Exhibit 13
1997
ANNUAL
REPORT
[LOGO OF SANDWICH BANCORP, INC. AND PICTURE OF BANK'S MAIN OFFICE APPEARS HERE]
Financial Highlights
Stockholder Letter
Minding Our Business
Selected Consolidated Financial Data
Management's Discussion and Analysis
Independent Auditors' Report
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Officers and Directors
Stockholder Information
Profile
Sandwich Bancorp, Inc. is a Massachusetts based single-bank holding
company. Its primary subsidiary is The Sandwich Co-operative Bank, a state
chartered financial institution which converted to stock ownership in July
1986. Organized in 1885, the Bank serves Cape Cod and adjacent communities.
The primary business of the Bank is to acquire funds in the form of
deposits and use the funds to make mortgage loans for the construction,
purchase and refinancing of residential properties, and to make small
business loans in its market area. The Bank is a member of the Federal
Deposit Insurance Corporation (FDIC) and the Federal Home Loan Bank (FHLB).
Sandwich Co-operative Bank has eleven full service banking offices in
Buzzards Bay, Cedarville, Chatham, Falmouth, Hyannis, Orleans, Pocasset,
Sandwich, South Sandwich, South Yarmouth and Wareham, and a loan office in
Plymouth.
Mission Statement
Our Mission Statement is posted in each banking office and in the Board of
Directors Room so that everyone connected with the Bank is aware of what
the organization is striving for:
At Sandwich Co-operative Bank our mission is to remain a viable and profitable
independent community bank providing the highest possible level
of service and value to our customers and stockholders.
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
(Dollars in thousands, except share data)
At December 31,
--------------------------
Balance Sheets 1997 1996 Change
---------- ---------- --------
Total assets $518,697 $464,555 + 11.7%
Investment securities (short & long-term) 110,673 113,596 - 2.6
Loans, net 366,642 317,103 + 15.6
Real estate acquired by foreclosure 596 465 + 28.2
Core deposit intangible 1,459 1,966 - 25.8
Deposits 423,014 388,249 + 9.0
Borrowed funds 45,601 32,073 + 42.2
Stockholders' equity 42,014 38,633 + 8.8
Shares outstanding 1,942 1,902 + 2.1
Book value per share $21.63 $20.31 + 6.5
Tangible book value per share 21.17 19.67 + 7.6
Twelve months ended
December 31,
--------------------------
Operations 1997 1996 Change
---------- ---------- --------
Net interest and dividend income $17,595 $16,517 + 6.5%
Provision for loan losses 750 265 + 183.0
Net income 4,860 4,137 + 17.5
Per Share Data
Basic earnings per share $2.54 $2.20 + 15.5%
Diluted earnings per share 2.45 2.13 + 15.0
At or for the twelve months
ended December 31,
---------------------------
Other Data 1997 1996 Change
----------- ---------- --------
Interest rate spread 3.12% 3.38% - 7.7%
Net interest margin 3.71 3.94 - 5.8
Return on average assets 0.98 0.94 + 4.3
Return on average stockholders' equity 12.49 11.47 + 8.9
Equity to assets ratio 8.10 8.32 - 2.6
STOCKHOLDER LETTER
Dear Stockholder:
Fiscal year 1997 was a record year for the Bank and its newly formed holding
company, Sandwich Bancorp, Inc. The staff did a remarkable job to ensure that we
obtained our share of the business available from a growing economy. By taking
full advantage of what was a strong local market, we were able to exceed our
internal projections for new deposits and loans, as well as for net income.
For the twelve months ended December 31, 1997, net income increased 18% to $4.9
million, or $2.45 per share, compared to $4.1 million, or $2.13 per share, for
the comparable period in 1996. Deposits grew by 9% and net loans by 16%.
The Company's return on equity was a respectable 12.49% and our return on assets
was 0.98%. Book value per share increased from $20.31 to $21.63 at year's end.
During 1997 we also continued our policy of paying out approximately 50% of our
earnings in dividends. Stockholders received $1.25 in cash dividends in 1997,
compared to $1.05 in 1996.
This year's examination by the Banking Department of the Commonwealth of
Massachusetts resulted in our retaining an "Outstanding" Community Reinvestment
Act (CRA) rating once again. We take great pride in earning this excellent
rating. Over the past seven years we have had five CRA examinations - three by
the Commonwealth and two by the Federal Deposit Insurance Corporation (FDIC).
Each review rated the Bank's performance as "Outstanding," the highest
achievable category. Meeting the credit needs of the total community has been
good business, and it has been particularly rewarding to our staff and
Directors.
If you are a long-term stockholder, you are probably aware of the Company's
Mission Statement, which declares our objective of remaining a viable and
profitable independent community bank providing the highest possible level of
service and value to our customers and stockholders. As I write this message and
reflect upon the past 112 years of the Bank's history - including my personal
tenure here over the past two decades - I am convinced that the Company has met
that mission well. It has always been a viable institution and it has been been
profitable (with only one exception) every year in recent history. We have
always been a "Community Bank" in the best sense of anyone's definition,
striving to provide the highest level of service and value to our customers and-
as a public company for the past 12 years - to our stockholders.
As you may know, on March 23, 1998, the Company entered into an agreement
providing for the merger of the Company with The 1855 Bancorp, the parent
company for CompassBank for Savings of New Bedford, Massachusetts, thereby
ending its long-standing independence. You might wonder why, after completing
such a successful year, the Bancorp's Directors would entertain such a
transaction. The answer to that question can be found in our Mission Statement "
... providing the highest level of value to our stockholders."
The past year was not only a record year for Sandwich Bancorp and Sandwich Co-
operative Bank, it was a record year for the stock market and for the market
value of publicly traded banks, as well. The Directors' recommendation that the
Bank be acquired in 1998 is an expression of their conviction that now is the
optimal time to enter into such a transaction. The recommendation is based on
their strong belief that a merger at this time is in the best interest of the
Bank's stockholders and its stakeholders. They have worked hard to structure an
agreement that will result in an on-going institution that will provide the best
possible opportunities for our employees, our customers, and the communities we
serve, while meeting their fiduciary responsibility to stockholders.
While the name over the door will change, the legacy of Sandwich Co-operative
Bank will hopefully live on in the minds of all of those associated with this
institution over the years--and the spirit of Sandwich Co-operative Bank will be
passed on to become an integral part of a new entity whose mission will be to
continue to provide a high level of value to customers and the community.
I am honored to have been associated with this organization. The Board of
Directors joins me in thanking our employees, customers and stockholders whose
dedication, loyalty and support over the years have made the Bank what it is
today.
Sincerely,
Frederic D. Legate
President and Chief Executive Officer
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
(Dollars in thousands, except share data)
At December 31,
---------------------------------------------------------
Balance Sheets 1997 1996 1995 1994 (1) 1993 (1)
---- ---- ---- -------- --------
Total assets $518,697 $464,555 $426,515 $408,282 $328,746
Investment securities 110,572 112,960 115,238 121,425 89,793
Loans 370,742 320,844 274,095 253,985 210,618
Allowance for loan losses (4,100) (3,741) (3,674) (3,255) (2,983)
Real estate acquired by foreclosure 596 465 367 969 2,867
Core deposit intangible 1,459 1,966 2,550 3,210 1,963
Deposits 423,014 388,249 377,973 358,009 279,965
Borrowed funds 45,601 32,073 8,148 12,865 14,300
Stockholders' equity 42,014 38,633 35,744 32,819 31,197
Shares outstanding 1,942 1,902 1,840 1,828 1,823
Book value per share $21.63 $20.31 $19.43 $17.95 $17.11
Tangible book value per share 21.17 19.67 18.57 16.90 16.04
Years ended December 31,
------------------------------------------------------
Operations 1997 1996 1995 1994 (2) 1993 (2)
---- ---- ---- -------- --------
Interest and dividend income $35,917 $32,309 $30,673 $ 24,077 $20,128
Interest expense 18,322 15,792 14,833 10,572 9,245
------- ------- ------- -------- -------
Net interest and dividend income 17,595 16,517 15,840 13,505 10,883
Provision for loan losses (750) (265) (597) (340) (478)
Gain on sale of branch deposits - - 214 - -
Gain on sale of loans 175 250 40 194 458
Gain on sales of investment securities, net 55 - - 6 107
Mortgage loan servicing fees 250 252 248 224 158
Foreclosed property expense (1) (46) (152) (173) (819)
Loss on writedown of real estate held for investment - - (305) (91) -
SAIF special assessment expense - (280) - - -
Other non-interest income 2,241 2,337 2,216 1,807 1,748
Other non-interest expense (12,225) (12,007) (11,899) (11,152) (10,165)
------- ------- ------- -------- -------
Income before income taxes 7,340 6,758 5,605 3,980 1,892
Income tax expense 2,480 2,621 2,169 1,396 241
------- ------- ------- -------- -------
Net income $ 4,860 $ 4,137 $ 3,436 $ 2,584 $ 1,651
======= ======= ======= ======== =======
Per Share Data
Basic earnings per share $2.54 $2.20 $1.87 $1.41 $0.91
======= ======= ======= ======== =======
Diluted earnings per share $2.45 $2.13 $1.82 $1.38 $0.90
======= ======= ======= ======== =======
Average basic shares outstanding 1,913 1,881 1,840 1,828 1,823
Average diluted shares outstanding 1,986 1,940 1,891 1,876 1,840
Cash dividends declared per share $1.25 $1.05 $0.70 $0.29 $0.00
At or for the years ended
December 31,
-----------------------------------------------------
Other Data 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Interest rate spread 3.12% 3.38% 3.51% 3.42% 3.54%
Net interest margin 3.71 3.94 3.98 3.83 3.66
Return on average assets 0.98 0.94 0.81 0.69 0.52
Return on average stockholders' equity 12.49 11.47 10.21 7.92 5.40
Equity to assets ratio 8.10 8.32 8.38 8.04 9.49
Dividend payout ratio (3) 49.24 47.84 37.49 20.51 -
(1) Includes the assets and liabilities acquired in branch office purchases.
(2) Includes income and expense generated by acquired branch offices.
(3) Dividend payout ratio is calculated by dividing cash dividends declared by
net income.
At December 31, 1996, the Bank's total assets were $464,555,000 as compared to
$426,515,000 at December 31, 1995. The increase was largely attributable to an
increase in loan production throughout 1996 offset by a decrease in the Bank's
investment portfoliPamela J. ButtrickFinancial Printing GroupAt December 31,
1997, the Company's total assets were $518,697,000 as compared to $464,555,000
at December 31, 1996, an increase of $54,142,000 or 11.7%. The increase is
largely attributable to an increase in loan production throughout 1997 offset by
a decrease in the Company's investment portfolio, including investment
securities held to maturity and available for sale. Total cash and cash
equivalents at December 31, 1997 totaled $15,967,000 compared to $11,718,000 at
December 31, 1996, an increase of $4,249,000. The Company's investment
portfolio, including other short-term investments, investment securities
available for sale and investment securities held to maturity, decreased
approximately $2,923,000 to $110,673,000. Maturities on investment securities
and cash flow from collateralized mortgage obligations (CMOs) were reinvested
into loans. The continuing improvement in the New England and local real estate
markets 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 approximately $49,539,000 or 15.6% to $366,642,000, through loan
originations and purchases offset by principal amortization and early payoffs.
Deposits totaled $423,014,000 at December 31, 1997 compared to $388,249,000 at
December 31, 1996, an increase of $34,765,000 or 9.0%. Borrowings totaled
$45,601,000 at December 31, 1997 compared to $32,073,000 at December 31, 1996,
an increase of $13,528,000 due to an increase in advances from the Federal Home
Loan Bank of Boston used to finance loan originations, loan purchases and the
purchase of investment securities.
Non-performing assets, which include non-accrual loans and real estate
acquired by foreclosure (OREO) decreased $374,000, from $4,551,000 at December
31, 1996, to $4,177,000 at December 31, 1997. At December 31, 1995, non-
performing assets totaled $5,038,000. Non-accrual loans decreased by $505,000,
from $4,086,000 at December 31, 1996, to $3,581,000 at December 31, 1997. Other
real estate owned, however, increased by $131,000, from $465,000 at December 31,
1996, to $596,000 at December 31, 1997.
The Company's results of operations are affected by interest rate levels, the
amount of non-performing assets, the health of the real estate sector of the
economy, investment securities transactions and seasonal trends. At December 31,
1997, non-performing assets totaled $4,177,000 or 0.81% of total assets, of
which $3,319,000 are residential properties, $560,000 are investment properties,
and the balance reflects other land loans and properties.
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. Management continues
to engage experienced outside consultants to assist in loan reviews in an effort
to minimize risk and control exposure.
Results of Operations
Comparison of years ended December 31, 1997 and December 31, 1996
General
Net income for the year ended December 31, 1997 amounted to $4,860,000 compared
with net income of $4,137,000 for the year ended December 31, 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 1997 period. Decreases in net gains realized on the sale of
loans in the secondary market and decreases in service charges also occurred for
the year ended December 31, 1997. The Company's operating results depend largely
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 the economic and market factors which influence interest
rates, loan demand and deposit flows. The interest rate margin decreased to
3.71% for the year ended December 31, 1997, from 3.94% for the year ended
December 31, 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 show signs of weakness, additional provisions for loan losses 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.
Average Balance Sheets and Net Interest and Dividend Income
The following table sets forth certain information relating to the Company's
average balance sheets, including interest-earning assets, interest-bearing
liabilities and net interest income:
(Dollars in thousands) Years ended December 31,
1997 1996 1995
-------- -------- --------
Interest Interest Interest
Average earned/ Yield/ Average earned/ Yield/ Average earned/ Yield/
balance paid Rate balance paid Rate balance paid Rate
--------- -------- ------- --------- -------- ------- --------- -------- -------
Assets
Interest-earnings assets:
Short-term investments $ 6,467 $ 304 4.70% $ 5,160 $ 234 4.53% $ 12,933 $ 709 5.48%
Investment securities
available for sale 12,995 758 5.83 24,236 1,512 6.24 29,246 1,719 5.88
Investment securities
held to maturity 104,211 6,575 6.31 93,398 5,833 6.25 92,676 6,027 6.50
-------- ------- -------- ------- -------- -------
Total investment
securities (1) 117,206 7,333 6.26 117,634 7,345 6.24 121,922 7,746 6.35
Total loans (2) 349,028 28,205 8.08 295,228 24,680 8.36 262,952 22,218 8.45
Other earning assets 1,988 75 3.77 1,657 50 3.02 0 0 0.00
-------- ------- -------- ------- -------- -------
Total interest-earnings assets 474,689 35,917 7.57 419,679 32,309 7.70 397,807 30,673 7.71
------- ------- -------
Allowance for loan losses (3,839) (3,635) (3,412)
-------- -------- --------
Total interest-earning assets less
allowance for loan losses 470,850 416,044 394,395
Other assets 25,683 25,214 27,369
-------- -------- --------
Total assets $496,533 $441,258 $421,764
======== ======== ========
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Savings accounts $154,856 3,588 2.32 $158,071 3,660 2.32 $171,197 4,338 2.53
Certificates of deposit 205,710 11,754 5.71 186,776 10,973 5.87 171,431 9,940 5.80
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits 360,566 15,342 4.25 344,847 14,633 4.24 342,628 14,278 4.17
Borrowed funds 51,241 2,980 5.82 20,999 1,159 5.52 10,423 555 5.32
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 411,807 18,322 4.45 365,846 15,792 4.32 353,051 14,833 4.20
------- ------- -------
Non-interest bearing deposits 40,852 36,415 32,450
Other liabilities 4,971 2,929 2,622
-------- -------- --------
Total liabilities 457,630 405,190 388,123
-------- -------- --------
Stockholders' equity 38,923 36,068 33,641
-------- -------- --------
Total liabilities and
stockholders' equity $496,553 $441,258 $421,764
======== ======== ========
Net interest income $17,595 $16,517 $15,840
======= ======= =======
Interest rate spread 3.12% 3.38% 3.51%
==== ==== ====
Net interest margin (3) 3.71% 3.94% 3.98%
==== ==== ====
(1) Investment securities are shown at average amortized cost.
(2) Loans on non-accrual status are included in the average balance.
(3) Net interest income before provision for loan losses divided by total
interest-earning average assets.
Interest and Dividend Income
Interest and dividend income increased by $3,608,000 or 11.2% to $35,917,000 for
the year ended December 31, 1997 when compared to the year ended December 31,
1996. Interest on loans increased $3,525,000 or 14.3% as a result of an increase
in the average balance outstanding of $53,800,000, and a decrease in non-accrual
loans, partially offset by a decrease in the average rate earned on the
portfolio from 8.36% in 1996 to 8.08% in 1997. Interest and dividends on
investment securities and other short-term investments increased by $58,000 or
0.8%.
Non-accrual loans decreased $505,000 to $3,581,000 when compared to the year
ended December 31, 1996 balance of $4,086,000. Restructured loans at December
31, 1997 amounted to approximately $105,000 compared to the December 31, 1996
balance of $258,000. Typically, restructured loans are restructured to provide
either a reduction of the interest on the loan principal or an extension of the
loan maturity.
The following table presents changes in interest and dividend income, interest
expense and net interest and dividend income which are attributable to changes
in the average amounts of interest-earning assets and interest-bearing
liabilities outstanding and/or to changes in the rates earned or paid thereon.
(Dollars in thousands) YEARS ENDED DECEMBER 31, Years ended December 31,
-------------------------------- ------------------------------
1997 vs. 1996 1996 vs. 1995
-------------------------------- ------------------------------
CHANGES DUE TO Changes due to
INCREASE/(DECREASE) increase/(decrease)
------------------- -------------------
RATE/ Rate/
TOTAL VOLUME RATE VOLUME Total Volume Rate Volume
------ ------- ------ ------- ------- ---------- -------- --------
Interest and dividend income:
Total loans $3,525 $4,498 $(827) $(146) $2,462 $2,727 $(237) $ (28)
Investments 58 54 12 (8) (876) (756) (135) 15
Other earning assets 25 10 13 2 50 0 0 50
------ ------ ----- ----- ------ ------ ----- -----
Total interest and
dividend income 3,608 4,562 (802) (152) 1,636 1,971 (372) 37
------ ------ ----- ----- ------ ------ ----- -----
Interest expense:
Deposits 709 666 34 9 355 93 240 22
Borrowed funds 1,821 1,669 63 89 604 555 21 28
------ ------ ----- ----- ------ ------ ----- -----
Total interest expense 2,530 2,335 97 98 959 648 261 50
------ ------ ----- ----- ------ ------ ----- -----
Net interest and
dividend income $1,078 $2,227 $(899) $(250) $ 677 $1,323 $(633) $ (13)
====== ====== ===== ===== ====== ====== ===== =====
Interest Expense
Total interest expense increased $2,530,000 to $18,322,000 for the year ended
December 31, 1997, from $15,792,000 for the year ended December 31, 1996.
Interest expense from deposits increased by $709,000 or 4.8%. The rise reflects
the increase in average interest-bearing deposits balance outstanding of
$15,719,000. Interest expense from borrowed funds increased $1,821,000 primarily
due to an increase in the average balance outstanding of $30,242,000. Interest
rates on interest-bearing deposits and borrowed funds for the year ended
December 31, 1997 increased to 4.45% from 4.32% when compared to 1996.
Provision for Loan Losses
The provision for loan losses charged to earnings amounted to $750,000 and
$265,000 for the years ended December 31, 1997 and 1996, respectively. The
Company increased its provision for loan losses for the year ended December 31,
1997 as compared to the year ended December 31, 1996 as a result of the overall
increase in the loan portfolio and an increase in specific loan charge-offs.
Non-accrual loans as a percentage of total loans outstanding were 0.97% at
December 31, 1997 and 1.27% at December 31, 1996. As of December 31, 1997 and
1996, the Company had identified $200,000 and $584,000, respectively, of
potential problem loans. 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.
(Dollars in thousands) DECEMBER 31, December 31, December 31,
1997 1996 1995
------------- ------------- -------------
Non-accrual loans:
Mortgage loans $3,283 $3,521 $4,238
Other loans 298 565 433
------ ------ ------
Total non-accrual loans 3,581 4,086 4,671
OREO 596 465 367
------ ------ ------
Total non-performing assets $4,177 $4,551 $5,038
====== ====== ======
Non-accrual loans as a percentage of:
Total loans receivable 0.97% 1.27% 1.70%
====== ====== ======
Total assets 0.69% 0.88% 1.10%
====== ====== ======
Non-performing assets as a percentage of:
Total assets 0.81% 0.98% 1.18%
====== ====== ======
For further information on non-accrual loans and the provision for loan
losses, see notes 4 and 5 of notes to consolidated financial statements.
Non-Interest Income
Non-interest income decreased $118,000 for the year ended December 31, 1997
compared to the 1996 period. The decrease was mainly the result of a decline of
$94,000 in service charges along with a decrease in gain on sale of loans of
$75,000, partially offset by a $55,000 increase in gains on sales of investment
securities, net. The decrease in gain on sale of fixed rate loans in the
secondary market was due to less favorable market interest rates during the year
1997. The decrease in service charges resulted from an overall decrease in fees
received for checking account services the Company provides to its customers.
Non-Interest Expense
Total non-interest expense consists of salaries and employee benefits, occupancy
and equipment, FDIC deposit insurance, advertising, data processing service
fees, foreclosed property expense, amortization of core deposit and other
intangibles, and other expenses. Also included are the costs of carrying and
administering non-performing loans.
Non-interest expense decreased as no provision for the special, one-time
deposit insurance assessment from SAIF was incurred in 1997, while a $280,000
provision was incurred in 1996.
Income Taxes
The Company recognized income tax expense of $2,480,000 for the year ended
December 31, 1997 and $2,621,000 in the comparable period of 1996. 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, dividend received deduction
and changes in the valuation allowance for deferred income taxes. Factors such
as the Company's earnings and equity securities gains or losses will affect
income taxes recorded in the financial statements. At December 31, 1997, the
Company had a net deferred income tax asset of $2,948,000, which is net of the
valuation allowance of $56,000. Management establishes a valuation allowance
when it is more likely than not that some portion of the gross deferred income
tax assets will not be realized. The valuation allowance at year end applies
principally to the tax effect of the state income tax benefit attributable to
the gross deductible temporary differences. The primary sources of recovery of
the deferred tax assets are taxes paid that are available for carry back of
$6,100,000 in 1997, 1996 and 1995, and the expectation that the deductible
temporary differences will reverse during periods in which the Company generates
taxable income.
During the fourth quarter of 1997, the Company implemented two tax strategies
in order to recognize the benefit of net, unused capital loss carryforwards that
were due to expire on December 31, 1997. The Company entered into a
sale/leaseback agreement with a third party for three of its offices. In
addition, the Company sold equity securities that were maintained in a Grantors
Trust in order to generate capital gains. The combination of these two
transactions allowed the Company to recognize a $576,000 benefit through a
reduction in the deferred tax asset valuation allowance.
Comparison of years ended December 31, 1996 and December 31, 1995
General
Net income for the year ended December 31, 1996 amounted to $4,137,000 compared
with net income of $3,436,000 for the year ended December 31, 1995. The
principal reasons for the increase were increased net interest and dividend
income, increased gains realized on the sale of loans and a decrease in
provisions for loan losses and FDIC deposit insurance expense, partially offset
by increases in other non-interest expenses and a special one-time deposit
insurance assessment from the Savings Association Insurance Fund ("SAIF"). The
Bank's operating results depend largely 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 the economic and
market factors which influence interest rates, loan demand and deposit flows.
The interest rate margin decreased to 3.94% for the year ended December 31,
1996, from 3.98% for the year ended December 31, 1995.
Interest and Dividend Income
Interest and dividend income increased by $1,636,000 or 5.3% to $32,309,000 for
the year ended December 31, 1996 when compared to the year ended December 31,
1995. Interest on loans increased $2,462,000 or 11.1% as a result of an increase
in the average balance outstanding of $32,276,000, and a decrease in non-accrual
loans, partially offset by a decrease in the average rate earned on the
portfolio from 8.45% in 1995 to 8.36% in 1996. Interest and dividends on
investment securities and other short-term investments decreased by $826,000 or
9.8% as a result of the decrease in the average balance outstanding to
$122,794,000 and a decrease in the yield on investment securities to 6.17% for
the year ended December 31, 1996, as compared to 6.27% for the year ended
December 31, 1995.
Interest Expense
Total interest expense increased $959,000 to $15,792,000 for the year ended
December 31, 1996, from $14,833,000 for the year ended December 31, 1995.
Interest expense from deposits increased by $355,000 or 2.5%. The rise reflects
the increase in average deposits balance outstanding of $2,219,000, along with
an increase in market interest rates over the period. Interest expense from
borrowed funds increased $604,000 primarily due to an increase in the average
balance outstanding of $10,576,000, and an increase in the interest rates over
the period. Interest rates on deposits and borrowed funds for the year ended
December 31, 1996 increased to 4.32% from 4.20% when compared to 1995.
Provision for Loan Losses
The provision for loan losses charged to earnings amounted to $265,000 and
$597,000 for the years ended December 31, 1996 and 1995, respectively. The Bank
decreased its provision for loan losses for the year ended December 31, 1996 as
compared to the year ended December 31, 1995 due to a decline in specific loan
charge-offs. Non-accrual loans as a percentage of total loans outstanding were
1.27% at December 31, 1996 and 1.70% at December 31, 1995. As of December 31,
1996 and 1995, the Bank had identified $584,000 and $349,000, respectively, of
potential problem loans. 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 Bank's non-
performing assets increase significantly.
Non-Interest Income
Non-interest income increased $121,000 for the year ended December 31, 1996
compared to the 1995 period. The increase was mainly the result of the increase
in gain on sale of loans of $210,000, along with an increase of $41,000 in
service charges, partially offset by a decrease of $214,000 in gain on sale of
branch deposits. The increase in gain on sale of loans was due to favorable
market interest rates during the year 1996 and the recording of the value of the
mortgage loan servicing rights. The increase in service charges resulted from
the overall increases in fees for services the Bank provides to its customers.
Non-Interest Expense
Total non-interest expense consists of salaries and employee benefits, occupancy
and equipment, FDIC deposit insurance, advertising, data processing service
fees, foreclosed property expense, amortization of core deposit and other
intangibles and other expenses. Also included are the costs of carrying and
administering non-performing assets.
The slight decrease in non-interest expense for the year when compared to the
prior period is attributed primarily to decreases in FDIC deposit insurance,
foreclosed property expense and amortization of core deposit intangible, offset
partially by increases in salaries and employee benefits and occupancy and
equipment, and the one-time special assessment of $280,000 on SAIF-assessable
deposits.
Income Taxes
The Bank recognized income tax expense of $2,621,000 for the year ended December
31, 1996 and $2,169,000 in the comparable period of 1995. 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, dividend received deduction and changes
in the valuation allowance for deferred income taxes. Factors such as the Bank's
earnings and equity securities gains or losses will affect income taxes recorded
in the financial statements. At December 31, 1996, the Bank had a net deferred
income tax asset of $2,469,000, which is net of the valuation reserve of
$632,000. Management establishes a valuation reserve when it is more likely than
not that some portion of the gross deferred income tax asset will not be
realized. The valuation reserve at year end applies principally to the tax
effect of the capital loss carryforward and the state income tax benefit
attributable to the gross deductible temporary differences. The primary sources
of recovery of the deferred tax asset are taxes paid that are available for
carry back of $5,400,000 in 1996, 1995 and 1994, and the expectation that the
deductible temporary differences will reverse during periods in which the Bank
generates taxable income.
Asset and Liability Management and Market Risk
The Company's pre-tax earnings depend primarily on its net interest income, the
difference between the income it receives on its loan portfolio and other
investments and its cost of money, consisting primarily of interest paid on
savings deposits, FHLB advances and other borrowings. Net interest income is
affected by (i) the difference ("interest rate spread") between rates of
interest earned on its interest-earning assets and rates paid on its interest-
bearing liabilities and (ii) the relative amounts of its interest-earning assets
and interest-bearing liabilities. When interest-earning assets approximate or
exceed interest-bearing liabilities, any positive interest rates spread will
generate net interest income. Thrift institutions have traditionally used
interest rate spreads as a measure of net interest income. Another indicator of
an institution's net interest income is its "net yield on interest-earning
assets" which is net interest income divided by average interest-earning assets.
Market risk is the risk of loss from adverse changes in market prices and
rates. The Company's market risk arises primarily from interest rate risk
inherent in its lending, security investments, and deposit taking activities. To
that end, management actively monitors and manages its interest rate risk
exposure.
The Company's primary objective in managing interest rate risk is to minimize
the adverse impact of changes on the Company's net interest income and capital,
while adjusting the Company's rate-sensitive asset and liability structure to
obtain the maximum net yield on that structure. The Company relies primarily on
this structure to control interest rate risk. However, a sudden and substantial
shift in interest rates may adversely impact the Company's earnings to the
extent that the interest rate earned on interest-earning assets and interest
paid on interest-bearing liabilities do not change at the same frequency, to the
same extent or on the same basis.
A method used by the Company to measure the interest rate risk exposure is the
interest rate sensitivity "GAP", which is the difference between assets and
liabilities subject to rate change over specific time periods. There are
limitations to GAP analysis. However, as rates on different assets and
liabilities may not move to the same extent in any given time period,
competition may affect the ability of the Company to change rates on particular
loan or deposit products. The following table discloses the Company's interest-
sensitive financial instruments, categorized by expected maturity and their fair
values at December 31, 1997. Market risk sensitive instruments are generally
defined as on- and off-balance sheet and other financial instruments.
The following table presents the Company's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at December 31, 1997.
In addition the table indicates the Company's sensitivity gap at various periods
and the ratio of the Company's interest-earning assets to interest-bearing
liabilities at various periods. Term certificates are based upon contractual
maturities.
Over One Over Three Over Five Over
One Year Through Through Through Ten
or less Three Years Five Years Ten Years Years Total
---------- ------------ ----------- ---------- --------- ----------
(Dollars in thousands)
Interest-earning assets:
Short-term investments, investment
securities held to maturity and
investment securities available for sale $ 71,379 $ 34,973 $ 32 $ 10,307 $ -- $116,691
Residential 101,623 66,312 68,511 7,193 5,272 248,911
Commercial real estate 44,975 17,286 153 111 54 62,579
Construction and land loans 13,384 6,378 11,850 23 -- 31,635
Other loans 20,230 3,029 2,602 709 1,047 27,617
-------- -------- -------- -------- -------- --------
Total $251,591 $127,978 $ 83,148 $ 18,343 $ 6,373 $487,433
======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Money market accounts $100,825 $ -- $ -- $ -- $ -- $100,285
NOW and Super NOW (1) -- -- -- -- 44,075 44,075
Regular savings accounts (1) -- -- -- -- 24,345 24,345
Certificates of deposit 134,958 77,230 6,572 17 -- 213,777
Borrowed funds 34,000 11,000 -- -- 601 45,601
-------- -------- -------- -------- -------- --------
Total $269,783 $ 83,230 $ 6,572 $ 17 $ 69,021 $428,623
======== ======== ======== ======== ======== ========
Interest sensitivity gap $(18,192) $ 44,748 $ 76,576 $ 18,326 $(62,648) $ 58,810
======== ======== ======== ======== ========
Cumulative interst sensitivity gap $(18,192) $ 26,556 $103,132 $121,458 $ 58,810 $ 58,810
======== ======== ======== ======== ======== ========
Interest sensitivity gap/total assets (3.51)% 8.63% 14.76% 3.53% (12.08)% 11.34%
======== ======== ======== ======== ======== ========
Cumulative interest sensitivity
gap/total assets (3.51)% 5.12% 19.88% 23.42% 11.34%
======== ======== ======== ======== ========
(1) Interest rates on these accounts have remained constant or decreased from
March of 1994 through December 31, 1997, although market interest rates have
increased over the same period. It is the current intention of the Company's
management not to increase rates on these accounts in a rising rate
environment.
The following table shows the company's financial instruments that are sensitive
in interest rates, categorized by expected maturity, and the instruments' fair
values as of December 31, 1997.
Expected Maturity Date at December 31, 1997 (1)
There-
(Dollars in millions) 1998 1999 2000 2001 2002 after Total Fair Value
------ ------ ----- ----- ----- ------ ------ ----------
INTEREST SENSITIVE ASSETS:
Loans:
Fixed interest rate
Residential mortgages $ 3 $ 2 $ 2 $ 2 $ 2 $ 4 $ 15 $ 15
Average interest rate 6.99% 7.05% 7.03% 6.96% 6.96% 7.33% 7.10%
Variable interest rate
Residential mortgages 49 37 30 23 23 96 258 260
Average interest rate 7.47% 7.49% 7.49% 7.49% 7.49% 7.51% 7.50%
Fixed interest rate
Consumer loans 4 1 1 -- -- -- 6 6
Average interest rate 10.34% 10.30% 9.89% 0.00% 0.00% 0.00% 10.17%
Variable interest rate
Consumer loans 8 4 2 -- -- -- 14 14
Average interest rate 9.80% 9.84% 9.87% 0.00% 0.00% 0.00% 9.85%
Fixed interest rate
Commercial loans 1 1 -- -- -- -- 2 2
Average interest rate 9.73% 9.71% 0.00% 0.00% 0.00% 0.00% 9.72%
Variable interest rate
Commercial loans 22 10 8 6 5 25 76 75
Average interest rate 9.87% 9.64% 9.63% 9.63% 9.63% 9.68% 9.72%
Fixed interest rate
Investment securities 21 12 5 4 4 13 59 59
Average interest rate 6.18% 6.22% 6.41% 6.40% 6.40% 6.42% 6.29%
Variable interest rate
Investment securities 10 8 6 5 5 18 52 52
Average interest rate 6.36% 6.36% 6.37% 6.38% 6.38% 6.42% 6.39%
------ ------ ----- ----- ----- ----- ------ ----
Total interest
sensitive assets $ 118 $ 75 $ 54 $ 40 $ 39 $ 156 $ 482 $483
====== ====== ===== ===== ===== ===== ====== ====
INTEREST SENSITIVE LIABILITIES:
Deposits:
Checking $ 2 $ 2 $ 2 $ 2 $ 2 $ 74 $ 84 $ 84
Average interest rate 0.58% 0.58% 0.58% 0.58% 0.58% 0.51% 0.52%
Savings 4 3 2 2 2 11 24 24
Average interest rate 1.98% 1.98% 1.98% 1.98% 1.98% 1.98% 1.98%
Money market 10 10 7 6 5 63 101 101
Average interest rate 2.88% 2.99% 2.68% 2.68% 2.68% 3.47% 3.22%
Time deposits 144 51 14 2 2 1 214 214
Average interest rate 5.41% 5.71% 5.92% 5.77% 5.77% 2.90% 5.51%
Borrowings:
FHLB 34 11 -- -- -- 1 46 46
Average interest rate 5.82% 5.71% 0.00% 0.00% 0.00% 5.96% 5.82%
Other -- -- -- -- -- -- -- --
----
Average interest rate 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
------ ------ ----- ----- ----- ----- ------
Total interest
sensitive liabilities: $ 194 $ 77 $ 25 $ 12 $ 11 $ 150 $ 469 $469
====== ====== ===== ===== ===== ===== ====== ====
(1) Expected maturities are contractual maturities adjusted for projected
prepayments of principal. The Company uses certain assumptions to estimate fair
values and expected maturities. For assets, expected maturities are based upon
contractual maturities, projected repayments and prepayments of principal. The
prepayment experience reflected herein is based on the Company's historical
experience. The Company's average Constant Prepayment Rate ("CPR") is 13.9% and
18.9% per year of its fixed-rate and adjustable-rate portfolios, respectively,
for interest-earning assets. For deposits, "decay rates" have been applied to
estimate deposit runoff of 14.3% per year based on the Company's own historical
experience. The actual maturities of these instruments could vary substantially
if future prepayments differ from the Company's historical experience. Off-
balance sheet risk includes commitments to extend credit and sell loans. At
December 31, 1997, the contract or notional amount of these commitments is
$46,200,000 and $6,100,000, respectively. Their fair values have been
estimated as $500,000.
Liquidity and Capital Resources
The Company's primary source of liquidity is dividends from its bank
subsidiary. Dividends from the Bank to the Company totaled $768,000 in 1997.The
Company made payments of dividends to stockholders in the amount of $672,000
during the fourth quarter ended December 31, 1997.
The Bank's primary sources of liquidity are deposits, loan payments and
payoffs, investment income and maturities and principal payments on investments,
mortgage-backed securities and CMOs, advances from the Federal Home Loan Bank of
Boston, and other borrowings. Management believes it is prudent to maintain an
investment portfolio that not only provides a source of income, but additionally
provides a source of liquidity, through its principal paydowns and maturities,
to meet lending demands and fluctuations in deposit flows. These various sources
of funds are utilized to fund withdrawals, new loans and other investments, as
well as to pay on-going expenses of operation. At December 31, 1997, the Bank
had total unused lines of credit and commitments to originate loans of
$38,784,000, unadvanced portions of construction loans of $7,188,000 and
commercial standby letters of credit of $218,000. In addition, the Bank had
commitments to sell loans totaling $6,149,000. Management believes that the
Bank's various sources of funds are sufficient to meet its commitments in the
ordinary course of business. For further information, see notes to consolidated
financial statements.
The Bank is required to maintain certain levels of capital (stockholders'
equity) pursuant to FDIC regulations. At December 31, 1997, the Bank's capital
level was significantly in excess of required minimums. For additional
information on capital ratios of the Company and the Bank, see note 11 of notes
to consolidated financial statements.
Impact of the Year 2000 Issue
The Year 2000 (Y2K) Issue is the result of computer programs being written using
two digits, rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company began addressing the Year 2000 Issue in the Fall of 1996. The
Company formed a Y2K Review Team which is composed of the Company's internal
Management Information Systems Steering Committee and all members of our Senior
Management Group. A Plan was developed by the Y2K Review Team and approved by
the Board of Directors. The Team has completed an assessment, identifying
mission critical systems and has initiated formal communications with all third
party vendors to determine the compliance status of any systems utilized by the
Company. Based upon the results of the assessment, the Company has determined
that there will be a need to replace portions of its existing hardware and
require upgrades to a portion of its software systems. The Company does not
utilize internally written and supported proprietary code. All software is
purchased or licensed through widely recognized providers.
The Company Plan calls for replacement and upgrading to take place with
allowances for extensive testing within time frames established by the Federal
Financial Institutions Examination Council (FFIEC). The Y2K Review Team meets no
less than quarterly and provides quarterly reports to the Board of Directors.
The Company has notified its customers of the Year 2000 Issue in the Fall 1997
issue of the Company newsletter, "Currents". The newsletter outlines the issue
and the Company's Plan to address it. Also, letters have been sent to all
commercial loan customers informing them of the Year 2000 Issue and how it can
impact businesses.
The Company had included approximately $150,000 for the replacement and
upgrade of specific hardware in its 1998 capital budget. An additional IS
Technician position has been planned and included in the budget for the IS
Department in the second quarter of 1998. The new employee will assist in the
deployment of Y2K compliant hardware, upgrade software and facilitate the Y2K
testing of all systems.
The Company will utilize internal and, if necessary, external resources to
upgrade, replace, and test the software and systems for Year 2000 Issue
modifications. The Company plans to complete the Year 2000 Issue project no
later than March 31, 1999.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 129, "Disclosure of Information about Capital Structure", which is 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
and is not expected to have a material effect on the 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 also effective for 1998 financial statements and is not expected to
have a material effect on the financial statements.
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
The Board of Directors and Stockholders
Sandwich Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Sandwich
Bancorp, Inc. and subsidiaries as of December 31, 1997 and 1996 and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepting auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sandwich Bancorp,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
January 26, 1998, except as to note 17,
which is as of March 23, 1998
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, December 31,
1997 1996
------------ ------------
(In thousands, except per share data)
ASSETS
Cash and due from banks (note 14) $ 9,949 $ 11,543
Federal funds sold 6,018 175
------------ ------------
Total cash and cash equivalents 15,967 11,718
------------ ------------
Other short-term investments (note 2) 101 636
Investment securities (notes 3 and 9):
Available for sale (amortized cost of $10,863 and $13,262,
at December 31, 1997 and 1996, respectively) 10,995 13,312
Held to maturity (fair value of $99,775 and $99,128,
at December 31, 1997 and 1996, respectively) 99,577 99,648
------------ ------------
Total investment securities 110,572 112,960
------------ ------------
Loans, less allowance for loan losses of
$4,100 in 1997 and $3,741 in 1996 (notes 4, 5, 9 and 14) 366,642 317,103
Stock in Federal Home Loan Bank of Boston, at cost (notes 7 and 9) 3,749 2,670
Accrued interest receivable 2,836 2,680
The Co-operative Central Bank Reserve Fund 965 965
Real estate held for sale 457 -
Real estate held for investment - 571
Real estate acquired by foreclosure 596 465
Office properties and equipment (note 6) 4,641 6,015
Leased property under capital lease (note 6) 1,738 -
Core deposit intangible 1,459 1,966
Income taxes receivable, net (note 10) 103 -
Deferred income tax asset, net (note 10) 2,948 2,469
Prepaid expenses and other assets 5,923 4,337
------------ ------------
Total assets $ 518,697 $ 464,555
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits (note 8) $ 423,014 $ 388,249
Borrowed funds (note 9) 45,601 32,073
Capital lease obligation (note 6) 1,738 -
Escrow deposits of borrowers 1,604 915
Income taxes payable, net (note 10) - 282
Accrued expenses and other liabilities 4,726 4,403
------------ ------------
Total liabilities 476,683 425,922
------------ ------------
Commitments and contingencies (note 14)
STOCKHOLDERS' EQUITY (NOTE 11)
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;
1,942,159 and 1,901,565 issued and outstanding, respectively 1,942 1,902
Additional paid-in capital 20,139 19,323
Retained earnings 19,848 17,381
Net unrealized gain on investment securities available for sale 85 27
------------ ------------
Total stockholders' equity 42,014 38,633
------------ ------------
Total liabilities and stockholders' equity $ 518,697 $ 464,555
============ ============
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------
Years ended
December 31,
---------------------------------------
1997 1996 1995
----------- ----------- -----------
(In thousands, except share data)
INTEREST AND DIVIDEND INCOME
Interest on loans $28,205 $24,680 $22,218
Interest and dividends on investment securities available for sale 772 1,562 1,719
Interest on investment securities held to maturity 6,575 5,833 6,027
Interest on short-term investments 304 166 640
The Co-operative Central Bank Reserve Fund 61 68 69
----------- ----------- -----------
Total interest and dividend income 35,917 32,309 30,673
----------- ----------- -----------
INTEREST EXPENSE
Deposits:
Savings accounts 3,588 3,660 4,338
Certificates of deposit 11,754 10,973 9,940
----------- ----------- -----------
Total deposits 15,342 14,633 14,278
Borrowed funds 2,980 1,159 555
----------- ----------- -----------
Total interest expense 18,322 15,792 14,833
----------- ----------- -----------
Net interest and dividend income 17,595 16,517 15,840
Provision for loan losses (note 5) 750 265 597
----------- ----------- -----------
Net interest and dividend income after provision for loan losses 16,845 16,252 15,243
----------- ----------- -----------
NON-INTEREST INCOME
Service charges 1,687 1,781 1,740
Mortgage loan servicing fees 250 252 248
Gain on sale of branch deposits - - 214
Gain on sale of loans 175 250 40
Gain on sales of investment securities, net 55 - -
Other 554 556 476
----------- ----------- -----------
Total non-interest income 2,721 2,839 2,718
----------- ----------- -----------
NON-INTEREST EXPENSE
Salaries and employee benefits 6,243 5,999 5,757
Occupancy and equipment 1,503 1,587 1,325
FDIC deposit insurance 73 112 469
SAIF special assessment - 280 -
Advertising 385 357 358
Data processing service fees 633 702 665
Foreclosed property expense 1 46 152
Loss on writedown of real estate held for investment - - 305
Amortization of core deposit intangible 507 584 660
Other 2,881 2,666 2,665
----------- ----------- -----------
Total non-interest expense 12,226 12,333 12,356
----------- ----------- -----------
Income before income tax expense 7,340 6,758 5,605
Income tax expense (note 10) 2,480 2,621 2,169
----------- ----------- -----------
Net income $ 4,860 $ 4,137 $ 3,436
=========== =========== ===========
Basic earnings per share $ 2.54 $ 2.20 $ 1.87
=========== =========== ===========
Diluted earnings per share $ 2.45 $ 2.13 $ 1.82
=========== =========== ===========
Average basic shares outstanding 1,913 1,881 1,840
Dilutive effect of outstanding stock options 73 59 51
----------- ----------- -----------
Average diluted shares outstanding 1,986 1,940 1,891
=========== =========== ===========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
Net
unrealized
gain (loss) on
investment
Additional securities
Common paid-in Retained available
stock capital earnings for sale, net Total
--------- ---------- ------------ -------------- ---------
(In thousands)
Balance at December 31, 1994 $1,833 $18,448 $ 13,075 $ (537) $ 32,819
Net income - - 3,436 - 3,436
Dividends declared ($0.70 per share) - - (1,288) - (1,288)
Stock options exercised 17 184 - - 201
Decrease in net unrealized loss on
investment securities available for sale - - - 576 576
------ ------- -------- -------- --------
Balance at December 31, 1995 1,850 18,632 15,223 39 35,744
Net income - - 4,137 - 4,137
Dividends declared ($1.05 per share) - - (1,979) - (1,979)
Stock options exercised 52 691 - - 743
Decrease in net unrealized gain on
investment securities available for sale - - - (12) (12)
------ ------- -------- -------- --------
Balance at December 31, 1996 1,902 19,323 17,381 27 38,633
Net income - - 4,860 - 4,860
Dividends declared ($1.25 per share) - - (2,393) - (2,393)
Stock options exercised 40 816 - - 856
Increase in net unrealized gain on
investment securities available for sale - - - 58 58
------ ------- -------- -------- --------
Balance at December 31, 1997 $1,942 $20,139 $ 19,848 $ 85 $ 42,014
====== ======= ======== ======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended
December 31,
-----------------------------------
1997 1996 1995
----------- ---------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,860 $ 4,137 $ 3,436
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 750 265 597
Provision for loss and writedowns of real estate acquired by foreclosure 31 48 96
Depreciation and amortization 684 1,422 1,592
(Increase) decrease in:
Accrued interest receivable (156) 61 (47)
Deferred income tax asset, net (503) 9 (528)
Other assets (1,586) 1,029 (3,626)
Income taxes receivable (103) - -
Core deposit intangible 507 - -
Increase(decrease)in:
Escrow deposits of borrowers 689 (664) 914
Income tax payable (282) 32 (455)
Accrued expenses and other liabilities 323 1,582 (398)
Gain on sales of loans, net (175) (250) (40)
Principal balance of loans originated for sale (18,197) (20,827) (14,752)
Principal balance of loans sold 18,238 20,999 14,363
Gain on sales of investment securities, net (55) - -
Gain on sales of real estate acquired by foreclosure (92) (65) (16)
--------- -------- --------
Total adjustments 73 3,641 (2,300)
--------- -------- --------
Net cash provided by operating activities 4,933 7,778 1,136
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available for sale (4,086) (145) (8,718)
Purchases of investment securities held to maturity (38,915) (29,948) (6,054)
Proceeds from sales of investment securities available for sale 2,910 - -
Proceeds from maturities and paydowns of investment securities available for sale 3,584 12,495 6,457
Proceeds from maturities and paydowns of investment securities held to maturity 39,031 19,675 15,120
(Increase) decrease in:
Short-term investments 535 274 773
Loans (51,400) (48,276) (20,405)
Real estate acquired by foreclosure - - (52)
Real estate held for sale (457) - -
Stock in Federal Home Loan Bank of Boston (1,079) - -
Investments in real estate 571 14 229
Proceeds from sale of real estate acquired by foreclosure 1,195 1,326 983
Disposal of office properties and equipment, net 1,055 - -
Capitalized expenses on real estate acquired by foreclosure (20) - -
Purchase of office properties and equipment (364) (512) (1,009)
--------- -------- --------
Net cash used by investing activities (47,440) (45,097) (12,676)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 34,765 10,276 11,830
Advances from the Federal Home Loan Bank of Boston 200,054 69,884 11,047
Repayment of Federal Home Loan Bank advances (186,526) (45,959) (15,764)
Cash dividends paid (2,393) (1,979) (1,288)
Net cash paid for deposits sold - - 8,134
Stock options exercised 856 743 201
--------- -------- --------
Net cash provided by financing activities 46,756 32,965 14,160
--------- -------- --------
Net increase (decrease) in cash and federal funds sold 4,249 (4,354) 2,620
Cash and federal funds sold, beginning of year 11,718 16,072 13,452
--------- -------- --------
Cash and federal funds sold, end of year $ 15,967 $ 11,718 $ 16,072
========= ======== ========
CASH PAID FOR
Interest on deposits $ 15,329 $ 14,635 $ 14,606
========= ======== ========
Interest on borrowed funds $ 2,870 $ 615 $ 582
========= ======== ========
Income taxes, net $ 2,983 $ 2,481 $ 3,152
========= ======== ========
OTHER NON-CASH ACTIVITIES
Deferred taxes on change in unrealized (gain) loss on securities available for sale ($24) $ 15 ($296)
========= ======== ========
Additions to real estate acquired by foreclosure $ 1,245 $ 1,407 $ 409
========= ======== ========
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995
(1) Basis of Presentation and Summary of Significant Accounting Policies
General
Sandwich Bancorp, Inc. (the "Company") is a Massachusetts corporation and the
holding company of Sandwich Co-operative Bank (the "Bank"). The Sandwich Co-
operative Bank was organized as a Massachusetts chartered co-operative bank in
1885. The Bank merged with Wareham Co-operative Bank in May 1982. In July 1986,
the Bank converted from mutual to stock form through the sale and issuance of
1,820,833 shares of common stock, par value $1.00 per share (the "Common
Stock"). The Bank's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC"), an agency of the federal government, up to $100,000 per
insured depositor, with additional insurance to the total amount of the deposit
provided by the Share Insurance Fund of The Co-operative Central Bank (the
"Central Bank"), a deposit insuring entity chartered by the Commonwealth of
Massachusetts. The Bank is subject to regulation by the Massachusetts
Commissioner of Banks ("Commissioner") and the FDIC.
On January 28, 1997, Sandwich Co-operative Bank announced that its Board of
Directors had approved a plan providing for the formation of a holding company
with the Bank as the principal subsidiary. Under the plan, each existing share
of the Bank's Common Stock was converted into one share of Common Stock in the
new holding company. As a result of this reorganization, the Bank's stockholders
became the owners of the newly formed holding company, which in turn owns all of
the outstanding stock of the Bank. The holding company formation resulted in no
change to the Bank's business, management, office locations or customer service,
and the holding company's corporate documents did not include any additional
anti-takeover provisions. The holding company reorganization was consummated on
September 30, 1997.
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Sandwich Bancorp, Inc. (the "Company") and its wholly owned subsidiaries, The
Sandwich Co-operative Bank, The Sextant Corporation, Sandwich Securities
Corporation and Sextant Securities Corporation. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and general practices
within the banking industry. In preparing the financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the balance sheet and income and
expenses for the period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to change relate to the
determination of the allowance for loan losses. This estimate is dependent on
future economic and overall business conditions.
Certain reclassifications have been made to previously reported balances to
conform with the current period's presentation.
Investment Securities
Debt securities that the Bank has the positive intent and ability to hold to
maturity are classified as held-to-maturity and reported at amortized cost; debt
and equity securities that are bought and held principally for the purpose of
selling in the near term are classified as trading and reported at fair value,
with unrealized gains and losses included in earnings; and debt and equity
securities not classified as either held-to-maturity or trading are classified
as available-for-sale and reported at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
stockholders' equity, net of applicable taxes.
Securities held to maturity, including bonds, mortgage-backed securities &
CMOs are stated at cost, adjusted for amortization of premiums or accretion of
discounts, calculated using a method which approximates the interest method. The
basis for valuation reflects management's intention and ability to hold these
securities to maturity.
Securities available for sale consisting of government bonds, adjustable rate
mortgage-backed securities and marketable equity securities are stated at fair
value, with unrealized gains and losses, net of tax, excluded from earnings and
reported as a separate component of stockholders' equity until realized. Fair
value is based upon quoted market prices or dealer quotes as of the reporting
date.
Gains and losses on the sale of investment securities are recognized at the
time of sale on a specific identification basis. Unrealized losses deemed to be
other than temporary declines in value are charged to operations.
Premiums and discounts on investment and mortgage-backed securities are
amortized or accreted into income by a method that estimates the interest method
adjusted for prepayments. If a decline in fair value below the amortized cost
basis of an investment or mortgage-backed security is judged to be other than
temporary, the cost basis of the investment is written down to fair value as a
new cost basis and the amount of the write-down is included as a charge against
income.
Notes to Consolidated Financial Statements
Loans
Loans are reported at their principal amount outstanding, net of any unearned
discount and deferred loan fees. Interest income on loans is credited to income
based on loan principal amounts outstanding at appropriate interest rates.
Unearned discount and premium on loans is credited or charged to income on a
basis which approximates the interest method.
Accrual of interest income on loans is discontinued and unpaid accrued
interest is reversed when management determines that borrowers will be unable to
meet contractual obligations and/or when loans are ninety days or more in
arrears, except in certain instances where management believes that collateral
held by the Bank is clearly sufficient for full satisfaction of both principal
and interest. Loans will be removed from non-accrual when the principal and
interest become current and the loan is considered fully collectable.
Loan origination fees and certain direct origination costs are offset and the
resulting net amount is deferred and amortized as an adjustment of the yield on
the related loans.
Loans held for sale are carried at the lower of cost or estimated fair value.
Fair value is determined based on outstanding investor commitments or, in the
absence of such commitments, current investor yield requirements.
Allowance for Loan Losses
The allowance for loan losses is available for probable credit losses inherent
in the loan portfolio. The allowance is increased by provisions charged to
operations on the basis of many factors including the risk characteristics of
the portfolio, current economic conditions and trends in loan delinquencies and
charge-offs. Realized losses, net of recoveries, are charged directly to the
allowance.
The Bank accounts for impaired loans, except loans accounted for at fair value
or at the lower of cost or fair value, at the present value of the expected
future cash flows discounted at the loan's effective interest rate or the fair
value of the collateral if the loan is collateral dependent. Impaired loans
include commercial, commercial real estate and individually significant mortgage
or consumer loans for which it is probable the Bank will not collect all amounts
due according to the terms of the loan agreement. Impairment on troubled debt
restructurings is measured using the premodification rate of interest.
While management uses the information available in establishing the allowance
for loan losses, future adjustments to the allowance may be necessary if
economic conditions differ substantially from the assumptions used in making the
evaluation. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgments different from those of management.
Real Estate Acquired by Foreclosure
Real estate acquired by foreclosure is comprised of properties acquired through
foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Real
estate acquired by foreclosure is initially recorded at the lower of the
carrying value of the loan or the fair value of the property minus costs to
sell. Fair value is based upon a market appraisal prepared by a State certified
appraiser not more than 30 days prior to the date of the foreclosure. Losses
arising from the acquisition of such properties are charged against the
allowance for loan losses.
Operating expenses and any subsequent provisions to reduce the carrying value
to fair value minus cost to sell are charged to current period earnings. Gains
upon disposition are reflected in earnings as realized. Realized losses are
charged to the valuation allowance.
Office Properties and Equipment
Office properties and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed on the straight-
line method over the estimated useful lives of the related assets or terms of
leases.
Pension Costs and Employee Benefits
The Bank accounts for pension and postretirement benefits on the net periodic
cost method for financial reporting purposes. This method recognizes the
compensation cost of an employee's benefit over that employee's approximate
service period.
The Company continues to follow APB Opinion No. 25 "Accounting for Stock
Issued to Employees" as permitted by Statement of Financial Accounting Standards
No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). For companies
that elect to continue using APB 25, SFAS 123 requires disclosure of the pro
forma effect of using the fair value method of accounting for stock-based
compensation that is encouraged by SFAS 123. See note 12 of notes to
consolidated financial statements for the expanded disclosures required by SFAS
123 regarding pro forma net income and earnings per share.
Core Deposit Intangible
Core deposit and other intangibles are amortized to expense over a period of ten
years using an accelerated method. The unamortized balance of these intangibles
are evaluated periodically for their recoverability.
Notes to Consolidated Financial Statements
Income Taxes
The Bank recognizes income taxes under the asset and liability method. Under
this method, deferred tax assets and liabilities are established for the
temporary differences between the accounting basis and the tax basis of the
Bank's assets and liabilities at enacted tax rates expected to be in effect when
the amounts related to such temporary differences are realized or settled. A
valuation allowance related to deferred tax assets is established when, in
management's judgment, it is more likely than not that all or a portion of such
deferred tax assets will not be realized. Changes in the valuation allowance are
reflected as deferred income tax expense or benefit. The deferred tax asset is
adjusted for changes in the federal and state tax rates.
Earnings Per Share
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128
replaces the existing accounting rules for computing earnings per share and
makes the new rules comparable to international standards. Basic earnings per
share excludes common stock equivalents and is computed by dividing net income
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share gives effect to all potential dilutive common shares
using the average market price of the Company's common stock for the period plus
the weighted average number of common shares outstanding for the equivalent
period of time. All prior period earnings per share have been restated to comply
with SFAS 128.
The numerator in the earnings per share calculation is net income, as
reported, for both the basic and dilutive calculations.
(2) Other Short-term Investments
A comparative summary of other short-term investments follows:
(In thousands) DECEMBER 31, December 31,
1997 1996
------------ ------------
Tax anticipation notes $ -- $ 570
Money market funds 101 66
----- -----
$ 101 $ 636
===== =====
(3) Investment Securities
A comparative summary of investment securities follows (mortgage-backed
securities and CMOs are shown at their final maturity, but are expected to have
shorter average lives); the Bank does not own callable securities.
(In thousands) DECEMBER 31, 1997 December 31, 1996
------------------ -----------------------------
HELD TO MATURITY AVAILABLE FOR SALE Held to maturity Available for sale
------------------ ------------------ ------------------ ------------------
AMORTIZED FAIR AMORTIZED FAIR Amortized Fair Amortized Fair
COST VALUE COST VALUE cost value cost value
--------- ------- --------- ------- --------- ------- --------- -------
U.S. Government obligations:
Maturing within 1 year $ 9,992 $10,004 $ -- $ -- $12,015 $12,035 $ 2,000 $ 1,994
Maturing after 1 year
but within 5 years 5,488 5,506 -- -- 10,462 10,492 -- --
------- ------- --------- ------- ------- ------- ------- -------
15,480 15,510 -- -- 22,477 22,527 2,000 1,994
------- ------- --------- ------- ------- ------- ------- -------
Collateralized mortgage obligations (CMOs):
Maturing within 1 year 413 413 -- -- 1,436 1,436 -- --
Maturing after 1 year
but within 5 years 4,598 4,591 -- -- 6,384 6,312 -- --
Maturing after 5 years
but within 10 years 5,036 5,021 -- -- 740 753 -- --
Maturing after 10 years 40,162 40,230 -- -- 56,220 55,708 -- --
------- ------- --------- ------- ------- ------- ------- -------
50,209 50,255 -- -- 64,780 64,209 -- --
------- ------- --------- ------- ------- ------- ------- -------
Mortgage-backed securities:
Maturing within 1 year -- -- 98 98 -- -- -- --
Maturing after 1 year
but within 5 years -- -- -- -- -- -- 147 147
Maturing after 5 years
but within 10 years 217 228 -- -- -- -- -- --
Maturing after 10 years 33,671 33,782 10,763 10,891 12,391 12,392 8,271 8,343
------- ------- --------- ------- ------- ------- ------- -------
33,888 34,010 10,861 10,989 12,391 12,392 8,418 8,490
------- ------- --------- ------- ------- ------- ------- -------
Marketable equity securities:
Mortgage-backed mutual fund -- -- -- -- -- -- 2,520 2,510
Common and preferred stocks -- -- 2 6 -- -- 324 318
------- ------- --------- ------- ------- ------- ------- -------
-- -- 2 6 -- -- 2,844 2,828
------- ------- --------- ------- ------- ------- ------- -------
$99,577 $99,775 $10,863 $10,995 $99,648 $99,128 $13,262 $13,312
======= ======= ========= ======= ======= ======= ======= =======
Notes to Consolidated Financial Statements
A comparative summary of mortgage-backed securities and CMO's follows:
(In thousands) DECEMBER 31, 1997 December 31, 1996
------------------ ------------------
AMORTIZED FAIR Amortized Fair
COST VALUE cost value
--------- ------- --------- -------
FHLMC $18,086 $18,210 $18,820 $18,720
FNMA 41,643 41,687 24,586 24,408
GNMA 4,398 4,492 3,982 4,068
Non-agency 30,831 30,865 38,201 38,201
------- ------- ------- -------
$94,958 $95,254 $85,589 $85,091
======= ======= ======= =======
A comparative summary of gross unrealized gains and losses pertaining to
investment securities are summarized as follows:
(In thousands)
DECEMBER 31, 1997 December 31, 1996
----------------- -----------------------
GROSS GROSS Gross Gross
AMORTIZED UNREALIZED UNREALIZED FAIR Amortized unrealized unrealized Fair
COST GAINS losses value cost gains losses value
--------- ----------------- ----------- ------- --------- ---------- ----------- --------
Held to Maturity
- ----------------
U.S. Government obligations $15,480 $ 36 $ (6) $15,510 $22,477 $ 50 $ -- $22,527
Collateralized mortgage
obligations 50,209 269 (223) 50,255 64,780 209 (780) 64,209
Mortgage-backed securities 33,888 331 (209) 34,010 12,391 88 (87) 12,392
------- ---- ----- ------- ------- ---- ----- -------
$99,577 $636 $(438) $99,775 $99,648 $347 $(867) $99,128
======= ==== ===== ======= ======= ==== ===== =======
DECEMBER 31, 1997 December 31, 1996
----------------- -----------------
GROSS GROSS Gross Gross
AMORTIZED UNREALIZED UNREALIZED FAIR Amortized unrealized unrealized Fair
COST GAINS LOSSES VALUE cost gains losses value
--------- ----------------- ----------- ------- --------- ---------- ----------- --------
Available for Sale
- ------------------
U.S. Government obligations $ -- $ -- $ -- $ -- $ 2,000 $ -- $ (6) $ 1,994
Mortgage-backed securities 10,861 137 (9) 10,989 8,418 112 (40) 8,490
Marketable equity securities 2 4 -- 6 2,844 20 (36) 2,828
------- ---- ----- ------- ------- ---- ----- -------
$10,863 $141 $ (9) $10,995 $13,262 $132 $ (82) $13,312
======= ==== ===== ======= ======= ==== ===== =======
The Bank had approximately $2,910,000 in proceeds from sales of securities
available for sale for the year ended December 31, 1997. The Bank realized gross
gains on sales of $66,000 and gross losses of $11,000 during 1997. There were no
sales of securities for the year ended December 31, 1996.
(4) Loans
The Bank's lending activities are conducted principally in the Southeastern and
Cape Cod areas of Massachusetts. The Bank grants single-family and multi-family
residential loans, commercial real estate loans and a variety of consumer loans.
In addition, the Bank grants loans for the construction of residential homes,
multi-family properties, commercial real estate properties and for land
development. Most loans granted by the Bank are either collateralized by real
estate or guaranteed by Federal and local governmental authorities. The loans
are expected to be repaid from borrower's earnings and cash flow or proceeds
from the sale of the related assets.
State banking regulations generally limit the amount of loans that may be
outstanding to one borrower to 20% of stockholders' equity. At December 31,
1997, the Bank had no loans outstanding to one borrower in an aggregate amount
exceeding this limitation.
Notes to Consolidated Financial Statements
A comparative summary of loans follows:
(In thousands) DECEMBER 31, December 31,
1997 1996
------------- -------------
Residential mortgage:
Fixed rate $ 14,956 $ 16,020
Adjustable rate 232,925 186,012
Commercial real estate 62,579 61,088
Construction 32,472 34,332
Land 6,351 4,526
Other loans:
Home equity 12,438 12,278
Consumer 4,847 5,393
Secured by deposits 1,182 1,160
Commercial 8,060 7,933
Education 826 1,123
-------- --------
376,636 329,865
Less:
Allowance for loan losses (note 5) (4,100) (3,741)
Unadvanced portion of construction loans (7,188) (9,763)
Deferred loan origination costs 1,294 742
-------- --------
$366,642 $317,103
======== ========
Non-accrual loans totaled approximately $3,581,000, $4,086,000, and $4,671,000
at December 31, 1997, 1996, and 1995, respectively. Restructured loans totaled
approximately $105,000, $258,000, and $1,062,000 at December 31, 1997, 1996, and
1995, respectively.
The reduction in interest income associated with non-accrual and restructured
loans at the end of the periods was as follows:
(In thousands)
Year ended December 31,
-----------------------
1997 1996 1995
------ ------ ------
Income in accordance with original terms $ 321 $ 403 $ 551
Income recognized 144 203 312
----- ----- -----
Reduction in interest income $ 177 $ 200 $ 239
===== ===== =====
Included in non-accrual loans are impaired loans totaling $630,000, $1,429,000
and $1,309,000 at December 31, 1997, 1996 and 1995, respectively. The reduction
in interest income associated with impaired loans at the end of the periods was
as follows:
(In thousands) Year ended December 31,
-----------------------
1997 1996 1995
------ ------ ------
Income in accordance with original terms $ 67 $ 148 $ 141
Income recognized 23 84 72
----- ----- -----
Reduction in interest income $ 44 $ 64 $ 69
===== ===== =====
The Bank granted mortgage loans to executive officers and to Directors and their
related interests in the normal course of business. The outstanding amount of
such loans at December 31, 1997, 1996 and 1995 was approximately $700,000,
$714,000, and $820,000, respectively. No such loans were on non-accrual.
Currently, the Bank grants only loans secured by deposits to executive officers
and Directors.
Mortgage loans serviced by the Bank for others amounted to approximately
$115,478,000, $108,756,000, and $100,902,000, at December 31, 1997, 1996 and
1995, respectively. The Bank had no loans held for sale at December 31, 1997 and
$221,000, and $389,000 at December 31, 1996, 1995, respectively. At December 31,
1997, the Bank had commitments to sell loans totaling approximately $6,149,000.
Notes to Consolidated Financial Statements
(5) Allowance for Loan Losses
An analysis of the allowance for loan losses follows:
(In thousands)
Year ended December 31,
------------------------------
1997 1996 1995
-------- -------- --------
Balance at beginning of period $ 3,741 $ 3,674 $3,255
Provision charged to operations 750 265 597
Recoveries on accounts previously
charged off 89 67 183
Loans charged off (480) (265) (361)
------- ------- ------
Balance at end of period $ 4,100 $ 3,741 $3,674
======= ======= ======
(6) Office Properties and Equipment
A summary of office properties and equipment follows:
(In thousands) DECEMBER 31, December 31,
1997 1996
------------ ------------
Land $ 712 $ 870
Buildings 2,627 4,395
Furniture, fixtures and equipment 4,282 3,923
Leasehold improvements 400 392
------- -------
8,021 9,580
Less accumulated depreciation and amortization (3,380) (3,565)
$ 4,641 $ 6,015
======= =======
In 1997, the Bank entered into a sale/leaseback agreement for three of its
offices and deferred the gain on sale of $599,000. The initial lease term is
twenty years followed by four five-year renewal options. Furthermore, the Bank
will have the right to re-purchase the properties at the end of years eight,
fifteen and twenty. The commitment for minimum annual lease payments is as
follows:
(In thousands) Years ending December 31,
1997 1998 1999 2000 2001 Thereafter Total
------ ---- ---- ---- ---- ---------- ------
Capital Lease Payments $ 15 182 182 182 182 995 $1,738
(7) Stock in Federal Home Loan Bank of Boston
As a member of the Federal Home Loan Bank of Boston ("FHLB of Boston"), the Bank
is required to invest in $100 par value stock of the FHLB of Boston in an amount
equal to 1% of its outstanding home loans or 5% of its outstanding advances from
the FHLB of Boston, or 1% of 30% of total assets, whichever is highest. If such
stock is redeemed, the Bank will receive from the FHLB of Boston an amount equal
to the par value of the stock. As of December 31, 1997, the Bank was required to
have an investment of at least $2,603,000.
(8) Deposits
A summary of deposits follows:
(In thousands) DECEMBER 31, 1997 December 31,1996
----------------- ----------------
Non-interest bearing accounts:
Demand $ 39,127 $ 38,459
Official checks 865 1,336
-------- --------
Total non-interest bearing accounts 39,992 39,795
-------- --------
Savings accounts:
Regular 24,345 23,321
NOW, Super NOW and Special Notice 44,075 40,488
Money market 100,825 92,441
-------- --------
Total savings accounts 169,245 156,250
-------- --------
Certificates of deposit:
Term 168,523 147,265
IRA 45,254 44,939
-------- --------
Total certificates of deposit 213,777 192,204
-------- --------
$423,014 $388,249
======== ========
Notes to Consolidated Financial Statements
A summary of certificates of deposit, by periods of maturity follows:
(In thousands) DECEMBER 31, December 31,
1997 1996
------------------ ------------------
Within one year $134,958 $122,255
From one to two years 55,552 42,250
From two to three years 16,678 15,798
From three to five years 6,572 11,844
Over five years 17 57
-------- --------
$213,777 $192,204
======== ========
Individual certificates of deposit of $100,000 or more, by periods of maturity,
are summarized below:
(In thousands) DECEMBER 31, December 31,
1997 1996
------------ ------------
Within three months $15,133 $ 8,945
From three to six months 6,976 3,675
From six to twelve months 7,897 4,823
Thereafter 15,146 18,391
------- --------
$45,152 $ 35,834
======= ========
(9) Borrowed Funds
Advances from the Federal Home Loan Bank of Boston are summarized as follows:
(Dollars in thousands)
Maturing in DECEMBER 31, December 31,
Interest rate year ending 1997 1996
----------- ----------- ------------
4.53 - 5.78% 1997 $ -- $26,026
5.60 - 6.47% 1998 34,000 5,000
5.71 - 6.83% 1999 11,000 1,000
8.32% 2015 47 47
6.67% 2017 54 --
5.66% 2018 500 --
-------- -------
$ 45,601 $32,073
======== =======
Weighted average rate 5.82% 5.70%
======== =======
The advances are secured by the Bank's stock in the FHLB of Boston and certain
qualifying assets of the Bank, which include mortgage loans on residential
property and investments with a market value in excess of 125% of outstanding
advances. The Bank has a line of credit with the FHLB of Boston aggregating
$8,146,000 of which all is available at December 31, 1997.
(10) Income Taxes
The components of income tax expense are as follows:
(In thousands)
Year ended December 31,
--------------------------
1997 1996 1995
-------- ------- -------
Current tax expense:
Federal $2,383 $2,070 $1,928
State 606 539 674
------ ------ ------
2,989 2,609 2,602
------ ------ ------
Deferred tax benefit:
Federal (426) (2) (423)
State (83) 14 (10)
------ ------ ------
(509) 12 (433)
------ ------ ------
Total income tax expense $2,480 $2,621 $2,169
====== ====== ======
Notes to Consolidated Financial Statements
The difference between income tax expense computed by applying the statutory
Federal income tax rate of 34% to income before income taxes and the reported
income tax expense (benefit) is explained as follows:
(Dollars in thousands)
Year ended December 31,
-------------------------
1997 1996 1995
------ ------ -------
Expected income tax expense
at statutory rate $2,496 $2,298 $1,906
Increase (decrease) resulting from:
Dividend received deduction and
municipal income (17) (7) (16)
State income taxes, net of
Federal benefit 345 365 436
Change in valuation allowance (576) (142) (100)
Expiration of capital loss carryforward 30 98 --
Other, net 202 9 (57)
------ ------ ------
Total income tax expense $2,480 $2,621 $2,169
====== ====== ======
Effective income tax rate 33.8% 38.8% 38.7%
====== ====== ======
The Bank had gross deferred tax assets and gross deferred tax liabilities as
follows:
(In thousands) DECEMBER 31, At December 31,
1997 1996
------------ ---------------
Gross deferred tax assets:
Allowance for loan losses $1,470 $1,269
Capital loss carryforward 9 490
Deferred compensation 1,113 966
Non-accrual loan interest 21 21
Losses on foreclosed real estate 56 148
Subsidiary state net operating loss carryforward -- 34
Deferred gain on the sale of office properties 269 --
Purchase accounting 589 498
------ ------
Gross deferred tax assets 3,527 3,426
Valuation allowance (56) (632)
------ ------
Gross deferred tax assets, net 3,471 2,794
------ ------
Gross deferred tax liabilities:
Mortgage servicing rights (143) (80)
Unrealized gains on securities available for sale (47) (17)
Depreciation (178) (112)
Loan origination costs (100) (71)
Miscellaneous (55) (45)
------ ------
Gross deferred tax liabilities (523) (325)
------ ------
Net deferred tax asset $2,948 $2,469
====== ======
A valuation allowance is provided when it is more likely than not that some
portion of the gross deferred tax asset will not be realized. Management has
established a valuation allowance principally for the tax effect of the capital
loss carry forward and the state income tax benefit derived from the gross
deductible temporary differences. The primary sources of recovery of the
deferred tax asset are taxes paid that are available for carryback of $6.1
million in 1997, 1996 and 1995, and the expectation that the deductible
temporary differences will reverse during periods in which the Bank generates
taxable income. As of December 31, 1997, the capital loss carryforward
approximates $25,000 and expires in 1998.
The balance of the pre-1988 bad debt reserves continue to be subject to
provision of present law that require recapture in the case of certain excess
distributions to shareholders. The tax effect of pre-1988 bad debt reserves
subject to recapture in the case of certain excess distributions is
approximately $2,300,000.
Notes to Consolidated Financial Statements
(11) Retained Earnings
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional, discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of Total and Tier I capital (as defined in the regulations) to risk
weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes that as of December 31, 1997, the Bank
meets all capital adequacy requirements to which they are subject.
As of December 31, 1997, the most recent notification from the FDIC
categorized the Bank as well capitalized under the prompt corrective action
provisions. To be categorized as well capitalized, the Bank must maintain Total
capital risk-based, Tier 1 capital risk-based and Tier 1 capital leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes would cause a change in the Bank's
categorization.
The Company's and Bank's actual capital amounts and ratios in addition to the
minimum capital requirements and well capitalized capital requirements at
December 31 follow:
To Be Well
Minimums Capitalized Under
For Capital Prompt Corrective
(In thousands) Actual Adequacy Action Provisions
--------------- ---------------- ------------------
(Dollars in thousands)
Amount Ratio Amount Ratio Amount Ratio
------- ------ -------- ------ ---------- ------
As of December 31, 1997:
- ------------------------
Risk-based capital ratio:
Total capital
Sandwich Bancorp, Inc. $44,371 14.9% $23,868 8.0% $29,835 10.0%
Sandwich Co-operative Bank 44,050 14.8 23,851 8.0 29,814 10.0
Tier I capital
Sandwich Bancorp, Inc. 40,640 13.6 11,934 4.0 17,901 6.0
Sandwich Co-operative Bank 40,321 13.5 11,926 4.0 17,889 6.0
Leverage capital ratio:
Tier I capital
Sandwich Bancorp, Inc. 40,640 7.9 20,690 4.0 25,863 5.0
Sandwich Co-operative Bank 40,321 7.8 20,686 4.0 25,858 5.0
As of December 31, 1996:
- ------------------------
Risk-based capital ratio:
Total capital:
Sandwich Co-operative Bank 40,112 14.7 21,851 8.0 27,314 10.0
Tier 1 capital
Sandwich Co-operative Bank 36,694 13.4 10,925 4.0 15,147 6.0
Leverage capital ratio:
Tier 1 capital
Sandwich Co-operative Bank 36,694 8.4 17,572 4.0 20,927 5.0
The Company may not declare or pay cash dividends on its common stock if the
effect thereof would cause its net worth to be reduced below regulatory net
worth requirements or if such declaration and payment would otherwise violate
regulatory requirements.
(12) Employee Benefits
Postretirement Benefits
The Bank provides postretirement medical benefits for employees that were hired
before July 1, 1993. The Bank accrued postretirement benefits other than
pensions (medical benefits) over the periods during which employees render
service. The Bank amortizes the transition obligation from January 31, 1993 into
operations over a 20 year period. Expense for the years ended December 31, 1997,
1996 and 1995 was approximately $54,000, $53,000 and $51,000, respectively.
Pension Plan
The Bank provides pension benefits for its employees through membership in the
Co-operative Banks Employee's Retirement Association. The Plan is a multi-
employer, noncontributory, defined benefit plan. Bank employees become eligible
after attaining age 21 and one year of service. The Plan is funded by the Bank
and benefits become fully vested after six years of eligible service.
Pension expense was approximately $317,000, $309,000 and $224,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
Notes to Consolidated Financial Statements
Stock Option Plan
During 1986, the Board of Directors adopted a Stock Option Plan for the benefit
of officer and non-officer employees and reserved 182,083 shares of authorized
but unissued common stock. Similarly, in 1994, the Board of Directors instituted
the 1994 Stock Option and Incentive Plan and reserved 90,000 shares of common
stock. Under terms of the Plans, the exercise price of any option granted will
not be less than the fair market value of the common stock on the date of grant
of the option and options may not have a maximum term of more than ten years.
A summary of the activity under the Plan follows:
Number of Average
shares exercise price
----------- ---------------
Balance outstanding at December 31, 1994 169,005 $10.67
Options granted ($16.75) 28,500 16.75
Options exercised ($7.00 - $12.00) (17,716) 11.37
------- ------
Balance outstanding at December 31, 1995 179,789 11.56
Options granted ($21.1875) 28,600 21.19
Options exercised ($7.00 - $16.75) (51,266) 12.49
Options canceled ($11.55 - $16.75) (450) 16.17
------- ------
Balance outstanding at December 31, 1996 156,673 13.00
Options granted ($30.6875) 31,850 30.69
Options exercised ($7.00 - $21.1875) (40,594) 10.47
Options canceled ($16.75 - $30.6875) (1,050) 24.41
------- ------
Balance outstanding at December 31, 1997 146,879 $17.46
======= ======
Stock options outstanding and exercisable:
At December 31, 1997
--------------------
Options outstanding Options exercisable
------------------- -------------------
Weighted Weighted Weighted
average average average
Number remaining exercise Number exercise
outstanding contractual life price outstanding price
----------- ---------------- -------------------- ------------------- --------
Range of exercise prices
$7.00 - $14.875 63,475 4.2 years $ 9.60 63,475 $ 9.60
$16.75 - $21.1875 52,004 7.8 years 19.07 24,064 18.29
$30.6875 31,400 9.2 years 30.69 -- --
There are 3,828 options available for future grant at December 31, 1997.
At December 31, 1997, the per share weighted average fair value of stock
options granted during 1997, 1996 and 1995 was $18.05, $7.39 and $5.20 ,
respectively on the date of grant using the Black Scholes option-pricing model
with the following weighted average assumptions for 1997, 1996 and 1995:
expected dividend yield of 2.42% for 1997 and 3.69% for 1996 and 1995, risk-free
interest rate of 5.92% for 1997 and 6.56% for 1996 and 1995, volatility of the
Company's common stock of 35% for 1997 and 45% for 1996 and 1995 and an expected
life of ten years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been reduced to the pro forma amounts indicated
below:
(Dollars in thousands
except per share data) 1997 1996 1995
------ ------ ------
Net income As reported $4,860 $4,137 $3,436
Pro forma 4,654 4,102 3,406
Earnings per share As reported $ 2.45 $ 2.13 $ 1.82
Pro forma 2.34 2.11 1.80
Pro forma net income reflects only options granted in 1997, 1996 and 1995.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income amounts
presented above because compensation cost is reflected over the options' vesting
period of three years and compensation cost for options granted prior to January
1, 1995 is not considered.
Notes to Consolidated Financial Statements
Employee Bonus Plan
The Bank has an employee bonus and management incentive compensation plan in
which employees are eligible to participate. The Plan provides for awards based
upon a combination of Bank and individual performance measured against
predetermined annual goals, based on specific performance objectives. The Plan
is administered by the Bank's president under the direction of the Board of
Directors.
Incentive compensation expense of $248,000, $188,000 and $235,000 was charged
to expense for the years ended December 31, 1997, 1996 and 1995, respectively.
Employee Stock Ownership Plan
Effective May 1, 1989, the Bank established an Employee Stock Ownership Plan
("ESOP") for the exclusive benefit of participating employees, defined as age 21
or older who have completed one year of service. Under the plan, the Bank
reviews its profitability and determines what contribution, if any, will be made
to the ESOP. ESOP expense of $197,000, $171,000 and $134,000 was charged to
expense for the years ended December 31, 1997, 1996 and 1995, respectively.
Executive Supplemental Retirement Agreements
The Bank entered into executive supplemental retirement agreements with certain
executive officers. These agreements provide retirement benefits designed to
supplement benefits available through the Bank's retirement plan for employees.
Total expense for benefits payable under the agreements amounted to $101,000,
$78,000 and $73,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. At December 31, 1997, the Bank's liability for these arrangements,
included in accrued expenses and other liabilities, was approximately $387,000.
Director Deferred Compensation Arrangements
Starting in 1983, the Bank entered into deferred compensation arrangements with
certain directors whereby in consideration for the deferral of directors' fees,
those directors will receive in the future a fixed amount of cash compensation.
Expensed under these arrangements for the years ended December 31, 1997, 1996
and 1995 was approximately $220,000, $238,000 and $148,000, respectively. At
December 31, 1997, the Bank's liability for these arrangements, included in
accrued expenses and other liabilities, was approximately $1,768,000.
(13) Estimated Fair Value of Financial Instruments
The following disclosure of the estimated fair value of financial instruments
have been determined by using available quoted market information or other
appropriate valuation methodologies at year-end, and are not indicative of the
fair value of those instruments at the date this report is published. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Bank's entire holdings of a particular financial
instrument. Because no market exists for a portion of the Bank's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial instruments include real estate acquired by foreclosure,
the deferred income tax asset, office properties and equipment, and core deposit
and other intangibles. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered.
The estimation methodologies used, book values and estimated fair values for
the Bank's financial instruments follows.
Financial instruments actively traded in a secondary market have been valued
using quoted available market prices as follows:
(In thousands) DECEMBER 31, 1997 December 31, 1996
-------------------- --------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE amount fair value
-------- ---------- -------- ----------
Loans held for sale $ -- $ -- $ 221 $ 216
Investment securities:
Available for sale 6 6 4,822 4,822
Held to maturity 15,480 15,510 22,477 22,527
Mortgage-backed securities and CMOs:
Available for Sale 10,989 10,989 8,490 8,490
Held to maturity 84,097 84,265 77,171 76,601
Notes to Consolidated Financial Statements
The fair value of financial instruments with stated maturities have been
estimated by discounting cash flows with a discount rate approximately equal to
the current market rate for similar instruments as follows:
(In thousands) DECEMBER 31, 1997 December 31, 1996
------------------------- --------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE amount fair value
------------ ---------- -------- ----------
Loans, net 366,642 372,455 $317,103 $321,473
Certificates of deposit 213,777 214,369 192,204 193,236
Federal Home Loan Bank advances 45,601 45,613 32,073 32,169
The fair value of financial instruments with no maturity or short-term
maturities approximates its carrying value as follows:
(In thousands) DECEMBER 31, 1997 December 31, 1996
------------------------ ----------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE amount fair value
---------- ----------- ---------- ----------
Cash and cash equivalents $ 15,967 $ 15,967 $11,718 $11,718
Other short-term investments 101 101 636 636
Accrued interest receivable 2,836 2,836 2,680 2,680
Stock in FHLB of Boston 3,749 3,749 2,670 2,670
Co-operative Central Bank Reserve Fund 965 965 965 965
Demand deposit accounts 39,992 39,992 39,795 39,795
NOW, Super NOW and
Special Notice accounts 44,075 44,075 40,488 40,488
Regular savings accounts 24,345 24,345 23,321 23,321
Money market deposit accounts 100,825 100,825 92,441 92,441
Escrow deposits of borrowers accounts 1,604 1,604 915 915
The fair value of commitments to extend credit have been estimated using fees
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
The fair value of commitments to sell loans are estimated as the cost to cancel
such agreements. The fair value of financial instruments with off-balance sheet
risk have been estimated as follows:
(In thousands) DECEMBER 31, 1997 December 31, 1996
----------------------------- -----------------------------
CONTRACT OR ESTIMATED Contract or Estimated
NOTIONAL AMOUNT FAIR VALUE notional amount fair value
----------------- ---------- ----------------- ----------
Commitments to extend credit $46,190 $490 $51,976 $539
Commitments to sell loans 6,149 20 1,232 0
(14) Commitments and Contingencies
Legal Proceedings
The Bank has been named a defendant in various legal proceedings arising in the
normal course of business. In the opinion of management, based on the advice of
legal counsel, the ultimate resolution of these proceedings will not have a
material effect on the Company's or the Bank's consolidated financial
statements.
Off-balance Sheet Risk
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates. These financial
instruments include commitments to originate or purchase loans, unadvanced
portions of construction loans, unused lines of credit, standby letters of
credit and forward commitments to sell loans. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated balance sheets. The contract or notional
amounts of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
Notes to Consolidated Financial Statement
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for loan commitments and standby letters of
credit is represented by the contractual amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments. For forward commitments, the
contract or notional amounts do not represent exposure to credit loss. The Bank
controls the credit risk of forward commitments through credit approvals, limits
and monitoring procedures.
Financial instruments with off-balance sheet risk are as follows:
Contract or
notional amount
-----------------------------
(In thousands) DECEMBER 31, December 31,
1997 1996
--------------- ------------
Financial instruments whose contract amounts represent credit risk:
Unused lines of credit and commitments to originate loans $38,784 $41,926
Unadvanced portions of construction loans 7,188 9,764
Standby letters of credit 218 286
Financial instruments whose notional or contract amounts
exceed the amount of credit risk:
Commitments to sell loans 6,149 1,232
Unused lines of credit, commitments to originate or purchase loans and
unadvanced portions of construction loans are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. For all lines of credit and loans, the Bank
evaluates each customer's creditworthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the borrower.
Commitments to sell loans are contracts which the Bank enters into for the
purpose of reducing the market risk associated with originating and selling
residential mortgage loans. In order to fulfill the commitment, the Bank must
deliver loans under contract or must pay a cash penalty as determined by the
investor. The Bank does not sell loans with recourse.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
The Bank is required to maintain certain reserves of vault cash and/or
deposits with the Federal Reserve Bank of Boston. The amount of this reserve
requirement included in cash and due from banks was $1,927,000 at December 31,
1997.
(15) Condensed Parent Company Financial Statements
Sandwich Bancorp, Inc. was formed on September 30, 1997, therefore the Statement
of Operations and Statement of Cash Flows is for the three months ended December
31, 1997 only. The following are the condensed financial statements for Sandwich
Bancorp, Inc., referred to as the "Parent Company" for purposes of this note
only, as of December 31:
BALANCE SHEET
1997
--------------
(IN THOUSANDS)
--------------
Assets
Cash and interest-bearing deposits in subsidiaries $ 258
Investments in subsidiaries, at equity 41,695
Other assets 73
-------
Total assets $42,026
=======
Liabilities and Stockholders' Equity
Total liabilities $ 12
Total stockholders' equity 42,014
-------
Total liabilities and stockholders' equity $42,026
=======
Notes to Consolidated Financial Statements
STATEMENT OF OPERATIONS
THREE MONTHS
ENDED
DECEMBER 31, 1997
-----------------
(in thousands)
Dividends from Company subsidiaries $ 768
Interest income from deposits in Company subsidiaries --
Total operating income --
Non-interest expenses 27
------
Income before income tax expense (benefit) and
equity in net income of subsidiaries 741
Income tax expense (benefit) --
------
Income before equity in net income of subsidiaries 741
Equity in net income of subsidiaries 687
------
Net income $1,428
======
The Parent Company's statements of changes in stockholders' equity are
identical to the consolidated statements of changes in stockholders' equity and
therefore are not presented here.
STATEMENT OF CASH FLOWS
THREE MONTHS
ENDED
DECEMBER 31, 1997
-------------------------
(in thousands)
Cash flows from operating activities:
Net income $ 1,428
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of subsidiaries (687)
Increase in other assets (73)
Increase in other liabilities 12
-------
Net cash provided by operating activities 680
-------
Cash flows from financing activities:
Stock options exercised 250
Dividends paid to stockholders (672)
-------
Net cash used by financing activities (422)
-------
Net cash received by subsidiary 258
-------
Net increase in cash and interest-bearing deposit
in subsidiaries 258
Cash and interest-bearing deposit in subsidiaries at
beginning of year --
-------
Cash and interest-bearing deposit in subsidiaries at
end of year $ 258
=======
(16) Quarterly Results of Operations (Unaudited)
(In thousands, except per share amounts)
1997 QUARTERS 1996 Quarters
THREE MONTHS ENDED Three months ended
------------------------------------------ ------------------------------------------
Periods ended DEC. 31, SEPT. 30, JUNE 30, MAR. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
-------- --------- -------- -------- -------- --------- -------- --------
Interest and dividend income $ 9,400 $ 9,234 $ 8,958 $ 8,325 $ 8,616 $ 8,233 $ 7,754 $ 7,706
Interest expense 4,896 4,720 4,584 4,122 4,155 4,042 3,805 3,790
------- ------- ------- ------- ------- ------- ------- -------
Net interest and
dividend income 4,504 4,514 4,374 4,203 4,461 4,191 3,949 3,916
Provision for loan losses (328) (181) (132) (109) (180) (50) (35) --
Non-interest income 823 662 620 616 712 719 702 706
Non-interest expense (3,186) (2,989) (3,046) (3,005) (2,915) (3,158) (3,116) (3,144)
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 1,813 2,006 1,816 1,705 2,078 1,702 1,500 1,478
Income tax expense 385 768 669 658 831 658 563 569
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 1,428 $ 1,238 $ 1,147 $ 1,047 $ 1,247 $ 1,044 $ 937 $ 909
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings per share $0.74 $ 0.65 $ 0.60 $ 0.55 $ 0.66 $ 0.55 $ 0.50 $ 0.49
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per share $0.71 $ 0.62 $ 0.58 $ 0.53 $ 0.63 $ 0.54 $ 0.48 $ 0.47
======= ======= ======= ======= ======= ======= ======= =======
Notes to Consolidated Financial Statements
(17) Subsequent Events
On February 2, 1998, the Company and the Bank entered into a definitive
agreement under which Compass Bank of New Bedford, Massachusetts will acquire
Sandwich Bancorp, Inc. Prior to the Company's consideration and approval of its
definitive agreement with Compass Bank, the Company had contacted and received
expressions of interest from three other parties who had expressed 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 clarification of the renewed
expressions of interest that it had received from three other parties subsequent
to February 2.
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 have signed an amendment to their previously announced agreement of
February 2, 1998 (the "Amended Agreement") 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
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 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.
3
Sandwich Bancorp, Inc.
Directors
Leon Davidson
Chairman of the Board
Retired Owner & President
Kobrin & Davidson Furniture Co.
Howard P. Crowell
Owner
Crow Farm
John J. Doran
President
Citizens Medical Corporation
Bradford N. Eames
Owner and President
Eames Insurance Agency
Mary F. Hebditch
Certified Public Accountant
George L. Jackson
Retired Owner and President
Jackson Plumbing & Heating
Richard S. Holway
Retired Sr. Vice President
Loomis Sayles & Company
Barry H. Johnson
Administrative Assistant to
Barnstable County Sheriff
Frederic D. Legate
President & Chief Executive Officer
Sandwich Bancorp, Inc. and
Sandwich Co-operative Bank
Reale J. Lemieux
Owner
Bay Beach Bed & Breakfast
David O. MacKinnon
Retired Superintendent
Wareham Public Schools
Gary A. Nickerson
Attorney at Law
George B. Rockwell
Retired Vice President
Arthur D. Little, Inc.
Honorary Directors
William Bryden
John S. Jillson
Camilla E. Nevius
John A. Ohman
George Sutton
Sandwich Bancorp, Inc.
Officers
Frederic D. Legate
President & Chief Executive Officer
Dana S. Briggs
Senior Vice President & Secretary
George L. Larson
Senior Vice President & Treasurer
David A. Parsons
Senior Vice President
Sandwich Co-operative Bank
Senior Officers
Frederic D. Legate
President & Chief Executive Officer
Dana S. Briggs
Senior Vice President, Senior
Retail/Operations Officer & Clerk
George L. Larson
Senior Vice President, Chief
Financial Officer & Treasurer
David A. Parsons
Senior Vice President &
Senior Loan Officer
Administration
Susan A. Montie
Vice President &
Director of Human Resources
Frederick W. Underhill, Jr.
Vice President &
Auditor/Compliance Officer
Finance
Michele J. Lino
Assistant Vice President &
Accounting Manager
Deborah S. Fitzpatrick
Assistant Treasurer &
Financial Analysis Manager
Lending
Mary Ann Ahonen
Vice President &
Commercial Loan Officer
John R. Callahan
Vice President &
Commercial Loan Officer
G. Stephen Cody
Vice President &
Senior Commercial Loan Officer
Jean M. Gilbert
Vice President & Senior Residential
Mortgage Officer
David B. Rowlings
Vice President &
Commercial Loan Officer
William P. Brazil
Assistant Vice President &
Commercial Loan Officer
Karen E. Dawson
Assistant Vice President &
Commercial Loan Officer
Carol C. Elloian
Assistant Vice President &
Credit Officer
Diane K. Johnson
Assistant Vice President &
Loan Operations Officer
Gregory N. Anderson
Assistant Treasurer &
Collections Manager
Barbara G. Meehan
Assistant Treasurer &
Lending Support Analyst
Thomas Russett
Assistant Treasurer &
Mortgage Origination Manager
Retail/Operations
Robert H. Delaive
Vice President &
Director of Information Systems
Daniel K. Trout
Vice President &
Main Office Manager
Glenn Van Wickle
Vice President &
Branch Coordinator
Adelaide M. Drolette
Assistant Vice President &
Falmouth Manager
James M. Galavotti
Assistant Vice President &
Wareham Manager
Ellen T. Holmes
Assistant Vice President &
Operations Officer
Lisa L. Block
Assistant Vice President &
Orleans Manager
Linda L. Mancovsky
Assistant Vice President &
Pocasset Manager
Joseph W. Mitchell, Jr.
Assistant Vice President &
Director of Marketing & Sales
Marc J. Oliva
Assistant Vice President &
Buzzards Bay Manager
Pamela K. Rideout
Assistant Vice President &
South Yarmouth Manager
Janet T. Crowell
Assistant Treasurer &
Chatham Manager
Jeanne E. Lemire
Assistant Treasurer &
Cedarville Manager
Ruth A. Ouellette
Assistant Treasurer &
Hyannis Manager
Glenn R. Sherman
Assistant Treasurer &
South Sandwich Manager
Common Stock Information
The Company's common stock is traded over-the-counter on the NASDAQ National
Market System under the symbol SWCB. Stock prices are generally shown in the
NASDAQ National market section of major daily newspapers with the listing SAND
BCP or similar abbreviations.
High and low trading prices of the Company's common stock for each quarter of
1997 and 1996 are shown below, along with the dividend declared:
1997 1996
--------- ---------
October- July- April- January- October- July- April- January-
December September June March December September June March
-------- --------- ------ -------- -------- --------- ------ --------
High $45 1/4 $39 3/4 $32 $34 3/4 $31 1/4 $23 1/4 $21 1/8 $21 1/2
Low 33 3/4 30 1/4 26 1/2 28 21 3/4 19 1/2 18 3/4 17
Dividend $ 0.35 $ 0.30 $ 0.30 $ 0.30 $ 0.30 $ 0.25 $ 0.25 $ 0.25
As of December 31, 1997, the number of shareholders of record was approximately
900.
Independent Auditors
KPMG Peat Marwick LLP
99 High Street
Boston, MA 02110
Special Counsel
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W., Suite 700
Washington, DC 20036
Transfer Agent
Stock certificate changes or changes of address should be directed to:
Registrar & Transfer Company
10 Commerce Drive
Cranford, NJ 07016
(800) 368-5948
Investor Information
In addition to this annual report, Sandwich Bancorp, Inc. will send a copy of
its annual report on
Form 10-K to stockholders and other interested parties upon written request
without charge. Requests
should be addressed to:
Investor Relations
Sandwich Bancorp, Inc.
P. O. Box 959
Sandwich, MA 02563
Analysts, stockholders and investors interested in additional information may
contact Dana S. Briggs,
Senior Vice President, at the address above.
Recent company news releases and financial information are available on the
internet at www.sandwichbank.com.
Annual Meeting
The Annual Meeting of Stockholders will be held at The Ridge Club, Country Club
Road, South Sandwich, Massachusetts on Wednesday, June 3, 1998 at 10:00 a.m.
Directions: From the Sagamore Bridge follow Route 6 East to Exit 4. Take right
off exit and proceed just over 2 miles to first stop sign. Take left and proceed
100 yards; The Ridge Club is on your right.
Sandwich Bancorp, Inc.
Corporate Offices
100 Old Kings Highway
P. O. Box 959
Sandwich, MA 02563
(508) 888-0026
Ssandwich Co-operative Bank
Banking Offices
108 Cohasset Avenue
Buzzards Bay
2277 Route 3A
Cedarville
895 Main Street
Chatham
310 Gifford Street
Falmouth
North Street & Bassett Lane
Hyannis
51 Main Street
Orleans
30 Barlows Landing Road
Pocasset
100 Old Kings Highway
Sandwich
331 Cotuit Road
South Sandwich
1029 Route 28
South Yarmouth
261 Main Street
Wareham
Loan Office
14 Main Street Ext.
Plymouth
Subsidiaries
The Sextant Corporation
Sandwich Securities Corporation
Sextant Securities Corporation
[LOGO OF SANDWICH BANCORP, INC. APPEARS HERE]
www.sandwichbank.com