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, 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 September 30, 1998:
Common Stock: $1.00 par value 2,085,178
- ----------------------------- -------------------
(Title of class) (Shares outstanding)
SANDWICH BANCORP, INC.
INDEX
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets at September 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the
three and nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Changes in Stockholders'
Equity at September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows for the nine
months ended September 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
September 30,
1998 December 31,
(Unaudited) 1997
----------- -------------
(In thousands)
ASSETS
Cash and due from banks $15,327 $ 9,949
Federal funds sold 12,903 6,018
------- -------
Total cash and cash equivalents 28,230 15,967
------- -------
Other short-term investments 12,037 101
Investment securities:
Available for sale 73,203 10,995
Held to maturity 48,253 99,577
------- -------
Total investment securities 121,456 110,572
------- -------
Loans:
Mortgage loans 336,051 346,062
Other loans 22,735 24,680
-------- --------
Total loans 358,786 370,742
Less allowance for loan losses 4,156 4,100
-------- --------
Net loans 354,630 366,642
-------- --------
Stock in Federal Home Loan Bank of Boston,
at cost 3,749 3,749
Accrued interest receivable 2,735 2,836
The Co-operative Central Bank Reserve Fund 965 965
Real estate held for sale 442 457
Real estate acquired by foreclosure 371 596
Office properties and equipment 4,503 4,641
Leased property under capital lease 1,713 1,738
Core deposit and other intangibles 1,129 1,459
Income taxes receivable, net 528 103
Deferred income tax asset, net 2,827 2,948
Prepaid expenses and other assets 6,486 5,923
------- -------
Total assets $541,801 $518,697
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $460,776 $423,014
Borrowed funds 25,691 45,601
Capital lease obligation 1,713 1,738
Escrow deposits of borrowers 1,820 1,604
Accrued expenses and other liabilities 5,599 4,726
-------- --------
Total liabilities 495,599 476,683
-------- --------
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; 2,085,178
and 1,942,159 issued and outstanding,
respectively 2,085 1,942
Additional paid-in capital 22,472 20,139
Retained earnings 21,325 19,848
Accumulated other comprehensive income 320 85
-------- --------
Total stockholders' equity 46,202 42,014
-------- --------
Total liabilities and stockholders'
equity $541,801 $518,697
======== ========
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,
------------------- -----------------
1998 1997 1998 1997
------ ------ ------ ------
(In thousands, except per share amounts)
INTEREST AND DIVIDEND INCOME
Interest on loans $7,053 $7,259 $21,565 $20,753
Interest on dividends on investment
securities available for sale 930 129 1,579 429
Interest on investment securities
held to maturity 813 1,771 3,557 5,148
Interest on short-term investments 233 75 622 187
------ ------ ------- -------
Total interest and dividend income 9,029 9,234 27,323 26,517
------ ------ ------- -------
INTEREST EXPENSE
Deposits 4,408 3,910 12,623 11,205
Borrowed funds 479 810 1,835 2,221
------ ------ ------- -------
Total interest expense 4,887 4,720 14,458 13,426
------ ------ ------- -------
Net interest and dividend income 4,142 4,514 12,865 13,091
Provision for loan losses -- 181 57 422
------ ------ ------- -------
Net interest and dividend income
after provision for loan losses 4,142 4,333 12,808 12,669
------ ------ ------- -------
NON-INTEREST INCOME
Service charges 412 423 1,224 1,261
Mortgage loan servicing fees 66 66 204 188
Gain on sale of loans, net 92 28 396 95
Other 156 145 276 354
------ ------ ------- -------
Total non-interest income 726 662 2,100 1,898
------ ------ ------- -------
Income before non-interest expense
and income taxes 4,868 4,995 14,908 14,567
------ ------ ------- -------
NON-INTEREST EXPENSE
Salaries and employee benefits 1,489 1,535 4,732 4,616
Occupancy and equipment 368 381 1,089 1,131
FDIC deposit insurance 19 18 65 54
Advertising 54 101 275 302
Data processing service fees 174 162 519 478
Foreclosed property expense (income) 14 (37) 42 (2)
Amortization of core deposit intangible 108 127 331 388
Other 695 702 2,161 2,074
------ ------ ------- -------
Total non-interest expense 2,921 2,989 9,214 9,041
------ ------ ------- -------
Income before income tax expense 1,947 2,006 5,694 5,526
Income tax expense 705 768 2,110 2,094
------ ------ ------- -------
Net income $1,242 $1,238 $ 3,584 $ 3,432
====== ====== ======= =======
Basic earnings per share $ 0.60 $ 0.65 $ 1.79 $ 1.80
====== ====== ======= =======
Diluted earnings per share $ 0.60 $ 0.62 $ 1.74 $ 1.72
====== ====== ======= =======
Average basic shares outstanding 2,073 1,916 1,999 1,911
Dilutive effect of outstanding stock options 12 84 63 82
------ ------ ------- -------
Average diluted shares outstanding 2,085 2,000 2,062 1,993
====== ====== ======= =======
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 nine months -- -- 3,432 -- 3,432
Other comprehensive income, net of tax
Unrealized gains on securities, net
of reclassification adjustment -- -- -- 84 84
-------
Comprehensive income 3,516
Dividends declared ($0.90 per share) -- -- (1,721) -- (1,721)
Stock options exercised 17 159 -- -- 176
------ ------- ------- ----- -------
Balance at September 30, 1997 $1,919 $19,482 $19,092 $ 111 $40,604
====== ======= ======= ===== =======
Balance at December 31, 1997 $1,942 $20,139 $19,848 $ 85 $42,014
Comprehensive income:
Net income for nine months -- -- 3,584 -- 3,584
Other comprehensive income, net of tax
Unrealized gains on securities, net
of reclassification adjustment -- -- -- 235 235
-------
Comprehensive income 3,819
Dividends declared ($1.05 per share) -- -- (2,107) -- (2,107)
Stock options exercised 143 2,333 -- -- 2,476
------ ------- ------- ----- -------
Balance at September 30, 1998 $2,085 $22,472 $21,325 $ 320 $46,202
====== ======= ======= ===== =======
DISCLOSURE OF RECLASSIFICATION AMOUNT:
Unrealized holding gains arising during
period $ 235
Less: reclassification adjustment for
gains included in net income --
-----
Net unrealized gains on securities $ 235
=====
See accompanying notes to consolidated financial statements.
5
SANDWICH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
-----------------
1998 1997
---- ----
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,584 $ 3,432
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 57 422
Provision for loss and writedowns of real
estate acquired by foreclosure 20 27
Depreciation and amortization 739 885
(Increase) decrease in:
Accrued interest receivable 101 (152)
Deferred income tax asset, net (35) (41)
Other assets (563) (352)
Income taxes receivable (425) --
Core deposit intangible 330 --
Increase(decrease)in:
Escrow deposits of borrowers 216 765
Income tax payable -- (183)
Accrued expenses and other liabilities 873 (377)
Gain on sales of loans, net (396) (95)
Principal balance of loans originated
for sale (51,647) (11,767)
Principal balance of loans sold 51,852 11,984
Loss on sales of investment securities, net -- 6
Gain on sales of real estate acquired by
foreclosure (23) (63)
------- -------
Total adjustments 1,099 1,059
------- -------
Net cash provided by operating
activities 4,683 4,491
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available
for sale (66,472) (13)
Purchases of investment securities held to
maturity -- (36,082)
Proceeds from sales of investment securities
available for sale -- 2,527
Proceeds from maturities and paydowns of
investment securities available for sale 4,602 3,051
Proceeds from maturities and paydowns of
investment securities held to maturity 51,088 28,783
(Increase) decrease in:
Short-term investments (11,936) (429)
Loans 11,826 (47,243)
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 -- (58)
Proceeds from sale of real estate acquired by
foreclosure 548 846
Purchase of office properties and equipment (312) (271)
------- -------
Net cash used by investing activities (10,641) (49,988)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 37,762 25,060
Advances from the Federal Home Loan Bank
of Boston 14,090 49,000
Repayment of Federal Home Loan Bank advances (34,000) (29,026)
Cash dividends paid (2,107) (1,721)
Stock options exercised 2,476 176
------- -------
Net cash provided by financing activities 18,221 43,489
------- -------
Net increase in cash and federal funds sold 12,263 (2,008)
Cash and federal funds sold, beginning of
period 15,967 11,718
------- -------
Cash and federal funds sold, end of period $28,230 $ 9,710
======= =======
CASH PAID FOR
Interest on deposits $12,636 $11,197
======= =======
Interest on borrowed funds $ 1,948 $ 2,123
======= =======
Income taxes, net $ 2,156 $ 2,316
======= =======
OTHER NON-CASH ACTIVITIES
Deferred taxes on change in unrealized (gain)
loss on securities available for sale $ (156) $ (20)
======= =======
Additions to real estate acquired by
foreclosure $ 320 $ 642
======= =======
See accompanying notes to unaudited consolidated financial statements.
6
SANDWICH BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
September 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 nine months ended September 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 September 30,
1997 balances to conform with September 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 the year 2000. This statement should not have a material
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. The 1855 Bancorp
subsequently changed its name to "Seacoast Financial Services
Corporation" ("Seacoast").
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
interest for the Company, the Company and Seacoast jointly
announced on March 23, 1998, that they had signed an amendment
to their previously announced agreement of February 2, 1998 by
which Seacoast would acquire Sandwich Bancorp, Inc. Under the
terms of the amended agreement, Compass Bank's parent company,
Seacoast 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 Seacoast near the transaction
date. Based on Seacoast's assumed initial public offering price
of $10.00 per share, each Sandwich Bancorp share will be
exchanged for Seacoast stock having a value of $64.00 per share
so long as Seacoast's 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
average price exceeds $13.50 per share, the value
7
to be received by Sandwich Bancorp shareholders will increase
proportionately up to a maximum value of $71.11 until Seacoast'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
Seacoast stock.
Sandwich Bancorp and Seacoast also entered into a Stock Option
Agreement, granting to Seacoast an option to acquire up to 19.9%
of Sandwich's common stock under certain circumstances.
On October 29, 1998, the Company announced that it had obtained
stockholder approval of its acquisition by Seacoast, holding
company for Compass Bank for Savings. Stockholder approval by
over two-thirds of the Company's outstanding shares was granted
at a Special Meeting held on October 29, 1998 with 99% of those
shares voted cast in favor of the acquisition.
Seacoast is currently offering its Common Stock in conjunction
with the conversion of Seacoast to a stockholder-owned company.
The acquisition of the Company by Seacoast, which is expected to
close in the fourth quarter of 1998, is subject to the
successful completion of Seacoast's conversion and final
Massachusetts regulatory approval.
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, 1998 as compared to
December 31, 1997.
At September 30, 1998, the Company's total assets were
$541,801,000 as compared to $518,697,000 at December 31, 1997,
an increase of $23,104,000 or 4.5%. 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 September 30, 1998 totaled $28,230,000 compared to 15,967,000
at December 31, 1997, an increase of $12,263,000. 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 $22,820,000 or
20.6% to $133,493,000 at September 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
and other short-term investments.
The major components of investment securities at September 30,
1998 and December 31, 1997 are as follows:
September 30, December 31,
1998 1997
---- ----
(In thousands)
Available-for-sale:
US Government obligations $ 22,349 $ ---
Mortgage-backed securities 50,848 10,989
Common and preferred stocks 6 6
-------- --------
73,203 10,995
-------- --------
Held-to-maturity:
US Government obligations 5,493 15,480
Collateralized mortgage obligations 31,006 50,209
Mortgage-backed securities 11,754 33,888
-------- --------
48,253 99,577
-------- --------
Total $121,456 $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 nine 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 $354,630,000 at
September 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 $371,000 at
September 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 nine months ended September 30, 1998, the Company acquired
four properties through foreclosure or repossession, of which
two were residential loans totaling $190,000, one was a land
loan totaling $30,000 and one, a commercial mortgage loan
totaling $100,000. During the same period, the Company sold five
foreclosed residential properties totaling $515,000 and one lot
of land totaling $28,000, thereby incurring a net gain of
$23,000 and have accepted a deposit totaling $5,000 on a pending
sale of one additional property.
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 $37,762,000 or 8.9% to $460,776,000 at
September 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, checking accounts and
certificates of deposit with eighteen month terms or less.
Borrowed funds decreased by $19,910,000 to $25,691,000 at
September 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 $4,188,000 or 10.0% since
December 31, 1997. Increases in stockholders' equity resulted
from net income of $3,584,000, proceeds from stock options
exercised of $2,476,000 and an increase in net unrealized gains
on investment securities available for sale of $235,000,
partially offset by cash dividends paid of $1.05 per share or
$2,107,000. The Company is required to maintain certain levels
of capital (stockholders' equity) pursuant to FDIC regulations.
At September 30, 1998, the Company had a qualifying total
capital to risk-weighted assets ratio of 16.96%, of which 8.45%
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 nine months of 1998, the Company
incurred approximately $1,047,000 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 SEPTEMBER 30, 1998 AND 1997
GENERAL
Operations for the three months ended September 30, 1998
resulted in net income of $1,242,000 compared with $1,238,000
for the three months ended September 30, 1997. Non-interest
income increased $64,000 or 9.7% to $726,000 for the three
months ended September 30, 1998 as compared to $662,000 for the
three months ended September 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 expense decreased by $68,000 or 2.3%
to $2,921,000 for the three months ended September 30, 1998 as
compared to $2,989,000 for the three months ended September 30,
1997. The major areas of decrease in non-interest expense were
in salaries and employee benefits, occupancy and equipment and
advertising. Market interest rates have remained low over the
three month period, a continuation of 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 3.24% for
the three months ended September 30, 1998 from 3.73% for the
three months ended September 30, 1997. As a result of this
decrease, net interest and dividend income decreased $372,000
from $4,514,000 for the three months ended September 30, 1997 to
$4,142,000 for the three months ended September 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
10
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.
INTEREST AND DIVIDEND INCOME
Interest and dividend income decreased by $205,000 or 2.2% to
$9,029,000 for the three months ended September 30, 1998 when
compared to three months ended September 30, 1997. Interest on
loans decreased $206,000 or 2.8% as a result of a decrease in
the average rate earned on the portfolio from 8.15% in the third
quarter of 1997 to 7.88% for the same period in 1998, partially
offset by an increase in the average balance outstanding of
$1,504,000. Interest and dividends on total investments stayed
relatively the same when comparing the three months ended
September 30, 1998 to the three months ended September 30, 1997.
INTEREST EXPENSE
Total interest expense increased $167,000 to $4,887,000 for the
three months ended September 30, 1998, from $4,720,000 for the
three months ended September 30, 1997. Interest expense on
interest bearing deposits increased by $498,000 or 12.7%. The
increase reflects an increase in the average balance outstanding
of $40,108,000 and an increase in interest rates over the three
month period, from 4.20% in 1997 to 4.27% in 1998. Interest
expense on borrowed funds decreased $331,000 primarily due to a
decrease in the average balance outstanding of $21,397,000,
along with a decrease in interest rates over the three month
period from 5.78% 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 September 30, 1998 decreased slightly
to 4.41% from 4.45% when compared to the same period in 1997.
PROVISION FOR LOAN LOSSES
No provision for loan losses was recorded for the three months
ended September 30, 1998 as a result of a decline in non-
performing assets, specific loan charge-offs and total loans,
compared to $181,000 charged to earnings for the 1997 period. At
September 30, 1998, total non-performing assets were $2,257,000
representing 0.41% of total assets, compared to $4,081,000 or
0.80% of total assets at September 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 September 30, 1998 decreased $1,878,000
to $1,886,000 when compared to the September 30, 1997 balance of
$3,764,000. Substantially all of the decrease was attributed to
a reduction in non-accrual residential mortgage loans. There
were no restructured loans at September 30, 1998 compared to
$105,000 at September 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)
September 30, December 31, September 30,
1998 1997 1997
---- ---- ----
Non-performing assets:
Non-accrual loans:
Mortgage loans $1,589 $3,283 $3,409
Other loans 297 298 355
------ ------ ------
Total non-accrual loans 1,886 3,581 3,764
Real estate acquired by
foreclosure 371 596 317
------ ------ ------
Total non-performing assets $2,257 $4,177 $4,081
====== ====== ======
11
(Dollars in thousands)
September 30, December 31, September 30,
1998 1997 1997
---- ---- ----
Non-accrual loans as a percentage of:
Total loans receivable 0.53% 0.97% 1.03%
==== ==== ====
Total assets 0.35% 0.69% 0.74%
==== ==== ====
Non-performing assets as a
percentage of:
Total assets 0.41% 0.81% 0.80%
==== ==== ====
NON-INTEREST INCOME
Non-interest income increased $64,000 for the three months ended
September 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 September 30, 1998
totaled $92,000 compared to $28,000 as of three months ended
September 30, 1997, an increase of $64,000. Other non-interest
income as of three months ended September 30, 1998 increased
$11,000 to $156,000 when compared to $145,000 as of three months
ended September 30, 1997.
NON-INTEREST EXPENSE
Non-interest expense decreased by $68,000 or 2.3% for the three
months ended September 30, 1998 compared to the three months
ended September 30, 1997.
INCOME TAX EXPENSE
The Company incurred income tax expense of $705,000 for the
three months ended September 30, 1998 and $768,000 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 NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
GENERAL
Operations for the nine months ended September 30, 1998 resulted
in net income of $3,584,000 compared with $3,432,000 for the
nine months ended September 30, 1997. The principal reason for
the increase was an increase in net gains realized on the sale
of fixed rate loans in the secondary market. The provision for
loan losses charged to earnings for the nine months ended
September 30, 1998 was $57,000, compared to $422,000 charged to
earnings for the 1997 period. Total non-interest expense
increased by $173,000 or 1.9% to $9,214,000 for the nine months
ended September 30, 1998 when compared to 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 3.42% for the nine months ended
September 30, 1998 from 3.73% for the nine months ended
September 30, 1997. As a result of this decrease, net interest
and dividend income decreased $226,000 from $13,091,000 for the
nine months ended September 30, 1997 to $12,865,000 for the nine
months ended September 30, 1998.
INTEREST AND DIVIDEND INCOME
Interest and dividend income increased by $806,000 or 3.0% to
$27,323,000 for the nine months ended September 30, 1998 when
compared to nine months ended September 30, 1997. Interest on
loans increased $812,000 or 3.9% as a result of an increase in
the average balance outstanding of $21,862,000, partially offset
by a decrease in the average rate earned on the portfolio from
8.08% in 1997 to 7.89% in 1998. Interest and dividends on total
investments decreased slightly by $6,000 to $5,758,000 for the
nine months ended September 30, 1998 when compared to nine
months ended September 30, 1997. The decrease was the result of
a decrease in the average rate earned on the portfolio from
6.20% in 1997 to 5.66% in 1998, partially offset by an increase
in the average balance outstanding of $11,584,000.
INTEREST EXPENSE
Total interest expense increased $1,032,000 to $14,458,000 for
the nine months ended September 30, 1998, from $13,426,000 for
the nine months ended September 30, 1997. Interest expense on
interest bearing deposits increased by $1,418,000 or 12.7%. The
rise reflects the increase in the average balance outstanding of
$37,031,000, that resulted substantially from an increase in
deposit account balances, along with market interest rates
increasing over the same nine month period, from 4.18% in 1997
to 4.27% in 1998. Interest expense on borrowed funds decreased
$386,000 due to a decrease in the average balance outstanding of
$8,650,000, along with a decrease in the interest rate paid for
the nine months ended September 30, 1998 of 5.68% compared to
5.71% for the same period in 1997.
PROVISION FOR LOAN LOSSES
The provision for loan losses charged to earnings for the nine
months ended September 30, 1998 was $57,000 compared to $422,000
for the same period in 1997. The Company decreased its provision
for loan losses for the nine months ended September 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 $2,100,000 for the nine months ended
September 30, 1998 compared to $1,898,000 for the same period in
1997. Gain on sale of fixed rate loans in the secondary market
was $396,000 for the nine months ended September 30, 1998
compared to $95,000 for the same period in 1997, an increase of
$301,000 due to the more favorable market interest rates in
1998.
13
NON-INTEREST EXPENSE
Non-interest expense increased by $173,000 or 1.9% for the nine
months ended September 30, 1998 compared to the nine months
ended September 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 $2,110,000 for the
nine months ended September 30, 1998 compared with $2,094,000 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
September 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 them satisfactory. They will
continue to monitor the Company's process. The Company's Y2K
Team, which includes all Senior Management, meets monthly and
continues to provide reports to the Board of Directors on a
quarterly basis.
Recognizing the importance of customer Year 2000 awareness,
informational mailings were sent during the third quarter of
1998 to all customers receiving monthly statements. Y2K
information is posted on the Company's web site. Additionally,
Y2K Customer Awareness training has been conducted for all
customer contact employees and a special in-house Y2K Awareness
newsletter was distributed to all employees during the third
quarter of this year.
The Company has also provided special training for all
Commercial Loan Officers regarding Y2K loan analysis. All
Commercial accounts have been identified and reviewed for
potential Y2K issues during the second and third quarters of
1998. All new loans include a formal Y2K analysis as part of the
underwriting decision process. Additionally, all Commercial Loan
customers received two separate informational mailings regarding
the Year 2000. The latest mailing during the third quarter of
1998 included a very detailed Year 2000 piece directed to small
business owners that was published by the Federal Reserve Bank
of San Francisco.
During the first, second and third 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 the established
1998 budget. 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 test the software and systems
for Year 2000 modifications.
14
The Company has made a careful inventory and assessment of all
non-information system equipment that may be using embedded
microchip technology. This includes, but is not limited to,
ATM's, vault timers, alarm systems, camera security systems,
HVAC systems, elevators, fax equipment and telephone systems.
Through the third quarter of 1998, the majority of the systems
were Y2K compliant. The remaining systems will be upgraded by
the end of 1998. The cost of upgrades will be included in
existing maintenance contracts.
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 conducted a successful test of its key transaction
processing system in the third quarter of 1998 and plans to
complete testing on most other applications not later than
December 31, 1998.
Although the Company continues to internally test third party
systems, 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.
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
merger. 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 merger.
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 nine
month period ending September 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.
---------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION.
-----------------
A cash dividend of $0.35 per common share was declared
on July 27, 1998. The dividend was paid on August 25,
1998 to shareholders of record as of August 10, 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 - Financial Data Schedule
b. There were no Current Reports on Form 8-K filed
during the quarter ended September 30, 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)
November 12, 1998 /s/ Frederic D. Legate
-------------------------------
Frederic D. Legate
President and Chief Executive Officer
November 12, 1998 /s/ George L. Larson
-------------------------------
George L. Larson
Sr. Vice President /Chief Financial
Officer