ended June 30, 1998 when compared to six months
ended June 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 3.51% for the six months ended June
30, 1998 from 3.74% for the six months ended June 30, 1997.
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased by $1,010,000 or 5.8% to
$18,293,000 for the six months ended June 30, 1998 when compared
to six months ended June 30, 1997. Interest on loans increased
$1,019,000 or 7.6% as a result of an increase in the average
balance outstanding of $32,209,000, partially offset by a
decrease in the average rate earned on the portfolio from 8.04%
in 1997 to 7.89% in 1998. Interest and dividends on total
investments decreased slightly by $9,000 to $3,781,000 for the
six months ended June 30, 1998 when compared to six months ended
June 30, 1997. The decrease was the result of a decrease in the
average rate earned on the portfolio from 6.19% in 1997 to 5.93%
in 1998, partially offset by an increase in the average balance
outstanding of $5,121,000.
INTEREST EXPENSE
Total interest expense increased $865,000 to $9,572,000 for the
six months ended June 30, 1998, from $8,707,000 for the six
months ended June 30, 1997. Interest expense on interest bearing
deposits increased by $920,000 or 12.6%. The rise reflects the
increase in the average balance outstanding of $35,468,000, that
resulted substantially from an increase in deposit account
balances, along with market interest rates increasing over the
same six month period, from 4.17% in 1997 to 4.27% in 1998.
Interest expense on borrowed funds decreased $55,000 due to a
decrease in the average balance outstanding of $2,170,000,
partially offset by a slight increase in the interest rate paid
for the six months ended June 30, 1998 of 5.70% compared to
5.68% for the same period in 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses charged to earnings for the six
months ended June 30, 1998 was $57,000 compared to $241,000 for
the same period in 1997. The Company decreased its provision for
loan losses for the six months ended June 30, 1998 as a result
of a decline in non-performing assets, specific loan charge-offs
and total loans.
NON-INTEREST INCOME
Non-interest income was $1,374,000 for the six months ended June
30, 1998 compared to $1,237,000 for the same period in 1997.
Gain on sale of fixed rate loans in the secondary market was
$304,000 for the six months ended June 30, 1998 compared to
$67,000 for the same period in 1997, an increase of $237,000 due
to the more favorable market interest rates in 1998. Other non-
interest income decreased $91,000 to $119,000 for the six months
ended June 30, 1998, from $210,000 for the six months ended June
30, 1997.
13
NON-INTEREST EXPENSE
Non-interest expense increased by $241,000 or 4.0% for the six
months ended June 30, 1998 compared to the six months ended June
30, 1997. Increases in salaries and employee benefits, data
processing service fees and other non-interest expenses were
incurred.
INCOME TAX EXPENSE
The Company incurred income tax expense of $1,404,000 for the
six months ended June 30, 1998 compared with $1,327,000 in the
1997 period. Both these amounts differ from the expected tax
expense of 34% of income before income taxes. The major reasons
for these variances relate to state income tax expense (net of
the federal tax benefit), tax exempt income and dividend
received deduction.
LIQUIDITY AND CAPITAL RESOURCES
Substantially all of the Company's funds are generated through
its Company's subsidiary, the Sandwich Co-operative Bank. The
Bank's primary sources of liquidity are deposits, loan payments
and payoffs, investment income and maturities and principal
payments of investments, mortgage-backed securities and CMOs,
advances from the Federal Home Loan Bank of Boston, and other
borrowings. As a member of the Co-operative Central Bank's Share
Insurance Fund, the Company also has a right to borrow from the
Share 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 its 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 Bank of Boston, and revenue from other
sources will be adequate to meet its funding commitments. At
June 30, 1998 and December 31, 1997 the Company's and the Bank's
capital ratios were in excess of regulatory requirements.
IMPACT OF THE YEAR 2000 ISSUE
The Company remains on track with plans for Year 2000
compliance. In March of 1998, the FDIC reviewed the Company's
Year 2000 readiness plans and found nothing unusual. They will
continue to monitor the Company's process. The Company continues
to provide reports to the Board of Directors on a quarterly
basis. Recognizing the importance of customer awareness,
additional informational mailings are planned for the third
quarter of 1998 for all customers receiving monthly statements.
A special follow-up mailing is also planned for commercial loan
customers during the third quarter of this year.
The Company relies on a third-party data processing vendor for
critical data warehousing and on-line transaction processing.
Other, less critical, systems are supported by purchased
applications software. The Company is continually evaluating
mission-critical vendor plans and monitoring project milestones.
The Company plans to begin testing its key transaction
processing system in the third quarter of 1998 and to complete
testing on most other applications not later than December 31,
1998. There can be no guarantee that the systems of other
companies, or third party vendors on which the Company's systems
rely, will be remedied on a timely basis. Therefore, the Company
may possibly be negatively impacted to the extent other entities
not affiliated with the Company are unsuccessful in properly
addressing their respective Year 2000 compliance
responsibilities. Specific factors that may cause such material
differences include, but are not limited to, the availability
and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar
uncertainties.
During the first and second quarters of 1998, the Company
replaced specific hardware and software that had been identified
as non-compliant in the organization assessment. All
replacements have been on schedule and within budget. The
remaining replacements are scheduled for the third quarter of
1998. In addition, the Company added to the Information Systems
Department staff in the second quarter of 1998, according to
plan. The Company will utilize internal and, if necessary,
external resources to upgrade, replace, and test the software
and systems for Year 2000 modifications.
14
Current projected timeframes call for completion of the proposed
merger with the 1855 Bancorp in the fourth quarter of 1998 and
the subsequent data system conversion in the first quarter of
1999. Y2K Team Leaders at both Companies have agreed to pursue
independent plans for Y2K compliance through the date of the
data system conversion. The Company foresees no significant
complications from the proposed merger and plans to complete the
Year 2000 Project no later than March 31, 1999. Y2K Team Leaders
from each Company are working in concert to ensure smooth
integration of plans after the conversion.
For further response, refer to the discussion under the
sub-caption "Impact of the Year 2000 Issue" of the caption
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" in the Annual Report, included as Part
II, Item 7 of the Form 10-K, which is incorporated herein by
reference.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The response is incorporated herein by reference from the
discussion under the sub-caption "Asset and Liability Management
and Market Risk" of the caption "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in
the Annual Report, included as Part II, Item 7 of the Form 10-K,
which is incorporated herein by reference. In addition, there
has been no significant change in interest rates over the six
month period ending June 30, 1998.
15
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.
---------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
At the Company's Annual Meeting of Stockholders, held on
June 3, 1998, an election of directors was held in
accordance with the Company's bylaws. Bradford N. Eames,
Barry H. Johnson, Reale J. Lemieux and Gary A.
Nickerson were nominated and, by a majority vote of the
stockholders, declared to be duly elected as directors
of the Company, each to serve a three year term.
ITEM 5. OTHER INFORMATION.
-----------------
A cash dividend of $0.35 per common share was declared
on April 27, 1998. The dividend was paid on May 26, 1998
to shareholders of record as of May 11, 1998.
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. On February 5, 1998, the Company filed a Form 8-K
announcing that the Company and the Bank had entered
into an Affiliation Merger Agreement with The 1855
Bancorp, and its wholly-owned subsidiary, Compass
Bank for Savings. For more information, reference is
made to "Item 12(c) -- Change in Control" and the
Form 8-K filed on February 5, 1998.
16
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)
July 29, 1998 /s/ Frederic D. Legate
-------------------------------
Frederic D. Legate
President and Chief Executive Officer
July 29, 1998 /s/ George L. Larson
-------------------------------
George L. Larson
Sr. Vice President /Chief Financial
Officer