PROSPECTUS SUPPLEMENT
SEACOAST FINANCIAL SERVICES CORPORATION
SAVINGS BANKS EMPLOYEES RETIREMENT ASSOCIATION
401(k) PLAN
as adopted by Compass Bank for Savings
(Participation Interests in up to 580,000 shares of Common Stock)
This Prospectus Supplement is being provided to participants (the
"Participants") in the Savings Banks Employees Retirement Association ("SBERA")
401(k) Plan as adopted by Compass Bank for Savings (the "Plan"). Seacoast
Financial Services Corporation ("Seacoast Financial"), the parent company of
Compass Bank for Savings (the "Bank"), is converting from a mutual bank holding
company to a stock bank holding company (the "Conversion"), and is offering for
sale shares of common stock of Seacoast Financial, par value $.01 per share
(the "Common Stock"), to certain depositors and the public (the "Offering").
Participants are being given the opportunity to direct the trustee of the Plan
(the "Trustee") to purchase Common Stock in the Offering with amounts in the
Plan allocated to their accounts. The Plan would invest in Common Stock through
the Seacoast Financial Stock Fund ("Employer Stock Fund").
Because the Plan actually purchases the Common Stock, Participants would
acquire a "participation interest" in the shares and would not own the shares
directly. This Prospectus Supplement relates to Participants' initial election
to direct that all or a portion of their Plan accounts be invested in the
Employer Stock Fund in the Offering and to their election to invest future
contributions in the Employer Stock Fund following the Offering.
The Prospectus of Seacoast Financial dated September 21, 1998 (the
"Prospectus"), which is attached to this Prospectus Supplement, includes
detailed information with respect to the Conversion and Offering and the
financial condition, results of operations and business of Seacoast Financial.
This Prospectus Supplement, which provides information with respect to the
Plan, should be read only in conjunction with the Prospectus. For a discussion
of certain factors that should be considered by each Participant as to an
investment in the Common Stock, see "Risk Factors" beginning on page 24 of the
Prospectus.
THE INTERESTS IN THE PLAN AND THE OFFERING OF THE COMMON STOCK HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE
MASSACHUSETTS DIVISION OF BANKS, THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR BY ANY OTHER FEDERAL AGENCY, OR BY ANY STATE SECURITIES COMMISSION OR
OTHER STATE AGENCY, NOR HAS SUCH COMMISSION, DIVISION, CORPORATION, OTHER
AGENCY OR ANY STATE SECURITIES COMMISSION OR OTHER STATE AGENCY PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE INTERESTS OFFERED HEREBY ARE NOT DEPOSIT ACCOUNTS AND ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE
SAVINGS ASSOCIATION INSURANCE FUND, THE DEPOSITORS INSURANCE FUND OR ANY OTHER
GOVERNMENT AGENCY, AND ARE NOT GUARANTEED BY SEACOAST FINANCIAL OR THE BANK.
THE SEACOAST FINANCIAL COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL INVESTED.
The date of this Prospectus Supplement is September 21, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE OFFERING ........................................................... 3
Securities Offered .................................................... 3
Election to Purchase Common Stock in the Offering; Priorities ......... 3
Value of Participation Interests ...................................... 3
How to Use Plan Funds to Invest in Offering ........................... 3
Deadline for Participating in Offering ................................ 3
Irrevocability of Election to Participate in Offering ................. 4
Direction to Purchase Common Stock After the Offering ................. 4
Purchase Price of Common Stock ........................................ 4
Nature of a Participant's Interest in Common Stock .................... 4
Voting Rights of Common Stock ......................................... 4
DESCRIPTION OF THE PLAN ................................................ 5
Introduction .......................................................... 5
Eligibility and Participation ......................................... 5
Contributions Under the Plan .......................................... 5
Limitations on Contributions .......................................... 5
Investment of Contributions and Account Balances ...................... 6
Benefits Under the Plan ............................................... 8
Withdrawals and Distributions from the Plan ........................... 8
Trustee ............................................................... 9
Plan Administrator .................................................... 9
Reports to Plan Participants .......................................... 9
Amendment and Termination ............................................. 9
Merger, Consolidation or Transfer ..................................... 10
Federal Income Tax Consequences ....................................... 10
ERISA and Other Qualifications ........................................ 12
SEC Reporting and Short-Swing Profit Liability ........................ 12
Financial Information Regarding Plan Assets ........................... 12
LEGAL OPINION .......................................................... 12
</TABLE>
2
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THE OFFERING
Securities Offered
The securities offered hereby are participation interests in the Plan. Up
to 580,000 shares (at a purchase price of $10.00 per share) of Common Stock may
be acquired in the Offering by the Plan to be held in the Employer Stock Fund.
Seacoast Financial is the issuer of the Common Stock. Only employees of the
Bank may become Participants in the Plan. The Common Stock to be issued hereby
is conditioned on the consummation of the Conversion. A Participant's
investment in the Employer Stock Fund in the Conversion is subject to the
priority applicable to the Participant, as set forth in the Plan of Conversion,
and as described below. Information with regard to the Plan is contained in
this Prospectus Supplement and information with regard to the Conversion and
the financial condition, results of operation and business of Seacoast
Financial is contained in the attached Prospectus. The address of the principal
executive office of Seacoast Financial and the Bank is 791 Purchase Street, New
Bedford, Massachusetts 02740. The telephone number of the Bank is (508)
984-6000.
Election to Purchase Common Stock in the Offering; Priorities
The Plan has recently been amended to permit each Participant to direct
the transfer of all or part of the funds which represent his or her beneficial
interest in the assets of the Plan to the Employer Stock Fund. The Trustee of
the Plan will subscribe for Common Stock offered for sale in connection with
the Offering in accordance with each Participant's directions. In the event the
Offering is oversubscribed and the Trustee is unable to use the full amount
allocated by a Participant to purchase Common Stock in the Offering, the amount
that is not invested in the Employer Stock Fund will be reallocated on a pro
rata basis among the other investment options that the Participant has
selected. If a Participant chooses not to direct the investment of his or her
account balance, the Participant's account balance will remain in the other
investment options of the Plan previously directed by the Participant.
The shares of Common Stock to be sold in the Offering are being offered in
the following order of priority: (i) holders of deposit accounts at the Bank
with an aggregate balance of $50 or more on December 31, 1996; (ii) holders of
deposit accounts at the Bank with an aggregate balance of $50 or more on June
30, 1997; (iii) the Bank's Employee Stock Ownership Plan; and (iv) employees,
officers, directors and trustees of the Bank and Seacoast Financial (the
"Subscription Offering"). (Subject to the prior rights of holders of
subscription rights, Seacoast Financial may also offer Conversion Shares in a
community offering and/or a syndicated community offering.) To the extent that
Participants fall into one of the Subscription Offering categories, they have
subscription rights to purchase shares of Common Stock in the Subscription
Offering and are being permitted to use funds in their Plan account to pay for
the Common Stock that they may subscribe for. Common Stock so purchased will be
placed in the Participant's Employer Stock Fund within his Plan account.
The limitations on the amount of Common Stock that a person may purchase
in the Offering, which are described in the Prospectus, apply to the aggregate
of the amount directly purchased by a person in the Offering and the amount
purchased by the Trustee with funds allocated to a Participant's Plan account.
Value of Participation Interests
The assets of the Plan were valued at approximately $5.8 million as of
June 30, 1998, representing the aggregate market value of all Participants'
accounts and earnings thereon, less previous withdrawals.
How to Use Plan Funds to Invest in Offering
Accompanying this Prospectus Supplement is a form (the "Investment
Election Form") which will enable a Participant to direct that all or a portion
of his or her beneficial interest in the Plan, representing Plan contributions
through September 30, 1998, be transferred to the Employer Stock Fund. If a
Participant wishes to invest all or part of his or her beneficial interest in
the assets of the Plan in the Common Stock issued in connection with the
Offering, he or she should complete the Investment Election Form.
Deadline for Participating in Offering
Directions to transfer amounts to the Employer Stock Fund in order to
purchase Common Stock issued in connection with the Offering must be returned
to Linda Perron no later than noon on October 26, 1998.
3
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Irrevocability of Election to Participate in Offering
A Participant's direction to transfer amounts credited to his or her
account in the Plan to the Employer Stock Fund in order to purchase shares of
Common Stock in connection with the Offering is irrevocable.
Direction to Purchase Common Stock After the Offering
After the Offering, a Participant will continue to be able to direct the
investment of past balances and current contributions in the investment options
available under the Plan, including the Employer Stock Fund (the percentage
invested in any option must be a whole percent). The allocation of a
Participant's interest in the various investment options offered under the Plan
may be changed each calendar quarter. Special restrictions may apply to
transfers directed to and from the Employer Stock Fund by those Participants
who are executive officers, directors and principal shareholders of Seacoast
Financial who are subject to the provisions of Section 16(b) of the Securities
and Exchange Act of 1934 (the "Exchange Act"), as amended. In addition,
Participants who are officers, directors, trustees or Corporators of Seacoast
Financial or the Bank will not be able to transfer their initial investment out
of the Employer Stock Fund for a period of one year following consummation of
the Conversion.
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of
Common Stock in connection with the Offering will be used in full by the
Trustee to purchase shares of Common Stock, except in the event of an
oversubscription, as discussed above. The price paid for such shares of Common
Stock will be $10.00 per share, the same price as is paid by all other persons
who purchase shares of Common Stock in the Offering.
Subsequent to the Offering, Common Stock purchased by the Trustee will be
acquired in open market transactions or from Seacoast Financial's treasury
stock account. The prices paid by the Trustee for shares of Common Stock will
not exceed "adequate consideration" as defined in Section 3(18) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA").
Nature of a Participant's Interest in Common Stock
The Common Stock will be held in the name of the Plan, as Trustee. Shares
of Common Stock acquired at the direction of a Participant will be allocated to
the Participant's account under the Plan. Therefore, earnings with respect to a
Participant's account should not be affected by the investment designations
(including investments in Common Stock) of other Participants. The Plan
Administrator will vote such allocated shares, if any, as described in the
following paragraph.
Voting Rights of Common Stock
The Plan Administrator generally will exercise voting rights attributable
to all Common Stock held by the Employer Stock Fund. For matters involving a
tender offer for Seacoast Financial, the Plan Administrator will vote such
allocated shares, if any, as directed by Participants with interests in the
Employer Stock Fund. Each Participant will be allocated voting instruction
rights reflecting such Participant's proportionate interest in the Employer
Stock Fund. The number of shares of Common Stock held in the Employer Stock
Fund that are voted in the affirmative and negative on each matter shall be
proportionate to the number of voting instruction rights exercised by
Participants in the affirmative and negative respectively. For matters not
involving a tender offer, the Plan Administrator will vote such allocated
shares in his own discretion and Participants will not have an opportunity to
direct the voting of shares.
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DESCRIPTION OF THE PLAN
Introduction
The Bank adopted the Plan and related Adoption Agreement effective July 1,
1992. The Board of Directors of the Bank has voted to include the Employer
Stock Fund as an investment option. The Plan is a profit sharing plan with a
cash or deferred compensation feature established in accordance with the
requirements under Section 401(a) and Section 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code"). The Bank has obtained a ruling from the
Internal Revenue Service that the Plan is qualified under Section 401(a) of the
Code, and its related trust is tax exempt under Section 501(a) of the Code.
Employee Retirement Income Security Act. The Plan is an "individual
account plan" other than a "money purchase pension plan" within the meaning of
ERISA. As such, the Plan is subject to all of the provisions of Title I
(Protection of Employee Benefit Rights) and Title II (Amendments to the
Internal Revenue Code Relating to Retirement Plans) of ERISA, except the
funding requirements contained in Part 3 of Title I of ERISA which by their
terms do not apply to an individual account plan (other than a money purchase
plan). The Plan is not subject to Title IV (Plan Termination Insurance) of
ERISA. The funding requirements contained in Title IV of ERISA are not
applicable to Participants (as defined below) or beneficiaries under the Plan.
Reference to Full Text of Plan. The following statements are summaries of
certain provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan. Words capitalized but not defined
in the following discussion have the same meaning as set forth in the Plan.
Copies of the Plan are available to all employees by filing a request with the
Bank, 791 Purchase Street, New Bedford, Massachusetts 02740, Attention: Linda
M. Perron. Each employee is urged to read carefully the full text of the Plan.
Eligibility and Participation
Any employee of the Employer is eligible to become a Participant in the
Plan on the first day of the month following completion of one (1) Year of
Service, as defined, with the Bank, provided he or she has reached age 21 at
such time. A Year of Service is defined as the 12 month period during which an
employee completes at least 1,000 hours of service with the Bank. The plan year
is November 1 to October 31 (the "Plan Year").
As of June 30, 1998, there were approximately 307 employees eligible to
participate in the Plan, and 286 employees participating by making elective
deferral contributions.
Contributions Under the Plan
401(k) Plan Contributions. Each Participant of the Plan is permitted to
elect to defer such Participant's Pay (as defined below) on a pre-tax basis up
to the lesser of 15% of annual Pay (expressed in terms of whole percentages) or
the applicable limit under the Code (for 1998, the applicable limit is $10,000)
and subject to certain other restrictions imposed by the Code, and to have that
amount contributed to the Plan on such Participant's behalf. For purposes of
the Plan, "Pay" means, generally, a Participant's total pay received from the
Bank as reported on IRS Form W-2 for purposes of income-tax withholding. In
1998, the annual Pay of each Participant taken into account under the Plan was
and is limited to $160,000. (Limits established by the IRS are subject to
increase pursuant to an annual cost of living adjustment, as permitted by the
Code). A Participant may elect to modify the amount contributed to the Plan,
effective on the first day of the month, by filing a new deferral agreement at
least 15 days prior to the effective date of the modification.
Employer Contributions. The Bank currently makes matching contributions to
the Plan equal to 50% of the elective deferral contributions, up to a maximum
of 6% of the Participant's Pay for the Plan Year. The Plan does not require
that the Bank make a matching contribution.
Limitations on Contributions
Limitation on Employee Salary Deferrals. The annual amount of deferred Pay
of a Participant (when aggregated with any elective deferrals of the
Participant under a simplified employee pension plan or a tax-deferred annuity)
may not exceed the limitation contained in Section 402(g) of the Code, adjusted
for increases in the cost of living as permitted by the Code (the limitation
for 1998 is $10,000). Contributions in excess of this limitation ("excess
deferrals") will be included in the Participant's gross income for federal
income tax purposes in the year they are made. In addition, any such excess
deferral will again be subject to federal income tax when distributed
5
<PAGE>
by the Plan to the Participant, unless the excess deferral (together with any
income allocable thereto) is distributed to the Participant not later than the
first April 15th following the close of the taxable year in which the excess
deferral is made. Any income on the excess deferral that is distributed not
later than such date shall be treated, for federal income tax purposes, as
earned and received by the Participant in the taxable year in which the
distribution is made.
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions and forfeitures
allocated to each Participant's account during any Plan Year may not exceed the
lesser of $30,000 or 25% of the Participant's Compensation (as defined) for the
Plan Year. In addition, annual additions are limited to the extent necessary to
prevent contributions on behalf of any employee from exceeding the employee's
combined plan limit, i.e., a limit that takes into account the contributions
and benefits made on behalf of an employee to all plans of the Bank.
Limitation on Plan Contributions for Highly Compensated Employees.
Sections 401(k) and 401(m) of the Code limit the amount of elective deferral
contributions and matching contributions that may be made to the Plan in any
Plan Year on behalf of Highly Compensated Employees (defined below) in relation
to the amount of elective deferral contributions made by or on behalf of all
other employees eligible to participate in the Plan. Specifically, the "actual
deferral percentage" ("ADP") (i.e., the average of the actual deferral ratios,
expressed as a percentage, of each eligible employee's elective deferral
contribution if any, for the Plan Year over the employee's Pay), of the Highly
Compensated Employees must meet either of the following tests: (i) the ADP of
the eligible Highly Compensated Employees is not more than 125% of the ADP of
all other eligible employees, or (ii) the ADP of the eligible Highly
Compensated Employees is not more than 200% of the ADP of all other eligible
employees, and the excess of the ADP for the eligible Highly Compensated
Employees over the ADP of all other eligible employees is not more than two
percentage points. Similarly, the actual contribution percentage ("ACP") (i.e.,
the average of the actual contribution ratios, expressed as a percentage, of
each eligible employee's matching contributions, if any, for the Plan Year over
the employees Pay) of the Highly Compensated Employees must meet either of the
following tests: (i) the ACP of the eligible Highly Compensated Employees is
not more than 125% of the ACP of all other eligible employees, or (ii) the ACP
of the eligible Highly Compensated Employees is not more than 200% of the ACP
of all other eligible employees, and the excess of the ACP for the eligible
Highly Compensated Employees over the ACP of all other employees is not more
than two percentage points.
In general, for Plan Years beginning in 1998, a Highly Compensated
Employee includes any employee, who, (1) during the Plan Year or the preceding
Plan Year, was at any time a 5% owner (i.e., owns directly or indirectly more
than 5% of the stock of an employer, or stock possessing more than 5% of the
total combined voting power of all stock of an employer), or (2) for the
preceding Plan Year, received Pay from an employer in excess of $80,000 (in
1998), and (if the employer elects for a Plan Year) was in the group consisting
of the top 20% of employees when ranked on the basis of Pay paid during the
Plan Year. The dollar amounts set forth above are adjusted annually to reflect
increases in the cost of living.
In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the ADP limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed first to Highly Compensated Employees with the
greatest dollar amount deferrals, and so on, until the Plan satisfies the ADP
test, before the close of the following Plan Year. Moreover, the Bank will be
subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are
re-characterized or are distributed before the close of the first 2-1/2 months
following the Plan Year to which such excess contributions relate. In addition,
in order to avoid disqualification of the Plan, any contributions by Highly
Compensated Employees that exceed the average contribution limitation in any
Plan Year ("excess aggregate contributions") together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the 10% excise tax will be imposed
on the Bank with respect to any excess aggregate contributions, unless such
amounts, plus any income allocable thereto, are distributed within 2-1/2 months
following the close of the Plan Year in which they arose.
Investment of Contributions and Account Balances
All amounts credited to Participants' accounts under the Plan are held in
the Plan trust (the "Trust"), which is administered by SBERA, as trustee.
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Prior to the effective date of the Offering, Participants have been
provided the opportunity to direct the investment of their accounts into one of
the following options (the "Funds"):
Money Market Account Index 500 Account
Equity Account Enhanced Index Account
Bond Account Small Cap Equity Account
Asset Allocation Account International Equity Account
The Plan now provides that in addition to the Funds specified above, a
Participant may direct the Trustee to invest all or a portion of his account in
the Employer Stock Fund.
The Plan provides that a Participant may elect to change the investment
mix of past contributions (as adjusted to reflect then current market value of
the Participant's investment options) by directing the Trustee to transfer all
or a portion of the Participant's account balance from one investment option to
another. A Participant may also elect to change the investment mix of future
contributions. Neither election will affect the other. Such elections may be
made by completing a Change in Investment form (available from Linda Perron).
These elections will be effective as of the last day of the calendar quarter
for which the election is made, provided that notice to the Plan Administrator
is received by the close of business on the first business day following the
second day of the month following the last month of the quarter for which the
election is made.
A. Previous Funds
Prior to the effective date of the Offering, contributions under the Plan
have been invested in the eight Funds specified above. The average compounded
rates of return as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
One Year Three Year Five Year
Average Average Average
Year to Date Annualized Annualized Annualized
Quarter Ended (January 1- Compounded Compounded Compounded
June 30, 1998 June 30, 1998) Return Return Return
--------------- ---------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Money Market Account ................. 1.31% 2.65% 5.44% 5.57% 5.02%
Asset Allocation Account ............. 1.03% 9.99% 14.73% 17.61% 14.43%
Equity Account ....................... -.22% 12.58% 19.69% 24.05% 19.04%
Bond Account ......................... 1.23% 3.24% 8.49% 6.71% 6.21%
Enhanced Index Account ............... 3.22% 18.80% 29.05% 29.44% 22.86%
Index 500 Account .................... 3.33% 17.74% 30.23% 30.17% 22.94%
International Equity Account ......... 2.48% 16.62% 14.91% 17.90% 13.08%
Small Cap Equity Account ............. -3.65% 8.25% 14.91% 25.84% 24.57%
</TABLE>
The following is a description of each of the Plan's eight investment
Funds:
The Money Market Account seeks the maximum current income that is
consistent with preservation of capital and liquidity. The account intends to
maintain a consistent net cash value of $1.00 per share. The objective of the
account is to consistently out-perform the Donoghue Money Fund Average. The
account is managed by SBERA.
The Asset Allocation Account seeks to offer a competitive long-term total
return and below-average volatility through a balanced and diversified
investment approach. The account invests in a carefully selected portfolio of
mutual funds that emphasizes either equity, fixed income, or money market
securities, both foreign and domestic. The Asset Allocation Account is managed
by Putnam Investments.
The Equity Account seeks long-term growth of capital and income by
investing in common stocks of domestic and foreign companies. This account is
managed by five investment advisors selected by the Board of Trustees of SBERA.
The Bond Account's objective is to produce a positive real rate of return
after inflation with a high degree of stability and limited volatility. The
entire portfolio will be invested in United States Treasury obligations,
Government National Mortgage Association mortgage-backed certificates, other
United States Agency obligations and cash equivalents. The goal of the account
is to exceed the returns of the Lehman Brothers Mortgage Backed Securities
Index. The account is managed by Putnam Investment Management.
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The Enhanced Index Account is a domestic common stock portfolio. The goal
of the account is to consistently provide excess returns over the Standard &
Poor's 500 Index. The account seeks to control risk by maintaining portfolio
characteristics and industry weights similar to those of the S&P 500 Index.
This account is managed by the Fidelity Management Trust Company.
The Index 500 Account attempts to provide investment results that parallel
the performance of the Standard & Poor's 500 Composite Stock Price Index. The
portfolio holds all of the 500 underlying securities in proportion to their
weighting in the Index. Given this objective, the account is expected to
provide investors with long-term growth of capital and income. This account is
administered by The Vanguard Group.
The International Equity Account's objective is to obtain long-term growth
through a diversified portfolio of marketable equity securities of foreign
companies. The performance objective is to outperform the Morgan Stanley
Capital International EAFE (Europe, Australia, Far East) Index in U.S. dollars
over a market cycle. This account is managed by Putnam International Equity
Management.
The Small Cap Equity Account's investment objective is capital
appreciation. The account is designed for participants willing to assume
above-average risk in exchange for above-average capital potential. The account
invests primarily in common stocks of small to medium-sized companies that the
account's investment advisor believes have potential for capital appreciation
significantly greater than the market average. The account is administered by
Putnam Investment Management.
B. The Employer Stock Fund
The Employer Stock Fund will consist of investments in Common Stock made
on and after the effective date of the Offering. After the Offering, the
Trustee will, to the extent practicable, use all amounts held by it in the
Employer Stock Fund, including cash dividends paid on Common Stock held in the
Employer Stock Fund, to purchase shares of Common Stock of Seacoast Financial.
It is expected that all purchases will be made at prevailing market prices.
Under certain circumstances, the Trustee may be required to limit the daily
volume of shares purchased. Pending investment in Common Stock, assets held in
the Employer Stock Fund will be placed in money market accounts.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market
for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund. Performance will be dependent upon a
number of factors, including the financial condition and profitability of
Seacoast Financial and the Bank and market conditions for the Common Stock
generally.
INVESTMENT IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN RISKS IN
INVESTMENT IN COMMON STOCK OF SEACOAST FINANCIAL. FOR A DISCUSSION OF THESE
RISK FACTORS, SEE THE PROSPECTUS.
Benefits Under the Plan
Vesting. A Participant, at all times, has a fully vested, nonforfeitable
interest in his or her account under the Plan.
Withdrawals and Distributions from the Plan
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL
RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR
HIS OR HER BENEFIT UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF
EMPLOYMENT WITH THE BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED
ON WITHDRAWALS MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59-1/2,
REGARDLESS OF WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS OR HER EMPLOYMENT
WITH THE BANK OR AFTER TERMINATION OF EMPLOYMENT.
Withdrawals Prior to Termination of Employment. A Participant may make a
withdrawal from his or her elective deferral contributions (and earnings
thereon) prior to termination of employment only in the event of financial
hardship, subject to the hardship distribution rules under the Plan. These
requirements insure that Participants have a true financial need before a
withdrawal may be made.
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Loans. A Participant may apply for a loan through the Bank's personnel
department.
Distribution Upon Retirement or Disability. Unless an optional form of
benefit has been elected, the automatic form of benefit payable to a
Participant who retires, incurs a disability, or otherwise terminates
employment shall be a life annuity (for married participants, a qualified joint
and survivor annuity). A Participant may elect to receive a lump sum payment;
however, if the Participant is married, spousal consent is required.
Distribution Upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment shall
have his or her benefits paid to the surviving spouse or beneficiary under one
or more of the forms available under the Plan.
Distribution Upon Termination for Any Other Reason. Distribution of
benefits to a Participant who terminates employment for any reason other than
retirement, disability or death whose account balance exceeds $5,000 will be
made on the Participant's normal retirement date unless the Participant
requests otherwise. Distribution of benefits to Participants whose account
balances do not exceed $5,000 will be made as soon as administratively
practicable following termination of employment but shall be made on the
occurrence of an event which would result in a distribution had the Participant
remained in the employ of the Bank (i.e., upon the Participant's death,
disability, or attainment of early or normal retirement age). Alternatively, at
the Participant's election, a Participant may receive a distribution of his
account after he ceases to be an employee.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations
order (as defined in the Code), benefits payable under the Plan shall not be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, charge, garnishment, execution, or levy of any kind,
either voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights
to benefits payable under the Plan shall be void.
Trustee
SBERA has been appointed as trustee of the Plan. SBERA is governed by a
Board of Trustees whose members are elected by the savings banks (including the
Bank) that have adopted the SBERA 401(k) Plan.
The Trustee receives, holds and invests the contributions to the Employer
Stock Fund of the Plan in trust and distributes them to Participants and
beneficiaries in accordance with the terms of the Plan and the directions of
the Plan Administrator. The Trustee is responsible for investment of the assets
of the Trust.
Plan Administrator
Pursuant to the terms of the Plan, the Plan is administered by the plan
administrator (the "Plan Administrator"). The name, address and telephone
number of the Plan Administrator, are as follows: Thomas Forese, Jr., c/o
SBERA, One Linscott Road, Box 4046, Woburn, Massachusetts 01801, (781)
938-3500. The Plan Administrator is responsible for the administration of the
Plan, interpretation of the provisions of the Plan, prescribing procedures for
filing applications for benefits, preparation and distribution of information
explaining the Plan, maintenance of plan records, books of account and all
other data necessary for the proper administration of the Plan, and preparation
and filing of all returns and reports relating to the Plan which are required
to be filed with the U.S. Department of Labor and the IRS, and for all
disclosures required to be made to Participants, beneficiaries, and others
under Sections 104 and 105 of ERISA.
Reports to Plan Participants
The Plan Administrator will furnish to each Participant a statement
quarterly showing (i) the balance in the Participant's account as of the end of
that period, (ii) the amount of contributions allocated to such Participant's
account for that period, and (iii) the adjustments to such Participant's
account to reflect earnings or losses (if any).
Amendment and Termination
It is the intention of the Bank to continue the Plan indefinitely.
Nevertheless, the Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the
Plan, each employee affected by such termination shall have a fully vested
interest in his or her accounts. The Bank reserves the right to make, from time
to time, any amendment or amendments to the Plan which do not cause any part of
9
<PAGE>
the Trust to be used for, or diverted to, any purpose other than the exclusive
benefit of Participants or their beneficiaries; provided, however, that the
Bank may make any amendment it determines necessary or desirable, with or
without retroactive effect, to comply with ERISA.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust assets to another plan, the Plan requires that
each Participant would (if either the Plan or the other plan then terminated)
receive a benefit immediately after the merger, consolidation or transfer which
is equal to or greater than the benefit he or she would have been entitled to
receive immediately before the merger, consolidation or transfer (if the Plan
had then terminated).
Federal Income Tax Consequences
The following is only a brief summary of certain federal income tax
aspects of the Plan which are of general application under the Code and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. Participants are urged to
consult their tax advisors with respect to any distribution from the Plan and
transactions involving the Plan.
The Plan is qualified under Section 401(a) and 401(k) of the Code and the
related Trust is exempt from tax under Section 501(a) of the Code. A plan that
is qualified under these sections of the Code is afforded special tax treatment
which include the following: (1) the Bank is allowed an immediate tax deduction
for the amount contributed to the Plan each year; (2) Participants pay no
current income tax on amounts contributed by the Bank on their behalf; and (3)
Earnings of the Plan are tax-exempt thereby permitting the tax-free
accumulation of income and gains on investments. The Plan will be administered
to comply in operation with the requirements of the Code as of the applicable
effective date of any change in the law. The Bank expects to timely adopt any
amendments to the Plan that may be necessary to maintain the qualified status
of the Plan under the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:
(a) Amounts contributed to a Participant's account and the investment
earnings on the account are not includable in a Participant's federal taxable
income until such contributions or earnings are actually distributed or
withdrawn from the Plan. Special tax treatment may apply to the taxable portion
of any distribution that includes Common Stock or qualifies as a Lump Sum
Distribution (as described below).
(b) Income earned on assets held by the Trust will not be taxable to the
Trust.
Lump Sum Distribution. A distribution from the Plan to a Participant or
the beneficiary of a Participant will qualify as a lump sum distribution ("Lump
Sum Distribution") if it is made: (i) within one taxable year of the
Participant or beneficiary; (ii) on account of the Participant's death,
disability or separation from service, or after the Participant attains age
59-1/2; and (iii) consists of the balance to the credit of the Participant under
this Plan and all other profit sharing plans, if any, maintained by the Bank.
The portion of any Lump Sum Distribution that is required to be included in the
Participant's or beneficiary's taxable income for federal income tax purposes
(the "total taxable amount") consists of the entire amount of such Lump Sum
Distribution less the amount of after-tax contributions, if any, made by the
Participant to any other profit sharing plan maintained by the Bank which is
included in such distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
Distribution that is attributable to participation after 1973 in the Plan or in
any other profit-sharing plan maintained by the Bank (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However, a Participant who has completed at least five years of
participation in the Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's
participation in the Plan or any other profit-sharing plan maintained by the
Bank), may elect to have the ordinary income portion of such Lump Sum
Distribution taxed according to
10
<PAGE>
a special averaging rule ("five-year averaging"). The election of the special
averaging rules may apply only to one Lump Sum Distribution received by the
Participant or beneficiary, provided such amount is received on or after the
Participant turns 59-1/2 and the recipient elects to have any other Lump Sum
Distribution from a qualified plan received in the same taxable year taxed
under the special averaging rule. Under a special grandfather rule, individuals
who turned 50 by 1985 may elect to have their Lump Sum Distribution taxed under
either the five- year averaging rule or under the prior law ten-year averaging
rule. Such individuals also may elect to have that portion of the Lump Sum
Distribution attributable to the Participant's pre-1974 participation in the
Plan taxed at a flat 20% rate as gain from the sale of a capital asset.
Contribution to Another Qualified Plan or to an IRA. A Participant may
defer federal income taxation of all or any portion of the total taxable amount
of a Lump Sum Distribution (including the proceeds from the sale of any Common
Stock included in the Lump Sum Distribution) to the extent that such amount, or
a portion thereof, is contributed, within 60 days after the date of its receipt
by the Participant, to another qualified plan or to an individual retirement
account ("IRA"). If less than the total taxable amount of a Lump Sum
Distribution is contributed to another qualified plan or to an IRA within the
applicable 60-day period, the amount not so contributed must be included in the
Participant's income for federal income tax purposes and will not be eligible
for the special averaging rules or for capital gains treatment. Additionally, a
Participant may defer the federal income taxation of any portion of an amount
distributed from the Plan on account of the Participant's disability or
separation from service, generally, if the amount is distributed within one
taxable year of the Participant, and such amount is contributed, within 60 days
after the date of its receipt by the Participant, to an IRA. Prior to 1993,
following the partial distribution of a Participant's account, any remaining
balance under the Plan (and the balance to the credit of the Participant under
any other profit sharing plan sponsored by the Bank) would not be eligible for
the special averaging rules or for capital gains treatment. For these purposes,
a "partial distribution" is a distribution within one taxable year of the
Participant equal to at least 50% of the balance of a Participant's account
("Partial Distribution").
Pursuant to a change in the law, effective January 1, 1993, virtually all
distributions from the Plan may be rolled over to another qualified Plan or to
an IRA without regard to whether the distribution is a Lump Sum Distribution or
a Partial Distribution. Effective January 1, 1993, Participants have the right
to elect to have the Trustee transfer all or any portion of an "eligible
rollover distribution" directly to another plan qualified under Section 401(a)
of the Code or to an IRA. If the Participant does not elect to have an
"eligible rollover distribution" transferred directly to another qualified plan
or to an IRA, the distribution will be subject to a mandatory federal
withholding tax equal to 20% of the taxable distribution. An "eligible rollover
distribution" means any amount distributed from the Plan except: (1) a
distribution that is (a) one of a series of substantially equal periodic
payments made (not less frequently than annually) over the Participant's life
or the joint life of the Participant and the Participant's designated
beneficiary, or (b) for a specified period of ten years or more; (2) any amount
that is required to be distributed under the minimum distribution rules; and
(3) any other distributions excepted under applicable federal law.
The beneficiary of a Participant who is the Participant's surviving spouse
also may defer federal income taxation of all or any portion of a distribution
from the Plan to the extent that such amount, or a portion thereof, is
contributed within 60 days after the date of its receipt by the surviving
spouse, to an IRA. If all or any portion of the total taxable amount of a Lump
Sum Distribution is contributed by the surviving spouse of a Participant to an
IRA within the applicable 60-day period, any subsequent distribution from the
IRA will not be eligible for the special averaging rules or for capital gains
treatment. Any amount received by the Participant's surviving spouse that is
not contributed to another qualified plan or to an IRA within the applicable
60-day period, and any amount received by a nonspouse beneficiary will be
included in such beneficiary's income for federal tax purposes in the year in
which it is received.
Additional Tax on Early Distributions. A Participant who receives a
distribution from the Plan prior to attaining age 59-1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate or a Participant)
on or after the death of the Participant, (ii) attributable to the
Participant's being disabled within the meaning of Section 72(m)(7) of the
Code, (iii) part of a series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) of the
Participant or the joint lives (or joint life expectancies) of the Participant
11
<PAGE>
and his beneficiary, (iv) made to the Participant after separation from service
after attainment of age 55, (v) made to pay medical expenses to the extent
deductible for federal income tax purposes, (vi) payments made to an alternate
payee pursuant to a qualified domestic relations order, or (vii) made to effect
the distribution of excess contributions or excess deferrals.
ERISA and Other Qualifications
The foregoing is only a brief summary of certain federal income tax
aspects of the Plan which are of general application under the Code and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan.
Accordingly, each Participant is urged to consult a tax advisor concerning the
federal, state and local tax consequences of participating in and receiving
distributions from the Plan.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the Exchange Act imposes reporting and liability
requirements on executive officers, directors, and persons beneficially owning
more than 10% of public companies such as Seacoast Financial. Section 16(a) of
the Exchange Act requires the filing of reports of beneficial ownership. Within
10 days of becoming a person subject to the reporting requirements of Section
16(a), a Form 3 reporting initial beneficial ownership must be filed with the
Securities and Exchange Commission ("SEC"). Certain changes in beneficial
ownership, such as purchases, sales and gifts must be reported periodically,
either on a Form 4 within 10 days after the end of the month in which a change
occurs, or annually on a Form 5 within 45 days after the close of the Company's
fiscal year. Certain discretionary transactions in and beneficial ownership of
the Common Stock through the Employer Stock Fund of the Plan by executive
officers, directors and persons beneficially owning more than 10% of the Common
Stock of the Company must be reported to the SEC by such individuals.
In addition to the reporting requirements described above, Section 16(b)
of the Exchange Act provides for the recovery by Seacoast Financial of profits
realized by an executive officer, director or any person beneficially owning
more than 10% of Seacoast Financial's Common Stock ("Section 16(b) Persons")
resulting from non-exempt purchases and sales of Seacoast Financial's Common
Stock within any six-month period.
The SEC has adopted rules that provide exemption from the profit recovery
provisions of Section 16(b) for all transactions in employer securities within
an employee benefit plan, such as the Plan, provided certain requirements are
met. These requirements generally involve restrictions upon the timing of
elections to acquire or dispose of employer securities for the accounts of
Section 16(b) Persons.
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, Section 16(b) Persons are required to hold shares of Common Stock
distributed from the Plan for six months following such distribution and are
prohibited from directing additional purchases of units within the Employer
Stock Fund for six months after receiving such a distribution.
Financial Information Regarding Plan Assets
Financial statements for the Plan for the year ended October 31, 1997 are
attached to this Prospectus Supplement.
LEGAL OPINION
The validity of the issuance of the Common Stock will be passed upon by
Foley, Hoag & Eliot LLP, which firm is acting as special counsel to Seacoast
Financial in connection with Seacoast Financial's conversion from a mutual bank
holding company to a stock bank holding company and the Offering.
12
<PAGE>
SAVINGS BANKS EMPLOYEES RETIREMENT ASSOCIATION 401(k) PLAN
AS ADOPTED BY COMPASS BANK FOR SAVINGS
FINANCIAL STATEMENT TO ACCOMPANY THE 1996 FORM 5500
ANNUAL REPORT OF EMPLOYEE BENEFIT PLAN UNDER ERISA OF 1974
FOR THE YEARS ENDED OCTOBER 31, 1997 AND OCTOBER 31, 1996
<PAGE>
SAVINGS BANKS EMPLOYEES RETIREMENT ASSOCIATION 401(k) PLAN
AS ADOPTED BY COMPASS BANK FOR SAVINGS
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
For the Years Ended October 31, 1997 and October 31, 1996
<TABLE>
<CAPTION>
Page(s)
--------
<S> <C>
Independent Auditor's Report .............................................. 1
Statements of Net Assets Available for Pension Benefits ................... 2
Statements of Changes in Net Assets Available for Pension Benefits ........ 3
Notes to Financial Statements ............................................. 4-7
Supplemental Schedules:
Item 27a--Schedule of Assets Held for Investment Purposes ................ 8
Item 27d--Schedule of Reportable Transactions ............................ 8
</TABLE>
<PAGE>
T.C. EDWARDS & CO., P.C.
CERTIFIED PUBLIC ACCOUNTANTS
Since 1902
The Board of Directors
Savings Banks Employees Retirement Association:
We have audited the accompanying Statement of Net Assets Attributable to 401(k)
Plan Participant Balances of the Savings Banks Employees Retirement Association
("SBERA") 401(k) Plan as adopted by Compass Bank For Savings (the "Plan") as of
October 31, 1997 and the related Statement of Changes in Net Assets Attributed
to 401(k) Plan Participant Balances for the year then ended. These financial
statements are the responsibility of the Plan's trustees. Our responsibility is
to express an opinion on these financial statements based on our audit. The
financial statements of the plan as of October 31, 1996 were audited by other
auditors whose report dated May 28, 1997, expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with generally accepted 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the Plan's net assets attributable to 401(k) plan
participant balances as of October 31, 1997, and the changes therein for the
year then ended in conformity with generally accepted accounting principles.
Our audit was performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedules of assets
held for investment purposes and reportable transactions are presented for the
purpose of additional analysis and are not a required part of the basic
financial statements but are supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure under
the Employee Retirement Income Security Act of 1974. The supplemental schedules
have been subjected to the auditing procedures applied in the audit of the
basic financial statements and, in our opinion, are fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
Woburn, Massachusetts
May 19, 1998
1
<PAGE>
SBERA 401(k) PLAN
AS ADOPTED BY COMPASS BANK FOR SAVINGS
Statements of Net Assets Attributable to 401(k)
Plan Participant Balances
October 31, 1997 and October 31, 1996
<TABLE>
<CAPTION>
October 31, October 31,
1997 1996
------------- ------------
<S> <C> <C>
Loans to participants ................................................ $ 134,230 $ 94,462
Investments, at fair value:
Interest in SBERA common/collective trust ........................... 4,442,911 3,197,626
---------- ----------
Net assets attributable to 401(k) plan participant balances ......... $4,577,141 $3,292,088
========== ==========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
2
<PAGE>
SBERA 401(k) PLAN
AS ADOPTED BY COMPASS BANK FOR SAVINGS
Statements of Changes in Net Assets Attributable to 401(k)
Plan Participant Balances
For the Years Ended October 31, 1997 and October 31, 1996
<TABLE>
<CAPTION>
October 31, October 31,
1997 1996
------------- --------------
<S> <C> <C>
Contributions:
Employee ................................................. $ 510,747 $ 460,719
Employer ................................................. 216,344 191,713
Employee Rollovers ....................................... 65,241 62,701
Loan Repayments .......................................... 85,354 29,536
---------- ----------
Total Contributions ................................... 877,686 744,669
---------- ----------
Investment Income:
Net investment gain from investment in SBERA common/
collective trust ......................................... 683,488 487,477
---------- ----------
401(k) Disbursements:
Participant balances paid ................................ (276,121) (134,899)
---------- ----------
Net assets attributable to 401(k) plan participant balances
Beginning of period ...................................... 3,292,088 2,194,841
---------- ----------
End of period ............................................ $4,577,141 $3,292,088
========== ==========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
3
<PAGE>
SBERA 401(k) PLAN
AS ADOPTED BY COMPASS BANK FOR SAVINGS
NOTES TO FINANCIAL STATEMENTS
(1) DESCRIPTION OF PLAN
The following brief description of the Savings Banks Employees Retirement
Association ("SBERA") 401(k) Plan as adopted by Compass Bank For Savings (the
"Bank") is provided for general information purposes only. Participants should
refer to the Summary Plan Description for more complete information.
General
The Plan is part of the SBERA 401(k) Savings Plan common/collective trust
(the "Trust"). Under the trust agreement, the Plan owns a portion of the net
assets of the Trust. Within the Trust, each plan's assets are jointly invested
and the return on the assets is allocated monthly to each plan based on the
percentage of ownership each plan had in the Trust's net assets at the end of
the prior month. Contributions made to and benefits paid from the Trust for the
Plan result in increases or decreases in the Plan's ownership percentage in the
net assets of the Trust.
The Plan is a defined contribution plan covering substantially all
employees of the Bank. It is subject to the provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA").
Participation
To become eligible for participation, an employee must be at least age 21
and must have completed 1 year of service. Upon reaching retirement age, a
participant can direct distribution of balances under several options described
by the 401(k) plan document.
Participants may contribute 1% to 15% of their annual earnings on a pretax
basis, subject to maximum annual limits. Participants may change their
investment options quarterly. The bank may also match a portion of the
employee's contribution as outlined in the Plan's adoption agreement.
Withdrawals
Participants may withdraw contributions only after termination of service
or, subject to the consent of the Plan Administrator, in the case of financial
hardship. Upon termination of employment, retirement or death, all salary
deferrals and the vested portion of employer contributions are payable to the
participant or their beneficiary.
Vesting
Participants are at all times 100% vested in their own contributions to
the Plan. Employer contributions, if any, will be 100% vested or vested
according to a schedule elected by the employer in the Plan's adoption
agreement.
Plan Termination
Although it has not expressed any intent to do so, the Bank has the right
to terminate the Plan subject to the provisions of ERISA. In the event of Plan
termination, participants will become 100% vested in their accounts.
Participant Loans
Loans may be made to participants when directed by the Plan Administrator
upon request by the participant. Each loan shall bear interest at the prime
rate as published in the Wall Street Journal on the last day of the previous
month prior to the origination of the loan, plus one percentage point. The rate
is fixed for the duration of the loan. Interest and principal are repaid and
credited to the participant's accounts based on the participant's current
investment choices.
The maximum loan amount is one-half of the participant's vested 401(k)
account balance, not to exceed fifty thousand dollars. The minimum loan amount
is one thousand dollars. Loans are repayable over a period of up to five years.
Benefit Payments
Benefits are recorded when paid.
4
<PAGE>
SBERA 401(k) PLAN
AS ADOPTED BY COMPASS BANK FOR SAVINGS (Continued)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(1) DESCRIPTION OF PLAN (Continued)
Investment Options
Participants may direct the investment of their elective deferrals and any
employer matching contributions to any of eight investment accounts in
accordance with the participant's election. Earnings in these funds and/or
market gains or losses are reflected in their changing unit values or returns.
Money Market Account
A portfolio of U.S. Treasury or agency obligations with maturities of six
months or less.
Equity Account
A diversified portfolio of domestic and international stocks.
Bond Account
A portfolio of U.S. Treasury obligations and other obligations guaranteed
by the U.S. Government or its agencies.
Asset Allocation Account
A portfolio of domestic and international common stocks, bonds and money
market investments.
Index 500 Account
A portfolio of domestic stocks based upon the Standard & Poor's 500
Composite Price Index.
Enhanced Index Account
A portfolio of domestic stocks based upon Standard & Poor's 500 Composite
Price Index invested only in stocks held by Fidelity Investment's mutual funds.
Small Cap Equity Account
A portfolio of common stocks of small to medium sized companies.
International Equity Account
A portfolio of international equity securities.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The financial statements of the Plan have been prepared in conformity with
generally accepted accounting principles.
(b) Valuation of Investments
Investments consist of assets held in the Trust and are valued at their
fair market value as of October 31, 1997 and October 31, 1996. Participant
loans are valued at cost which approximates market value.
The Trust reports bond and other obligations, short-term investments and
equity securities at fair values based on published quotations. Interest earned
is recorded on the accrual basis; dividends are recorded when received.
Purchases and sales of investments are recorded on a trade date basis. Gains or
losses on investments sold are calculated using the average cost identification
method.
(c) Use of Estimates
In addition, the preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
significant estimates and assumptions that affect the reported amounts of
assets at
5
<PAGE>
SBERA 401(k) PLAN
AS ADOPTED BY COMPASS BANK FOR SAVINGS (Continued)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
the date of the financial statements and the reported amounts of changes in net
assets available for Plan benefits during the reporting period. These
significant estimates include the accumulated plan benefits and market values
of investments. Actual results could differ from those estimates.
(3) INVESTMENTS
The plan owned approximately .96% of the fair market value of the Trust
net assets at October 31, 1997. The total net assets of the Trust at October
31, 1997 were:
<TABLE>
<S> <C>
Cash ................................................. $ 20,078,891
------------
Investments:
Bonds and other obligations:
U.S. Government and agency obligations ............. 67,848,952
Other bonds and obligations ........................ 11,376,695
------------
Total bonds and other obligations ................ 79,225,647
Short-term investments ............................. 23,284,001
Equity securities, primarily common stocks ......... 299,228,128
Guaranteed investment contract ..................... 54,200,000
Loans to participants .............................. 1,823,178
------------
Total Investments ................................ 457,760,954
Other assets (liabilities), net ..................... 1,092,881
------------
Total trust net assets ............................... $478,932,726
============
</TABLE>
(4) TRUST INCOME
Trust income for the year ended October 31, 1997 was comprised of:
<TABLE>
<S> <C>
Investment income:
Net realized gains on investments .................. $ 47,883,345
Interest and dividends ............................. 17,968,343
Net unrealized appreciation of investments ......... 9,345,771
------------
Total investment income .......................... 75,197,459
Administrative expenses .............................. (1,015,441)
------------
Total trust income ............................... $ 74,182,018
============
Portion allocated to the Plan ........................ $ 683,488
============
</TABLE>
(5) ADMINISTRATION OF THE PLAN
Investment expenses of the Trust and Plans, such as custodial and advisory
fees, are borne by the Trust. Investment transaction fees are borne by the
Trust and are recorded as part of the cost of investments acquired.
Miscellaneous fees, including audit fees, are allocated to the Plan's sponsor.
6
<PAGE>
SBERA 401(k) PLAN
AS ADOPTED BY COMPASS BANK FOR SAVINGS (Continued)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(6) FEDERAL INCOME TAXES
The SBERA 401(k) Plan is a Volume Submitter Plan which has been approved
by the Internal Revenue Service (IRS). SBERA is presently in the process of
requesting individual determination letters from the IRS for each adopting
employer. The Plan administrator and the Plan's tax counsel believe that the
Plan is designed and is currently being operated in compliance with the
applicable requirements of the Internal Revenue Code.
(7) 401(k) PLAN FUND INFORMATION 1997
<TABLE>
<CAPTION>
Money Asset Index Enhanced Small Cap Internat'l Employer
Market Equity Bond Allocation 500 Index Equity Equity Stock Participant
Account Account Account Account Account Account Account Account Account Loans TOTAL
------- ------- ------- ---------- -------- -------- --------- --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
October 31, 1996 .. 575,309 609,016 236,446 232,459 482,234 367,182 577,245 117,735 0 94,462 3,292,088
Contributions ...... 150,003 134,340 45,397 69,079 127,833 100,673 138,823 26,184 0 0 792,332
Withdrawals ........ -38,254 -9,390 -4,016 -8,061 -11,612 -7,912 -41,914 -40,461 0 0 -161,620
Transfers .......... 111,141 -41,336 -43,256 -6,711 -55,544 -2,487 -26,537 35,584 0 29,146 0
Interest Income .... 37,872 0 0 0 0 0 0 0 0 10,622 48,494
Appreciation ....... 0 145,174 19,875 39,344 145,566 118,579 111,323 25,986 0 0 605,847
Balance,
October 31, 1997 .. 836,071 837,804 254,446 326,110 688,477 576,035 758,940 165,028 0 134,230 4,577,141
</TABLE>
7
<PAGE>
SBERA 401(k) PLAN
AS ADOPTED BY COMPASS BANK FOR SAVINGS
SUPPLEMENTAL SCHEDULES
October 31, 1997 and for the period November 1, 1996 through October 31, 1997
Item 27a--Schedule of Assets Held for Investment Purposes
<TABLE>
<CAPTION>
Issue Description Cost Current Value
- ----------------------- -------------------------- ------------- --------------
<S> <C> <C> <C>
* The Savings Bank Savings Bank Employees $3,683,481 $4,442,911
Employees Retirement Retirement Association
Association Common/Collective Trust
* Participant Loans Interest of prime at $ 134,230 $ 134,230
loan origination plus 1%
</TABLE>
Item 27d--Schedule of Reportable Transactions
Investments that represent 5% or more of total net assets available for
the Plan under the Trust's 401(k) benefits are as follows:
<TABLE>
<CAPTION>
Cost Current Value
-------------- --------------
<S> <C> <C>
Savings Bank Employees
Retirement Association
Common/Collective Trust ......... $ 3,683,481 $ 4,442,911
</TABLE>
- ------------
* Party in interest to the Plan
8
<PAGE>
PROSPECTUS SUPPLEMENT
SEACOAST FINANCIAL SERVICES CORPORATION
COMPASS BANK FOR SAVINGS
EXECUTIVE DEFERRED COMPENSATION PLAN
(Plan Investment in up to 35,000 shares of Common Stock)
This Prospectus Supplement is being provided to participants (the
"Participants") in the Compass Bank for Savings Executive Deferred Compensation
Plan (the "Plan"). Seacoast Financial Services Corporation ("Seacoast
Financial"), the parent company of Compass Bank for Savings (the "Bank"), is
converting from a mutual bank holding company to a stock bank holding company
(the "Conversion"), and is offering for sale shares of common stock of Seacoast
Financial, par value $.01 per share (the "Common Stock"), to certain depositors
and the public (the "Offering"). Participants are being given the opportunity
to request that the trustee of the "Rabbi" Trust that holds the assets of the
Plan (the "Trustee") purchase Common Stock in the Offering with amounts in the
Plan allocated to their accounts. The Plan would invest in Common Stock through
the Seacoast Financial Stock Fund ("Employer Stock Fund").
This Prospectus Supplement relates to Participants' initial election to
direct that all or a portion of their Plan accounts be invested in the Employer
Stock Fund in the stock offering and also to their election to have future
contributions invested in the Employer Stock Fund following the Offering.
The Prospectus of Seacoast Financial dated September 21, 1998 (the
"Prospectus"), which is attached to this Prospectus Supplement, includes
detailed information with respect to the Conversion and Offering and the
financial condition, results of operations and business of Seacoast Financial.
This Prospectus Supplement, which provides information with respect to the
Plan, should be read only in conjunction with the Prospectus. For a discussion
of certain factors that should be considered by each Participant as to an
investment in the Common Stock, see "Risk Factors" beginning on page 24 of the
Prospectus.
THE INTERESTS IN THE PLAN AND THE OFFERING OF THE COMMON STOCK HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, THE
MASSACHUSETTS DIVISION OF BANKS, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
BY ANY OTHER FEDERAL AGENCY, OR BY ANY STATE SECURITIES COMMISSION OR OTHER
STATE AGENCY, NOR HAS SUCH COMMISSION, DIVISION, CORPORATION, OTHER AGENCY
OR ANY STATE SECURITIES COMMISSION OR OTHER STATE AGENCY PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE INTERESTS OFFERED HEREBY ARE NOT DEPOSIT ACCOUNTS AND ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE
SAVINGS ASSOCIATION INSURANCE FUND, THE DEPOSITORS INSURANCE FUND OR ANY OTHER
GOVERNMENT AGENCY, AND ARE NOT GUARANTEED BY SEACOAST FINANCIAL OR THE BANK.
THE SEACOAST FINANCIAL COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING
THE POSSIBLE LOSS OF PRINCIPAL INVESTED.
The date of this Prospectus Supplement is September 21, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE OFFERING ....................................................... 3
Securities Offered ................................................ 3
Election to Purchase Common Stock in Offering; Priorities ......... 3
Value of Participation Interests .................................. 3
How to Request Trustee to Invest in Offering ...................... 3
Deadline for Participating in Offering ............................ 3
Irrevocability of Election to Participate in Offering ............. 3
Request to Purchase Common Stock After Offering ................... 4
Purchase Price of Common Stock .................................... 4
Nature of a Participant's Interest in Common Stock ................ 4
Voting Rights of Common Stock ..................................... 4
DESCRIPTION OF THE PLAN ............................................ 5
Introduction ...................................................... 5
Eligibility and Participation ..................................... 5
Deferrals Under Plan .............................................. 5
Investment of Deferred Compensation ............................... 5
Withdrawals and Distributions from the Plan ....................... 7
Administration of Plan ............................................ 7
Reports to Plan Participants ...................................... 7
Amendment and Termination ......................................... 7
Change in Control ................................................. 7
Federal Income Tax Consequences ................................... 7
SEC Reporting and Short-Swing Profit Liability .................... 7
LEGAL OPINION ...................................................... 8
</TABLE>
2
<PAGE>
THE OFFERING
Securities Offered
Up to 35,000 shares (assuming a purchase price of $10.00 per share) of
Common Stock may be acquired by the Plan to be held in the Employer Stock Fund.
Seacoast Financial is the issuer of the Common Stock. Only senior management
employees of the Bank may become Participants in the Plan. The Common Stock to
be acquired by the Plan is conditioned on the consummation of the Conversion. A
Participant's investment in the Employer Stock Fund in the Conversion is
subject to the priority applicable to the Participant, as set forth in the Plan
of Conversion, and as described below. Information with regard to the Plan is
contained in this Prospectus Supplement and information with regard to the
Conversion and the financial condition, results of operation and business of
Seacoast Financial is contained in the attached Prospectus. The address of the
principal executive office of the Bank is 791 Purchase Street, New Bedford,
Massachusetts 02740. The telephone number of the Bank is (508) 984-6000.
Election to Purchase Common Stock in Offering; Priorities
The Trustee will subscribe for Common Stock offered for sale in connection
with the Offering in accordance with each Participant's preferences. In the
event the Offering is oversubscribed and the Trustee is unable to use the full
amount allocated by a Participant to purchase Common Stock in the Offering, the
amount that is not invested in the Employer Stock Fund will be reallocated on a
pro rata basis among the other investment options that the Participant has
selected. If a Participant fails to request the Trustee to invest all or a
portion of his or her account balance in the Employer Stock Fund, the
Participant's account balance will remain in the other investment options of
the Plan previously requested by the Participant.
The shares of Common Stock to be sold in the Offering are being offered in
the following order of priority: (i) holders of deposit accounts at the Bank
with an aggregate balance of $50 or more on December 31, 1996; (ii) holders of
deposit accounts at the Bank with an aggregate balance of $50 or more on June
30, 1997; (iii) the Bank's Employee Stock Ownership Plan; and (iv) employees,
officers, directors and trustees of the Bank and Seacoast Financial (the
"Subscription Offering"). (Subject to the prior rights of holders of
subscription rights, Seacoast Financial may also offer Conversion Shares in a
community offering and/or a syndicated community offering.) To the extent that
Participants fall into one of the Subscription Offering categories, they have
subscription rights to purchase shares of Common Stock in the Subscription
Offering and are being permitted to request the Trustee to use funds in their
Plan account to pay for the Common Stock that they may subscribe for. Common
Stock so purchased will be placed in the Participant's Employer Stock Fund
within his Plan account.
The limitations on the amount of Common Stock that a person may purchase
in the Offering, which are described in the Prospectus, apply to the aggregate
of the amount directly purchased by a person in the Offering and the amount
purchased by the Trustee with funds allocated to a Participant's plan account.
Value of Participation Interests
The assets of the Plan were valued at approximately $345,827 as of June
30, 1998, representing the aggregate market value of all Participants' accounts
and earnings thereon, less previous withdrawals.
How to Request Trustee to Invest in Offering
Each Participant will receive a form which will enable a Participant to
request that all or a portion of his or her account balance be transferred to
the Employer Stock Fund (the "Investment Election Form"). If a Participant
wishes that all or part of his or her account balance be invested in the Common
Stock issued in connection with the Offering, he or she should complete the
Investment Election Form.
Deadline for Participating in Offering
Requests to transfer amounts to the Employer Stock Fund in order to
purchase Common Stock issued in connection with the Offering must be returned
to Linda Perron no later than noon on October 26, 1998.
Irrevocability of Election to Participate in Offering
A Participant's direction to transfer amounts credited to his or her
account in the Plan to the Employer Stock Fund in order to purchase shares of
Common Stock in connection with the Offering is irrevocable.
3
<PAGE>
Request to Purchase Common Stock After Offering
After the Offering, a Participant will continue to be able to request the
investment of past balances and current deferrals in the investment options
available under the Plan, including the Employer Stock Fund (the percentage
invested in any option must be a whole percent). The allocation of a
Participant's account balance among the various investment options offered
under the Plan may be changed each month. Special restrictions may apply to
transfers directed to and from the Employer Stock Fund by those Participants
who are executive officers, directors and principal shareholders of Seacoast
Financial who are subject to the provisions of Section 16(b) of the Securities
and Exchange Act of 1934 (the "Exchange Act"), as amended. In addition,
Participants (all of whom are officers of Seacoast Financial or the Bank) will
not be able to request the Trustee to transfer the initial investment of their
account balance out of the Employer Stock Fund for a period of one year
following consummation of the Conversion.
Purchase Price of Common Stock
The funds transferred to the Employer Stock Fund for the purchase of
Common Stock in connection with the Offering will be used by the Trustee to
purchase shares of Common Stock, except in the event of an oversubscription, as
discussed above. The price paid for such shares of Common Stock will be $10.00
per share, the same price as is paid by all other persons who purchase shares
of Common Stock in the Offering. Subsequent to the Offering, Common Stock
purchased by the Trustee will be acquired in open market transactions or from
Seacoast Financial's treasury stock account.
Nature of a Participant's Interest in Common Stock
Participants in the Plan do not have any beneficial interest in or
contractual right to the assets in the Trust, including the Common Stock
purchased by the Trustee in accordance with Participants' preferences. The
assets that the Bank has contributed to the Trust consist of an amount equal to
the compensation that Participants have elected to defer. As beneficiary of the
Trust, the Bank has authorized the Trustee to invest the Bank's contribution to
the Trust in various investment options in accordance with Participants'
preferences, and to establish an account for each Participant. Upon retirement
from the Bank, a Participant has a contractual right to receive from the Bank
an amount equal to the amount of his or her deferred compensation, as adjusted
to reflect the then current market value of the assets in which the Trustee has
invested that Participant's account balance.
The Common Stock will be held in the name of the Trustee. Shares of Common
Stock acquired in accordance with the preferences of a Participant will be
allocated to the Participant's account under the Plan. Therefore, earnings with
respect to a Participant's account should not be affected by the investment
designations (including investments in Common Stock) of other Participants.
Voting Rights of Common Stock
The Trustee generally will exercise voting rights attributable to all
Common Stock held by the Employer Stock Fund. The Trustee will vote such
allocated shares, if any, in his discretion.
4
<PAGE>
DESCRIPTION OF THE PLAN
Introduction
The Bank adopted the Plan effective October 1, 1995. The Board of
Directors of the Bank has voted to include the Employer Stock Fund as an
investment option. The following statements are summaries of certain provisions
of the Plan. They are not complete and are qualified in their entirety by the
full text of the Plan. Words capitalized but not defined in the following
discussion have the same meaning as set forth in the Plan. Copies of the Plan
are available to all participants by filing a request with the Bank, 791
Purchase Street, New Bedford, Massachusetts 02740, Attention: Linda M. Perron.
Each Participant is urged to read carefully the full text of the Plan.
The Plan is intended to qualify as an unfunded plan, maintained by the
Bank primarily for the purpose of providing deferred compensation for a select
group of management or highly-compensated employees. As such, the Plan is
exempt from having to comply with Part 2 (Participation and Vesting), Part 3
(Funding) and Part 4 (Fiduciary Responsibility) of Title I of ERISA, but is
subject to Part 1 (Reporting and Disclosure) and Part 5 (Administration and
Enforcement) of Title I of ERISA.
Eligibility and Participation
The President of the Bank and other senior management employees of the
Bank from time to time designated by the President are eligible to participate
in the Plan. As of June 30, 1998, there were approximately 17 employees
eligible to participate in the Plan, and nine employees participating by making
elective deferral contributions.
Deferrals Under Plan
Each Participant in the Plan is permitted to elect to defer from 1% to
15%, in whole percentages, of his or her gross salary and from 1% to 100%, in
whole percentages, of his or her annual bonus otherwise payable in cash.
Deferral elections must be made in writing on or before the December 31
preceding the year during which the compensation is to be earned, except that
elections for the first year of eligibility must be made within 30 days of the
date of initial eligibility.
Investment of Deferred Compensation
All amounts credited to Participants' accounts under the Plan are held in
a "Rabbi" Trust, which is administered by Northeast Retirement Services, Inc.
as Trustee.
Prior to the effective date of the Offering, the Trustee has invested
Participants' accounts in one of the following mutual funds (the "Funds") in
accordance with Participants' preferences:
o Barron Asset Fund
o Dodge and Cox Stock Fund
o T. Rowe Price International Stock Fund
o T. Rowe Price Mid-Cap Growth Fund
o Strong Advantage Fund
o Government Obligations Tax-Managed Fund
The Plan now provides that in addition to the Funds specified above, the
Trustee may invest all or a portion of a Participant's account in the Employer
Stock Fund in accordance with the Participant's preferences.
A Participant may elect to change the investment mix of past deferrals (as
adjusted to reflect then current market value of the Participant's account
balance) by requesting that the Trustee transfer all or a portion of the
Participant's account balance from one investment option to another. A
Participant may also elect to change the investment mix of future deferrals.
Neither election will affect the other.
5
<PAGE>
A. Previous Funds
Prior to the effective date of the Offering, amounts deferred under the
Plan have been invested in the six Funds specified above. The cumulative
returns for each of the Funds (rounded to the nearest whole percent) as of June
30, 1998 are as follows:
<TABLE>
<CAPTION>
Three-Month One Year Three Years Five Years
------------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Barron Asset Fund ................................ -3% 25% 103% 184%
Dodge and Cox Stock Fund ......................... -1% 18% 91% 150%
T. Rowe Price Int'l Stock Fund ................... 0% 4% 46% 86%
T. Rowe Price Mid Cap Growth Fund ................ 0% 30% 106% 180%
Strong Advantage Fund ............................ 2% 6% 21% 35%
Government Obligations Tax-Managed Fund .......... 1% 5% 17% *
</TABLE>
- ------------
*Fund was established June 1, 1995.
The following is a description of each of the Plan's six investment funds:
Barron Asset Fund. This fund seeks capital appreciation through
investments in companies with market capitalizations between $100 million and
$2 billion that the investment advisor believes have under-valued assets or
favorable growth prospects.
Dodge & Cox Stock Fund. This fund's primary objective is to provide
investors with an opportunity for long-term growth of principal and income,
with a secondary objective of achieving a reasonable current income. The fund
seeks to achieve these objectives by investing primarily in a broadly
diversified and carefully selected portfolio of common stocks.
T. Rowe Price International Stock Fund. This fund seeks to provide
long-term growth of capital by investing primarily in established foreign
companies that have strong performance records as well as attractive long-term
prospects. Due to its international focus, the fund involves specific risks not
found in domestic funds, including political uncertainty, unfavorable currency
exchange rates, and, to a lesser degree, market illiquidity. These factors will
cause the value of this fund to fluctuate more than that of a domestic one.
T. Rowe Price Mid-Cap Growth Fund. This fund seeks long-term capital
appreciation by investing primarily in common stocks of medium-sized companies
with attractive growth prospects. The Fund is subject to the inherent
instability of the stock market and can be expected to be more volatile than a
fund focusing on large, established companies.
The Strong Advantage Fund. This fund seeks to provide current income with
a very low degree of share-price fluctuation. The fund invests primarily in
ultra short-term investment-grade debt obligations. The fund is designed for
investors who seek higher yields than money market funds generally offer and
who are willing to accept some modest principal fluctuation in order to achieve
that objective. The fund's investment advisor is Strong Capital Management,
Inc.
Government Obligations Tax-Managed Fund. This fund invests in short-term
U.S. government securities to provide current income consistent with stability
of principal and liquidity. The Fund's investment strategy is intended to
enable the Fund to provide shareholders with dividends that are exempt from
state and local income taxation to the extent permissible by federal and state
law. The fund's investment advisor is Federated Administrative Services.
B. The Employer Stock Fund
The Employer Stock Fund will consist of investments in Common Stock made
on and after the effective date of the Offering. After the Offering, the
Trustee will, to the extent practicable, use all amounts held by it in the
Employer Stock Fund, including cash dividends paid on Common Stock held in the
Employer Stock Fund, to purchase shares of Common Stock of Seacoast Financial.
It is expected that all purchases will be made at prevailing market prices.
Under certain circumstances, the Trustee may be required to limit the daily
volume of shares purchased. Pending investment in Common Stock, assets held in
the Employer Stock Fund will be placed in money market accounts.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market
for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund. Performance will be dependent upon a
number of factors,
6
<PAGE>
including the financial condition and profitability of Seacoast Financial and
the Bank and market conditions for the Common Stock generally.
INVESTMENT IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN RISKS IN
INVESTMENT IN COMMON STOCK OF SEACOAST FINANCIAL. FOR A DISCUSSION OF THESE
RISK FACTORS, SEE THE PROSPECTUS.
Withdrawals and Distributions from the Plan
Withdrawals Prior to Termination of Employment. A Participant may make a
withdrawal from his or her account prior to termination of employment only in
the event of financial hardship caused by an unforeseeable emergency. An
unforeseeable emergency is defined in the Plan as an unanticipated emergency
that is caused by an event beyond the control of the Participant or beneficiary
and that would result in severe financial hardship if early withdrawal were not
permitted. The Salary Committee of the Board of Directors of the Bank (the
"Committee") may approve a withdrawal only to the extent needed to meet the
emergency.
Distribution Upon Retirement, Death or Other Termination of
Employment. Distributions shall be made upon the earliest of a Participant's
retirement, death or other termination of employment in accordance with the
form of benefit requested by the Participant in his voluntary salary reduction
deferral election, subject to the discretion of the Committee to use any form
of payment it determines. If no form of distribution is elected, the Committee
may distribute benefits at a time and in a form that most closely approximates
the form and time of distributions to the Participant under the Bank's 401(k)
Plan. A Participant may elect to receive a distribution as a single-sum cash
payment or in annual cash installments for a period not to exceed five years.
Administration of Plan
The Plan is administered by a committee consisting of three members of
management of the Bank. The committee is responsible for interpretation of the
Plan.
Reports to Plan Participants
The Trustee will furnish to each Participant a monthly statement showing
(i) the balance in the Participant's account as of the end of that period, (ii)
the amount of deferrals allocated to such Participant's account for that
period, and (iii) the adjustments to such Participant's account to reflect
earnings or losses (if any).
Amendment and Termination
The Bank may amend the Plan without the consent of any Participant,
beneficiary or other person, provided that no amendment may reduce the amount
then credited to the accounts of any Participant at the time of the amendment.
The Bank may terminate the Plan at any time.
Change in Control
In the event of a change in control, as defined in the Plan, the method of
determining a Participant's earnings with respect to amounts credited to the
Plan for any year up to and including the year of the change in control may not
result in an earnings rate that is less favorable than the rate that would
apply under the method as in effect immediately prior to the change in control.
Federal Income Tax Consequences
Amounts contributed to a Participant's account and the investment earnings
on the account are not includable in a Participant's federal taxable income
until such contributions or earnings are actually distributed or withdrawn from
the Plan.
SEC Reporting and Short-Swing Profit Liability
Section 16 of the Exchange Act imposes reporting and liability
requirements on executive officers, directors, and persons beneficially owning
more than 10% of public companies such as Seacoast Financial. Section 16(a) of
the Exchange Act requires the filing of reports of beneficial ownership. Within
10 days of becoming a person subject to the reporting requirements of Section
16(a), a Form 3 reporting initial beneficial ownership must be filed with the
Securities and Exchange Commission ("SEC"). Certain changes in beneficial
ownership, such as purchases,
7
<PAGE>
sales and gifts must be reported periodically, either on a Form 4 within 10
days after the end of the month in which a change occurs, or annually on a Form
5 within 45 days after the close of Seacoast Financial's fiscal year. Certain
discretionary transactions in and beneficial ownership of the Common Stock
through the Employer Stock Fund of the Plan by executive officers, directors
and persons beneficially owning more than 10% of the Common Stock of Seacoast
Financial must be reported to the SEC by such individuals.
In addition to the reporting requirements described above, Section 16(b)
of the Exchange Act provides for the recovery by Seacoast Financial of profits
realized by an executive officer, director or any person beneficially owning
more than 10% of Seacoast Financial's Common Stock ("Section 16(b) Persons")
resulting from non-exempt purchases and sales of Seacoast Financial's Common
Stock within any six-month period.
The SEC has adopted rules that provide exemption from the profit recovery
provisions of Section 16(b) for all transactions in employer securities within
an employee benefit plan, such as the Plan, provided certain requirements are
met. These requirements generally involve restrictions upon the timing of
elections to acquire or dispose of employer securities for the accounts of
Section 16(b) Persons.
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, Section 16(b) Persons are required to hold shares of Common Stock
distributed from the Plan for six months following such distribution and are
prohibited from requesting additional purchases in the Employer Stock Fund for
six months after receiving such a distribution.
LEGAL OPINION
The validity of the issuance of the Common Stock will be passed upon by
Foley, Hoag & Eliot LLP, which firm is acting as special counsel to Seacoast
Financial in connection with Seacoast Financial's conversion from a mutual bank
holding company to a stock bank holding company and the Offering.
8
<PAGE>
PROSPECTUS
[LOGO] SEACOAST
Financial Services Corporation
(Holding Company for Compass Bank for Savings)
13,600,000 (Anticipated Minimum) Shares of Common Stock
18,400,000 (Anticipated Maximum) Shares of Common Stock
21,160,000 (Anticipated Maximum, as Adjusted) Shares of Common Stock
At $10.00 Per Share
Seacoast Financial Services Corporation ("Seacoast Financial"), a
Massachusetts mutual holding company and the sole stockholder of Compass Bank
for Savings ("Compass"), New Bedford, Massachusetts, is offering up to
18,400,000 shares (the "Conversion Shares") of its common stock, par value $.01
per share ("Seacoast Financial Common Stock"), in connection with its
conversion from a Massachusetts-chartered mutual holding company to a
Massachusetts-chartered business corporation and stock holding company (the
"Conversion"). In certain circumstances described herein, the maximum number of
Conversion Shares sold may be increased to up to 21,160,000 shares without a
resolicitation of subscribers. The Conversion Shares are being offered for a
purchase price of $10.00 per share (the "Purchase Price"). Seacoast Financial
was formerly known as "The 1855 Bancorp," and recently changed its name in
connection with the Conversion.
(Continued on next page)
--------------
For a discussion of certain factors that should be considered by prospective
investors, see "Risk Factors" beginning on page 24 of this Prospectus.
THE CONVERSION IS CONTINGENT UPON THE SALE OF THE MINIMUM NUMBER OF CONVERSION
SHARES OFFERED, UPON RECEIPT OF ALL REGULATORY APPROVALS RELATING TO THE
CONVERSION AND UPON RECEIPT OF ALL REGULATORY AND SANDWICH BANCORP
STOCKHOLDER APPROVALS RELATING TO THE MERGER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE MASSACHUSETTS DIVISION OF BANKS, THE BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM, THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR BY ANY OTHER FEDERAL AGENCY, OR BY ANY STATE SECURITIES
COMMISSION OR OTHER STATE AGENCY, NOR HAS SUCH COMMISSION, DIVISION,
CORPORATION, OTHER AGENCY OR ANY STATE SECURITIES COMMISSION OR OTHER STATE
AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF SEACOAST FINANCIAL COMMON STOCK OFFERED HEREBY ARE NOT DEPOSIT
ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND, THE DEPOSITORS
INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY, AND ARE NOT GUARANTEED BY
SEACOAST FINANCIAL OR COMPASS. THE SEACOAST FINANCIAL COMMON STOCK IS SUBJECT
TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL INVESTED.
<TABLE>
<CAPTION>
Estimated Commissions
Subscription and Other Fees Estimated
Price (2) and Expenses (3) Net Proceeds (4)
<S> <C> <C> <C>
Per Share (1) ...................... $ 10.00 $ 0.20 $ 9.80
Minimum Total ...................... $136,000,000 $2,956,000 $133,044,000
Midpoint Total ..................... $160,000,000 $3,178,000 $156,822,000
Maximum Total ...................... $184,000,000 $3,398,000 $180,602,000
Adjusted Maximum Total (5) ......... $211,600,000 $3,652,000 $207,948,000
</TABLE>
- ----------
(1) Estimated fees and expenses per share and estimated net conversion proceeds
per share are based on the midpoint of the Estimated Valuation Range.
(2) Determined in accordance with the Independent Valuation, prepared by RP
Financial and dated as of September 4, 1998, which states that the
Estimated Valuation Range is from $136.0 million to $184.0 million with a
midpoint of $160.0 million. The Independent Valuation is based upon
estimates and projections that are subject to change, and the valuation
must not be construed as a recommendation as to the advisability of
purchasing the Conversion Shares nor an assurance that a purchaser of
Conversion Shares will thereafter be able to sell such shares at prices
within the Estimated Valuation Range. See "The Conversion and the
Merger--Description of the Conversion--Stock Pricing and Number of
Conversion Shares to be Issued."
(3) Consists of the estimated costs to Compass and Seacoast Financial arising
from the Conversion, including estimated fixed expenses of approximately
$1.8 million and marketing fees to be paid to Ryan Beck and McConnell Budd
in connection with the Subscription and Community Offerings, which fees are
estimated to be $1,188,000 and $1,630,000 at the minimum and maximum of the
Estimated Valuation Range, respectively. See "The Offerings--Plan of
Distribution and Selling Commissions." The actual fees and expenses may
vary from the estimates. See "Pro Forma Data" for the assumptions used to
arrive at these estimates.
(4) Actual net proceeds may vary substantially from estimated amounts depending
upon the number of shares sold and other factors. The figures in this
column include proceeds from the purchase of Conversion Shares by the ESOP
which is intended to be funded by a loan to the ESOP from Seacoast
Financial, which will be deducted from Seacoast Financial's stockholders'
equity. See "Capitalization," "Use of Proceeds of Conversion" and "Pro
Forma Data--Pro Forma Conversion Data."
(5) As adjusted to reflect the sale of additional Conversion Shares due to a
possible increase of up to 15% in the Estimated Valuation Range, without
resolicitation of subscribers or any right of cancellation, due to
regulatory considerations or changes in market and financial conditions, as
supported by the Independent Valuation. See "Pro Forma Data" and "The
Conversion and the Merger--Description of the Conversion--Stock Pricing and
Number of Conversion Shares to be Issued." For a discussion of the
distribution and allocation of the additional shares, if any, see "The
Offerings--Subscription Offering," "--Community Offering" and
"--Limitations upon Purchases of Conversion Shares."
Ryan, Beck & Co. McConnell, Budd & Downes, Inc.
The Date of this Prospectus is September 21, 1998.
<PAGE>
The Offering
The Conversion Shares are being offered under the terms of a Plan of
Conversion (the "Conversion Plan") in a subscription offering, in order of
priority, (i) to eligible depositors of Compass at December 31, 1996, (ii) to
supplemental eligible depositors of Compass at June 30, 1997, (iii) to an
employee stock ownership plan of Compass (the "ESOP") and (iv) to employees,
officers, trustees and directors of Seacoast Financial and Compass (together,
the "Subscription Offering"). Concurrently with or at any time during or after
the Subscription Offering, Seacoast Financial may offer Conversion Shares not
subscribed for in the Subscription Offering for sale to certain members of the
general public (the "Community Offering"). Conversion Shares not subscribed for
in the Subscription or Community Offerings may be offered for sale to certain
members of the general public in a Syndicated Community Offering (the
"Syndicated Community Offering"), which would be conducted as soon as
practicable after the expiration of the Community Offering (the Subscription,
Community and Syndicated Community Offerings are referred to herein
collectively as the "Offering" or "Offerings"). Subscription rights of
depositors to purchase Conversion Shares in the Subscription Offering are
non-transferable. There is no obligation to subscribe for Conversion Shares.
Seacoast Financial reserves the absolute right to reject, in whole or in part,
in its sole discretion, any order received in the Community and Syndicated
Community Offerings. Except for the ESOP, generally no person may purchase more
than $750,000 of Conversion Shares in the Offering, and no person together with
his or her associates and groups acting in concert may purchase in the
aggregate more than $1.5 million of Conversion Shares in the Offering. See "The
Offerings--Limitations upon Purchases of Conversion Shares." The minimum
purchase is 25 shares of Seacoast Financial Common Stock.
The Conversion Shares will be issued at an aggregate Purchase Price equal
to the estimated pro forma market value of such shares based on an independent
appraisal of the Conversion Shares (the "Independent Valuation") prepared by RP
Financial, LC., an independent appraisal firm ("RP Financial"). RP Financial
has estimated that the pro forma market value of the Conversion Shares is
between $136.0 million and $184.0 million (the "Estimated Valuation Range"),
giving effect to a merger with Sandwich Bancorp, Inc. ("Sandwich Bancorp"),
which merger is described below. Based on this estimate, Seacoast Financial
will issue a total of between 13,600,000 and 18,400,000 Conversion Shares at
the $10.00 Purchase Price per share. RP Financial will update its appraisal
immediately prior to consummation of the sale of the Conversion Shares. As long
as the estimated pro forma market value is not increased by more than 15% above
the maximum, or decreased below the minimum, of the Estimated Valuation Range,
no resolicitation of subscribers will be made and subscribers will not be
permitted to modify or cancel their subscriptions. See "The Offerings." The
actual number of Conversion Shares issued will have a corresponding effect on
the estimated net proceeds of the Conversion and the pro forma capitalization
and per share data of Seacoast Financial. See "Use of Proceeds of Conversion,"
"Capitalization" and "Pro Forma Data."
The Subscription Offering will expire at 10:00 a.m., Boston time on
November 2, 1998, unless extended by Seacoast Financial, with regulatory
approval, if necessary. The Community Offering, if held, may commence during or
promptly after the Subscription Offering. The Community and Syndicated
Community Offerings must be completed by December 17, 1998, unless extended,
with regulatory approval if necessary. If the Offerings are not completed by
that date and are not so extended, subscribers will have their funds refunded
promptly, with interest. Stock orders submitted are irrevocable until
consummation or termination of the Conversion. However, if the Offering is not
consummated by March 20, 1999, the Offering will be terminated and subscribers
will receive refunds, with interest.
Seacoast Financial has engaged Ryan, Beck & Co., Inc. ("Ryan Beck") and
McConnell, Budd & Downes ("McConnell Budd"), registered broker-dealers, to
consult with and advise Seacoast Financial in connection with the sale of the
Conversion Shares in the Conversion. Ryan Beck and McConnell Budd have agreed
to use their best efforts to assist Seacoast Financial and Compass in the
solicitation of subscriptions for the Conversion Shares. Neither Ryan Beck nor
McConnell Budd is obligated to take or purchase any Conversion Shares offered
in the Conversion. See "The Offerings--Plan of Distribution and Selling
Commissions."
Seacoast Financial has received conditional approval to have the Seacoast
Financial Common Stock listed on the Nasdaq National Market System under the
symbol "SCFS," subject to the completion of the Conversion and compliance with
certain initial listing conditions. Seacoast Financial has never issued stock
to the public or to any person and there can be no assurance that an active and
liquid trading market for the Seacoast Financial Common Stock will develop or
that purchasers of Conversion Shares in connection with the Conversion will be
able to sell their shares at or above the Purchase Price. Ryan Beck and
McConnell Budd have advised Seacoast Financial that
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they intend to act as market makers for the Seacoast Financial Common Stock
following consummation of the Conversion. See "Market for Seacoast Financial
Common Stock" beginning on Page 47 of this Prospectus.
The Merger
The primary reason that Seacoast Financial's Board of Trustees determined
to undertake the Conversion at this time is to facilitate the consummation of
Seacoast Financial's proposed acquisition of Sandwich Bancorp in a
stock-for-stock exchange. As a mutual holding company, Seacoast Financial would
not have shares to issue in such exchange without first undertaking the
Conversion. On March 23, 1998, Seacoast Financial and Compass entered into an
Amended and Restated Affiliation and Merger Agreement (the "Merger Agreement")
with Sandwich Bancorp and its wholly-owned subsidiary, Sandwich Co-operative
Bank ("Sandwich Bank"), pursuant to which Sandwich Bancorp will merge with a
corporate subsidiary of Seacoast Financial (the "Merger"). Pursuant to the
terms of the Merger Agreement, upon consummation of the Merger, each share of
common stock, par value $1.00 per share, of Sandwich Bancorp ("Sandwich Bancorp
Common Stock") and each outstanding option to purchase Sandwich Bancorp Common
Stock will automatically convert into and become exchangeable for a number of
shares of Seacoast Financial Common Stock (the "Exchange Shares") determined by
application of an exchange ratio (the "Exchange Ratio"). The Exchange Ratio
will be determined based upon the trading price of Seacoast Financial Common
Stock for a number of days immediately following the consummation of the
Conversion. See "The Conversion and the Merger--Description of the Merger and
the Exchange Ratio." The Exchange Shares to be issued to the Sandwich Bancorp
stockholders will be in addition to the Conversion Shares to be issued in the
Offering. The Merger is expected to close on the tenth trading day after
consummation of the Conversion. Although the Conversion and the Merger will not
close simultaneously, they are interdependent transactions, and the Conversion
will not be consummated unless or until all conditions to the consummation of
both the Conversion and the Merger (other than the delivery of the Exchange
Shares to the Sandwich Bancorp stockholders and optionholders) have been
satisfied or waived. Unless otherwise indicated, all pro forma data presented
herein which reflect consummation of the Conversion also reflect consummation
of the Merger. See "The Conversion and the Merger" and "Pro Forma Data."
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[GRAPHIC--MAP]
SEACOAST FINANCIAL
SERVICES CORPORATION
[Map of Southeastern Massachusetts, depicting Branches of
Compass Bank for Savings and Sandwich Co-Operative Bank]
* Headquarters of
Compass Bank for Savings
and Seacoast Financial Services Corporation
791 Purchase Street
New Bedford, Massachusetts
[/GRAPHIC--MAP]
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SUMMARY OF PROSPECTUS
Generally, this summary highlights selected information from this document
and does not contain all the information that an investor needs to know before
making an informed investment decision. To understand the Conversion and the
Merger fully, persons considering the purchase of Conversion Shares should
carefully read this entire Prospectus, including the consolidated financial
statements and the notes to the consolidated financial statements of Seacoast
Financial and Sandwich Bancorp included herein. References in this document to
"Compass" refer to Compass Bank for Savings. References in this document to the
"Company" or "Seacoast Financial" refer to Seacoast Financial Services
Corporation. References to "Sandwich Bancorp" refer to Sandwich Bancorp, Inc.
and references to "Sandwich Bank" refer to The Sandwich Co-operative Bank.
Seacoast Financial Services Corporation
Seacoast Financial (formerly known as "The 1855 Bancorp") is a mutual
holding company that was created in connection with Compass's reorganization
from a mutual savings bank to the mutual holding company form of organization
in 1994. Seacoast Financial's operations have been limited to the ownership of
Compass. Seacoast Financial has never issued, or been authorized to issue, any
capital stock. It is now undertaking a mutual to stock conversion into a stock
holding company (the "Conversion") and issuing shares (the "Conversion Shares")
of its common stock, par value $.01 per share ("Seacoast Financial Common
Stock"), in connection with such conversion. Seacoast Financial is registered
with the Board of Governors of the Federal Reserve System (the "FRB") as a bank
holding company under the Bank Holding Company Act of 1956, as amended (the
"BHCA"). Since its formation, Seacoast Financial has owned 100% of Compass's
outstanding capital stock, and will continue to do so after consummation of the
Conversion. Upon completion of the Conversion, Seacoast Financial will have no
significant liabilities and no assets other than 100% of the shares of
Compass's outstanding common stock, the ESOP loan, a portfolio of investment
securities (Seacoast Financial held $5.3 million of such securities as of May
31, 1998) and any net proceeds of the Conversion not contributed by Seacoast
Financial to Compass. Following the Conversion, Seacoast Financial will not
initially engage in any significant business activity other than to conduct the
Merger, hold the outstanding common stock of Compass, hold the loan to the ESOP
and invest any funds it holds. See "Business of Seacoast Financial" and "Use of
Proceeds of Conversion." At the present time, Seacoast Financial does not
employ any persons other than certain officers who are also officers of
Compass, but uses the support staff of Compass from time to time.
At May 31, 1998, Seacoast Financial, on a consolidated basis, had total
assets of $1,176.6 million, total loans (net) of $873.9 million, total deposits
of $982.4 million and total surplus of $106.5 million. Seacoast Financial also
had, as of the same date, a Tier 1 leverage capital ratio of 8.89% and a Tier 1
risk-based capital ratio of 12.44%.
Compass Bank for Savings
Compass was organized in 1855 as a Massachusetts-chartered mutual savings
bank, and reorganized into mutual holding company form (without a minority
stock issuance) in 1994. Compass's principal business has been, and continues
to be, gathering deposits from customers within its market area and investing
those funds in residential and commercial real estate loans, indirect
automobile loans, commercial loans, construction loans, home equity loans and
other consumer loans. Compass conducts business from its corporate headquarters
and 23 full-service banking offices, six of which are located in New Bedford,
Massachusetts and the remaining 17 of which are located in the Massachusetts
communities of Fall River (two offices), Plymouth (three offices), Fairhaven,
North Dartmouth, Somerset, Swansea, Westport, Assonet and Carver and the island
of Martha's Vineyard (five offices). Compass also has two limited service high
school branches and four remote service ATMs. In addition, Compass's indirect
auto lending business extends into the State of Rhode Island through its
subsidiary, Compass Credit Corporation.
Compass's deposits are insured by the Bank Insurance Fund (the "BIF"), as
administered by the Federal Deposit Insurance Corporation (the "FDIC"), up to
the maximum amount permitted by law, except that certain deposits that Compass
acquired from a savings association are insured by the Savings Association
Insurance Fund (the "SAIF"), also administered by the FDIC. Deposit amounts in
excess of FDIC insurance limits are insured by the Depositors Insurance Fund
(the "DIF"), a deposit insuring entity for Massachusetts savings banks. Compass
is subject to comprehensive regulation and examination by the Massachusetts
Commissioner of Banks (the "Commissioner") and the FDIC.
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Compass's business strategy includes (i) taking advantage of its position
as a locally based bank to foster a community orientation, (ii) developing a
niche through its expertise in indirect automobile lending, (iii) diversifying
its loan portfolio composition in an effort to broaden its business
opportunities and help manage credit and interest rate risk, (iv) emphasizing
transaction accounts in order to build customer relationships, achieve a low
cost of funds and generate service fee income and (v) expanding its products
and market area, with the goals of achieving a higher profile and increased
opportunities for growth. Compass seeks to pursue its business strategy in a
manner that allows it to maintain asset quality and control operating expenses.
Compass's business strategy has produced the following results:
o Community Orientation. As a result of mergers over the last several
years, Compass is one of the few remaining savings banks (and the largest
financial institution) headquartered in New Bedford. Throughout its market
area, Compass seeks to provide a high level of personalized service to
individuals and small businesses. Examples of such service include
experienced branch personnel (due to low turnover), prompt local
decisionmaking and a "call center" to address customer questions. After
the Merger with Sandwich Bancorp (as defined in the next section), Compass
will seek to increase its reputation as a small business lender by
promoting commercial loans to the many retail and tourism-related
businesses on Cape Cod.
o Loan Portfolio Diversity. Compass differs from a typical savings bank.
The latter normally concentrates primarily on residential lending while
Compass has historically diversified its lending focus. As a result, at
May 31, 1998, one- to four-family residential loans represented 41.6% of
Compass's loan portfolio, indirect auto loans (net of unearned discount)
represented 28.0% of the portfolio and commercial real estate loans
represented 14.1% of the loan portfolio. The remainder of the portfolio
consists of commercial loans, construction loans and other consumer loans.
For a discussion of the added risks of Compass's diversification strategy,
see "Risk Factors--Construction, Commercial Real Estate, Commercial and
Indirect Auto Lending Risks." The addition of Sandwich Bank's loan
portfolio following the Merger will increase the relative percentage of
real estate loans in Compass's portfolio, particularly of those real
estate loans secured by one- to four-family owner-occupied residences.
After the Merger with Sandwich Bancorp, Compass intends to maintain its
presence as a residential mortgage lender, while emphasizing its indirect
auto lending and commercial lending in the new market provided by Sandwich
Bank.
o Geographic and Product Expansion. Beginning in 1994, Compass has pursued
geographic expansion of its branch network, on a selected basis, through
building and acquiring new branches and acquiring small financial
institutions. The expanded branch network has allowed Compass to move
beyond its Greater New Bedford/Fall River market areas, so that its
primary market area now also includes the island of Martha's Vineyard and
the Greater Plymouth area (geographically, Plymouth is the largest town in
Massachusetts). Compass's business activities on Cape Cod are currently
limited. The addition of Sandwich Bank's nine Cape Cod branches will
provide Compass an immediate presence in a contiguous market. Compass
intends to continue its growth strategy on a basis that management
considers prudent, targeting promising market areas and, in the case of
acquisitions, identifying favorable opportunities. Concurrent with
geographic expansion, Compass has in recent years initiated customer
convenience products, such as a debit card and a "sweep" account for
commercial customers. Compass has installed a telephone voice response
system and a telephone "call center," with extended hours, manned with
Compass staff. These services accommodate customers who have account
inquiries, want information about loan programs or want to conduct banking
business by telephone. Later in 1998, Compass expects to expand its
telephone voice response system to include bill payment services, and to
offer customers the ability to conduct certain banking business, also
including bill payment services, over the Internet.
o Emphasizing Core Deposits. Compass attracts a substantial amount of money
market, NOW (checking), passbook and savings accounts, and
non-interest-bearing demand checking accounts. These accounts, which carry
a lower cost and generally represent a more stable source of funds than
certificate of deposit accounts, represented 48.4% of Compass's deposits
at May 31, 1998. Additionally, unlike certificate accounts, they provide
service fee income. Sandwich Bank's transaction accounts at June 30, 1998
represented 52.0% of Sandwich Bank's total deposits. Through its own and
Sandwich Bank's branch network, Compass will continue to emphasize
transaction accounts after the Merger. The weighted average
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rate paid on Compass's deposits was 4.02% for the seven months ended May
31, 1998. For Sandwich Bank, this rate was 3.78% for the six months ended
June 30, 1998.
o Managing Overhead Expense. One of management's goals is to maintain a
reasonable efficiency ratio, which is the ratio of its non-interest
expense to the sum of net interest income and non-interest income. The
efficiency ratio has consistently improved since 1995, when it was 67.95%,
compared with 54.21% for the seven months ended May 31, 1998. Sandwich
Bancorp's efficiency ratio was 60.13% for the six months ended June 30,
1998.
o Maintenance of Asset Quality. Compass maintains a loan portfolio that is
diversified between residential mortgage, commercial, commercial real
estate and indirect auto loans and other consumer loans. Residential
mortgage loans historically pose less credit risk than the other loan
types but the latter offer the advantages of relatively short terms and
generally higher interest rates. For a discussion of the added risks
involved with non-residential lending, see "Risk Factors--Construction,
Commercial Real Estate, Commercial and Indirect Auto Lending Risks."
Compass pursues a diversified portfolio, while seeking to maintain asset
quality and moderate credit risk. At May 31, 1998, its ratio of
non-performing assets to total assets was 0.93%. The comparable ratio for
Sandwich Bank at June 30, 1998 was 0.56%.
The executive offices of Compass and Seacoast Financial are located at 791
Purchase Street, New Bedford, Massachusetts 02740. Their telephone number is
(508) 984-6000.
The Merger with Sandwich Bancorp
The Merger. Seacoast Financial determined to undertake the Conversion in
connection with its decision to enter into an Amended and Restated Affiliation
and Merger Agreement (the "Merger Agreement") with Sandwich Bancorp and its
subsidiary, Sandwich Bank. The Merger will enable Compass to expand its branch
network geographically into the Cape Cod market, which is contiguous to
Compass's existing market areas. Compass currently operates primarily in the
southeastern Massachusetts region (the "South Coast") just west of Cape Cod,
including the New Bedford, Fall River and Plymouth markets, and also operates
on the island of Martha's Vineyard, off the coast of Cape Cod. Sandwich Bancorp
operates primarily on Cape Cod itself. As a result of the Conversion and the
Merger, Compass will operate 34 full-service banking offices, and, based on pro
forma total assets at May 31, 1998, would be the third largest savings bank in
Massachusetts and the largest financial institution headquartered in
southeastern Massachusetts. For further information about Seacoast Financial's
reasons for undertaking the Merger, see "Certain Effects of the Merger on
Seacoast Financial," and "The Conversion and the Merger--Seacoast Financial's
Background and Reasons for the Conversion and the Merger."
The Merger Agreement provides for a stock-for-stock exchange. Seacoast
Financial would not have shares to issue in such exchange without first
undertaking the Conversion. Pursuant to the Merger Agreement, Sandwich Bancorp
will merge with a corporate subsidiary of Seacoast Financial (the "Merger") on
the tenth trading day following consummation of the Conversion, and it is
expected that thereafter Sandwich Bank will merge with Compass. Upon completion
of the Merger, each outstanding share of common stock, par value $1.00 per
share, of Sandwich Bancorp ("Sandwich Bancorp Common Stock") (other than shares
held by stockholders exercising dissenters rights or by Seacoast Financial or
Compass) and each outstanding option to purchase Sandwich Bancorp Common Stock
(each such option, a "Sandwich Option" and, the options collectively, the
"Sandwich Options") will automatically convert into and become exchangeable for
shares of Seacoast Financial Common Stock (the "Exchange Shares") and cash in
lieu of any fractional share of Seacoast Financial Common Stock which Sandwich
Bancorp's stockholders and optionholders otherwise would be entitled to
receive. Seacoast Financial will issue in the Merger up to a maximum of
12,686,225 Exchange Shares, assuming that 1,953,475 shares of Sandwich Bancorp
Common Stock (representing the aggregate number of such shares outstanding at
June 30, 1998 less the 90,000 shares owned by Seacoast Financial and Compass)
and 45,203 Sandwich Bancorp Options (representing the number of such options
outstanding at June 30, 1998) are outstanding as of consummation of the Merger.
In addition, Seacoast Financial will issue in the Conversion up to 18,400,000
Conversion Shares (which may be increased to up to 21,160,000 under certain
circumstances described herein). In the event all Sandwich Bancorp Options were
exercised for cash prior to the consummation of the Merger, the maximum number
of Exchange Shares that could be issued would increase by 105,314. See "Pro
Forma Data--Pro Forma Outstanding Seacoast Financial Common
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Stock." The Merger is expected to be accounted for under the
pooling-of-interests method of accounting. See "The Conversion and the
Merger--Accounting Treatment of the Conversion and the Merger."
The number of Exchange Shares issuable in exchange for each outstanding
share of Sandwich Bancorp Common Stock will be determined by application of an
exchange ratio (the "Exchange Ratio"). The Exchange Ratio will be based upon
the average trading price of Seacoast Financial Common Stock during a period
between the consummation of the Conversion and consummation of the Merger. This
average trading price (the "Seacoast Financial Trading Price") will be
determined by averaging the closing bid and asked prices of Seacoast Financial
Common Stock for each of the second through the ninth trading days, inclusive,
following consummation of the Conversion (the average of the closing bid and
asked price for each such day is referred to as the "Daily Closing Price"),
discarding the two highest and two lowest Daily Closing Prices and averaging
the remaining Daily Closing Prices. The closing bid and asked prices will be as
quoted at the close of business on the Nasdaq National Market System (the
"Nasdaq National Market"). If the Seacoast Financial Trading Price is between
$10.01 and $13.50, the Exchange Ratio will be between 6.3936 and 4.7407
(determined by dividing $64.00 by the Seacoast Financial Trading Price). If the
Seacoast Financial Trading Price is between $13.51 and $15.00, the Exchange
Ratio will be fixed at 4.7407. If the Seacoast Financial Trading Price exceeds
$15.00, the Exchange Ratio will be less than 4.7407 (determined by dividing
$71.11 by the Seacoast Financial Trading Price). If the Seacoast Financial
Trading Price is equal to or less than $10.00 per share, the Exchange Ratio
will be 6.4000. For a depiction of the calculation of the Exchange Ratio
calculation in tabular form, see "The Conversion and the Merger--Description of
the Merger and the Exchange Ratio."
The number of Exchange Shares issuable in exchange for each outstanding
Sandwich Option will be determined by subtracting the per share exercise price
of an option from the product of the Seacoast Financial Trading Price and the
Exchange Ratio and dividing the result by the Seacoast Financial Trading Price.
The reason for the delay between the dates of consummation of the
Conversion and consummation of the Merger is that the calculation of the
Exchange Ratio is based upon the Seacoast Financial Trading Price during a
period following the consummation of the Conversion. Notwithstanding this
delay, the Conversion and the Merger are interdependent transactions, and
neither one will occur unless both of them do. Any person who subscribes for
Conversion Shares will be deemed to have consented to the consummation of the
Merger. Although the Conversion and the Merger will not close simultaneously,
it is a condition to consummation of the Conversion that all conditions to
consummation of the Merger (other than the delivery of the Exchange Shares to
Sandwich Bancorp stockholders and optionholders) shall have been satisfied or
waived as of the date of consummation of the Conversion. Similarly, it is a
condition to consummation of the Merger that the Conversion shall have been
consummated. Completion of the Conversion and the Merger are subject to a
number of conditions, including the final regulatory approval of the
Commissioner, the Massachusetts Board of Bank Incorporation ("BBI"), the FDIC
and the FRB and the approval of the Sandwich Bancorp stockholders. For more
information about the Merger and the terms of the Merger Agreement, see "The
Conversion and the Merger--Description of the Merger and the Exchange Ratio"
and "--Description of the Merger Agreement."
Sandwich Bancorp and Sandwich Bank. Sandwich Bancorp is a stock bank
holding company registered with the FRB and was organized in 1997 for the
purpose of serving as the holding company of Sandwich Bank. Sandwich Bancorp's
business consists primarily of the business of Sandwich Bank, and Sandwich
Bancorp has no significant assets other than the issued and outstanding capital
stock of Sandwich Bank. At June 30, 1998, Sandwich Bancorp, on a consolidated
basis, had total assets of $531.0 million, total deposits of $444.8 million and
stockholders' equity of $44.6 million. At that date, Sandwich Bancorp and
Sandwich Bank employed approximately 128 full-time and 31 part-time employees.
Sandwich Bank was organized as a Massachusetts-chartered co-operative bank
in 1885 and merged with Wareham Co-operative Bank in May 1982. In July 1986,
Sandwich Bank converted from mutual to stock form. The business of Sandwich
Bank consists primarily of attracting deposits from the general public and
originating construction and residential mortgage loans secured by one- to
four-family homes, consumer loans, home equity loans and commercial and
commercial real estate loans. Sandwich Bank's deposit and lending operations
are conducted through eleven full-service office facilities located in the Cape
Cod communities of Sandwich, South Sandwich, Buzzards Bay, Pocasset, Falmouth,
Hyannis, Chatham, Orleans and South Yarmouth and in the
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southeastern Massachusetts communities of Wareham and Cedarville. In addition,
Sandwich Bank maintains a loan production office in Plymouth, Massachusetts.
Sandwich Bank's business also includes investing in money market instruments,
federal government and agency obligations and various types of corporate
securities and other authorized investments, such as collateralized mortgage
obligations and mortgage-backed securities.
For further information about Sandwich Bancorp and Sandwich Bank, see
"Excerpts from Annual Report on Form 10-K for the Year Ended December 31, 1997"
and "Excerpts from Sandwich Bancorp's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1998," attached to this Prospectus.
The Plan of Conversion
The Plan of Conversion, which Seacoast Financial's Board of Trustees
adopted on April 23, 1998 and its Board of Corporators approved on August 24,
1998 (the "Conversion Plan"), provides for the amendment of Seacoast
Financial's charter to authorize the issuance of capital stock (among other
amendments) so that Seacoast Financial will become a stock holding company
rather than a mutual holding company. The Conversion Plan further provides that
Seacoast Financial will offer the Conversion Shares for sale in a subscription
offering (the "Subscription Offering") to Compass's depositors, the ESOP and
directors, trustees, officers and employees of Seacoast Financial and Compass
and may offer Conversion Shares in a community offering (the "Community
Offering") and in a syndicated community offering (the "Syndicated Community
Offering;" the Subscription, Community and Syndicated Community Offerings are
referred to collectively as the "Offering" or "Offerings.") Seacoast Financial
expects to contribute at least 50% of the proceeds of the Offering to Compass.
See "The Conversion and the Merger--Overview," "The Offerings" and "Use of
Proceeds of Conversion."
The Offerings
Seacoast Financial is offering the Conversion Shares for sale in the
Subscription Offering pursuant to subscription rights in the following order of
priority to: (i) holders of deposit accounts in Compass with an aggregate
balance of $50 or more on December 31, 1996 ("Eligible Account Holders" and the
"Eligibility Record Date"); (ii) holders of aggregate deposit accounts in
Compass with a balance of $50 or more on June 30, 1997 ("Supplemental Eligible
Account Holders" and the "Supplemental Eligibility Record Date"); (iii) the
ESOP; and (iv) employees, officers, trustees and directors of Seacoast
Financial and Compass. Subject to the prior rights of holders of subscription
rights, Seacoast Financial may offer Conversion Shares in the Community
Offering to certain members of the general public with a preference given to
residents of Compass's community (as such community is defined in "The
Offerings--Community Offering"). The Community Offering, if any, will commence
concurrently with, during or promptly after the Subscription Offering. Shares
not purchased in the Subscription and Community Offerings, if any, may be
offered for sale to the general public in the Syndicated Community Offering
through a syndicate of registered broker-dealers (which may include Ryan, Beck
& Co., Inc. ("Ryan Beck") and McConnell, Budd & Downes ("McConnell Budd"),
registered broker dealers), to be formed and managed by Ryan Beck and McConnell
Budd acting as agents of Seacoast Financial to assist Seacoast Financial in the
sale of the Conversion Shares. The Syndicated Community Offering, if any, would
occur as soon as practicable following the close of the Community Offering.
Seacoast Financial reserves the absolute right to reject, in whole or part and
in its sole discretion, any order received in the Community and Syndicated
Community Offerings. See "The Offerings--Subscription Offering" and
"--Community Offering."
Offering Expiration Date
The Subscription Offering will terminate at 10:00 a.m., Boston Time, on
November 2, 1998 (the "Expiration Date"), unless extended by Seacoast Financial
with the approval of the Commissioner and the FRB, if necessary. The Community
and Syndicated Community Offerings must be completed by December 17, 1998,
unless extended, with regulatory approval if necessary. If the Offerings are
not completed by that date and are not so extended, subscribers will have their
funds refunded, with interest. Orders submitted are irrevocable until
completion of the Offering. However, if the Offering is not consummated by
March 20, 1999, (or by the date the Merger Agreement expires or is terminated,
if earlier) the Offering will be terminated and subscribers will receive
refunds, with interest. See "The Offerings--Procedure for Purchasing Shares."
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Purchase Price and Independent Valuation
Seacoast Financial has established a fixed price of $10.00 per share for
each Conversion Share sold in the Offering (the "Purchase Price"). Federal and
state regulations require that the aggregate Purchase Price of the Conversion
Shares offered in the Offering be based on the appraised pro forma market value
of the Conversion Shares (the "Independent Valuation"), as determined by an
independent appraiser. Seacoast Financial has engaged RP Financial, LC., an
independent appraisal firm ("RP Financial"), to conduct such valuation. The
Independent Valuation is not a recommendation for the purchase of Conversion
Shares. RP Financial has estimated that the pro forma market value of the
Conversion Shares is between $136.0 million and $184.0 million (the "Estimated
Valuation Range"). Based on this estimate, Seacoast Financial will issue a
total of between 13,600,000 and 18,400,000 Conversion Shares at the Purchase
Price. RP Financial will update its appraisal immediately prior to completion
of the sale of the Conversion Shares. As long as the estimated pro forma market
value is not increased by more than 15% above the maximum, or decreased below
the minimum, of the Estimated Valuation Range, no resolicitation of subscribers
will be made and subscribers will not be permitted to modify or cancel their
subscriptions. See "The Conversion and the Merger--Description of the
Conversion--Stock Pricing and Number of Conversion Shares to be Issued." The
actual number of Conversion Shares issued will have a corresponding effect on
the estimated net proceeds of the Conversion and the pro forma capitalization
and per share data of Seacoast Financial. See "Use of Proceeds of Conversion,"
"Capitalization" and "Pro Forma Data."
Nontransferability of Subscription Rights
No person may transfer or enter into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Conversion Plan or the Conversion Shares to be issued upon the
exercise of such rights. Each person exercising subscription rights will be
required to certify on the Order Form that the purchase of Conversion Shares by
such person is solely for the purchaser's own account and that there is no
agreement or understanding regarding the sale or transfer of such shares.
Seacoast Financial and Compass will pursue any and all legal and equitable
remedies in the event they become aware of the transfer of subscription rights
and will not honor orders that they believe involve the transfer of
subscription rights. See "The Offerings--Restrictions on Agreements or
Understandings Regarding Transfer of Conversion Shares to be Purchased in the
Offering." Following the Offering, there generally will be no restrictions on
the transfer or sale of Conversion Shares by purchasers unless such purchasers
are "affiliates" of Seacoast Financial or Compass (as such term is defined in
Rule 144 ("Rule 144"), promulgated under the Securities Act of 1933, as
amended, (the "Securities Act")). In addition, Massachusetts law prohibits
(subject to certain exceptions) for one year after the Offering sales by
directors, trustees, officers and Corporators of Seacoast Financial or Compass
of Conversion Shares. See "The Conversion and the Merger--Resale Restrictions."
Marketing Agents
Seacoast Financial and Compass have engaged Ryan Beck and McConnell Budd,
registered broker-dealers, to consult with and advise them in connection with
the sale of Conversion Shares in the Offering. Ryan Beck and McConnell Budd
have agreed to use their best efforts to assist Seacoast Financial in
soliciting subscriptions in the Offering. See "The Offerings--Plan of
Distribution and Selling Commissions." Neither Ryan Beck, McConnell Budd nor
any registered broker-dealer shall have any obligation to take or purchase any
Conversion Shares.
Prospectus Delivery and Procedure for Delivering Shares
To ensure that each purchaser receives this Prospectus at least 48 hours
prior to the Expiration Date in accordance with Rule 15c2-8 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), Seacoast Financial will
not mail the Prospectus any later than five days prior to the Expiration Date or
hand-deliver the Prospectus any later than two days prior to such date. Order
forms to purchase Conversion Shares ("Order Forms") will be distributed only
with the Prospectus. Seacoast Financial is not obligated to accept for
processing orders not submitted on an original Order Form. Payment by check,
money order or debit authorization to an existing non-transaction account at
Compass must accompany an Order Form. No wire transfers will be accepted. See
"The Offerings--Procedure for Purchasing Shares."
10
<PAGE>
Purchase Limitations
Generally, no person may purchase, in the aggregate, more than $750,000 of
Conversion Shares in the Offerings and no person together with associates or
persons acting in concert with such person may purchase in the aggregate more
than $1.5 million of Conversion Shares in the Offerings. However, Seacoast
Financial may, in its sole discretion, and without notice to or solicitation of
subscribers or other prospective purchasers, increase or decrease such maximum
purchase limitations. The minimum purchase is 25 Conversion Shares. The ESOP,
however, may purchase in the Subscription Offering up to 8% of the Conversion
Shares issued in the Offering. Prior to completion of the Offering, if the
maximum purchase limitation is increased, subscribers for the maximum amount
will be, and certain other large subscribers in the sole discretion of Seacoast
Financial and Compass may be, given the opportunity to increase their
subscriptions up to the then applicable limits. See "The Offerings."
Conditions to Consummation of Conversion and Merger
The Merger is expected to be completed on the tenth trading day following
completion of the Conversion. Although the Conversion and the Merger will not
close simultaneously, it is a condition to completion of the Conversion that
all conditions to consummation of the Merger (other than the delivery of the
Exchange Shares to the Sandwich Bancorp stockholders and optionholders) shall
have been satisfied or waived and it is a condition to consummation of the
Merger that the Conversion shall have been consummated. Consummation of the
Conversion and the Merger are subject to a number of other conditions,
including final regulatory approval of the Commissioner, the BBI, the FDIC and
the FRB and approval of the Sandwich Bancorp stockholders. See "The Conversion
and the Merger--Required Approvals" and "--Description of the Merger
Agreement--Conditions to the Merger."
Use of Proceeds of Conversion
Net proceeds from the sale of the Conversion Shares are estimated to be
between $133.0 million and $180.6 million, depending on the number of
Conversion Shares sold and the expenses of the Offering ($207.9 million if the
Estimated Valuation Range is increased by 15%). Up to 50% of the net proceeds
of the Offering will be retained by Seacoast Financial and used for general
business purposes, including a loan by Seacoast Financial to the ESOP to enable
the ESOP to purchase up to 8% of the Conversion Shares issued in the Offerings.
The net proceeds retained by Seacoast Financial will be invested in short- and
medium-term debt securities, including U.S. Government and Agency securities,
corporate bonds and mortgage-backed securities. Seacoast Financial will
contribute at least 50% of the net proceeds from the Offering to Compass, to be
used for general corporate purposes, including origination of loans and
purchase of investments in the ordinary course of business. Initially, Compass
plans to invest the net proceeds primarily in short- and medium-term debt
securities of the same types as Seacoast Financial's investments. Compass also
intends to use approximately $20.0 million of the proceeds to build a new main
office. Compass or Seacoast Financial may use proceeds to support the
acquisition of other financial institutions, branches thereof or other
financial services businesses. Compass has no arrangements or understandings
regarding acquisitions at this time, other than the Merger with Sandwich
Bancorp. See "Use of Proceeds of Conversion."
Dividend Policy
Upon completion of the Conversion, the Board of Directors of Seacoast
Financial will have the authority to declare dividends on the Seacoast
Financial Common Stock, subject to statutory and regulatory requirements.
Although no decision has been made whether to pay dividends, Seacoast Financial
will consider a policy of paying quarterly cash dividends on the Seacoast
Financial Common Stock, with the first such dividend to be declared and paid no
sooner than the first full quarter following consummation of the Conversion and
Merger. There can be no assurance that dividends will be paid or, if paid, what
the amounts of dividends will be, or whether such dividends, once paid, will
continue to be paid. Declaration of dividends by the Board will be dependent
upon a number of factors, including capital requirements, regulatory
limitations, Seacoast Financial's operating results and financial condition and
general economic conditions. See "Seacoast Financial's Dividend Policy."
Purchases by Management
Officers and directors of Seacoast Financial and Compass have indicated to
Seacoast Financial that they intend to purchase up to $4,050,000 of Conversion
Shares, equal to 3.0%, 2.5%, 2.2% and 1.9% of the number of shares to be issued
in the Conversion, at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated
11
<PAGE>
Valuation Range, respectively. There is no assurance, however, that such
persons will not purchase more or less than such number of shares or that there
will be sufficient shares available to fill such subscriptions. Such persons
will pay $10.00 per share for such shares. See "Purchases by Management of
Seacoast Financial and Compass."
Benefits of Conversion to Management and Directors
Compass has adopted the ESOP, a tax-qualified benefit plan for officers
and employees of Compass, which intends to purchase 8% of the Conversion
Shares, or 1,088,000 shares ($10.9 million) and 1,472,000 shares ($14.7
million) at the minimum and maximum, respectively, of the Estimated Valuation
Range. See "Management of Seacoast Financial and Compass--Compensation of
Officers and Directors through Benefit Plans--Employee Stock Ownership Plan and
Trust."
Following completion of the Conversion, the Board of Directors may
consider the adoption of a stock option plan for, and a stock plan for the
recognition and retention of, officers and directors of Compass and Seacoast
Financial. Applicable banking regulations would permit the Company to adopt
such plans for presentation to Seacoast Financial's stockholders at a meeting
to be held no earlier than six months after the completion of the Conversion.
If the Board adopts such plans, no options or stock awards would be granted
under either plan until the date on which stockholder approval of the
respective plan is received. See "Management of Seacoast Financial and
Compass--Compensation of Officers and Directors through Benefit Plans--Stock
Option Plan" and "--Stock Plan."
In connection with the Conversion, Seacoast Financial and Compass expect
to enter into employment agreements and change in control agreements with its
President and four other senior officers (and change in control agreements with
three additional officers) that provide for, among other things, payment in the
event of termination of employment. See "Management of Seacoast Financial and
Compass--Employment and Change in Control Agreements."
Market for Seacoast Financial Common Stock
As a mutual holding company, Seacoast Financial has never issued capital
stock, and consequently, there is no existing market for the Seacoast Financial
Common Stock. Seacoast Financial has received conditional approval to have the
Seacoast Financial Common Stock quoted on the Nasdaq National Market under the
symbol "SCFS," subject to the completion of the Conversion and compliance with
certain initial listing conditions. See "Market for Seacoast Financial Common
Stock."
No Board Recommendation
Neither the Board of Trustees of Seacoast Financial nor the Board of
Directors of Compass has made any recommendations to depositors or other
potential investors regarding whether such persons should purchase any
Conversion Shares. An investment in the Conversion Shares must be made pursuant
to each investor's evaluation of his or her best interests.
Risk Factors
A purchase of Conversion Shares involves a substantial degree of risk.
Prospective investors should carefully consider the matters set forth under
"Risk Factors," including a discussion of certain risks of construction,
commercial real estate, commercial and indirect auto lending; risks arising
from Compass's geographic concentration of loans in Southeastern Massachusetts
and Rhode Island; risks of changing interest rates and their potential impact
on earnings; risks related to the acquisition of Sandwich Bancorp; the expected
low return on equity after the Conversion; the risk of dilution resulting from
the issuances of additional shares and the possible adoption of stock benefit
plans; the risk that after-market stock performance may not compare favorably
with that of other recent mutual-to-stock conversions; and other risks of the
Offering.
Stock Information Center
If you have any questions regarding the Conversion, call Seacoast
Financial's Stock Information Center at (888) 7-COMPASS [(888) 726-6727].
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF SEACOAST FINANCIAL
Set forth below are the selected consolidated financial and other data of
Seacoast Financial. The financial data are derived in part from, and should be
read in conjunction with, the Consolidated Financial Statements of Seacoast
Financial and Subsidiary and notes thereto presented elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
At October 31,
---------------------------------------------------------------
At May 31,
1998 (1) 1997 1996 1995 1994 1993
------------- ------------- ------------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets .................................. $1,176,559 $1,106,590 $1,027,764 $983,975 $791,989 $705,734
Loans (2) ..................................... 884,422 820,197 748,113 676,007 509,868 451,114
Allowance for loan losses ..................... 10,508 10,642 10,334 9,850 7,002 6,000
Debt securities (3):
Available/held for sale ...................... 173,820 205,620 198,783 77,562 68,472 50,328
Held to maturity/held for investment ......... 13,649 12,633 11,752 153,805 160,856 143,923
Marketable equity securities (3) .............. 9,520 3,696 1,523 1,064 2,631 2,030
Deposits ...................................... 982,351 937,948 882,608 859,723 687,291 622,729
Borrowed funds ................................ 77,074 60,703 49,948 41,178 33,469 16,098
Surplus ....................................... 106,510 98,141 84,917 74,604 65,192 61,746
Net unrealized gain (loss) on securities
available for sale, net of taxes, included
in surplus ................................... 2,317 1,614 174 16 (1,910) --
Non-performing loans .......................... 9,493 10,925 10,326 8,506 15,171 9,906
Non-performing assets ......................... 10,888 12,632 12,924 12,424 20,969 16,867
</TABLE>
<TABLE>
<CAPTION>
Seven months
ended May 31, Year ended October 31,
------------------------ ------------------------------------------------------
1998 (1) 1997 (1) 1997 1996 1995 1994 1993
------------- ---------- ---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income ................................ $49,990 $45,643 $80,032 $74,126 $66,472 $50,682 $51,215
Interest expense ............................... 25,032 22,652 39,831 37,245 34,539 23,280 23,314
------- ------- ------- ------- ------- ------- -------
Net interest income ........................... 24,958 22,991 40,201 36,881 31,933 27,402 27,901
Provision (credit) for loan losses ............. 536 890 1,865 1,166 (351) 2,524 3,838
------- ------- ------- ------- ------- ------- -------
Net interest income after provision
(credit) for loan losses .................... 24,422 22,101 38,336 35,715 32,284 24,878 24,063
Gains (losses) on sales of securities, net ..... (3) 23 37 60 (84) 663 1,847
Other non-interest income ...................... 3,776 3,085 5,906 5,086 4,487 3,475 2,669
Other real estate owned expense, net ........... 138 293 519 644 1,072 1,026 1,560
Other non-interest expense ..................... 15,437 14,378 24,291 23,514 23,618 19,342 16,757
-------- ------- ------- ------- ------- ------- -------
Income before income taxes and
cumulative effect of change in
accounting principle .......................... 12,620 10,538 19,469 16,703 11,997 8,648 10,262
Provision for income taxes ..................... 4,954 4,254 7,685 6,548 4,511 3,292 4,451
Cumulative effect of change in
accounting principle (4) ...................... -- -- -- -- -- -- 2,000
-------- ------- ------- ------- ------- ------- -------
Net income ..................................... $7,666 $ 6,284 $11,784 $10,155 $ 7,486 $ 5,356 $ 7,811
======== ======= ======= ======= ======= ======= =======
</TABLE>
(footnotes begin on following page)
13
<PAGE>
<TABLE>
<CAPTION>
Seven months
ended May 31, Year ended October 31,
--------------------- -----------------------------------------------------
1998 (1) 1997 (1) 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data (5):
Performance Ratios:
Return on average assets ........................ 1.15% 1.03% 1.11% 1.02% 0.82% .71% 1.12%
Return on average surplus ....................... 12.63 12.03 12.73 12.63 10.57 8.42 13.74
Surplus to total assets at end of period ........ 9.05 8.52 8.87 8.26 7.58 8.23 8.75
Net interest rate spread (6) .................... 3.42 3.52 3.48 3.47 3.33 3.50 3.97
Net interest margin (7) ......................... 3.91 3.96 3.95 3.90 3.69 3.81 4.23
Average interest-earning assets to average
interest-bearing liabilities .................. 112.62 111.43 112.01 110.71 108.94 109.25 107.35
Total non-interest expense to average assets..... 2.34 2.41 2.33 2.42 2.70 2.66 2.69
Efficiency ratio (8) ............................ 54.21 56.21 53.77 57.48 67.95 64.58 56.50
Regulatory Capital Ratios (9):
Tier 1 leverage capital ......................... 8.89 8.44 8.60 8.13 7.35 8.14 8.72
Tier 1 risk-based capital ....................... 12.44 12.64 12.67 12.47 11.07 12.35 12.84
Total risk-based capital ........................ 13.69 13.89 13.92 13.73 12.31 13.69 14.09
Asset Quality Ratios:
Non-performing loans as a percent of
loans (10) .................................... 1.07 1.74 1.33 1.38 1.26 2.98 2.20
Non-performing assets as a percent of
total assets .................................. .93 1.47 1.14 1.26 1.26 2.65 2.39
Allowance for loan losses as a percent
of loans ...................................... 1.19 1.36 1.30 1.38 1.46 1.37 1.33
Allowance for loan losses as a percent of
total non-performing loans .................... 110.69 78.49 97.41 100.08 115.80 46.15 60.57
Number of Full Service Customer Facilities ....... 23 22 22 22 22 17 15
</TABLE>
- ------------
(1) The data presented at and for the seven months ended May 31, 1998 and 1997
were derived from unaudited consolidated financial statements and reflect,
in the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary to present fairly the results
for such interim periods. Interim results at and for the seven months ended
May 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending October 31, 1998.
(2) Loans are comprised of gross loan balances, less loans held for sale, net
unadvanced funds on loans, net deferred loan origination fees and unearned
discounts.
(3) Compass adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities,"
effective November 1, 1993. In November 1995, Compass reclassified
securities having a market value of $138.7 million from its
held-to-maturity portfolio to its available-for-sale portfolio pursuant to
a Financial Accounting Standards Board (the "FASB") interpretation of SFAS
No. 115. Prior to the adoption of SFAS No. 115, debt securities were
classified as either held for sale, in which case they were accounted for
at the lower of amortized cost or market value, or held to maturity, in
which case they were accounted for at amortized cost and marketable equity
securities were stated at the lower of cost or market.
(4) In 1993, the "cumulative effect of change in accounting principle" resulted
from the adoption of SFAS No. 109, "Accounting for Income Taxes."
(5) Asset Quality Ratios and Regulatory Capital Ratios are end-of-period
ratios. With the exception of end-of-period ratios, all ratios are based on
average daily balances during the periods indicated and are annualized
where appropriate.
14
<PAGE>
(6) The net interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities.
(7) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
(8) The efficiency ratio represents the ratio of non-interest expenses to the
sum of net interest income and non-interest income.
(9) For definitions and further information relating to Seacoast Financial's
and Compass's regulatory capital requirements and for Seacoast Financial's
pro forma capital levels as a result of the Offering, see "Regulatory
Capital Compliance" and "Regulation of Seacoast Financial and
Compass--Regulatory Capital Requirements" and "--Prompt Corrective Action."
(10) Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified by Compass as presenting uncertainty
with respect to the collectibility of interest or principal. It is
Compass's policy to cease accruing interest on all such loans, except
indirect auto loans and other consumer loans.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF SANDWICH BANCORP
Set forth below are the selected consolidated financial and other data of
Sandwich Bancorp. The financial data are derived in part from, and should be
read in conjunction with, the Consolidated Financial Statements of Sandwich
Bancorp and Subsidiaries and notes thereto presented elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------
At June 30,
1998(1) 1997 1996 1995 1994 1993
------------ ------------- ------------- ------------- ----------- -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Condition Data:
Total assets .............................. $ 531,013 $ 518,697 $ 464,555 $ 426,515 $408,282 $ 328,746
Loans ..................................... 360,617 370,742 320,844 274,095 253,985 210,618
Allowance for loan losses ................. 4,167 4,100 3,741 3,674 3,255 2,983
Investment securities:
Available for sale ....................... 58,180 10,995 13,312 25,770 31,318 --
Held to maturity/held for investment ..... 64,792 99,577 99,648 89,468 90,107 89,793
Deposits .................................. 444,750 423,014 388,249 377,973 358,009 279,965
Borrowed funds ............................ 33,601 45,601 32,073 8,148 12,865 14,300
Stockholders' equity ...................... 44,556 42,014 38,633 35,744 32,819 31,197
Net unrealized gain (loss) on securities,
available for sale, net of taxes, included
in stockholders' equity .................. 162 85 27 39 (537) --
Book value per share ...................... $ 21.80 $ 21.63 $ 20.31 $ 19.43 $ 17.95 $ 17.11
Non-performing loans ...................... 2,691 3,581 4,086 4,671 2,063 2,331
Non-performing assets ..................... 2,962 4,177 4,551 5,038 3,032 5,198
</TABLE>
<TABLE>
<CAPTION>
Six months
ended June 30, Year ended December 31,
------------------------- ----------------------------------------------------------------
1998(1) 1997(1) 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------ ------------ ------------
(In thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest and dividend income ......... $ 18,293 $ 17,283 $ 35,917 $ 32,309 $ 30,673 $ 24,077 $ 20,128
Interest expense ..................... 9,572 8,707 18,322 15,792 14,833 10,572 9,245
-------- -------- -------- -------- -------- -------- --------
Net interest income ................. 8,721 8,576 17,595 16,517 15,840 13,505 10,883
Provision for loan losses ............ 57 241 750 265 597 340 478
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses ......... 8,664 8,335 16,845 16,252 15,243 13,165 10,405
Gains on sales of securities, net .... -- -- 55 -- -- 6 107
Other non-interest income ............ 1,374 1,237 2,666 2,839 2,718 2,225 2,364
Non-interest expense ................. 6,292 6,051 12,225 12,333 12,356 11,416 10,984
-------- -------- -------- -------- -------- -------- --------
Income before income taxes ........... 3,746 3,521 7,340 6,758 5,605 3,980 1,892
Provision for income taxes ........... 1,404 1,327 2,480 2,621 2,169 1,396 241
-------- -------- -------- -------- -------- -------- --------
Net income ........................... $ 2,342 $ 2,194 $ 4,860 $ 4,137 $ 3,436 $ 2,584 $ 1,651
======== ======== ======== ======== ======== ======== ========
Basic earnings per share ............. $ 1.19 $ 1.15 $ 2.54 $ 2.20 $ 1.87 $ 1.41 $ 0.91
-------- -------- -------- -------- -------- -------- --------
Diluted earnings per share ........... $ 1.14 $ 1.10 $ 2.45 $ 2.13 $ 1.82 $ 1.38 $ 0.90
-------- -------- -------- -------- -------- -------- --------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Six months
ended June 30, Year ended December 31,
------------------- ------------------------------------------------------
1998(1) 1997(1) 1997 1996 1995 1994 1993
--------- --------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data (2):
Performance Ratios:
Return on average assets ........................ 0.90% 0.91% 0.98% 0.94% 0.81% 0.69% 0.52%
Return on average equity ........................ 11.23 11.48 12.49 11.47 10.21 7.92 5.40
Average equity to average assets ................ 7.98 7.97 7.84 8.17 7.98 8.72 9.56
Equity to total assets at end of period ......... 8.39 7.95 8.10 8.32 8.38 8.04 9.49
Net interest rate spread (3) .................... 2.96 3.20 3.12 3.38 3.51 3.42 3.54
Net interest margin (4) ......................... 3.51 3.74 3.71 3.94 3.98 3.83 3.66
Average interest-earning assets to average
interest-bearing liabilities .................. 114.23 114.17 115.27 114.71 112.68 113.56 112.77
Total non-interest expense to average assets..... 2.41 2.52 2.46 2.80 2.93 3.05 3.60
Efficiency ratio (5) ............................ 60.13 59.00 57.68 60.53 61.61 69.19 78.88
Regulatory Capital Ratios (6):
Tier 1 leverage capital ......................... 8.29 7.77 7.86 8.35 7.92 7.30 8.73
Tier 1 risk-based capital ....................... 15.21 13.23 13.61 13.43 13.13 12.34 14.14
Total risk-based capital ........................ 16.46 14.48 14.86 14.14 14.40 13.59 15.39
Asset Quality Ratios
Non-performing loans as a percent of
loans (7) ..................................... 0.75 1.05 0.97 1.27 1.70 0.81 1.09
Non-performing assets as a percent of
total assets .................................. 0.56 0.79 0.81 0.98 1.18 0.74 1.58
Allowance for loan losses as a percent
of loans ...................................... 1.16 1.09 1.11 1.17 1.34 1.28 1.42
Allowance for loan losses as a percent of
total non-performing loans .................... 154.85 104.06 114.49 91.56 78.66 157.78 127.97
Number of Full Service Customer Facilities ....... 11 11 11 11 11 11 10
</TABLE>
- ------------
(1) The data presented at and for the six months ended June 30, 1998 and 1997
were derived from unaudited consolidated financial statements and reflect,
in the opinion of Sandwich Bancorp's management, all adjustments
(consisting only of normal recurring adjustments) which are necessary to
present fairly the results for such interim periods. Interim results at and
for the six months ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998.
(2) Asset Quality Ratios and Regulatory Capital Ratios are end-of-period
ratios. With the exception of end-of-period ratios, all ratios are based on
average daily balances during the periods indicated and are annualized
where appropriate.
(3) The net interest rate spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities.
(4) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
(5) The efficiency ratio represents the ratio of non-interest expenses
(excluding amortization of core deposit intangible asset) to the sum of net
interest income and non-interest income.
(6) For definitions and further information relating to Sandwich Bancorp's and
Sandwich Bank's regulatory capital requirements, see "Regulation of
Seacoast Financial and Compass--Regulatory Capital Requirements" and
"--Prompt Corrective Action."
(7) Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified by Sandwich Bank as presenting
uncertainty with respect to the collectibility of interest or principal. It
is Sandwich Bank's policy to cease accruing interest on all such loans.
17
<PAGE>
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA OF SEACOAST FINANCIAL
The following tables present certain unaudited pro forma consolidated
financial data with respect to Seacoast Financial and its subsidiary. For each
period presented below, the "Pro Forma for Merger" information gives effect to
the Merger but not the Conversion. The "Pro Forma for Merger and Conversion"
information gives effect to the consummation of both the Conversion and the
Merger, including the sale of Conversion Shares in the Offering and the
issuance of Exchange Shares in the Merger, and includes interest income on the
investment of the net proceeds on the sale of Conversion Shares and the
anticipated expenses associated with the ESOP and one-time Merger costs
(reflected as a reduction to stockholders' equity but not to net income). This
financial data assumes that these transactions occurred on each of the dates
and at the beginning of each of the periods presented, that 12,686,225 Exchange
Shares are issued and that 18,400,000 Conversion Shares are sold in the
Offerings at the $10.00 Purchase Price per share, resulting in gross proceeds
of $184.0 million (the maximum of the Estimated Valuation Range). For
information on net income, net income per share, stockholders' equity and
stockholders' equity per share at the minimum, midpoint and 15% above the
maximum of the Estimated Valuation Range, see "Pro Forma Data--Pro Forma
Conversion Data." For additional assumptions used in calculating the pro forma
data, see "Pro Forma Data--Unaudited Pro Forma Condensed Consolidated Financial
Information."
In accordance with generally accepted accounting principles ("GAAP"), the
Merger will be accounted for using the pooling-of-interests method. Under the
pooling-of-interests method of accounting, the recorded assets and liabilities
of the parties to the Merger Agreement will be carried forward at their
recorded amounts, and the results of operations of the combined parties will
include the results of operations of Seacoast Financial and Sandwich Bancorp
for the entire year in which the Conversion and the Merger occur and, as
restated, for prior periods. Such accounting treatment requires satisfaction of
certain conditions, including that "affiliates" of the parties to the Merger
Agreement may not dispose of shares of Seacoast Financial Common Stock prior to
the publication of financial results covering at least 30 days of post-closing
combined operations of such parties.
The following selected unaudited pro forma financial data should be read
in conjunction with the consolidated financial statements and related notes
presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At May 31, 1998(1) At October 31, 1997(1)
---------------------------------- ---------------------------------
Pro Forma Pro Forma
Pro Forma for Merger Pro Forma for Merger
for Merger and Conversion for Merger and Conversion
--------------- ---------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Financial Condition:
Total assets ....................................... $ 1,698,414 $ 1,864,296 $ 1,621,295 $ 1,787,177
Loans, net ......................................... 1,230,364 1,230,364 1,176,197 1,176,197
Investment securities held to maturity ............. 13,649 13,649 12,633 12,633
Investment securities available for sale ........... 300,597 300,597 319,896 319,896
Deposits ........................................... 1,427,101 1,427,101 1,360,962 1,360,962
Borrowed funds ..................................... 112,396 112,396 108,042 108,042
Total stockholders' equity ......................... 141,908 307,790 136,132 302,014
Non-performing loans ............................... 12,184 12,184 14,506 14,506
Non-performing assets .............................. 13,850 13,850 16,809 16,809
Asset quality ratios (period end):
Allowance for loan losses to total loans ......... 1.18% 1.18% 1.24% 1.24%
Non-performing assets as a percent of
total assets .................................... 0.82% 0.74% 1.04% 0.94%
Allowance for loan losses to non-
performing loans ................................ 120.44% 120.44% 101.63% 101.63%
</TABLE>
(footnotes begin on following page)
18
<PAGE>
<TABLE>
<CAPTION>
Seven months ended May 31, (1) For the year ended October 31, (1)
----------------------------------------- --------------------------------------------------------
1998 1997 1997 1996 1995
------------------- ------------------- ------------------ --------------------------------------
Pro Pro Pro Pro Pro
Forma Forma Forma Forma Forma
Pro for Pro for Pro for Pro for Pro for
Forma Merger Forma Merger Forma Merger Forma Merger Forma Merger
for and for and for and for and for and
Merger Conversion Merger Conversion Merger Conversion Merger Conversion Merger Conversion
-------- ---------- -------- ----------- ------- ---------- ------- ---------- ------- ----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Results of Operations (2):
Net interest income ............. $35,214 $39,627 $33,194 $37,623 $57,796 $65,390 $53,398 $61,203 $47,773 $56,437
Provision for loan losses ....... 830 830 1,241 1,241 2,615 2,615 1,431 1,431 246 246
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses ...... 34,384 38,797 31,953 36,382 55,181 62,775 51,967 59,772 47,527 56,191
Noninterest income .............. 5,449 5,449 4,566 4,566 8,664 8,664 7,985 7,985 7,121 7,121
Noninterest expense ............. 22,969 23,398 21,706 22,135 37,036 37,772 36,491 37,227 37,046 37,782
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes ...... 16,864 20,848 14,813 18,813 26,809 33,667 23,461 30,530 17,602 25,530
Income taxes .................... 6,265 7,859 5,884 7,484 10,165 12,909 9,169 11,997 6,680 9,851
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income ...................... $10,599 $12,989 $8,929 $11,329 $16,644 $20,758 $14,292 $18,533 $10,922 $15,679
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings per share (5) .. $ 0.34 $ 0.44 $ 0.29 $ 0.39 $ 0.54 $ 0.71 $ 0.47 $ 0.63 $ 0.36 $ 0.54
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Selected Ratios:
Performance ratios:
Return on average assets (3)(4).. 1.09% 1.22% 1.00% 1.15% 1.07% 1.20% 0.99% 1.15% 0.82% 1.04%
Return on average equity (3)(4).. 12.46% 7.36% 11.98% 6.70% 12.66% 7.08% 12.27% 6.66% 10.45% 5.89%
</TABLE>
- ------------
(1) Sandwich Bancorp financial data is included at June 30, 1998 and December
31, 1997 and for the seven-month periods ended June 30, 1998 and 1997 and
the fiscal years ended December 31, 1997, 1996 and 1995.
(2) Does not reflect any cost savings or other benefits of the Merger.
(3) These ratios are based on average daily balances.
(4) Annualized.
(5) Diluted earnings per share have been computed as follows: for "Pro Forma
for Merger" purposes, no ESOP shares are assumed to have been issued; for
"Pro Forma for Merger and Conversion" purposes, ESOP shares are assumed to
have been issued but are not treated as outstanding until committed to be
released.
19
<PAGE>
RECENT DEVELOPMENTS
The following table sets forth certain consolidated financial and other
data of Seacoast Financial at and for the periods indicated. Consolidated
financial and operating data and financial ratios and other data at and for the
year ended October 31, 1997 have been derived from and should be read in
conjunction with the audited Consolidated Financial Statements of Seacoast
Financial and Notes thereto presented elsewhere in this Prospectus.
Consolidated financial and operating data and financial ratios and other data
at and for the nine months ended July 31, 1998 and 1997 were derived from
unaudited Consolidated Financial Statements. The results of operations and
ratios and other data presented for the nine months ended July 31, 1998 are not
necessarily indicative of the results that may be expected for the year ending
October 31, 1998.
<TABLE>
<CAPTION>
At July 31, At October 31,
1998 (1) 1997
-------------- -------------
(In thousands)
<S> <C> <C>
Selected Financial Condition Data:
Total assets ................................................. $1,201,704 $1,106,590
Loans (2) .................................................... 907,404 820,197
Allowance for loan losses .................................... 10,534 10,642
Debt securities:
Available for sale .......................................... 178,668 205,620
Held to maturity ............................................ 13,695 12,633
Marketable equity securities ................................. 10,828 3,696
Deposits ..................................................... 1,008,417 937,948
Borrowed funds ............................................... 74,368 60,703
Surplus ...................................................... 108,721 98,141
Net unrealized gain on securities available for sale,
net of taxes, included in surplus ........................... 2,174 1,614
Non-performing loans ......................................... 4,592 10,925
Non-performing assets ........................................ 5,866 12,632
<CAPTION>
Nine months ended July 31,
1998 (1) 1997 (1)
---------- ----------
(In thousands)
<S> <C> <C>
Selected Operating Data:
Interest income .............................................. $ 64,776 $ 59,191
Interest expense ............................................. 32,395 29,431
----------- ----------
Net interest income ......................................... 32,381 29,760
Provision for loan losses .................................... 837 1,337
----------- ----------
Net interest income after provision for loan losses ......... 31,544 28,423
Gains (losses) on sales of securities, net ................... (3) 20
Other non-interest income .................................... 5,050 4,154
Other real estate owned expense, net ......................... 121 382
Other non-interest expense ................................... 20,027 17,908
----------- ----------
Income before income taxes ................................... 16,443 14,307
Provision for income taxes ................................... 6,423 5,588
----------- ----------
Net income ................................................... $ 10,020 $ 8,719
=========== ==========
</TABLE>
(footnotes begin on following page)
20
<PAGE>
<TABLE>
<CAPTION>
Nine months
ended July 31,
1998(1) 1997(1)
<S> <C> <C>
Selected Financial Ratios and Other Data (3):
Performance Ratios:
Return on average assets .................................................... 1.16% 1.10%
Return on average surplus ................................................... 12.69 12.82
Surplus to total assets at end of period .................................... 9.05 8.63
Net interest rate spread (4) ................................................ 3.43 3.50
Net interest margin (5) ..................................................... 3.92 3.95
Average interest-earning assets to average interest-bearing liabilities ..... 112.54 111.62
Total non-interest expense to average assets ................................ 2.33 2.32
Efficiency ratio (6) ........................................................ 53.83 53.90
Regulatory Capital Ratios (7):
Tier 1 leverage capital ..................................................... 8.91 8.53
Tier 1 risk-based capital ................................................... 12.32 12.55
Total risk-based capital .................................................... 13.55 13.80
Asset Quality Ratios:
Non-performing loans as a percent of loans (8) .............................. 0.51 1.44
Non-performing assets as a percent of total assets .......................... 0.49 1.24
Allowance for loan losses as a percent of loans ............................. 1.16 1.34
Allowance for loan losses as a percent of total nonperforming loans ......... 229.40 93.09
Number of Full Service Customer Facilities ................................... 23 22
</TABLE>
- ------------
(1) The data presented at and for the nine months ended July 31, 1998 and 1997
was derived from unaudited consolidated financial statements and reflect,
in the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary to present fairly the results
for such interim periods. Interim results at and for the nine months ended
July 31, 1998 are not necessarily indicative of the results that may be
expected for the year ending October 31, 1998.
(2) Loans are comprised of gross loan balances less loans held for sale,
unadvanced funds on loans, deferred loan origination fees and unearned
discounts.
(3) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of period ratios, all ratios are based on
average daily balances during the indicated periods and are annualized
where appropriate.
(4) The net interest spread represents the difference between the weighted
average yield on average interest-earning assets and the weighted average
cost of average interest-bearing liabilities.
(5) The net interest margin represents net interest income as a percent of
average interest-earning assets.
(6) The efficiency ratio represents the ratio of non-interest expenses divided
by the sum of net interest income and non-interest income.
(7) For definitions and further information relating to Seacoast Financial's
and Compass's regulatory capital requirements, and for Seacoast Financial's
pro forma capital levels as a result of the Offering, see "Regulatory
Capital Compliance" and "Regulation of Seacoast Financial and
Compass--Regulatory Capital Requirements" and "--Prompt Corrective Action."
(8) Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified by Compass as presenting uncertainty
with respect to the collectibility of interest or principal. It is
Compass's policy to cease accruing interest on all such loans, except
indirect auto loans and other consumer loans.
21
<PAGE>
Comparison of Financial Condition at July 31, 1998 and October 31, 1997
Total assets increased by $95.1 million, or 8.6%, from $1,106.6 million at
October 31, 1997 to $1,201.7 million at July 31, 1998. This growth was due
primarily to a $14.8 million, or 45.0%, increase in cash and cash equivalents
and a $87.2 million, or 10.6% increase in loans. Asset growth was funded
primarily by a $70.5 million, or 7.5%, increase in deposits and a $10.3
million, or 20.1%, increase in FHLB advances.
The increase in cash and cash equivalents at July 31, 1998 was temporary
in nature and attributable to a reduction in the difference in rates paid on
short- to medium-term investments and funds invested overnight as well as to
normal fluctuations in activity.
The increase in loans occurred primarily in Seacoast Financial's
construction and indirect auto loan portfolios. From October 31, 1997 to July
31, 1998, construction loans increased by $9.7 million, or 28.6% and indirect
auto loans (net of unearned discounts) increased by $63.6 million, or 30.6%.
The growth during the nine months ended July 31, 1998 is primarily attributable
to the favorable interest rate environment and economic conditions which
prevailed during this period. In addition, Seacoast Financial has continued to
emphasize the origination of indirect auto loans through its network of
automobile dealers.
Total deposits at July 31, 1998, were $1,008.4 million, an increase of
$70.5 million, or 7.5% compared to $937.9 million at October 31, 1997. The
increase in deposits continues to be impacted by favorable economic conditions
partially offset by a continuing low interest rate environment wherein Seacoast
Financial competes against other instruments available to the public such as
mutual funds and annuities. In addition, deposit growth reflects increased
seasonal activity on Martha's Vineyard and the continuing effect of industry
consolidation. Total borrowed funds were $74.4 million at July 31, 1998
compared to $60.7 million at October 31, 1997, an increase of $13.7 million, or
22.6%. During the nine months ended July 31, 1998, Seacoast Financial's net
borrowing from the FHLB increased by $10.3 million.
The increase in surplus of $10.6 million to $108.7 million at July 31,
1998 resulted from net earnings of $10.0 million for the nine months ended July
31, 1998 and a $560,000 increase in unrealized gains (net of taxes) on
securities available for sale, most of which pertained to Seacoast Financial's
marketable equity securities portfolio.
Comparison of Operating Results for the Nine Months Ended July 31, 1998 and
July 31, 1997
General. Net income increased by $1.3 million or 14.9%, from $8.7 million
for the nine months ended July 31, 1997 to $10.0 million for the nine months
ended July 31, 1998. The improvement was attributable to higher net interest
income of $2.6 million, a $500,000 decrease in the provision for loan losses
due to a continuation of the favorable trends in the various factors considered
by management in evaluating the adequacy of the allowance for loan losses and
an increase in net gains on sales of loans of $556,000. The improvement was
partially offset by an increase of $1.9 million in non-interest expense due to
higher salaries, occupancy and equipment expenses, data processing expenses and
marketing costs. Of the $1.9 million increase in non-interest expense, $412,000
was due to a recovery, in 1997, of life insurance premiums recognized when an
insurance company emerged from receivership. The increase in net interest
income was due to growth in average interest-earning assets.
Interest Income. Interest income for the nine months ended July 31, 1998
was $64.8 million, compared to $59.2 million for the nine months ended July 31,
1997, an increase of $5.6 million, or 9.5%. All of the increase in interest
income resulted from growth in average interest-earning assets of $98.7
million, or 9.8%, as the overall yield on interest-earning assets declined by 2
basis points in the 1998 period. The principal areas of growth related to real
estate loans (up $36.9 million, or 7.1%) and indirect auto loans (up $56.7
million, or 32.5%). Most of the real estate loan growth resulted from increased
originations of one-to-four family real estate loans and construction loans.
The increase in indirect auto loans resulted from an improved economic
environment within Compass's local markets, the expansion of such lending into
Rhode Island and the continued emphasis of this area of lending.
Interest Expense. Interest expense for the nine months ended July 31, 1998
was $32.4 million, compared to $29.4 million for the nine months ended July 31,
1997, an increase of $3.0 million, or 10.1%. This increase resulted from a
higher average balance of interest-bearing liabilities (up $80.3 million, or
8.9%). Average interest-bearing deposit balances increased $62.9 million, or
7.5%, primarily as a result of the factors noted in the prior discussion on
deposit growth.
Compass increased its borrowings from the FHLB during the nine months
ended July 31, 1998. Interest expense on borrowed funds increased $752,000, or
27.5%, in the nine months ended July 31, 1998 due to a $17.5 million,
22
<PAGE>
or 31.0%, increase in the average balance of such funds to $73.9 million, which
was partially offset by an 18 basis point reduction in the average rate paid on
borrowed funds to 6.29% in the 1998 period compared to the 1997 period.
Provision for Loan Losses. Compass establishes provisions for loan losses,
which are charged to operations, in order to maintain the allowance for loan
losses at a level that management estimates is appropriate to absorb future
charge-offs of loans deemed uncollectible. In determining the appropriate level
of the allowance for loan losses, management considers past and anticipated
loss experience, evaluations of real estate collateral, current and anticipated
economic conditions, volume and type of lending and the levels of nonperforming
and other classified loans. The amount of the allowance is based on estimates
and the ultimate losses may vary from such estimates. Management assesses the
allowance for loan losses on a quarterly basis and makes provisions for loan
losses monthly in order to maintain the adequacy of the allowance.
Compass provided $837,000 for loan losses in the nine month period ended
July 31, 1998 compared to $1.3 million in the nine month period ended July 31,
1997, a decrease of $500,000, or 37.4%. This decrease was primarily influenced
by a reduction in the balance of adversely classified loans and fewer
delinquencies.
Non-Interest Income. Total non-interest income was $5.0 million for the
nine months ended July 31, 1998 compared to $4.2 million for the nine months
ended July 31, 1997, an increase of $873,000, or 20.9%. The increase resulted
primarily from an increase of $556,000 in the gain on sale of mortgage loans
from $297,000 in the nine months ended July 31, 1997 to $853,000 in the nine
months ended July 31, 1998. Compass generally sells in the secondary mortgage
market fixed rate residential mortgage loans with terms of 15 years or longer.
With the reduction in interest rates on 15- and 30-year fixed rate mortgages
which occurred in 1997 and into 1998, the volume of fixed-rate mortgage loan
originations increased which caused this increase. Also, Compass earned
$188,000 of fees in 1998 under a new relationship with an outside vendor which
processes its official checks. This fee is determined based on the average
length of time such checks, which are drawn on the account of the outside
vendor, remain outstanding.
Non-Interest Expense. Non-interest expense increased by $1.9 million, or
10.4%, from $18.3 million for the nine months ended July 31, 1997 to $20.2
million for the nine months ended July 31, 1998. Of this increase, $868,000
related to compensation and employee benefits, which rose 8.5% to $11.0 million
for the nine months ended July 31, 1998. The higher level of compensation and
employee benefits was caused by overall salary increases averaging 4%,
increased commissions of $155,000 related to higher mortgage loan originations,
staffing increases in the lending area and higher health insurance costs of
$65,000.
Occupancy and equipment expenses increased $127,000, or 5.1%, to $2.6
million for the nine months ended July 31, 1998. This increase was due to an
increase in ATM maintenance costs, and a one-time reduction in rent expense in
1997 of $36,000 attributable to a leased facility which Compass no longer
utilized.
Marketing expenses increased $280,000, or 32.6%, to $1.1 million for the
nine months ended July 31, 1998. This increase was primarily attributable to
advertising campaigns related to the new ROTH IRA accounts allowed by changes
in the tax law, Compass's commercial loan programs and the advertising of
Compass's Preferred Checking account program.
Data processing expenses increased $285,000, or 17.9%, to $1.9 million for
the nine months ended July 31, 1998. This increase was due to new services,
including laser printing and Internet services, and volume-related increases in
loans and deposits.
Other real estate owned (OREO) expenses decreased $261,000, or 68.3%, to
$121,000 for the nine months ended July 31, 1998 due to the continuation of the
decline in the number of properties held as OREO and stable real estate market
values.
Other non-interest expenses for the nine months ended July 31, 1998 were
$2.5 million compared to $1.9 million for the comparable period in 1997, an
increase of $527,000 or 27.1%. Included in the results for 1997 was a recovery
of life insurance premiums of $412,000 from an insurance company which emerged
from receivership. Exclusive of this item, other non-interest expenses
increased in 1998 by $115,000 or 4.9%.
Income Taxes. Income tax expense was $6.4 million of the nine months ended
July 31, 1998, an increase of $835,000, or 14.9%, compared to the 1997 period.
The effective tax rate was 39.1% in 1998 and 1997.
23
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus and in the documents incorporated by
reference herein that are not statements of historical fact may be deemed to be
"forward-looking statements". Without limiting the foregoing, the words
"expect," "anticipate," "plan," "believe," "seek," "estimate," "internal" and
similar words are intended to identify expressions that may be forward-looking
statements. Forward-looking statements involve certain risks and uncertainties,
and actual results may differ materially from those contemplated by such
statements. For example, actual results may be adversely affected by the
following possibilities: (i) competitive pressure among depository institutions
may increase; (ii) changes in interest rates may reduce banking interest
margins; (iii) general economic conditions and real estate values may be less
favorable than contemplated; (iv) adverse legislation or regulatory
requirements may be adopted; (v) contemplated cost savings, revenue
enhancements, etc., from the Merger may not be timely or fully realized; and
(vi) the impact of the Year 2000 issue may be more significant than currently
anticipated. Many of such factors are beyond Seacoast Financial's or Sandwich
Bancorp's ability to control or predict. Readers of this Prospectus are
accordingly cautioned not to place undue reliance on forward-looking
statements. Seacoast Financial and Sandwich Bancorp disclaim any intent or
obligation to update publicly any of the forward-looking statements herein,
whether in response to new information, future events or otherwise. Important
factors that may cause Seacoast Financial's or Sandwich Bancorp's actual
results to differ from such forward-looking statements include, but are not
limited to, the risk factors discussed below.
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in
this Prospectus, should be considered by investors in deciding whether to
purchase the Conversion Shares offered hereby.
Construction, Commercial Real Estate, Commercial and Indirect Auto Lending
Risks
Residential real estate loans represent a smaller proportion of Compass's
loan portfolio than that of most savings institutions. In general, construction
loans, commercial real estate loans, commercial loans and indirect auto loans
generate higher returns, but also pose greater credit risks, than do
owner-occupied residential mortgage loans.
The repayment of construction and commercial real estate loans depends on
the business and financial condition of borrowers and, in the case of
construction loans, on the economic viability of projects financed. A number of
Compass's borrowers have more than one construction or commercial real estate
loan outstanding with Compass. Moreover, these loans are concentrated primarily
in southeastern Massachusetts. Economic events and changes in government
regulations, which Compass and its borrowers cannot control, could have an
adverse impact on the cash flows generated by properties securing Compass's
construction and commercial real estate loans and on the values of such
properties. Commercial properties tend to decline in value more rapidly than
residential owner-occupied properties during economic recessions. Compass held
$167.0 million in construction and commercial real estate loans in its loan
portfolio as of May 31, 1998 and on a pro forma basis at that date, assuming
consummation of the Merger, it would have had $258.3 million of such loans in
its portfolio.
Compass makes both secured and some short-term unsecured commercial loans,
holding $58.2 million of such loans in its loan portfolio as of May 31, 1998.
On a pro forma basis at that date, assuming consummation of the Merger, it
would have had $66.4 million of commercial loans in its portfolio. Repayment of
both secured and unsecured commercial loans depends substantially on borrowers'
underlying business, financial condition and cash flows. Unsecured loans
generally involve a higher degree of risk of loss than do secured loans
because, without collateral, repayment is wholly dependent upon the success of
the borrowers' businesses. Secured commercial loans are generally
collateralized by equipment, leases, inventory and accounts receivable.
Compared to real estate, such collateral is more difficult to monitor, its
value is harder to ascertain, it may depreciate more rapidly and it may not be
as readily saleable if repossessed.
In 1985, Compass began to make indirect auto loans and its portfolio of
such loans has grown significantly since then. Compass's portfolio of indirect
auto loans, net of unearned discounts, totaled $247.6 million as of May 31,
1998. Although Compass has not experienced significant delinquencies in this
portfolio to date, borrowers may be more likely to become delinquent on an
automobile loan than on a residential mortgage loan secured by their primary
residence. Moreover, automobiles depreciate rapidly and, in the event of
default, principal loss as a percent of the loan balance depends upon the
mileage and condition of the vehicle at the time of repossession, over which
Compass has no control.
24
<PAGE>
The interest rate charged to an indirect auto loan borrower is generally
one to two percentage points higher than the rate earned by Compass. The
difference between the two rates is referred to as the "spread." At loan
inception, the dollar value of the spread over the contractual term of the loan
is prepaid by Compass to an auto dealer. Such prepaid amounts are generally
subject to rebate to Compass in the event the underlying loan is prepaid or
becomes delinquent. The risk of loss of amounts previously advanced to a dealer
is primarily dependent upon loan performance and general economic conditions
but is also dependent upon the financial condition of the dealer. To mitigate
this risk, Compass withholds a portion of the spread at loan origination as a
dealer reserve. The amount withheld, in the aggregate, generally approximates
1% of the outstanding balance of loans originated by each dealer. However,
there is no assurance that Compass can successfully recover amounts advanced
for spreads.
Geographic Concentration of Loans in and Deposits from Southeastern
Massachusetts and Rhode Island
Compass operates primarily in southeastern Massachusetts and, to a much
lesser degree, Rhode Island. Over the past several decades, portions of
Compass's market area, including the cities of New Bedford and Fall River, have
experienced relatively flat economic activity and higher unemployment rates
than most of New England and the country, primarily as a result of a reduction
in manufacturing and marine-related jobs there. The economies of New Bedford
and Fall River did not experience the same growth and increase in real estate
values that characterized much of Massachusetts and New England during the
1980's. Similarly, during the latter half of the 1990's, the economies,
employment rates and real estate markets of New Bedford and Fall River have
remained relatively flat, continuing to lag behind many other New England
regions that have enjoyed significant economic improvement in recent years.
Compass's current primary market area also includes Martha's Vineyard.
Following consummation of the Merger, Compass's operations will also include
Sandwich Bank's extensive market area on Cape Cod. See "Business of Compass--
Market Area and Competition" and "Certain Effects of the Merger on Seacoast
Financial." The economies of Cape Cod and Martha's Vineyard depend heavily on
tourists who visit primarily during summer months. As a result, many businesses
on Cape Cod and Martha's Vineyard have positive cash flows only during those
months. Tourism-based businesses are customers--commercial loan borrowers and
depositors--of both Compass and Sandwich Bank, and seasonal fluctuations affect
these customers' deposit balances as well as their ability to repay their
loans. Compass and Sandwich Bank often structure loans to such customers with
uneven payment schedules, so that the bulk of the annual debt service comes due
in the summer months. Nevertheless, a tourist season may be delayed or cut
short due to conditions beyond Compass's control (such as the weather) and,
thus, Compass's loans to tourism-based businesses may be subject to a greater
risk of non-repayment than its other commercial loans.
Potential Impact of Changes in Interest Rates on Seacoast Financial's Earnings
Seacoast Financial's profitability, like that of most financial
institutions, depends to a large extent upon its net interest income, which is
the difference, or spread, between its gross interest income on
interest-earning assets, such as loans and securities, and its interest expense
on interest-bearing liabilities, such as deposits and borrowed funds.
Accordingly, Seacoast Financial's results of operations and financial condition
depend largely on movements in market interest rates and its ability to manage
its interest-rate-sensitive assets and liabilities in response to such
movements. Changes in interest rates could have a material adverse effect on
Seacoast Financial's business, financial condition, results of operations and
cash flows. Because, as a general matter, Seacoast Financial's interest-bearing
liabilities reprice or mature more quickly than its interest-earning assets, an
increase in interest rates generally would result in a decrease in its interest
rate spread and net interest income. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations of Seacoast
Financial--Management of Market and Interest Rate Risk."
Changes in interest rates also affect the value of Seacoast Financial's
interest-earning assets, including, in particular, the value of its investment
securities portfolio. Generally, the value of investment securities fluctuates
inversely with changes in interest rates. At May 31, 1998, Seacoast Financial's
securities portfolio totaled $202.3 million, including $183.3 million of
securities available for sale. Unrealized gains and losses on securities
available for sale are reported as a separate component of surplus, net of
related taxes. Decreases in the fair value of securities available for sale
therefore would have an adverse affect on Seacoast Financial's stockholders'
equity. See "Business of Compass--Investment Activities."
Seacoast Financial is also subject to reinvestment risk relating to
interest rate movements. Decreases in interest rates can result in increased
prepayments of loans and mortgage-related securities, as borrowers refinance to
reduce their borrowing costs. Under these circumstances, Seacoast Financial is
subject to reinvestment risk to the extent
25
<PAGE>
that it is not able to reinvest funds from such prepayments at rates that are
comparable to the rates on the prepaid loans or securities. On the other hand,
increases in interest rates on adjustable rate mortgage loans result in larger
mortgage payments from borrowers, which could potentially increase Seacoast
Financial's level of loan delinquencies and defaults.
Risks Related to the Acquisition of Sandwich Bancorp
Compass's future operating performance will depend, in part, on the
success of the Merger. The success of the Merger will, in turn, depend on a
number of factors, including Compass's ability to (i) integrate into Compass
Sandwich Bank's operations and branches, (ii) retain Sandwich Bank's deposits
and customers, (iii) control future non-interest expenses in a manner that
enables Compass to improve its overall operating efficiencies and (iv) retain
and integrate certain personnel of Sandwich Bank into Compass's operations.
Integration of Sandwich Bank into Compass following the Merger will require the
dedication of the time and resources of Compass's and Seacoast Financial's
managements, and may temporarily distract managements' attention from the
day-to-day business of Compass. No assurance can be given that Compass will
successfully integrate Sandwich Bank's operations into its own, or that Compass
will achieve anticipated benefits of the Merger or achieve earnings results in
the future similar to those it, or Sandwich Bancorp, has achieved in the past.
Further, no assurance can be given that Compass will effectively manage any
growth resulting from the Merger.
Low Return on Equity Following the Conversion
Seacoast Financial's ratio of surplus to assets was 9.05% as of May 31,
1998. The consummation of the Conversion will increase this ratio significantly
because the proceeds from the sale of the Conversion Shares will be added to
Seacoast Financial's equity. Seacoast Financial's consolidated ratio of equity
to assets would be 15.5% and 16.5%, respectively, on a pro forma basis as of
May 31, 1998 assuming the sale of Conversion Shares at the midpoint and the
maximum, respectively, of the Estimated Valuation Range and assuming
consummation of the Merger. Seacoast Financial's ability to leverage this
additional capital will be significantly affected by competition for loans and
deposits and economic conditions. Seacoast Financial currently anticipates that
it will take considerable time to prudently deploy such capital. Management
expects that Seacoast Financial will earn a return on its equity that is below
the industry average (and below its own historical levels) for a period of time
after the Conversion and the Merger.
Since Seacoast Financial expects to account for the Merger as a
pooling-of-interests under generally accepted accounting principles ("GAAP"),
Seacoast Financial's ability to repurchase shares of Seacoast Financial Common
Stock may be restricted during the two-year period that will follow completion
of the Merger. See "Use of Proceeds of Conversion."
Dilution Resulting From Issuances of Additional Shares
The exact number of Conversion Shares to be issued in the Offerings will
not be determined until RP Financial updates its appraisal immediately prior to
the consummation of the sale of the Conversion Shares. The higher the number of
Conversion Shares issued, the lower Seacoast Financial's pro forma net income
per share and pro forma stockholders' equity per share, and the higher the
Purchase Price as a percentage of pro forma stockholders' equity per share and
as a multiple of net income per share. See "Pro Forma Data--Pro Forma
Conversion Data."
The issuance of the Exchange Shares in connection with the Merger will
dilute the ownership interest of purchasers of Conversion Shares in the
Conversion. The trading price of Seacoast Financial Common Stock during the
time period between the consummation of the Conversion and the consummation of
the Merger will determine the number of shares of Seacoast Financial Common
Stock issued by Seacoast Financial to effect the Merger. Generally, the lower
the trading price during that period, the greater the number of Exchange Shares
issuable in the Merger, and the greater such dilution. See "The Conversion and
the Merger--Description of the Merger and the Exchange Ratio."
In preparing the Independent Valuation, RP Financial considered various
Seacoast Financial Trading Prices and Exchange Ratios for purposes of
estimating the number of Exchange Shares to be issued in the Merger. The actual
Seacoast Financial Trading Price and Exchange Ratio, and therefore the total
number of shares of Seacoast Financial Common Stock that will be outstanding
after consummation of the Merger, will not be determined until after
consummation of the Conversion. As a result, the actual per share data reported
by Seacoast Financial after completion of the Conversion and the Merger will,
in all probability, be different from the pro forma per share data considered
by RP Financial in preparing the Independent Valuation and disclosed herein.
26
<PAGE>
Relatively High Pro Forma Pricing Multiples May Negatively Affect After-Market
Stock Performance Compared with Other Converted Institutions
The Purchase Price as a percentage of pro forma stockholders' equity per
share of the Conversion Shares ranges from 99.5% at the minimum of the
Estimated Valuation Range to 101.6% at 15% above the Estimated Valuation Range,
assuming a 6.4 Exchange Ratio in the Merger. The Purchase Price to pro forma
stockholders' equity at which the Conversion Shares are being sold in the
Offering substantially exceeds the price to pro forma stockholders' equity of
common stock sold in most mutual-to-stock conversions that do not also involve
mutual holding companies or acquisitions of other financial institutions.
Prospective investors should be aware that as a result of the relatively high
pro forma pricing multiples, the after-market performance of the Seacoast
Financial Common Stock may be less favorable during the period immediately
following the Conversion than the price performance of common stock sold in
mutual-to-stock conversions that do not involve a mutual holding company or an
acquisition of another institution.
Recent Stock Market Volatility
Publicly traded stocks, including stocks of financial institutions, have
recently experienced substantial market price volatility. These market
fluctuations may be unrelated to the operating performance of particular
companies whose shares are traded. In several cases, common stock issued by
recently converted financial institutions has traded at a price that is below
the price at which such shares were sold in the stock offering. The Purchase
Price of the Seacoast Financial Common Stock in the Offering is based on the
Independent Valuation. In the after-market, the trading price of the Seacoast
Financial Common Stock will be determined by the marketplace, and may be
influenced by many factors, including prevailing interest rates, investor
perceptions of Seacoast Financial and general industry and economic conditions.
Due to possible continued market volatility and to other factors, including
certain Risk Factors discussed herein, there can be no assurance that,
following the Conversion, the trading price of the Seacoast Financial Common
Stock will be at or above the Purchase Price. See "--Relatively High Pro Forma
Pricing Multiples May Negatively Affect After-Market Stock Performance Compared
with Other Converted Institutions" and "--Absence of Market for Shares of
Seacoast Financial Common Stock."
Possible Dilution Resulting From Stock Plans
Seacoast Financial may adopt certain stock plans following the Conversion,
subject to stockholder approval, and such plans could dilute the voting rights
of Seacoast Financial's stockholders. Federal and state banking regulations
allow the Board of Directors of Seacoast Financial, and the Board may decide,
to adopt one or more stock plans for the benefit of employees, officers and
directors of Seacoast Financial and Compass, including stock award plans and
stock option plans. See "Management of Seacoast Financial and
Compass--Compensation of Officers and Directors Through Benefit Plans--Stock
Option Plan" and "--Stock Plan." Such plans could purchase and could grant
options to purchase Seacoast Financial Common Stock, and such stock purchases
and option grants could dilute the voting rights of purchasers of Conversion
Shares in the Conversion.
Competition
Compass faces significant competition both in attracting deposits and in
the origination of loans. See "Business of Compass--Market Area and
Competition." Savings banks, credit unions, savings and loan associations and
commercial banks operating in Compass's primary market area have historically
provided most of Compass's competition for deposits. In addition, and
particularly in times of high interest rates, Compass faces additional and
significant competition for funds from money-market mutual funds and issuers of
corporate and government securities. Competition for the origination of real
estate and other loans comes from other thrift institutions, commercial banks,
insurance companies, finance companies, other institutional lenders and
mortgage companies. Many of Compass's competitors have substantially greater
financial and other resources than those of Compass. Moreover, Compass may face
increased competition in the origination of loans if competing thrift
institutions convert to stock form, because such converting thrifts would
likely seek to invest their new capital into loans. Finally, credit unions do
not pay federal or state income taxes and are subject to fewer regulatory
constraints than savings banks. Numerous credit unions are located in Fall
River and Rhode Island and, because of their tax and regulatory status, they
enjoy a competitive advantage over Compass. This advantage places significant
competitive pressure on the prices of Compass's loan and deposits.
Regulatory Oversight and Legislation
Seacoast Financial and Compass are subject to extensive regulation,
supervision and examination. See "Regulation of Seacoast Financial and
Compass." Any change in the laws or regulations applicable to Seacoast
Financial and Compass, or in banking regulators' supervisory policies or
examination procedures, whether by the
27
<PAGE>
Commissioner, the FDIC, the FRB, other state or federal regulators, the United
States Congress or the Massachusetts legislature could have a material adverse
effect on Seacoast Financial's and Compass's business, financial condition,
results of operations and cash flows.
Compass is subject to regulations promulgated by the Massachusetts
Division of Banks, as its chartering authority, and by the FDIC and the
Depositors Insurance Fund (the "DIF") as insurers of its deposits up to certain
limits. Compass also belongs to the Federal Home Loan Bank System and, as a
member of such system, is subject to certain limited regulations promulgated by
the Federal Home Loan Bank. In addition, the FRB regulates and oversees
Seacoast Financial in Seacoast Financial's capacity as Compass's holding
company.
Such regulation and supervision limit the activities in which Seacoast
Financial and Compass may engage. The regulation and supervision is intended
primarily to protect Compass's depositors and borrowers and, in the case of
FDIC regulation, the FDIC's insurance funds. Regulatory authorities have
extensive discretion in the exercise of their supervisory and enforcement
powers. They may, among other things, impose restrictions on the operation of a
banking institution, the classification of assets by such institution and such
institution's allowance for loan losses. Regulatory and law enforcement
authorities also have wide discretion and extensive enforcement powers under
various consumer protection and civil rights laws, including the
Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair Housing Act,
the Real Estate Settlement Procedures Act and Massachusetts's deceptive acts
and practices law. These laws also permit private individual and class action
law suits and provide for the recovery of attorneys fees in certain instances.
No assurance can be given that the foregoing regulations and supervision will
not change.
Absence of Market for Seacoast Financial Common Stock
Seacoast Financial has never issued capital stock and, consequently, there
is currently no existing market for the Seacoast Financial Common Stock.
Seacoast Financial has received conditional approval to have the Seacoast
Financial Common Stock quoted on the Nasdaq National Market under the symbol
"SCFS," subject to the completion of the Conversion and compliance with certain
initial listing conditions, including the presence of at least three market
makers.
A public trading market having the desirable characteristics of depth,
liquidity and orderliness depends upon the existence of willing buyers and
sellers at any given time, the presence of which is dependent upon the
individual decisions of buyers and sellers over which neither Seacoast
Financial nor any market maker has control. Accordingly, there can be no
assurance that an active and liquid trading market for the Seacoast Financial
Common Stock will develop or that, if developed, it will continue. The failure
of an active and liquid trading market to develop would likely have a material
adverse effect on the value of the Seacoast Financial Common Stock. In
addition, common stock is subject to investment risk, including loss of
principal invested. No assurance can be given that a purchaser in the
Conversion will be able to resell the Conversion Shares at or above the
Purchase Price, nor can any assurance be given that a Sandwich Bancorp
stockholder receiving Exchange Shares in the Merger will be able to sell such
Exchange Shares at or above the Seacoast Financial Trading Price used in the
calculation of the Exchange Ratio. See "Market for Seacoast Financial Common
Stock."
Certain Anti-Takeover Effects of the Articles of Organization and By-Laws of
Seacoast Financial, the ESOP and Federal and State Regulations and Laws.
Seacoast Financial has adopted Articles of Organization and By-Laws that
will go into effect upon consummation of the Conversion and those Articles and
By-Laws contain provisions (known as "anti-takeover" provisions) which may
impede efforts to acquire Seacoast Financial, or stock purchases in furtherance
of such an acquisition, even though such acquisition efforts or stock purchases
might otherwise have a favorable effect on the price of the Seacoast Financial
Common Stock. The Articles and By-Laws provide for, among other things,
staggered Directors' terms, restrictions on the acquisition of more than 10% of
Seacoast Financial's outstanding voting stock for a period of five years after
consummation of the Conversion and approval of certain actions, including
certain business combinations, by specified percentages of its Disinterested
Directors (as such term is defined in the Articles) or by specified percentages
of the shares outstanding and entitled to vote thereon. The Articles also
authorize the Board of Directors to issue up to 10,000,000 shares of serial
preferred stock, the rights and preferences of which may be designated by the
Board, without the approval of Seacoast Financial's stockholders.
The ESOP, which expects to purchase in the Subscription Offering 8% of the
Conversion Shares sold in the Offering, contains provisions that permit
participating employees to direct the voting of shares held in the ESOP, and
such provisions may have anti-takeover effects.
28
<PAGE>
Federal and state regulations and laws may also have anti-takeover
effects. The Change in Bank Control Act and the BHCA, together with FRB
regulations promulgated under those acts, require that a person obtain the
consent of the FRB before attempting to acquire control of a bank holding
company. In addition, Massachusetts laws place certain limitations on
acquisitions of the stock of banking institutions.
For additional information regarding the anti-takeover effects of Seacoast
Financial's Articles and By-Laws, the ESOP and certain federal and state
regulations and laws, see "Restrictions on Acquisition of Seacoast Financial
and Compass."
Year 2000 Issue
The Year 2000 issue (commonly referred to as "Y2K") is the result of
computer programs being written using two digits, rather than four digits, to
define the applicable year. The Y2K issue, which is common to most corporations
including banks, concerns the inability of information and other systems,
primarily (but not exclusively) computer software programs, to properly
recognize and process date-sensitive information as the year 2000 approaches.
This problem could produce miscalculations, generate erroneous data or even
cause a computer system to fail.
A bank such as Compass relies heavily upon computer systems for its daily
operations, including particularly the accurate processing of its customers'
financial records. Compass currently estimates that the cost of its efforts to
achieve Y2K readiness will not exceed $1.0 million. However, no assurance can
be given that Compass or the third-party vendors to whom Compass outsources its
information systems functions will solve such issues in a successful and timely
fashion or that the costs of such effort will not exceed current estimates. If
Compass does not solve such issues, or does not do so in a timely manner, the
Y2K issue could have a material adverse impact on Compass's business, financial
condition, results of operations and cash flows.
Bank regulatory agencies have recently issued additional guidance under
which they are assessing Y2K readiness. The failure of a financial institution,
such as Compass, to take appropriate action to address Y2K issues may result in
enforcement actions which could have a material adverse effect on such
institution, result in the imposition of civil money penalties, or result in
the delay (or receipt of an unfavorable or critical evaluation of management of
a financial institution in connection with a regulatory review) of applications
seeking to acquire other entities or otherwise expand the institution's
activities.
Compass's credit risk associated with its borrowers may increase as a
result of problems such borrowers may have resolving their own Y2K issues.
Although it is not possible to evaluate the magnitude of any potential
increased credit risk at this time, the impact of the Y2K issue on borrowers
could result in increases in Compass's problem loans and credit losses in
future years.
For additional information regarding the Y2K issue and the steps Compass
is taking in response, see "Business of Compass--Year 2000 Issue."
Possible Delays in Completion of the Offering and the Merger; Irrevocability of
Stock Orders
Seacoast Financial will hold funds submitted to purchase Conversion Shares
in connection with the Offering until it completes or terminates the Offering,
and it may not complete or terminate the Offering for an extended period of
time. The Offering may be delayed one or more times because its completion will
be subject to various conditions, including the receipt of regulatory approvals
of both the Conversion and the Merger. Moreover, unless Seacoast Financial
terminates the Conversion, orders to purchase Conversion Shares made in
connection with the Offering will be irrevocable. No assurance can be given
that Seacoast Financial will complete or terminate the Offering on or before
any particular date, except that the Conversion Plan provides that if the
Offering is not completed within 180 days after the date that this Prospectus
was declared effective by the Commissioner (i.e., by March 20, 1999), the
Offering will be terminated and all subscribers will have applicable
subscription funds returned promptly with interest (or have applicable
withdrawal authorizations canceled). Moreover, in the event that the Merger is
not consummated by February 20, 1999, the Merger Agreement may be terminated by
either Seacoast Financial or Sandwich Bancorp (subject to a possible one-month
extension in certain circumstances). If the Merger Agreement is terminated, the
Offering will also be terminated and all subscribers will have applicable
subscription funds returned promptly with interest (or have applicable
withdrawal authorizations canceled).
29
<PAGE>
PRO FORMA DATA
Unaudited Pro Forma Condensed Consolidated Financial Information
The following Unaudited Pro Forma Condensed Consolidated Balance Sheets at
May 31, 1998 and October 31, 1997 and Unaudited Pro Forma Condensed
Consolidated Statements of Income for the seven months ended May 31, 1998 and
1997 and for each of the years ended October 31, 1997, 1996 and 1995 give
effect to the Conversion and the Merger based on the assumptions set forth
below. The unaudited pro forma consolidated financial statements are based on
the unaudited consolidated financial statements of Seacoast Financial for the
seven-month periods ended May 31, 1998 and 1997 and of Sandwich Bancorp for the
seven-month periods ended June 30, 1998 and 1997 and on the audited
consolidated financial statements of Seacoast Financial for the years ended
October 31, 1997, 1996 and 1995 and of Sandwich Bancorp for the years ended
December 31, 1997, 1996 and 1995. The unaudited pro forma consolidated
financial statements give effect to the Merger using the pooling-of-interests
method of accounting under GAAP.
The pro forma adjustments in the tables assume the sale of 18,400,000
Conversion Shares in the Offerings at the $10.00 Purchase Price per share,
which is the maximum of the Estimated Valuation Range. In addition, the pro
forma adjustments in the tables assume the issuance of 6.4 shares of Seacoast
Financial Common Stock for each share of Sandwich Bancorp Common Stock
(including the effect of outstanding Sandwich Bancorp Stock Options) in
connection with the Merger. The net proceeds in the tables are based upon the
following assumptions: (i) all Conversion Shares will be sold in the
Subscription and Community Offerings; (ii) no fees will be paid to Ryan Beck or
McConnell Budd on shares purchased by the ESOP or the 625,000 shares assumed
purchased by officers, trustees, directors, employees and members of their
immediate families; (iii) Ryan Beck and McConnell Budd will receive an
aggregate fee equal to 1.00% of the aggregate Purchase Price for sales in the
Subscription and Community Offerings (excluding the sale of shares to the ESOP
and to officers, trustees, directors, employees and their immediate families);
and (iv) total expenses of the Conversion, including the marketing fees of $1.6
million paid to Ryan Beck and McConnell Budd, will be $3.4 million. Actual
expenses may vary from those estimated. The actual amount of Conversion Shares
sold may be more or less than the maximum of the Estimated Valuation Range. For
the effects of such possible changes, see "--Pro Forma Conversion Data." In
addition, the expenses of the Conversion and of the Merger may vary from those
estimated. The fees paid to Ryan Beck and McConnell Budd will vary from the
amounts estimated if more or less shares are sold, or if a Syndicated Community
Offering is conducted. Additionally, certain one-time charges to operating
results (estimated to be $4.0 million, net of income tax effect) are expected
to occur following the Conversion and the Merger. These items are shown as a
reduction in stockholders' equity in the following tables but are not shown as
a reduction in net income for the periods shown in the following tables. No
cost savings or other benefits of the Merger are reflected in the tables. The
Unaudited Pro Forma Condensed Consolidated Statements of Income do not reflect
investment income from investment of Conversion proceeds or anticipated ESOP
expense. For the effects of such items, see "--Pro Forma Conversion Data."
The unaudited pro forma information is provided for informational purposes
only. The pro forma financial information presented is not necessarily
indicative of the actual results that would have been achieved had the
Conversion and the Merger been consummated on the dates or at the beginning of
the periods presented, and is not necessarily indicative of future results. The
unaudited pro forma financial information should be read in conjunction with
the consolidated financial statements and the notes thereto of Seacoast
Financial and Sandwich Bancorp contained elsewhere in this Prospectus.
The pro forma stockholders' equity is based upon the combined book value
of the common stockholders' ownership of Seacoast Financial and Sandwich
Bancorp computed in accordance with GAAP. This amount is not intended to
represent fair market value and does not represent amounts, if any, that would
be available for distribution to stockholders in the event of liquidation.
THE UNAUDITED PRO FORMA COMMON STOCKHOLDERS' EQUITY AND NET INCOME DERIVED
FROM THE ABOVE ASSUMPTIONS ARE QUALIFIED BY THE STATEMENTS SET FORTH UNDER THIS
CAPTION AND SHOULD NOT BE CONSIDERED INDICATIVE OF THE MARKET VALUE OF SEACOAST
FINANCIAL COMMON STOCK OR THE ACTUAL OR FUTURE RESULTS OF OPERATIONS OF
SEACOAST FINANCIAL AND SANDWICH BANCORP FOR ANY PERIOD. SUCH PRO FORMA DATA MAY
BE MATERIALLY AFFECTED BY THE ACTUAL GROSS AND NET PROCEEDS FROM THE SALE OF
CONVERSION SHARES IN THE CONVERSION, THE ACTUAL EXCHANGE RATIO IN THE MERGER
AND OTHER FACTORS. SEE "USE OF PROCEEDS OF CONVERSION."
30
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
At May 31, 1998 (1)
-----------------------------------------------------------------------------------------------
Pro Forma Seacoast Pro Forma
Seacoast Conversion Financial Sandwich Merger Pro Forma
Financial Adjustments as Converted Bancorp Adjustments Consolidated
------------- ----------------- ------------- ------------- ------------------ ---------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents .......... $ 45,001 $ 145,882(2) $ 190,883 $ 25,921 $ (5,000)(5) $ 211,804
Securities available for sale ...... 183,340 183,340 58,180 59,077 (4) 300,597
Securities held to maturity ........ 13,649 13,649 64,792 (64,792)(3) 13,649
Loans held for sale ................ 19,810 19,810 -- 19,810
Loans, net ......................... 873,914 873,914 356,450 1,230,364
Bank premises and equipment ........ 13,932 20,000 (2) 33,932 6,231 40,163
OREO ............................... 1,395 1,395 271 1,666
Net deferred tax asset ............. 5,877 5,877 2,929 557 (3) 9,363
Other assets ....................... 19,641 19,641 16,239 1,000 (5) 36,880
---------- ------------ ---------- --------- ---------- ----------
Total assets .................... $1,176,559 $ 165,882 $1,342,441 $ 531,013 $ (9,158) $1,864,296
========== ============ ========== ========= ========== ==========
Liabilities and
Stockholders' Equity:
Deposits ........................... $ 982,351 $ 982,351 $ 444,750 $1,427,101
Borrowed funds ..................... 77,074 77,074 35,322 112,396
Other liabilities .................. 10,624 10,624 6,385 17,009
---------- ---------- --------- ----------
Total liabilities ............... 1,070,049 1,070,049 486,457 1,556,506
---------- ---------- --------- ----------
Stockholders' equity:
Common stock ...................... -- $ 1,840(2) 1,840 2,043 $ (774)(6) 3,109
Additional paid-in capital ........ -- 178,762 (2) 178,762 21,540 (3,549)(6) 196,753
Retained earnings ................. 104,193 104,193 20,811 (4,000)(5) 121,004
Unearned compensation--
ESOP ............................ -- (14,720)(2) (14,720) -- (14,720)
Unrealized gain on securities
available for sale, net
of taxes ........................ 2,317 2,317 162 (835)(4) 1,644
---------- ------------ ---------- --------- ---------- ----------
Total stockholders' equity ........ 106,510 165,882 272,392 44,556 (9,158) 307,790
---------- ------------ ---------- --------- ---------- ----------
Total liabilities and
stockholders' equity ............ $1,176,559 $ 165,882 $1,342,441 $ 531,013 $ (9,158) $1,864,296
========== ============ ========== ========= ========== ==========
Book value per share ............... $ 21.80 $ 9.90(7)
========= ==========
Book value per equivalent share--
Sandwich Bancorp .................. $ 63.36(8)
==========
</TABLE>
(footnotes begin on following page)
31
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheets, continued
<TABLE>
<CAPTION>
At October 31, 1997 (1)
---------------------------------------------------------------------------------
Pro Forma Seacoast Pro Forma
Seacoast Conversion Financial as Sandwich Merger Pro forma
Financial Adjustments Converted Bancorp Adjustments Consolidated
----------- ------------- ------------- --------- -------------- -------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents ......... $ 32,761 $145,882 (2) $ 178,643 $ 16,068 $ (5,000)(5) $ 189,711
Securities available for sale ..... 209,316 209,316 10,995 99,585 (4) 319,896
Securities held to maturity ....... 12,633 12,633 99,577 (99,577)(3) 12,633
Loans held for sale ............... 4,277 4,277 -- 4,277
Loans, net ........................ 809,555 809,555 366,642 1,176,197
Bank premises and equipment ....... 12,254 20,000 (2) 32,254 6,379 38,633
OREO .............................. 1,707 1,707 596 2,303
Net deferred tax asset ............ 6,988 6,988 2,948 9,936
Other assets ...................... 17,099 17,099 15,492 1,000 (5) 33,591
---------- -------- ---------- -------- -------- ----------
Total assets ...................... $1,106,590 $165,882 $1,272,472 $518,697 $ (3,992) $1,787,177
========== ======== ========== ======== ======== ==========
Liabilities and
Stockholders' Equity:
Deposits .......................... $ 937,948 $ 937,948 $423,014 $1,360,962
Borrowed funds .................... 60,703 60,703 47,339 108,042
Other liabilities ................. 9,798 9,798 6,330 $ 31 (3) 16,159
---------- ---------- -------- -------- ----------
Total liabilities ................. 1,008,449 1,008,449 476,683 31 (3) 1,485,163
---------- ---------- -------- -------- ----------
Stockholders' equity:
Common stock ..................... -- $ 1,840 (2) 1,840 1,942 (688)(6) 3,094
Additional paid-in capital ....... -- 178,762 (2) 178,762 20,139 619 (6) 199,520
Retained earnings ................ 96,527 96,527 19,848 (4,000)(5) 112,375
Unearned compensation--
ESOP ........................... -- (14,720)(2) (14,720) -- (14,720)
Unrealized gain on securities
available for sale, net of
taxes .......................... 1,614 1,614 85 46 (4) 1,745
---------- -------- ---------- -------- -------- ----------
Total stockholders' equity ..... 98,141 165,882 264,023 42,014 (4,023) 302,014
---------- -------- ---------- -------- -------- ----------
Total liabilities and
stockholders' equity .......... $1,106,590 $165,882 $1,272,472 $518,697 $ (3,992) $1,787,177
========== ======== ========== ======== ======== ==========
Book value per share .............. $ 21.63 $ 9.76(7)
======== ==========
Book value per equivalent share--
Sandwich Bancorp ................. $ 62.46(8)
==========
</TABLE>
- ------------
(1) Reflects Sandwich Bancorp's balance sheets as of June 30, 1998 and December
31, 1997.
(2) Reflects gross proceeds of $184.0 million from the sale of Conversion
Shares, assuming the maximum of the Estimated Valuation Range less (i)
estimated expenses of the Conversion equal to $3.4 million, (ii) the
purchase of $14.7 million of Conversion Shares by the ESOP funded
internally by a loan from Seacoast Financial and (iii) $20 million for the
estimated construction costs of a new main office building.
(3) Reflects transfer of Sandwich investments from held to maturity to
available for sale consistent with Seacoast Financial's classification and
as permitted by SFAS No. 115.
(4) Reflects the adjustment set forth in Note 3 above and the retirement of
shares of Sandwich Bancorp Common Stock held by Seacoast Financial having a
carrying value of $5,715,000 at May 31, 1998 (90,000 shares) and $190,000
at October 31, 1997 (5,000 shares) and a net SFAS No. 115 adjustment of
$835,000 at May 31, 1998 and $73,000 at October 31, 1997.
32
<PAGE>
(5) Adjustment to record the effects of estimated one-time expenses of
approximately $5.0 million, which, net of a $1.0 million income tax
benefit, will be charged to earnings as incurred following the Merger.
Since these expenses are non-recurring, they have not been reflected in the
pro forma condensed statements of income and related per share amounts.
These expenses are expected to be incurred prior to or shortly after the
Merger. The estimated non-recurring expenses consist of the following (in
thousands):
<TABLE>
<S> <C>
Merger related professional fees ...................... $ 2,400
Employee severance costs .............................. 2,500
Data processing and other costs ....................... 100
--------
Total estimated merger expenses .................... 5,000
Tax benefit ........................................... (1,000)
--------
Total estimated merger expenses, net of tax benefit $ 4,000
========
</TABLE>
(6) Reflects the reclassification to retire Sandwich Bancorp Common Stock
previously held by Seacoast Financial (assuming no additional purchases or
exercises of options to acquire Sandwich Bancorp Common Stock) and the
effects of the assumed Exchange Ratio of 6.4 shares of Seacoast Financial
Common Stock for each share of Sandwich Bancorp Common Stock, net of
effect of differences in par values.
(7) The pro forma consolidated book value per share was calculated assuming the
exchange of 6.4 shares of Seacoast Financial Common Stock for each share
of Sandwich Bancorp Common Stock, the maximum number of shares of Seacoast
Financial Common Stock to be exchanged for each share of Sandwich Bancorp
Common Stock. This Exchange Ratio assumes that the Seacoast Financial
Trading Price is $10 or less. In the event that the Seacoast Financial
Trading Price is greater than $10, the Exchange Ratio will be lower. The
following reflects the impact of selected higher Seacoast Financial
Trading Prices on the Exchange Ratio, on the pro forma book value per
share of Seacoast Financial Common Stock and the pro forma book value per
equivalent share of Sandwich Bancorp (assuming the issuance of the maximum
number of Conversion Shares as set forth in Note 2 above):
<TABLE>
<CAPTION>
Pro Forma Book Value
Pro Forma Book Value Per Per Equivalent
Share Share--Sandwich Bancorp
--------------------------- --------------------------
Seacoast
Financial Exchange May 31, October 31, May 31, October 31,
Trading Price Ratio 1998 1997 1998 1997
- ------------------ ---------- ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
$11 ............. 5.8182 $ 10.28 $ 10.14 $ 59.81 $ 59.00
12 ............. 5.3333 10.62 10.47 56.64 55.84
13 ............. 4.9231 10.93 10.77 53.81 53.02
14 ............. 4.7407 11.07 10.91 52.48 51.72
15 ............. 4.7407 11.07 10.90 52.48 51.67
16 ............. 4.4444 11.31 11.13 50.27 49.47
</TABLE>
(8) As each Sandwich Bancorp shareholder is assumed in this table to receive
6.4 Exchange Shares in exchange for each share of Sandwich Bancorp Common
Stock, the pro forma consolidated book value per share has been multiplied
by 6.4 to present the pro forma impact on Sandwich Bancorp shareholders of
the Merger. If the Exchange Ratio is less than 6.4, the pro forma book
value per equivalent share of Sandwich Bancorp would be lower, as set
forth in Note 7 above.
33
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statements of Income
<TABLE>
<CAPTION>
Seven months ended May 31, 1998 (1) Seven months ended May 31, 1997 (1)
------------------------------------- -----------------------------------
Seacoast Sandwich Pro forma Seacoast Sandwich Pro forma
Financial Bancorp Consolidated Financial Bancorp Consolidated
--------- -------- ------------ --------- -------- -------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Interest income ................... $ 49,990 $21,466 $ 71,456 $ 45,643 $20,294 $ 65,937
Interest expense .................. 25,032 11,210 36,242 22,652 10,091 32,743
-------- ------- -------- -------- ------- --------
Net interest income .............. 24,958 10,256 35,214 22,991 10,203 33,194
Provision for loan losses ......... 536 294 830 890 351 1,241
-------- ------- -------- -------- ------- --------
Net interest income after
provision for loan losses ....... 24,422 9,962 34,384 22,101 9,852 31,953
Non-interest income ............... 3,773 1,676 5,449 3,108 1,458 4,566
Non-interest expense .............. 15,575 7,394 22,969 14,671 7,035 21,706
-------- ------- -------- -------- ------- --------
Income before income taxes ....... 12,620 4,244 16,864 10,538 4,275 14,813
Provision for income taxes ........ 4,954 1,311 6,265 4,254 1,630 5,884
-------- ------- -------- -------- ------- --------
Net income ....................... $ 7,666 $ 2,933 $ 10,599 $ 6,284 $ 2,645 $ 8,929
======== ======= ======== ======== ======= ========
Basic earnings per share .......... $ 1.49 $ 0.34(2) $ 1.39 $ 0.29(2)
======= ======== ======= ==========
Diluted earnings per share ........ $ 1.43 $ 0.34(2) $ 1.33 $ 0.29(2)
======= ======== ======= ==========
Basic earnings per equivalent
share--Sandwich Bancorp .......... $ 2.18(3) $ 1.86(3)
======== ==========
<CAPTION>
Year ended October 31, 1997(1) Year ended October 31, 1996(1)
-------------------------------------- -----------------------------------
Seacoast Sandwich Pro forma Seacoast Sandwich Pro forma
Financial Bancorp Consolidated Financial Bancorp Consolidated
--------- ---------- ------------ --------- -------- ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Interest income ................... $ 80,032 $35,917 $115,949 $ 74,126 $32,309 $106,435
Interest expense .................. 39,831 18,322 58,153 37,245 15,792 53,037
--------- ------- -------- -------- ------- -----------
Net interest income .............. 40,201 17,595 57,796 36,881 16,517 53,398
Provision for loan losses ......... 1,865 750 2,615 1,166 265 1,431
--------- ------- -------- -------- ------- -----------
Net interest income after
provision for loan losses ...... 38,336 16,845 55,181 35,715 16,252 51,967
Non-interest income ............... 5,943 2,721 8,664 5,146 2,839 7,985
Non-interest expense .............. 24,810 12,226 37,036 24,158 12,333 36,491
--------- ------- -------- -------- ------- -----------
Income before income taxes ....... 19,469 7,340 26,809 16,703 6,758 23,461
Provision for income taxes ........ 7,685 2,480 10,165 6,548 2,621 9,169
--------- ------- -------- -------- ------- -----------
Net income ....................... $ 11,784 $ 4,860 $ 16,644 $ 10,155 $ 4,137 $ 14,292
========= ======= ======== ======== ======= ===========
Basic earnings per share .......... $ 2.54 $ 0.54(2) $ 2.20 $ 0.47(2)
======= ======== ======= ===========
Diluted earnings per share ........ $ 2.45 $ 0.54(2) $ 2.13 $ 0.47(2)
======= ======== ======= ===========
Basic earnings per equivalent
share--Sandwich Bancorp .......... $ 3.46(3) $ 3.01(3)
======== ===========
</TABLE>
(footnotes begin on following page)
34
<PAGE>
Unaudited Pro Forma Condensed Consolidated Statements of Income, continued
<TABLE>
<CAPTION>
Year ended October 31, 1995 (1)
------------------------------------------
Seacoast Sandwich Pro forma
Financial Bancorp Consolidated
----------- ------------ -------------
(In thousands, except per share data)
<S> <C> <C> <C>
Interest income ........................................... $66,472 $ 30,673 $97,145
Interest expense .......................................... 34,539 14,833 49,372
------- -------- -------
Net interest income ...................................... 31,933 15,840 47,773
Provision (credit) for loan losses ........................ (351) 597 246
------- -------- -------
Net interest income after
provision (credit) for loan losses ..................... 32,284 15,243 47,527
Non-interest income ....................................... 4,403 2,718 7,121
Non-interest expense ...................................... 24,690 12,356 37,046
------- -------- -------
Income before income taxes ............................... 11,997 5,605 17,602
Provision for income taxes ................................ 4,511 2,169 6,680
------- -------- -------
Net income ............................................... $ 7,486 $ 3,436 $10,922
======= ======== =======
Basic earnings per share .................................. $ 1.87 $ 0.36(2)
======== ========
Diluted earnings per share ................................ $ 1.82 $ 0.36(2)
======== ========
Basic earnings per equivalent share--Sandwich Bancorp ..... $ 2.30(3)
========
</TABLE>
- ------------
(1) Sandwich Bancorp's statements of income included in the pro forma
statements of income are for the seven months ended June 30, 1998 and 1997
and the years ended December 31, 1997, 1996 and 1995.
(2) Earnings per share have been computed assuming the issuance of 18,400,000
Conversion Shares (none of which are assumed to be issued to the ESOP) and
an Exchange Ratio of 6.4:1 in connection with the Merger. As discussed in
Note 7 to the Pro Forma Condensed Consolidated Balance Sheets, this ratio
will vary based on the Seacoast Financial Trading Price. The following
tables indicate the impact on pro forma earnings per share and earnings
per equivalent share--Sandwich Bancorp for the seven months ended May 31,
1998 and 1997 and for the years ended October 31, 1997, 1996 and 1995
(basic and diluted) at selected Seacoast Financial Trading Prices. In no
event can the Exchange Ratio exceed 6.4:1.
<TABLE>
<CAPTION>
Pro Forma Earnings Per Share
------------------------------------------------------------------------------------------------
Seacoast Seven Months Seven Months
Financial Exchange Ended Ended Year Ended Year Ended Year Ended
Trading Price Ratio May 31, 1998 May 31, 1997 October 31, 1997 October 31, 1996 October 31, 1995
- ---------------- ---------- -------------- -------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
$11 ........... 5.8182 $ 0.36 $ 0.30 $ 0.56 $ 0.48 $ 0.37
12 ........... 5.3333 0.37 0.31 0.58 0.50 0.38
13 ........... 4.9231 0.38 0.32 0.60 0.51 0.39
14 ........... 4.7407 0.38 0.32 0.60 0.52 0.40
15 ........... 4.7407 0.38 0.32 0.60 0.52 0.40
16 ........... 4.4444 0.39 0.33 0.62 0.53 0.41
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Basic Earnings Per Equivalent Share--Sandwich Bancorp
-------------------------------------------------------------------------------------
Seacoast Seven Months Seven Months
Financial Exchange Ended Ended Year Ended Year Ended Year Ended
Trading Price Ratio May 31, 1998 May 31, 1997 October 31, 1997 October 31, 1996 October 31, 1995
- ---------------- ---------- -------------- -------------- ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
$11 ........... 5.8182 $ 2.09 $ 1.75 $ 3.26 $ 2.79 $ 2.15
12 ........... 5.3333 1.97 1.65 3.09 2.67 2.03
13 ........... 4.9231 1.87 1.58 2.95 2.51 1.92
14 ........... 4.7407 1.80 1.52 2.84 2.47 1.90
15 ........... 4.7407 1.80 1.52 2.84 2.47 1.90
16 ........... 4.4444 1.73 1.47 2.76 2.36 1.82
</TABLE>
35
<PAGE>
(3) As each Sandwich Bancorp stockholder is assumed in this table to receive
6.4 Exchange Shares in exchange for each share of Sandwich Bancorp Common
Stock, the pro forma consolidated basic earnings per share has been
multiplied by 6.4 to present the pro forma equivalent earnings for
Sandwich Bancorp stockholders. If the Exchange Ratio is less than 6.4, the
pro forma consolidated basic earnings per equivalent share of Sandwich
Bancorp would be lower, as set forth in Note 2 above.
Pro Forma Conversion Data
The tables on the following pages provide unaudited pro forma data with
respect to Seacoast Financial's stockholders' equity, net income and related
per share amounts based upon the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Valuation Range at May 31, 1998 and for the seven
months then ended and at October 31, 1997 and for the year then ended. The
actual net proceeds from the sale of the Conversion Shares cannot be determined
until the Conversion is completed. However, net proceeds are currently
estimated to be between $133.0 million and $180.6 million ($207.9 million in
the event the Estimated Valuation Range is increased by 15%) based upon the
following assumptions: (i) all Conversion Shares will be sold in the
Subscription and Community Offerings; (ii) Ryan Beck and McConnell Budd will
receive an aggregate fee equal to 1% of the aggregate Purchase Price for sales
in the Subscription Offering (excluding the sale of shares to the ESOP and the
625,000 shares assumed purchased by officers, directors, trustees, employees
and their immediate families); (iii) total expenses of the Conversion,
including the marketing fees paid to Ryan Beck and McConnell Budd, will range
from $3.0 million to $3.7 million; and (iv) construction costs for the planned
new main office will be $20.0 million. Actual amounts may vary from those
estimated.
Pro forma net income has been calculated for the seven months ended May
31, 1998 and the year ended October 31, 1997 as if the Conversion Shares had
been sold on the dates indicated and the net proceeds had been invested at the
yield on the one year U.S. Treasury Note in effect at the beginning of the
period for each of the periods presented (rates ranged from 5.37% to 5.39%).
This yield is believed to reflect the interest rate at which the Conversion
proceeds will be initially invested. The effect of withdrawals from deposit
accounts at Compass for the purchase of Conversion Shares in the Offerings has
not been reflected. A combined effective federal and state income tax rate of
40% has been assumed for pro forma adjustments in all periods. Pro forma
earnings per share amounts have been calculated by dividing pro forma amounts
by the number of outstanding shares of Seacoast Financial Common Stock less
ESOP shares which have not been committed to be released.
Pro forma unaudited consolidated stockholders' equity of Seacoast
Financial have been calculated in the same manner and based upon the same
assumptions as set forth with respect to the preceding pro forma unaudited
presentations. Pro forma stockholders' equity per share has been calculated by
dividing pro forma amounts by the number of outstanding shares of Seacoast
Financial Common Stock.
The following pro forma unaudited information is based, in part, on
historical information related to Seacoast Financial and Sandwich Bancorp and
on assumptions as to future events. For these and other reasons, the pro forma
unaudited financial data may not be representative of the financial effects of
the Conversion and the Merger at the dates on which such transactions actually
occur and should not be taken as indicative of future results of operations.
Pro forma stockholders' equity represents the difference between the stated
amount of assets and liabilities of Seacoast Financial computed in accordance
with GAAP.
The following table gives effect to the issuance of the Exchange Shares in
the Merger and certain non-recurring expenses expected to be incurred as a
result of the Merger. For information related to the seven-month period ended
May 31, 1998 and for the year ended October 31, 1997, the table assumes the
issuance of 12,537,392 and 12,393,048 Exchange Shares, based upon the number of
shares of Sandwich Bancorp Common Stock and Sandwich Options outstanding at the
beginning of each period, respectively. For information related to May 31, 1998
and October 31, 1997, the table assumes the issuance of 12,686,225 and
12,537,392 Exchange Shares, based upon the number of shares of Sandwich Bancorp
Common Stock and Sandwich Options outstanding on such dates, respectively. The
pro forma stockholders' equity is not intended to represent the fair market
value of the Seacoast Financial Common Stock and may be different than amounts
that would be available for distribution to stockholders in the event of
liquidation of Seacoast Financial.
36
<PAGE>
<TABLE>
<CAPTION>
At or for the seven months ended May 31, 1998
-------------------------------------------------------------
21,160,000
13,600,000 16,000,000 18,400,000 shares sold
shares sold shares sold shares sold at $10.00
at $10.00 at $10.00 at $10.00 per share
per share per share per share (15% above
(minimum of (midpoint of (maximum of maximum of
Estimated Estimated Estimated Estimated
Valuation Valuation Valuation Valuation
Range) Range) Range) Range)
------------- -------------- ------------- ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Gross proceeds ...................................... $ 136,000 $ 160,000 $ 184,000 $ 211,600
Less: estimated Offering expenses ................... (2,957) (3,178) (3,398) (3,652)
--------- --------- --------- ---------
Estimated net proceeds ............................. 133,043 156,822 180,602 207,948
Less: Non-recurring Merger expenses ................. (5,000) (5,000) (5,000) (5,000)
Less: Shares purchased by the ESOP (1) .............. (10,880) (12,800) (14,720) (16,928)
Less: Construction of new main office ............... (20,000) (20,000) (20,000) (20,000)
--------- --------- --------- ---------
Estimated net investable proceeds .................. $ 97,163 $ 119,022 $ 140,882 $ 166,020
========= ========= ========= =========
Net income:
Historical combined ................................ $ 10,599 $ 10,599 $ 10,599 $ 10,599
Pro forma income on estimated net
investable proceeds .............................. 1,826 2,237 2,648 3,120
Pro forma ESOP adjustment (1) ...................... (190) (224) (258) (296)
--------- --------- --------- ---------
Pro forma net income ............................. $ 12,235 $ 12,612 $ 12,989 $ 13,423
========= ========= ========= =========
Net income per share (4):
Historical combined ................................ $ 0.43 $ 0.39 $ 0.36 $ 0.33
Pro forma income on estimated net
investable proceeds .............................. 0.07 0.08 0.09 0.10
Pro forma ESOP adjustment (1) ...................... (0.01) (0.01) (0.01) (0.01)
--------- --------- --------- ---------
Pro forma net income per share ................... $ 0.49 $ 0.46 $ 0.44 $ 0.42
========= ========= ========= =========
Stockholders' equity (2):
Historical combined ................................ $ 151,066 $ 151,066 $ 151,066 $ 151,066
Estimated net proceeds ............................. 133,043 156,822 180,602 207,948
Less: Seacoast Financial Common Stock
acquired by the ESOP ............................. (10,880) (12,800) (14,720) (16,928)
Less: Non-recurring Merger expenses,
net of taxes ..................................... (4,000) (4,000) (4,000) (4,000)
Less: Shares of Sandwich Bancorp Common
Stock owned by Seacoast Financial ................ (5,158) (5,158) (5,158) (5,158)
--------- --------- --------- ---------
Pro forma stockholders' equity. .................. $ 264,071 $ 285,930 $ 307,790 $ 332,928
========= ========= ========= =========
Stockholders' equity per share (3 and 4):
Historical combined ................................ $ 5.75 $ 5.27 $ 4.86 $ 4.46
Net proceeds ....................................... 5.06 5.47 5.81 6.15
Less: Seacoast Financial Common Stock
acquired by the ESOP ............................. (0.41) (0.45) (0.47) (0.50)
Less: Non-recurring Merger expenses,
net of taxes ..................................... (0.15) (0.14) (0.13) (0.12)
Less: Shares of Sandwich Bancorp Common
Stock owned by Seacoast Financial ................ (0.20) (0.18) (0.17) (0.15)
--------- --------- --------- ---------
Pro forma stockholders' equity per share ......... $ 10.05 $ 9.97 $ 9.90 $ 9.84
========= ========= ========= =========
Purchase price as a percentage of pro forma
stockholders' equity per share ..................... 99.50% 100.30% 101.01% 101.63%
========= ========= ========= =========
Purchase price as a multiple of pro forma net
income per share--annualized ....................... 11.90x 12.66x 13.33x 13.89x
========= ========= ========= =========
</TABLE>
(footnotes begin on following page)
37
<PAGE>
Pro Forma Conversion Data, Continued
- ------------
(1) It is assumed that 8% of the Conversion Shares issued in the Conversion
will be purchased by the ESOP. The funds used to acquire such shares are
assumed to have been borrowed by the ESOP from Seacoast Financial. The
amount to be borrowed is reflected as a reduction of stockholders' equity.
Pro forma net income assumes that the ESOP shares are released over a
twenty-year period at an average fair value of $10.00 per share. Only ESOP
shares committed to be released (7/12 of 1/20 for the seven month period)
were considered outstanding for purposes of the net income per share
calculation.
(2) The retained earnings of Seacoast Financial will continue to be restricted
after the Conversion. See "Seacoast Financial's Dividend Policy,"
"Description of Capital Stock of Seacoast Financial--Seacoast Financial
Common Stock--Liquidation or Dissolution," "Regulation of Seacoast
Financial and Compass--Massachusetts Bank Regulation" and "The Conversion
and the Merger--Effects of the Conversion and the Merger--Liquidation
Rights."
(3) Stockholders' equity per share data is based on a total of 26,286,225,
28,686,225, 31,086,225 and 33,846,225 shares outstanding representing
shares sold in the Conversion and Exchange Shares issued in the Merger.
(4) All per share data has been computed assuming an exchange ratio in
connection with the Merger of 6.4:1. This ratio assumes that the Seacoast
Financial Trading Price used for calculating the Exchange Ratio is $10 or
less. In no event can the Exchange Ratio exceed 6.4:1. In the event that
the Seacoast Trading Price is greater than $10, the Exchange Ratio will be
reduced. The following tables reflect pro forma per share data based on
selected higher trading prices of Seacoast Financial Common Stock:
<TABLE>
<CAPTION>
Net Income Per Share
---------------------------------------------------------
15% Above
Seacoast Exchange Minimum of Midpoint of Maximum of Maximum of
Financial Exchange Shares Valuation Valuation Valuation Valuation
Trading Price Ratio Issued Range Range Range Range
- ------------------ ---------- ------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
$10 ............. 6.4000 12,537,392 $ 0.49 $ 0.46 $ 0.44 $ 0.42
11 ............. 5.8182 11,397,630 0.51 0.48 0.46 0.43
12 ............. 5.3333 10,447,827 0.53 0.50 0.47 0.45
13 ............. 4.9231 9,644,148 0.55 0.52 0.49 0.46
14 ............. 4.7407 9,293,660 0.56 0.52 0.49 0.47
15 ............. 4.7407 9,305,872 0.56 0.52 0.49 0.47
16 ............. 4.4444 8,724,193 0.58 0.54 0.51 0.48
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Equity Per Share
----------------------------------------------------------
15% Above
Seacoast Exchange Minimum of Midpoint Maximum of Maximum of
Financial Exchange Shares Valuation of Valuation Valuation Valuation
Trading Price Ratio Issued Range Range Range Range
- ------------------ ---------- ------------ ------------ -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
$10 ............. 6.4000 12,686,225 $ 10.05 $ 9.97 $ 9.90 $ 9.84
11 ............. 5.8182 11,532,932 10.51 10.39 10.28 10.18
12 ............. 5.3333 10,571,854 10.92 10.76 10.62 10.49
13 ............. 4.9231 9,758,635 11.31 11.10 10.93 10.77
14 ............. 4.7407 9,399,909 11.48 11.26 11.07 10.89
15 ............. 4.7407 9,404,923 11.48 11.25 11.07 10.89
16 ............. 4.4444 8,817,053 11.78 11.52 11.31 11.11
</TABLE>
38
<PAGE>
Pro Forma Conversion Data, Continued
<TABLE>
<CAPTION>
Purchase Price as a Percentage of
Pro Forma Stockholders' Equity Per Share
---------------------------------------------------------
15% Above
Seacoast Exchange Minimum of Midpoint of Maximum of Maximum of
Financial Exchange Shares Valuation Valuation Valuation Valuation
Trading Price Ratio Issued Range Range Range Range
- --------------- ---------- ------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
$10 .......... 6.4000 12,686,225 99.50% 100.30% 101.01% 101.63%
11 .......... 5.8182 11,532,932 95.15 96.25 97.28 98.23
12 .......... 5.3333 10,571,854 91.58 92.94 94.16 95.33
13 .......... 4.9231 9,758,635 88.42 90.09 91.49 92.85
14 .......... 4.7407 9,399,909 87.11 88.81 90.33 91.83
15 .......... 4.7407 9,404,923 87.11 88.89 90.33 91.83
16 .......... 4.4444 8,817,053 84.89 86.81 88.42 90.01
</TABLE>
<TABLE>
<CAPTION>
Purchase Price as a Multiple of
Pro Forma Net Income Per Share--Annualized
---------------------------------------------------------
15% Above
Seacoast Exchange Minimum of Midpoint of Maximum of Maximum of
Financial Exchange Shares Valuation Valuation Valuation Valuation
Trading Price Ratio Issued Range Range Range Range
- --------------- ---------- ------------ ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
$10 .......... 6.4000 12,537,392 11.90x 12.66x 13.33x 13.89x
11 .......... 5.8182 11,397,630 11.44 12.05 12.82 13.51
12 .......... 5.3333 10,447,827 11.01 11.63 12.35 12.99
13 .......... 4.9231 9,644,148 10.61 11.24 11.90 12.66
14 .......... 4.7407 9,293,660 10.42 11.11 11.76 12.50
15 .......... 4.7407 9,305,872 10.42 11.11 11.76 12.50
16 .......... 4.4444 8,724,193 10.06 10.87 11.49 12.35
</TABLE>
39
<PAGE>
Pro Forma Conversion Data, Continued
<TABLE>
<CAPTION>
At or for the year ended October 31, 1997
-------------------------------------------------------
21,160,000
13,600,000 16,000,000 18,400,000 shares sold
shares sold shares sold shares sold at $10.00
at $10.00 at $10.00 at $10.00 per share
per share per share per share (15% above
(minimum of (midpoint of (maximum of maximum of
Estimated Estimated Estimated Estimated
Valuation Valuation Valuation Valuation
Range) Range) Range) Range)
------------- -------------- ------------- ------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Gross proceeds ......................................... $ 136,000 $ 160,000 $ 184,000 $ 211,600
Less: estimated Offering expenses ...................... (2,957) (3,178) (3,398) (3,652)
--------- --------- --------- ---------
Estimated net proceeds ................................ 133,043 156,822 180,602 207,948
Less: Non-recurring Merger expenses .................... (5,000) (5,000) (5,000) (5,000)
Less: Shares purchased by the ESOP (1) ................. (10,880) (12,800) (14,720) (16,928)
Less: Construction of new main office .................. (20,000) (20,000) (20,000) (20,000)
--------- --------- --------- ---------
Estimated net investable proceeds ..................... $ 97,163 $ 119,022 $ 140,882 $ 166,020
========= ========= ========= =========
Net income:
Historical combined ................................... $ 16,644 $ 16,644 $ 16,644 $ 16,644
Pro forma income on estimated net investable
proceeds ............................................ 3,142 3,849 4,556 5,369
Pro forma ESOP adjustment (1) ......................... (326) (384) (442) (508)
--------- --------- --------- ---------
Pro forma net income ................................ $ 19,460 $ 20,109 $ 20,758 $ 21,505
========= ========= ========= =========
Net income per share (4):
Historical combined ................................... $ 0.67 $ 0.61 $ 0.57 $ 0.52
Pro forma income on estimated net investable
proceeds ............................................ 0.12 0.14 0.16 0.17
Pro forma ESOP adjustment (1) ......................... (0.01) (0.01) (0.02) (0.02)
--------- --------- --------- ---------
Pro forma net income per share ...................... $ 0.78 $ 0.74 $ 0.71 $ 0.67
========= ========= ========= =========
Stockholders' equity (2):
Historical combined ................................... $ 140,155 $ 140,155 $ 140,155 $ 140,155
Estimated net proceeds ................................ 133,043 156,822 180,602 207,948
Less: Seacoast Financial Common Stock acquired
by the ESOP ......................................... (10,880) (12,800) (14,720) (16,928)
Less: Non-recurring Merger expenses, net of taxes ..... (4,000) (4,000) (4,000) (4,000)
Add: Change in unrealized gain on securities
available for sale, net of taxes .................... 119 119 119 119
Less: Shares of Sandwich Bancorp Common Stock
owned by Seacoast Financial ......................... (142) (142) (142) (142)
--------- --------- --------- ---------
Pro forma stockholders' equity ........................ $ 258,295 $ 280,154 $ 302,014 $ 327,152
========= ========= ========= =========
Stockholders' equity per share (3 and 4):
Historical combined ................................... $ 5.36 $ 4.91 $ 4.53 $ 4.16
Net proceeds .......................................... 5.09 5.50 5.84 6.17
Less: Seacoast Financial Common Stock acquired
by the ESOP ......................................... (0.42) (0.45) (0.48) (0.50)
Less: Non-recurring Merger expenses, net of taxes ..... (0.15) (0.14) (0.13) (0.12)
Add: Change in unrealized gain on securities
available for sale net of taxes ..................... -- -- -- --
Less: Shares of Sandwich Bancorp Common Stock
owned by Seacoast Financial ......................... -- -- -- --
--------- --------- --------- ---------
Pro forma stockholders' equity per share .............. $ 9.88 $ 9.82 $ 9.76 $ 9.71
========= ========= ========= =========
Purchase price as a percentage of pro forma
stockholders' equity per share ........................ 101.21% 101.83% 102.46% 102.99%
========= ========= ========= =========
Purchase price as a multiple of pro forma
net income per share .................................. 12.82x 13.51x 14.08x 14.93x
========= ========= ========= =========
</TABLE>
(footnotes begin on following page)
40
<PAGE>
Pro Forma Conversion Data, Continued
- ------------
(1) It is assumed that 8% of the Conversion Shares issued in the Conversion
will be purchased by the ESOP. The funds used to acquire such shares are
assumed to have been borrowed by the ESOP from Seacoast Financial. The
amount to be borrowed is reflected as a borrowing and as a reduction of
stockholders' equity. Pro forma net income assumes that the ESOP shares
are released over a twenty-year period at an average fair value of $10.00
per share. Only ESOP shares committed to be released (1/20 for the annual
period) were considered outstanding for purposes of the net income per
share calculation.
(2) The retained earnings of Seacoast Financial will continue to be restricted
after the Conversion. See "Seacoast Financial's Dividend Policy,"
"Description of Capital Stock of Seacoast Financial--Seacoast Financial
Common Stock--Liquidation or Dissolution, "Regulation of Seacoast
Financial and Compass--Massachusetts Bank Regulation" and "The Conversion
and the Merger--Effects of the Conversion and the Merger--Liquidation
Rights."
(3) Stockholders' equity per share data is based on a total of 26,137,392,
28,537,392, 30,937,392 and 33,697,392 shares outstanding representing
shares sold in the Conversion and issued in the Merger.
(4) All per share data has been computed assuming an exchange ratio in
connection with the Merger of 6.4:1, the maximum ratio which could occur.
This exchange ratio assumes that the Seacoast Financial Trading Price is
$10 or less. In the event the Seacoast Financial Common Stock in such
period trades at prices greater than $10, the Exchange Ratio will be
reduced. The following table reflects pro forma per share data based on
selected higher trading prices of Seacoast Financial Common Stock:
<TABLE>
<CAPTION>
Net Income Per Share
----------------------------------------------------------------------
Seacoast Exchange 15% Above
Financial Exchange Shares Minimum of Midpoint of Maximum of Maximum of
Trading Price Ratio Issued Valuation Range Valuation Range Valuation Range Valuation Range
- --------------- ---------- ------------ ----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$10 .......... 6.4000 12,393,048 $ 0.78 $ 0.74 $ 0.71 $ 0.67
11 .......... 5.8182 11,266,408 0.82 0.77 0.73 0.70
12 .......... 5.3333 10,327,540 0.85 0.80 0.76 0.72
13 .......... 4.9231 9,533,114 0.88 0.83 0.78 0.74
14 .......... 4.7407 9,185,344 0.89 0.84 0.79 0.75
15 .......... 4.7407 9,195,043 0.89 0.84 0.79 0.75
16 .......... 4.4444 8,620,291 0.92 0.86 0.81 0.76
</TABLE>
<TABLE>
<CAPTION>
Stockholders' Equity Per Share
----------------------------------------------------------------------
Seacoast Exchange 15% Above
Financial Exchange Shares Minimum of Midpoint of Maximum of Maximum of
Trading Price Ratio Issued Valuation Range Valuation Range Valuation Range Valuation Range
- --------------- ---------- ------------ ----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$10 .......... 6.4000 12,537,392 $ 9.88 $ 9.82 $ 9.76 $ 9.71
11 .......... 5.8182 11,397,630 10.33 10.23 10.14 10.05
12 .......... 5.3333 10,447,827 10.74 10.59 10.47 10.35
13 .......... 4.9231 9,644,148 11.11 10.92 10.77 10.62
14 .......... 4.7407 9,293,660 11.28 11.08 10.91 10.74
15 .......... 4.7407 9,305,872 11.28 11.07 10.90 10.74
16 .......... 4.4444 8,724,193 11.57 11.33 11.13 10.95
</TABLE>
41
<PAGE>
Pro Forma Conversion Data, Continued
<TABLE>
<CAPTION>
Purchase Price as a Percentage of
Pro Forma Stockholders' Equity Per Share
----------------------------------------------------------------------
Seacoast Exchange 15% Above
Financial Exchange Shares Minimum of Midpoint of Maximum of Maximum of
Trading Price Ratio Issued Valuation Range Valuation Range Valuation Range Valuation Range
- --------------- ---------- ------------ ----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$10 .......... 6.4000 12,537,392 101.21% 101.83% 102.46% 102.99%
11 .......... 5.8182 11,397,630 96.81 97.75 98.62 99.50
12 .......... 5.3333 10,447,827 93.11 94.43 95.51 96.62
13 .......... 4.9231 9,644,148 90.01 91.58 92.85 94.16
14 .......... 4.7407 9,293,660 88.65 90.25 91.66 93.11
15 .......... 4.7407 9,305,872 88.65 90.33 91.74 93.11
16 .......... 4.4444 8,724,193 86.43 88.26 89.85 91.32
</TABLE>
<TABLE>
<CAPTION>
Purchase Price as a Multiple of
Pro Forma Net Income Per Share
----------------------------------------------------------------------
Seacoast Exchange 15% Above
Financial Exchange Shares Minimum of Midpoint of Maximum of Maximum of
Trading Price Ratio Issued Valuation Range Valuation Range Valuation Range Valuation Range
- --------------- ---------- ------------ ----------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$10 .......... 6.4000 12,393,048 12.8x 13.5x 14.1x 14.9x
11 .......... 5.8182 11,266,408 12.2 13.0 13.7 14.3
12 .......... 5.3333 10,327,540 11.8 12.5 13.2 13.9
13 .......... 4.9231 9,533,114 11.4 12.1 12.8 13.5
14 .......... 4.7407 9,185,344 11.2 11.9 12.7 13.3
15 .......... 4.7407 9,195,043 11.2 11.9 12.7 13.3
16 .......... 4.4444 8,620,291 10.9 11.6 12.4 13.2
</TABLE>
Pro Forma Outstanding Seacoast Financial Common Stock
The following table sets forth, for the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range, the total number of
Conversion Shares to be issued, and, for various possible Exchange Ratios, (i)
the total number of Exchange Shares to be issued (taking into consideration
both the outstanding Sandwich Bancorp Common Stock and the outstanding Sandwich
Bancorp Options as of June 30, 1998) and (ii) the total Seacoast Common Stock
outstanding following consummation of both the Conversion and the Merger.
<TABLE>
<CAPTION>
Total Outstanding Seacoast Financial Common Stock
following Conversion and Merger based on
--------------------------------------------------------------------------
21,160,000
13,600,000 16,000,000 18,400,000 Conversion
Conversion Conversion Conversion Shares Issued
Shares Issued Shares Issued Shares Issued (15% above
Seacoast Exchange (Minimum of (Minimum of (Maximum of Maximum of
Financial Exchange Shares Estimated Estimated Estimated Estimated
Trading Price Ratio Issued Valuation Range) Valuation Range) Valuation Range) Valuation Range)
- --------------- ---------- ------------ ------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
$10 .......... 6.4000 12,686,225 26,286,225 28,686,225 31,086,225 33,846,225
11 .......... 5.8182 11,532,932 25,132,932 27,532,932 29,932,932 32,692,932
12 .......... 5.3333 10,571,854 24,171,854 26,571,854 28,971,854 31,731,854
13 .......... 4.9231 9,758,635 23,358,635 25,758,635 28,158,635 30,918,635
14 .......... 4.7407 9,399,909 22,999,909 25,399,909 27,799,909 30,559,909
15 .......... 4.7407 9,404,923 23,004,923 25,404,923 27,804,923 30,564,923
16 .......... 4.4444 8,817,053 22,417,053 24,817,053 27,217,053 29,977,053
</TABLE>
42
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At May 31, 1998, Compass and Sandwich Bank each exceeded all of their
regulatory capital requirements. The following table sets forth the approximate
pro forma regulatory capital of Seacoast Financial and Compass after giving
effect to the Conversion, the Merger and the Bank Merger, based upon the banks'
respective regulatory capital at that date and the sale of the number of shares
shown in the table. The pro forma regulatory capital amounts reflect the
receipt by Compass of 50% of the estimated net Conversion proceeds. The pro
forma risk-based capital amounts assume the investment of the estimated net
proceeds received, exclusive of $20.0 million to be used by Compass in the
construction of a new main office building, in U.S. Treasury Notes which have a
risk-weight of 0% under applicable regulations as if such net proceeds had been
received and so applied at May 31, 1998. The FRB has adopted capital adequacy
guidelines for bank holding companies (on a consolidated basis) substantially
similar to the FDIC's capital requirements for Compass. On a pro forma basis
after the Conversion and the consummation of the Merger, Seacoast Financial's
and Compass's pro forma regulatory capital will exceed these requirements. See
"Regulation of Seacoast Financial and Compass--Holding Company Regulation."
<TABLE>
<CAPTION>
Pro Forma Combined for Seacoast Financial and Compass at May 31, 1998 based on
--------------------------------------------------------------------------------------------------
13,600,000 16,000,000 18,400,000 21,160,000
Conversion Shares Conversion Shares Conversion Shares Conversion Shares
sold at $10.00 sold at $10.00 sold at $10.00 sold at $10.00
per share per share per share per share
------------------------ ------------------------ ------------------------ -----------------------
Percent of Percent of Percent of Percent of
Amount assets (1) Amount assets (1) Amount assets (1) Amount assets (1)
----------- ------------ ----------- ------------ ----------- ------------ ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Seacoast Financial
Tier 1 leverage:
Actual .................. $259,750 13.82% $281,609 14.65% $303,469 15.44% $328,607 16.31%
Requirement ............. 70,367 4.00 71,241 4.00 72,115 4.00 73,121 4.00
Excess .................. 189,383 9.82 210,368 10.65 231,354 11.44 255,486 12.31
Tier 1 risk-based capital:
Actual .................. 259,750 23.04 281,609 24.97 303,469 26.91 328,607 29.14
Requirement ............. 45,105 4.00 45,105 4.00 45,105 4.00 45,105 4.00
Excess .................. 214,645 19.04 236,504 20.97 258,364 22.91 283,502 25.14
Total risk-based capital:
Actual .................. 273,853 24.29 295,712 26.22 317,572 28.16 342,710 30.39
Requirement ............. 90,209 8.00 90,209 8.00 90,209 8.00 90,209 8.00
Excess .................. 183,644 16.29 205,503 18.22 227,363 20.16 252,501 22.39
Compass
Tier 1 leverage:
Actual .................. 199,597 11.49 211,487 12.10 223,376 12.69 237,049 13.36
Requirement ............. 69,462 4.00 69,938 4.00 70,413 4.00 70,960 4.00
Excess .................. 130,135 7.49 141,549 8.10 152,963 8.69 166,089 9.36
Tier 1 risk-based capital:
Actual .................. 199,597 17.76 211,487 18.82 223,376 19.87 237,049 21.09
Requirement ............. 44,957 4.00 44,957 4.00 44,957 4.00 44,957 4.00
Excess .................. 154,640 13.76 166,530 14.82 178,419 15.87 192,092 17.09
Total risk-based capital:
Actual .................. 213,653 19.01 225,543 20.07 237,433 21.13 251,106 22.34
Requirement ............. 89,914 8.00 89,914 8.00 89,914 8.00 89,914 8.00
Excess .................. 123,739 11.01 135,629 12.07 147,519 13.13 161,192 14.34
</TABLE>
- ------------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate.
43
<PAGE>
CAPITALIZATION
The following table presents the actual capitalization of Seacoast
Financial and Sandwich Bancorp at May 31, 1998 and June 30, 1998, respectively,
and the approximate pro forma consolidated capitalization of Seacoast Financial
after giving effect to the Conversion and the Merger, based upon the companies'
respective capitalization at those dates, the sale of the number of shares
indicated in the table and the other assumptions set forth under "Pro Forma
Data--Pro Forma Conversion Data."
<TABLE>
<CAPTION>
Seacoast Financial pro forma based upon
the sale of Conversion Shares at $10.00 per share
----------------------------------------------------------
21,160,000
13,600,000 16,000,000 18,400,000 shares
shares shares shares (15% above
(minimum (midpoint (maximum maximum
Seacoast of the of the of the of the
Seacoast Sandwich Financial estimated estimated estimated estimated
Financial Bancorp combined valuation valuation valuation valuation
Historical Historical Historical range) range) range) range) (1)
------------ ------------ ----------------------------- -------------- -------------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Deposits (2) .................. $ 982,351 $444,750 $1,427,101 $1,427,101 $1,427,101 $1,427,101 $1,427,101
Borrowed funds and capital
lease obligation ............. 77,074 35,322 112,396 112,396 112,396 112,396 112,396
---------- -------- ---------- ---------- ---------- ---------- ----------
Total deposits and
borrowed funds ............. $1,059,425 $480,072 $1,539,497 $1,539,497 $1,539,497 $1,539,497 $1,539,497
========== ======== ========== ========== ========== ========== ==========
Stockholders' equity:
Preferred Stock,
$.01 par value,
10,000,000 shares
authorized; none to be
issued ..................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
---------- -------- ---------- ---------- ---------- ---------- ----------
Common Stock,
$.01 par value,
100,000,000 shares
authorized (3) ............. -- 2,043 2,043 2,629 2,869 3,109 3,385
Additional paid-in
capital (3) ................ -- 21,540 21,540 149,674 173,213 196,753 223,823
Retained earnings (4)(5) ..... 104,193 20,811 125,004 121,004 121,004 121,004 121,004
Less:
Unearned compensation--
ESOP (6) ................... -- -- -- (10,880) (12,800) (14,720) (16,928)
Net unrealized gain on
securities available for
sale, net of taxes ......... 2,317 162 2,479 1,644 1,644 1,644 1,644
---------- -------- ---------- ---------- ---------- ---------- ----------
Total stockholders' equity $ 106,510 $44,556 $ 151,066 $ 264,071 $ 285,930 $ 307,790 $ 332,928
========== ======== ========== ========== ========== ========== ==========
Total stockholders' equity
as a % of total assets ....... 9.05% 8.39% 8.85% 14.5% 15.5% 16.5% 17.6%
========== ======== ========== ========== ========== ========== ==========
</TABLE>
- ------------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% as a result of regulatory considerations or changes in market or
general financial and economic conditions following the commencement of the
Subscription Offerings in Compass.
(2) Does not reflect withdrawals from deposit accounts in Compass for the
purchase of Seacoast Financial Common Stock in the Conversion. Such
withdrawals would reduce pro forma deposits by the amount of such
withdrawals.
(3) Reflects the issuance of 12,686,225 Exchange Shares in the Merger and the
sale of a number of Conversion Shares as noted in the headings above. See
"The Conversion and the Merger--Description of the Conversion--Stock
Pricing and Number of Conversion Shares to be Issued" and "--Description of
the Merger and the Exchange Ratio."
44
<PAGE>
(4) The retained earnings of Compass will be restricted at the time of the
Conversion. See "Description of Capital Stock of Seacoast
Financial--Seacoast Financial Common Stock--Liquidation or Dissolution."
(5) Pro forma stockholders' equity includes the effects of estimated
non-recurring expenses of approximately $4.0 million net of tax benefit.
Since the expenses are non-recurring, they have not been reflected in the
pro forma condensed consolidated statements of income and related per share
amounts. See Note 5 to the Notes to Unaudited Pro Forma Condensed
Consolidated Balance Sheets.
(6) It is assumed that 8% of the Conversion Shares issued in the Conversion
will be purchased by the ESOP. The funds used to acquire such shares are
assumed to have been borrowed by the ESOP from Seacoast Financial. The
amount to be borrowed is reflected as a reduction of stockholders' equity.
45
<PAGE>
USE OF PROCEEDS OF CONVERSION
Although the actual net proceeds from the sale of the Conversion Shares
cannot be determined until the Conversion is completed, it is presently
anticipated that such proceeds will be between $133.0 million and $180.6
million ($207.9 million if the Estimated Valuation Range is increased by 15%).
See "Pro Forma Data" and "The Conversion and the Merger--Stock Pricing and the
Number of Shares to be Offered in the Conversion" for a description and
discussion of the assumptions used to arrive at such amounts. Seacoast
Financial will be unable to utilize any of the net proceeds of the Conversion
until the consummation of the Conversion.
Seacoast Financial will contribute at least 50% of the net proceeds of the
Conversion to Compass, or $66.5 million to $90.3 million at the minimum and
maximum, respectively, of the Estimated Valuation Range. Compass intends to add
such funds to its general funds, to be used for general corporate purposes,
including investments in short- and medium-term, investment-grade debt
securities, including U.S. Government and Agency securities, corporate bonds
and mortgage-backed securities. Depending on market conditions, Compass also
intends to use the funds to increase its loan originations and may use funds to
open new branches. Compass also intends to use approximately $20.0 million of
the funds for the construction of a new main office.
Net proceeds retained by Seacoast Financial will be used to fund the loan
to Compass's ESOP to acquire up to 8% of the Conversion Shares issued in the
Offerings. Seacoast Financial intends to invest any remaining net proceeds
retained by it in short- and medium-term, investment-grade debt securities,
including U.S. Government and Agency securities, corporate bonds and
mortgage-backed securities. Seacoast Financial may also use a portion of the
net proceeds it retains to pay dividends on its issued and outstanding capital
stock. See "Seacoast Financial's Dividend Policy."
Seacoast Financial and Compass may also use the funds to expand operations
through acquisitions of other banks or branch offices of other banks or
acquisitions of other financial services companies, such as insurance agencies.
However, neither Seacoast Financial nor Compass has any current arrangements,
understandings or agreements regarding any such transactions, other than the
Merger (for which neither will use any of the Conversion proceeds because the
Merger is structured as a stock-for-stock exchange).
To the extent that the stock-based benefit programs which Seacoast
Financial or Compass may adopt subsequent to the Conversion are not funded with
authorized but unissued Seacoast Financial Common Stock, Seacoast Financial or
Compass may use net proceeds from the Conversion to fund the purchase of
Seacoast Financial Common Stock to be awarded under such stock benefit
programs, if any. See "Management of Seacoast Financial and
Compass--Compensation of Officers and Directors through Benefit Plans--Stock
Option Plan" and "--Stock Plan."
Finally, although it has no current intention to do so, Seacoast Financial
may in the future decide to repurchase shares of its issued and outstanding
capital stock, to the extent that such repurchases are consistent with the
preservation of pooling-of-interests accounting treatment under GAAP of the
Merger and of possible future acquisitions, if any. Any such stock repurchase
program would be based upon facts and circumstances at the time of adoption of
such a program, including but not limited to: (i) market and economic factors
such as the price at which the stock is trading in the market, the volume of
trading, the attractiveness of other investment alternatives in terms of the
rate of return and risk involved in such alternatives, the ability to increase
the book value and/or earnings per share of the remaining outstanding shares
and the opportunity to improve Seacoast Financial's return on equity; (ii) the
avoidance of dilution to stockholders by not having to issue additional shares
to cover the exercise of stock options or to fund stock plans; and (iii) any
other circumstances in which repurchases would be in the best interests of
Seacoast Financial and its stockholders.
In order to preserve pooling-of-interests accounting treatment under GAAP
of the Merger, Seacoast Financial's ability to repurchase shares of its common
stock may be limited during the two-year period following consummation of the
Merger. Moreover, in the event Seacoast Financial determines to repurchase
stock, such repurchases will be made at market prices which may be in excess of
the Purchase Price in the Offering. Any stock repurchases will be subject to
the determination of the Board of Directors that both Seacoast Financial and
Compass will be capitalized in excess of all applicable regulatory requirements
after any such repurchases and that such capital will be adequate, taking into
account, among other things, the level of non-performing and other risk assets,
Seacoast Financial's and Compass's current and projected results of operations
and asset/liability structure, the economic environment, tax and other
considerations. The repurchase of stock or payment of dividends, however, would
be
46
<PAGE>
prohibited if Compass's net worth would be reduced below the amount required
for the liquidation account to be established for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders. See "The Conversion
and the Merger--Effects of the Conversion and the Merger--Liquidation Rights."
SEACOAST FINANCIAL'S DIVIDEND POLICY
Upon completion of the Conversion, the Board of Directors of Seacoast
Financial will have the authority to declare dividends on the Seacoast
Financial Common Stock, subject to statutory and regulatory requirements.
Although no decision has been made whether to pay dividends, Seacoast Financial
will consider a policy of paying quarterly cash dividends on the Seacoast
Financial Common Stock, with the first such dividend to be declared and paid no
sooner than the first full quarter following consummation of the Conversion and
the Merger. There can be no assurance that dividends will be paid or, if paid,
what the amounts of dividends will be, or whether such dividends, once paid,
will continue to be paid. Declaration of dividends by the Board of Directors
will be dependent upon a number of factors, including capital requirements,
regulatory limitations, Seacoast Financial's operating results and financial
condition and general economic conditions.
The source of funds for the payment of any dividends by Seacoast Financial
will depend, in part, upon dividends paid from Compass to Seacoast Financial,
in addition to the net Conversion proceeds retained by Seacoast Financial and
earnings thereon. Compass's ability to pay cash dividends is subject to various
federal and state restrictions. Under FDIC regulations, Compass would be
prohibited from paying dividends if, among other things, Compass was not in
compliance with applicable regulatory capital requirements. Under Massachusetts
law, a stock-form savings bank may pay dividends only out of its net profits
and only to the extent such payments do not impair its capital and surplus
accounts. Provided that Compass can meet these requirements, Massachusetts law
permits net profits of a bank to be distributed as a dividend so long as, after
such a distribution, either (i) the capital and surplus accounts of the bank
equal at least 10% of its deposit liabilities or (ii) the surplus account of
the bank equals 100% of its capital account, subject to certain statutory
exceptions.
MARKET FOR SEACOAST FINANCIAL COMMON STOCK
Seacoast Financial has received conditional approval to have the Seacoast
Financial Common Stock quoted on the Nasdaq National Market under the symbol
"SCFS," subject to the completion of the Conversion and compliance with certain
initial listing conditions, including the presence of at least three registered
market makers. Seacoast Financial will seek to encourage and assist at least
three market makers to make a market in its common stock. Although under no
obligation to do so, each of Ryan Beck and McConnell Budd has indicated its
intention to act as a market maker for the Seacoast Financial Common Stock
following consummation of the Conversion. Making a market involves maintaining
bid and ask quotations and being able, as principal, to effect transactions in
reasonable quantities at those quoted prices, subject to various securities
laws and other regulatory requirements. There can be no assurance that the
Seacoast Financial Common Stock will be able to meet the applicable criteria to
maintain its quotation on the Nasdaq National Market or that an active and
liquid trading market in such stock will develop or, if developed, will be
maintained. A public market having the desirable characteristics of depth,
liquidity and orderliness depends upon the presence in the marketplace of both
willing buyers and sellers at any given time, which is not within the control
of Seacoast Financial.
No assurance can be given that a purchaser in the Conversion will be able
to resell the Conversion Shares at or above the Purchase Price, nor can any
assurance be given that a Sandwich Bancorp stockholder receiving Exchange
Shares in the Merger will be able to sell such Exchange Shares at or above the
Seacoast Financial Trading Price used in the calculation of the Exchange Ratio.
See "Risk Factors--Absence of Market for Common Stock" and "The Conversion and
the Merger--Descriptions of the Merger and the Exchange Ratio."
47
<PAGE>
SEACOAST FINANCIAL AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of Seacoast Financial and
Subsidiary for each of the years in the three year period ended October 31,
1997 have been audited by Arthur Andersen LLP, independent public accountants,
whose report thereon appears elsewhere in this Prospectus. With respect to
information for the seven months ended May 31, 1998 and 1997, which is
unaudited, in the opinion of management, all adjustments necessary for a fair
presentation of such periods have been included and are of a normal recurring
nature. Results for the seven months ended May 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending October 31,
1998. These statements should be read in conjunction with the "Seacoast
Financial's Consolidated Financial Statements and Notes Thereto" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Seacoast Financial" included elsewhere herein.
<TABLE>
<CAPTION>
Seven Months Years Ended
Ended May 31, October 31,
-------------------------- ------------------------------------
1998 1997 1997 1996 1995
------------- ---------- ---------- ---------- ----------
(unaudited)
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest and Dividend Income:
Interest on loans ....................................... $41,580 $37,375 $65,499 $60,423 $52,459
Interest and dividends on investment securities ......... 7,523 7,560 13,298 12,756 12,756
Interest on federal funds sold and short-term
investments ........................................... 887 708 1,235 947 1,257
------- ------- ------- ------- -------
Total interest and dividend income ..................... 49,990 45,643 80,032 74,126 66,472
------- ------- ------- ------- -------
Interest Expense:
Interest on deposits .................................... 22,360 20,546 36,109 34,621 31,852
Interest on borrowed funds .............................. 2,672 2,106 3,722 2,624 2,687
------- ------- ------- ------- -------
Total interest expense ................................. 25,032 22,652 39,831 37,245 34,539
------- ------- ------- ------- -------
Net interest income .................................... 24,958 22,991 40,201 36,881 31,933
Provision (credit) for possible loan losses .............. 536 890 1,865 1,166 (351)
------- ------- ------- ------- -------
Net interest income after provision (credit)
for loan losses ....................................... 24,422 22,101 38,336 35,715 32,284
------- ------- ------- ------- -------
Noninterest Income:
Deposit and other banking fees .......................... 1,841 1,760 3,213 2,733 2,271
Loan servicing fees ..................................... 305 342 571 607 584
Card fee income, net .................................... 195 138 398 354 402
Other loan fees ......................................... 277 250 449 412 386
Gain (loss) on sales of investment
securities, net ....................................... (3) 23 37 60 (84)
Gain on sales of loans, net ............................. 568 190 542 181 94
Other income ............................................ 590 405 733 799 750
-------- ------- ------- ------- -------
Total noninterest income ............................... 3,773 3,108 5,943 5,146 4,403
-------- ------- ------- ------- -------
Noninterest Expense:
Salaries and employee benefits .......................... 8,534 8,041 13,633 12,890 12,747
Occupancy and equipment expenses ........................ 2,023 1,911 3,344 3,276 2,970
Data processing expenses ................................ 1,417 1,230 2,192 2,049 1,896
Marketing expenses ...................................... 792 542 1,225 743 901
Professional services expenses .......................... 645 647 1,044 975 950
Deposit insurance premiums .............................. 90 58 121 392 1,198
Other real estate owned expenses, net ................... 138 293 519 644 1,072
Other operating expenses ................................ 1,936 1,949 2,732 3,189 2,956
-------- ------- ------- ------- -------
Total noninterest expense .............................. 15,575 14,671 24,810 24,158 24,690
-------- ------- ------- ------- -------
Income before provision for income taxes ............... 12,620 10,538 19,469 16,703 11,997
Provision for income taxes ............................... 4,954 4,254 7,685 6,548 4,511
-------- ------- ------- ------- -------
Net income .............................................. $7,666 $ 6,284 $11,784 $10,155 $ 7,486
======== ======= ======= ======= =======
</TABLE>
48
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SEACOAST FINANCIAL
General
Seacoast Financial's results of operations depend primarily on its net
interest income, which is the difference between the income earned on its loan
and securities portfolios and its cost of funds, consisting of the interest
paid on deposits and borrowings. Results of operations are also affected by
Seacoast Financial's provision for loan losses, as well as noninterest income
and expenses. Seacoast Financial's noninterest income consists principally of
gains and losses from sales of loans and securities, deposit and other banking
fees. Seacoast Financial's non-interest expenses consist principally of
compensation and employee benefits, occupancy, data processing, marketing and
professional services costs and other operating expenses. Results of operations
are also significantly affected by general economic and competitive conditions
and changes in interest rates as well as government policies and actions of
regulatory authorities. Future changes in applicable law, regulations or
government policies may materially affect Seacoast Financial and Compass. See
"Risk Factors--Regulatory Oversight and Legislation."
Seacoast Financial's and Compass's fiscal years end on October 31.
References to a year in this Management's Discussion and Analysis and in
"Business of Compass" refer to a fiscal year ended on October 31.
Management Strategy
Historically, Seacoast Financial (through its banking subsidiary, Compass)
has focused on offering deposit products in New Bedford, Fall River and
Plymouth and their surrounding communities as well as on the island of Martha's
Vineyard. Compass's lending activities are concentrated primarily in
Southeastern Massachusetts (including Cape Cod, primarily for indirect auto
lending) and, to a much lesser degree, Rhode Island, primarily for indirect
auto lending. After the Merger, Cape Cod will become a targeted market area for
both Compass's deposit and its loan products. Seacoast Financial generates its
earnings primarily by originating loans, investing in debt and equity
securities, attracting and retaining deposits by paying competitive interest
rates, borrowing from the Federal Home Loan Bank of Boston ("FHLB") and
controlling its operating expenses.
Compass's business strategy includes (i) taking advantage of its position
as a locally based bank to foster a community orientation, (ii) developing a
niche through its expertise in indirect automobile lending, (iii) diversifying
its loan portfolio composition in an effort to broaden its business
opportunities and help manage credit and interest rate risk, (iv) emphasizing
transaction accounts in order to build customer relationships, achieve a low
cost of funds and generate service fee income and (v) expanding its products
and market area, with the goals of achieving a higher profile and increased
opportunities for growth. Seacoast Financial seeks to pursue its business
strategy in a manner that allows it to maintain asset quality and control
operating expenses.
Management of Credit Risk
Management considers credit risk to be the most important risk factor
affecting the financial condition and operating results of Compass. The
potential for loss associated with this risk factor is managed through a
combination of policies established by Compass's Board of Directors, the
monitoring of compliance with these policies and the periodic reporting and
evaluation of loans with problem characteristics. Policies relate to the
maximum amount that can be granted to a single borrower and his or her related
interests, the aggregate amount of loans outstanding by type in relation to
total assets and capital, loan concentrations, loan to collateral value ratios,
approval limits and other underwriting criteria. Policies also exist with
respect to performing periodic credit reviews, the rating of loans, when loans
should be placed in a non-performing status and the factors that should be
considered in establishing Compass's allowance for loan losses. See "Business
of Compass--Lending Activities."
Management of Market and Interest Rate Risk
General. The chief market risk factor affecting the financial condition
and operating results of Seacoast Financial is interest rate risk. This risk is
managed by periodic evaluation of the interest rate risk inherent in certain
balance sheet accounts, determination of the level of risk considered
appropriate given Compass's capital and liquidity requirements, business
strategy, performance objectives and operating environment and maintenance of
such risks within guidelines approved by the Board. Through such management,
Compass seeks to reduce the vulnerability of its net earnings to changes in
interest rates. Compass's Asset/Liability Committee, comprised of senior
management, is responsible for managing interest rate risk and reviewing with
the Board of Directors on
49
<PAGE>
a quarterly basis its activities and strategies, the effect of those strategies
on Compass's and Seacoast Financial's operating results, Compass's interest
rate risk position and the effect changes in interest rates would have on
Compass's net interest income. The extent of movement of interest rates is an
uncertainty that could have a negative impact on the earnings of Seacoast
Financial. See "Risk Factors--Potential Impact of Changes in Interest Rates on
Seacoast Financial's Earnings."
The principal strategies Seacoast Financial and Compass use to manage
interest rate risk include (i) emphasizing the origination and retention of
adjustable-rate loans, origination of indirect auto loans which have relatively
short maturities and origination of loans with maturities at least partly
matched with those of the deposits and borrowings funding the loans, (ii)
investing in debt securities with relatively short maturities and (iii)
classifying a significant portion of its investment portfolio as available for
sale so as to provide sufficient flexibility in liquidity management.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is deemed to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The "interest rate
sensitivity gap" is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that same
time period. At May 31, 1998, Seacoast Financial's cumulative one-year gap
position, the difference between the amount of interest-earning assets maturing
or repricing within one year and interest-bearing liabilities maturing or
repricing within one year, was negative $59.1 million, or negative 5.0% of
total assets. A gap is positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
negative when the amount of interest rate sensitive liabilities exceeds the
amount of interest rate sensitive assets. Accordingly, during a period of
rising interest rates, a bank with a negative gap position generally would not
be in as favorable a position, compared to an institution with a positive gap,
to invest in higher yielding assets. The resulting yield on a bank's assets
generally would increase at a slower rate than the increase in its cost of
interest-bearing liabilities. Conversely, during a period of falling interest
rates, a bank with a negative gap would tend to experience a repricing of its
assets at a slower rate than its interest-bearing liabilities which,
consequently, would generally result in its net interest income growing at a
faster rate than the net interest income of a bank with a positive gap
position.
The following table (the "GAP Table") sets forth the amounts of
interest-earning assets and interest-bearing liabilities outstanding at May 31,
1998 which Seacoast Financial expects, based upon certain assumptions, to
reprice or mature in each of the future time periods shown. Except as stated
below, the amount of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the contractual
maturity or, if earlier, the term to repricing of the asset or liability. The
table sets forth an approximation of the projected repricing of assets and
liabilities at May 31, 1998, on the basis of contractual maturities,
anticipated prepayments and scheduled rate adjustments within a three month
period and subsequent selected time intervals. The loan amounts in the table
reflect principal balances expected to be redeployed and/or repriced as a
result of contractual amortization and anticipated prepayments of
adjustable-rate and fixed-rate loans and as a result of contractual rate
adjustments on adjustable-rate loans. Loans and mortgage-backed securities with
prepayment options (fixed and adjustable) have been modeled utilizing an
industry standard financial modeling system to project cash flows based upon
current interest rates. Deposits that do not possess contractual maturity dates
or are not directly linked to an interest rate index are modeled utilizing
deposit decay rates (the estimated period over which a depositor relationship
will last) based on information provided by Compass's excess deposit insurer,
the Depositors Insurance Fund. These deposits include deposits in savings
accounts, NOW accounts and money market accounts. See "Business of
Compass--Lending Activities," "--Investment Activities" and "--Sources of
Funds."
50
<PAGE>
<TABLE>
<CAPTION>
Up to More than More than More than More than More than
Three three months six months one year to three years five years More than
Months to six months to one year three years to five years to ten years ten years Total
-------- ------------- ----------- ----------- ------------- ------------ --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets (1): $ 10,440 $ -- $ -- $ -- $ -- $ -- $ -- $ 10,440
Debt securities (4) ................. 37,116 11,552 24,291 77,499 28,467 7,027 667 186,619
Loans held for sale ................. 19,810 -- -- -- -- -- -- 19,810
Mortgage loans (2) .................. 48,778 60,566 105,590 207,880 74,276 40,961 13,040 551,091
Commercial loans .................... 29,887 3,241 11,711 9,735 2,114 1,428 84 58,200
Indirect auto loans ................. 25,695 24,079 43,670 113,846 39,292 996 -- 247,578
Other consumer loans ................ 5,351 1,883 3,425 9,435 4,489 2,773 197 27,553
-------- -------- -------- --------- --------- -------- -------- ----------
Total interest-earning assets ...... 177,077 101,321 188,687 418,395 148,638 53,185 13,988 1,101,291
-------- -------- -------- --------- --------- -------- -------- ----------
Interest-bearing liabilities:
NOW and money market
savings accounts ................... 3,716 2,064 41,956 67,477 25,933 47,737 49,801 238,684
Savings accounts .................... 15,922 8,846 10,615 35,383 26,537 35,383 44,229 176,915
Certificate of deposit accounts ..... 171,687 122,943 126,734 77,661 8,349 -- -- 507,374
Borrowed funds ...................... 16,233 1,914 3,574 22,287 15,630 9,626 7,810 77,074
-------- -------- -------- --------- --------- -------- -------- ----------
Total interest-bearing liabilities 207,558 135,767 182,879 202,808 76,449 92,746 101,840 1,000,047
-------- -------- -------- --------- --------- -------- -------- ----------
Interest sensitivity gap (3) ........ $(30,481) $(34,446) $ 5,808 $ 215,587 $ 72,189 $(39,561) $(87,852) $ 101,244
======== ======== ======== ========= ========= ======== ======== ==========
Cumulative interest sensitivity gap.. $(30,481) $(64,927) $(59,119) $ 156,468 $ 228,657 $189,096 $101,244
======== ======== ======== ========= ========= ======== ========
Cumulative interest sensitivity gap
as percentage of total assets ...... (2.59%) (5.52%) (5.02%) 13.30% 19.43% 16.07% 8.61%
Cumulative interest sensitivity gap
as a percentage of total interest-
earning assets ..................... (2.77%) (5.90%) (5.37%) 14.21% 20.76% 17.17% 9.19%
Cumulative interest-earning assets
as a percentage of cumulative
interest-bearing liabilities ....... 85.31% 81.09% 88.77% 121.46% 128.39% 121.05% 110.12%
</TABLE>
- ------------
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments and contractual maturities.
(2) For purposes of the gap analysis, allowances for loan losses, deferred loan
fees, unearned discounts and non-performing loans have been excluded.
(3) The interest sensitivity gaps represent the differences between
interest-earning assets and interest-bearing liabilities, expressed as a
dollar amount.
(4) Debt securities are presented at amortized cost.
Certain shortcomings are inherent in the method of analysis presented in
the GAP Table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates both on a short-term basis
and over the life of the asset. Further, in the event of changes in interest
rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in presenting the GAP table. Finally, the
ability of certain borrowers to service their adjustable-rate loans may
decrease in the event of an interest rate increase.
Interest rate gap analysis provides a static view of the maturity and
repricing characteristics of balance sheet positions. Seacoast Financial
quantifies its interest-rate risk exposures using a sophisticated simulation
model as well as the simpler gap analysis. Simulation analysis is used to
measure the exposure of net interest income to changes in interest rates over a
specified time horizon. Simulation analysis involves projecting future interest
income and expense under various rate scenarios. Compass's internal guidelines
on interest rate risk specify that for every 100 basis points immediate shift
in interest rates, its estimated net interest income over the next 12 months
should decline by less than 5%. As of May 31, 1998, Seacoast Financial's
estimated exposure as a percentage of estimated net interest income for the
next twelve and twenty-four month periods is as follows:
<TABLE>
<CAPTION>
Percentage Change in
Estimated
Net Interest Income Over:
--------------------------
12 months 24 months
----------- ------------
<S> <C> <C>
200 basis point increase in rates ......... (7.98%) (4.57%)
200 basis point decrease in rates ......... (0.27%) (5.07%)
</TABLE>
51
<PAGE>
Based on the scenarios above, net income would be adversely affected
(within Compass's internal guidelines) in both the twelve and twenty-four month
periods. For each one percentage point change in net interest income, the
adverse effect on net income would be $277,000, assuming a 40% tax rate.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rates earned or paid on them.
Average Balance Sheet. The following tables set forth certain information
relating to Seacoast Financial for the seven months ended May 31, 1998 and 1997
and the years ended October 31, 1997, 1996 and 1995. The average yields and
costs are derived by dividing income or expenses by the average balances of
interest-earning assets or interest-bearing liabilities, respectively, for the
periods shown and reflect annualized yields and costs. Average balances are
derived from average daily balances. The yields and costs include fees which
are considered adjustments to yields.
<TABLE>
<CAPTION>
Seven months ended May 31,
------------------------------------------------------------------------------
1998 1997
-------------------------------------- -------------------------------------
Average Average Average Average
balance Interest yield/cost balance Interest yield/cost
-------------- ---------- ------------ -------------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term investments ........................... $ 24,886 $ 887 6.11% $ 20,036 $ 708 6.06%
Debt securities (1) .............................. 201,545 7,242 6.16 207,997 7,357 6.06
Equity securities (1) ............................ 11,674 281 4.13 6,801 203 5.12
Mortgage loans (2) ............................... 552,078 26,761 8.31 516,622 25,364 8.42
Commercial loans (2) ............................. 54,069 3,111 9.86 49,005 2,830 9.90
Indirect auto loans (2) .......................... 223,809 10,385 7.95 171,135 8,019 8.03
Other consumer loans (2) ......................... 25,428 1,323 8.92 22,486 1,162 8.86
---------- ------- ---------- -------
Total interest-earning assets ................... 1,093,489 49,990 7.84 994,082 45,643 7.87
------- ------ ------- ------
Allowance for loan losses ........................ (10,597) (10,422)
Non-interest earning assets ...................... 58,146 60,142
---------- ----------
Total assets .................................... $1,141,038 $1,043,802
========== ==========
Liabilities and Surplus:
Interest-bearing liabilities:
NOW accounts ..................................... $ 80,170 $ 679 1.45% $ 70,289 $ 595 1.45%
Savings accounts ................................. 170,023 2,567 2.59 170,407 2,563 2,58
Money market savings accounts .................... 146,465 2,352 2.75 137,744 2,276 2.83
Certificate of deposit accounts .................. 501,324 16,762 5.73 458,149 15,112 5.65
---------- ------- ---------- -------
Total deposits .................................. 897,982 22,360 4.27 836,589 20,546 4.21
Borrowed funds:
Short-term borrowings (3) ....................... 10,993 316 4.93 4,221 129 5.24
FHLB advances ................................... 61,986 2,356 6.52 51,293 1,977 6.61
---------- ------- ---------- -------
Total borrowings ............................... 72,979 2,672 6.28 55,514 2,106 6.50
---------- ------- ---------- -------
Total interest-bearing liabilities ............ 970,961 25,032 4.42 892,103 22,652 4.35
---------- ------- ------ ---------- ------- ------
Non-interest bearing demand checking accounts .... 56,213 53,562
Other liabilities ................................ 9,778 8,559
---------- ----------
Total liabilities .............................. 1,036,952 954,224
Surplus .......................................... 104,086 89,578
---------- ----------
Total liabilities and surplus .................. $1,141,038 $1,043,802
========== ==========
Net interest income/interest rate spread (4) ..... $24,958 3.42% $22,991 3.52%
======= ====== ======= ======
Net interest margin (5) .......................... 3.91% 3.96%
====== ======
Ratio of interest-earning assets to
interest-bearing liabilities .................... 112.62% 111.43%
====== ======
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Year ended October 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
------------------------------ ----------------------------- -----------------------------
Average Average Average Average Average Average
balance Interest yield/cost balance Interest yield/cost balance Interest yield/cost
--------- --------- ---------- --------- -------- ---------- --------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets:
Short-term investments ................ $ 21,516 $ 1,235 5.74% $ 15,969 $ 947 5.93% $ 17,263 1,257 7.28%
Debt securities (1) ................... 211,304 12,910 6.11 208,665 12,370 5.93 210,680 12,280 5.83
Equity securities (1) ................. 7,290 388 5.32 7,296 386 5.29 8,484 476 5.61
Mortgage loans (2) .................... 523,376 43,977 8.40 498,185 42,162 8.46 451,497 37,813 8.37
Commercial loans (2) .................. 50,361 4,972 9.87 45,283 4,456 9.84 35,610 3,522 9.89
Indirect auto loans (2) ............... 180,600 14,497 8.03 150,070 11,927 7.95 124,850 9,502 7.61
Other consumer loans (2) .............. 23,195 2,053 8.85 20,795 1,878 9.03 17,204 1,622 9.43
---------- ------- --------- ------- -------- ------
Total interest-earning assets ........ 1,017,642 80,032 7.86 946,263 74,126 7.83 865,588 66,472 7.68
------- ------ ------- ------ ------ ------
Allowance for loan losses ............. (10,570 (10,109) (9,811)
Non-interest earning assets ........... 59,094 61,480 58,298
---------- --------- --------
Total assets ......................... $1,066,166 $ 997,634 $914,075
========== ========= ========
Liabilities and Surplus:
Interest-bearing liabilities:
Deposits:
NOW accounts ......................... $ 72,837 $ 1,065 1.46% $ 68,156 $ 1,008 1.48% $ 61,366 $ 1,078 1.76%
Savings accounts ..................... 171,157 4,434 2.59 176,311 4,660 2.64 173,700 5,107 2.94
Money market savings accounts ........ 140,413 3,959 2.82 136,322 3,888 2.85 129,920 3,916 3.01
Certificate of deposit accounts ...... 466,942 26,651 5.71 434,930 25,065 5.76 388,708 21,751 5.60
---------- ------- --------- ------- -------- -------
Total deposits ...................... 851,349 36,109 4.24 815,719 34,621 4.24 753,694 31,852 4.23
Borrowed funds:
Short-term borrowings (3) ............ 5,666 283 4.99 1,727 100 5.79 1,326 84 6.33
FHLB advances ........................ 51,490 3,439 6.68 37,288 2,524 6.77 39,552 2,603 6.58
---------- ------- --------- ------- -------- -------
Total borrowings .................... 57,156 3,722 6.51 39,015 2,624 6.73 40,878 2,687 6.57
---------- ------- --------- ------- -------- -------
Total interest-bearing liabilities .. 908,505 39,831 4.38 854,734 37,245 4.36 794,572 34,539 4.35
------ ------ ------
Non-interest bearing demand
checking accounts ................... 56,284 53,684 41,824
Other liabilities ..................... 8,807 8,807 6,845
---------- --------- --------
Total liabilities .................... 973,596 917,225 843,241
Surplus ............................... 92,570 80,409 70,834
---------- --------- --------
Total liabilities and surplus ........ $1,066,166 $ 997,634 $914,075
========== ========= ========
Net interest income/interest rate
spread (4) .......................... $40,201 3.48% $36,881 3.47% $31,933 3.33%
======= ====== ======= ====== ======= ======
Net interest margin (5) ............... 3.95% 3.90% 3.69%
====== ====== ======
Ratio of interest-earning assets to
interest-bearing liabilities ........ 112.01% 110.71% 108.94%
====== ====== ======
</TABLE>
- --------------
(1) Average balances include unrealized gains on securities available for sale.
Equity securities include marketable equity securities and restricted
equity securities.
(2) Loans on non-accrual status are included in the average balances.
(3) Short-term borrowings include immaterial balances of other borrowings.
(4) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents annualized net interest income divided by
average interest-earning assets.
53
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities have affected Seacoast Financial's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
<TABLE>
<CAPTION>
Seven months ended Year ended Year ended
May 31, 1998 October 31, 1997 October 31, 1996
compared to compared to compared to
seven months ended year ended year ended
May 31, 1997 October 31, 1996 October 31, 1995
------------------------------ -------------------------- -------------------------
Increase (decrease) due to Increase (decrease) due to Increase (decrease) due to
------------------------------ -------------------------- -------------------------
Volume Rate Net Volume Rate Net Volume Rate Net
------- ------ ------ ------ ------ ------ ------ -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments .......... $ 173 $ 6 $ 179 $ 319 $ (31) $ 288 $ (89) $(221) $ (310)
Debt securities ................. (231) 116 (115) 158 382 540 (118) 208 90
Equity securities ............... 123 (45) 78 -- 2 2 (64) (25) (89)
Mortgage loans .................. 1,722 (325) 1,397 2,119 (304) 1,815 3,947 402 4,349
Commercial loans ................ 291 (10) 281 501 15 516 952 (18) 934
Indirect auto loans ............. 2,445 (79) 2,366 2,450 120 2,570 1,989 436 2,425
Other consumer loans ............ 153 8 161 213 (38) 175 327 (72) 255
------ ----- ------ ------ ----- ------ ------ ----- ------
Total interest-earning assets .. $4,676 $(329) $4,347 $5,760 $ 146 $5,906 $6,944 $ 710 $7,654
------ ----- ------ ------ ----- ------ ------ ----- ------
Interest-bearing liabilities:
Deposits:
NOW accounts ................... $ 84 $ -- $ 84 $ 69 $ (12) $ 57 $ 112 $(182) $ (70)
Savings accounts ............... (6) 10 4 (135) (91) (226) 76 (523) (447)
Money market savings
accounts ...................... 141 (65) 76 116 (45) 71 188 (216) (28)
Certificate of deposit
accounts ..................... 1,441 209 1,650 1,829 (243) 1,586 2,648 666 3,314
------ ----- ------ ------ ----- ------ ------ ----- ------
Total deposits ................ 1,660 154 1,814 1,879 (391) 1,488 3,024 (255) 2,769
------ ----- ------ ------ ----- ------ ------ ----- ------
Borrowed funds:
Short-term borrowings ......... 195 (8) 187 199 (16) 183 24 (8) 16
FHLB borrowings ............... 407 (28) 379 950 (35) 915 (152) 73 (79)
------ ------ ------ ------ ----- ------ ------ ----- ------
Total borrowings .............. 602 (36) 566 1,149 (51) 1,098 (128) 65 (63)
------ ------ ------ ------ ----- ------ ------ ----- ------
Total interest-bearing
liabilities .................. 2,262 118 2,380 3,028 (442) 2,586 2,896 (190) 2,706
------ ------ ------ ------ ----- ------ ------ ----- ------
Net change in net interest
income ........................ $2,414 $(447) $1,967 $2,732 $ 588 $3,320 $4,048 $ 900 $4,948
====== ====== ====== ====== ===== ====== ====== ===== ======
</TABLE>
Comparison of Financial Condition at May 31, 1998 and October 31, 1997
Total assets increased by $70.0 million, or 6.3%, from $1,106.6 million at
October 31, 1997 to $1,176.6 million at May 31, 1998. This growth was due
primarily to a $12.2 million, or 37.2%, increase in cash and cash equivalents
and a $64.2 million, or 7.8% increase in loans. Asset growth was funded
primarily by a $44.4 million, or 4.7%, increase in deposits and a $13.6
million, or 26.7%, increase in FHLB advances.
The increase in cash and cash equivalents at May 31, 1998 was temporary in
nature and attributable to a reduction in the difference in rates paid on
short- to medium-term investments and funds invested overnight as well as
normal fluctuations in activity.
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The increase in loans occurred primarily in Seacoast Financial's
construction and indirect auto loan portfolios. From October 31, 1997 to May
31, 1998, construction loans increased by $8.0 million, or 23.6%, and indirect
auto loans (net of unearned discounts) increased by $39.5 million, or 19.0%.
The growth during the seven months ended May 31, 1998 is primarily attributable
to the favorable interest rate environment and economic conditions which
prevailed during this period.
Total deposits at May 31, 1998 were $982.4 million, an increase of $44.4
million, or 4.7%, compared to $937.9 million at October 31, 1997. The increase
in deposits was primarily due to favorable economic conditions partially offset
by a continuing low interest rate environment wherein Seacoast Financial
competes against other instruments available to the public such as mutual funds
and annuities. Total borrowed funds were $77.1 million at May 31, 1998 compared
to $60.7 million at October 31, 1997, an increase of $16.4 million, or 27.0%.
During the seven months ended May 31, 1998, Seacoast Financial's net borrowings
from the FHLB increased by $13.6 million at a weighted average rate of 5.98%.
The increase in surplus of $8.4 million to $106.5 million at May 31, 1998
resulted from net earnings of $7.7 million for the seven months ended May 31,
1998 and a $703,000 increase in unrealized gains (net of taxes) on securities
available for sale, most of which pertained to Seacoast Financial's marketable
equity securities portfolio.
Comparison of Financial Condition at October 31, 1997 and October 31, 1996
Total assets were $1,106.6 million at October 31, 1997 compared to
$1,027.8 million at October 31, 1996, an increase of $78.8 million, or 7.7%.
Substantially all of the growth was due to a $71.8 million, or 9.7%, increase
in net loans. Asset growth was funded primarily from increased deposits ($55.3
million), increased borrowings from the FHLB ($5.6 million), increased
borrowings through repurchase agreements ($7.6 million) and increased surplus
($13.2 million). Total net loans increased from $737.8 million at October 31,
1996 to $809.6 million at October 31, 1997. Between those dates, total real
estate loans increased by $21.9 million, or 4.3%, to $536.1 million, and total
commercial loans increased by $5.2 million, or 11.2%, to $51.4 million. The
most significant area of real estate loan growth was in residential real estate
loans which increased by $19.8 million, or 5.8%, to $363.0 million. While the
residential real estate loan market was strong throughout the year due to a
favorable interest rate environment, so too was the competition for such
business. Many borrowers took advantage of the increased competition to
refinance their loans. This factor, along with an increase in the sales of
fixed-rate mortgage loans, caused Seacoast Financial's net growth in real
estate loans in 1997 ($21.9 million) to be less than that achieved in 1996
($39.9 million) despite approximately the same level of loan originations in
each year.
The most significant area of overall loan growth in 1997 and 1996 was in
the area of indirect auto loans. During 1997, such loans increased, before
unearned discount, $48.2 million, or 25.4%, to $238.1 million at October 31,
1997. During 1996 such loans increased $30.4 million, or 19.1%, to $189.9
million at October 31, 1996. This growth is primarily attributable to the
expansion of the network of auto dealerships offering Compass's auto financing
program. This expansion resulted in an increase in the number of new loan
originations from 8,181 in 1996 to 9,817 in 1997, an increase of 20%.
Total investments increased modestly from $216.7 million at October 31,
1996 to $227.1 million at October 31, 1997. Among debt securities, Seacoast
Financial increased its holdings of U.S. Government and Agency obligations by
$2.8 million and corporate bonds by $22.4 million while decreasing its holdings
of mortgage-backed securities by $18.5 million. These shifts were caused by a
change in tax regulations and an opportunity to increase portfolio yield
without extending portfolio duration.
Total deposits increased 6.3% from $882.6 million at October 31, 1996 to
$937.9 million at October 31, 1997. The overall growth in deposits in 1997 was
favorably affected by Compass's introduction and promotion of
relationship-based retail checking account products offering a package of
benefits, including enhanced pricing on certificates of deposits. The
acquisition of competing local financial institutions by larger regional banks
also contributed to Compass's deposit growth in 1997 as customers who prefer to
bank with a locally-based community institution shifted their deposits to
Compass.
Of the $55.3 million increase in deposits in 1997, $37.4 million occurred
in certificates of deposit, continuing a gradual shift of deposits to
higher-yielding accounts. The remaining deposit growth of $17.9 million, or
4.1%, resulted from an increase in retail and business checking accounts.
Compass also offers customers with checking
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accounts the opportunity to "sweep" funds into a higher-yielding, non-insured,
investments under a repurchase agreement. The balance in these accounts
increased by $7.6 million from October 31, 1996 to October 31, 1997. Funds
invested under repurchase agreements are classified as short-term borrowings
rather than as deposits.
Customers also moderated inflows of deposits by opting to invest their
funds in alternative investments, such as mutual funds and annuities, that
Compass does not offer directly (other than through its affiliation with INVEST
Financial Corporation), rather than in deposit products perceived to have less
attractive returns.
Compass increased its borrowings from the FHLB from $45.4 million at
October 31, 1996 to $51.0 million at October 31, 1997 as part of its Affordable
Home Loan Program. Under that program, Compass borrows funds under a special
fixed-rate, amortizing program to provide low cost financing for first time
home buyers in the low-to-moderate income categories.
The increase in surplus of $13.2 million to $98.1 million at October 31,
1997 resulted from net earnings of $11.8 million and a $1.4 million increase in
unrealized gains (net of taxes) on securities available for sale.
Comparison of Operating Results for the Seven Months Ended May 31, 1998 and May
31, 1997
General. Net income increased by $1.4 million or 22.2%, from $6.3 million
for the seven months ended May 31, 1997 to $7.7 million for the seven months
ended May 31, 1998. The improvement was attributable to higher net interest
income of $2.0 million, a $354,000 decrease in the provision for loan losses
due to a continuation of the favorable trends in the various factors considered
by management in evaluating the adequacy of the allowance for loan losses and
an increase in net gains on sales of loans of $378,000. The improvement was
partially offset by an increase of $904,000 in non-interest expense due to
higher salaries, occupancy and equipment expenses, data processing expenses and
marketing costs. The increase in net interest income was due to growth in
average interest-earning assets.
Interest Income. Interest income for the seven months ended May 31, 1998
was $50.0 million, compared to $45.6 million for the seven months ended May 31,
1997, an increase of $4.4 million, or 9.6%. Substantially all of the increase
in interest income resulted from growth in average interest-earning assets of
$99.4 million, or 10.0%. The principal areas of growth related to real estate
loans (up $35.5 million, or 6.9%) and indirect auto loans (up $52.7 million, or
30.8%). Most of the real estate loan growth resulted from increased
originations of one- to four-family real estate loans. The increase in indirect
auto loans resulted from an improved economic environment within Compass's
local markets plus the expansion of such lending into Rhode Island.
Interest Expense. Interest expense for the seven months ended May 31, 1998
was $25.0 million, compared to $22.7 million for the seven months ended May 31,
1997, an increase of $2.3 million, or 10.1%. This increase resulted from a
higher average balance of interest-bearing liabilities ($78.9 million, or
8.8%). Average interest-bearing deposit balances increased $61.4 million, or
7.3%, as a result of the introduction and promotion of relationship-based
retail checking account products in 1996 and 1997.
Compass increased its borrowings from the FHLB during the seven months
ended May 31, 1998. Interest expense on borrowed funds increased $566,000, or
26.9%, in the seven months ended May 31, 1998 due to a $17.5 million, or 31.5%,
increase in the average balance of such funds to $73.0 million, which was
partially offset by a 22 basis point reduction in the average rate paid on
borrowed funds to 6.28% in the 1998 period compared to the 1997 period.
Provision for Loan Losses. Compass establishes provisions for loan losses,
which are charged to operations, in order to maintain the allowance for loan
losses at a level that management estimates is appropriate to absorb future
charge-offs of loans deemed uncollectible. In determining the appropriate level
of the allowance for loan losses, management considers past and anticipated
loss experience, evaluations of real estate collateral, current and anticipated
economic conditions, volume and type of lending and the levels of nonperforming
and other classified loans. The amount of the allowance is based on estimates
and the ultimate losses may vary from such estimates. Management assesses the
allowance for loan losses on a quarterly basis and makes provisions for loan
losses monthly in order to maintain the adequacy of the allowance.
Compass provided $536,000 for loan losses in the seven month period ended
May 31, 1998 compared to $890,000 in the seven month period ended May 31, 1997,
a decrease of $354,000, or 39.8%. This decrease was primarily influenced by a
reduction in the balance of adversely classified loans and fewer delinquencies.
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Non-Interest Income. Non-interest income is comprised of fees and charges
for bank services, net interchange fees on the processing of merchant credit
card receipts, gains or losses from sales of assets, loan servicing fees and
other income resulting from miscellaneous transactions. Total non-interest
income was $3.8 million for the seven months ended May 31, 1998 compared to
$3.1 million for the seven months ended May 31, 1997, an increase of $665,000,
or 21.4%. The increase resulted primarily from an increase of $378,000 in the
gain on sale of mortgage loans, from $190,000 in the seven months ended May 31,
1997 to $568,000 in the seven months ended May 31, 1998. Compass generally
sells in the secondary mortgage market fixed rate residential mortgage loans
with terms of 15 years or longer. With the reduction in interest rates on 15-
and 30-year fixed rate mortgages which occurred in 1997 and into 1998, the
volume of fixed-rate mortgage loan originations increased which contributed to
this increase.
Non-Interest Expense. Non-interest expense increased by $904,000, or 6.1%,
from $14.7 million for the seven months ended May 31, 1997 to $15.6 million for
the seven months ended May 31, 1998. Of this increase, $493,000 related to
compensation and employee benefits, which rose 6.1% to $8.5 million for the
seven months ended May 31, 1998. The higher level of compensation and employee
benefits was caused by overall salary increases averaging 4% and staffing
increases in the lending area.
Seacoast Financial expects compensation and employee benefits expenses to
increase after the Offering, primarily as a result of the adoption of the ESOP
in connection with the Offering. In this regard, the proposed ESOP, which
intends to purchase 8% of the Conversion Shares issued in connection with the
Offering, would result in increased compensation and employee benefits expenses
as the ESOP shares are allocated. See "Management of Seacoast Financial and
Compass--Compensation of Officers and Trustees through Benefit Plans-- Employee
Stock Ownership Plan and Trust." Following the Conversion, Seacoast Financial
may also adopt a stock plan for the recognition and retention of management. If
such a stock plan were adopted, compensation and employee benefit expense would
increase as stock plan awards were granted.
Occupancy and equipment expenses increased $112,000, or 5.9%, to $2.0
million for the seven months ended May 31, 1998. This increase was due to an
increase in ATM maintenance costs, and a one-time reduction in rent expense in
1997 of $36,000 attributable to a leased facility which Compass no longer
utilized.
Marketing expenses increased $250,000, or 46.1%, to $792,000 for the seven
months ended May 31, 1998. This increase was primarily attributable to
advertising campaigns related to the new ROTH IRA accounts allowed by changes
in the tax law, Compass's commercial loan programs and the advertising of
Compass's Preferred Checking account program.
Data processing expenses increased $187,000, or 15.2%, to $1.4 million for
the seven months ended May 31, 1998. This increase was due to new services,
including laser printing and Internet services, and volume-related increases in
loans and deposits.
Other real estate owned (OREO) expenses decreased $155,000, or 52.9%, to
$138,000 for the seven months ended May 31, 1998 due to the continuation of the
decline in the number of properties held as OREO and stable real estate market
values.
Income Taxes. Income tax expense was $5.0 million for the seven months
ended May 31, 1998, an increase of $700,000, or 16.5%, compared to the 1997
period. The effective tax rate was 39.3% in 1998 compared to 40.4% in 1997
which decrease was caused by Compass's greater utilization of non-bank
subsidiaries that were taxed at a lower rate for state tax purposes.
Comparison of Operating Results for the Years Ended October 31, 1997 and
October 31, 1996
General. Net income was $11.8 million in 1997 compared to $10.2 million in
1996, an increase of $1.6 million or 15.7%. Due primarily to an increase in
average interest-earning assets of $71.4 million, or 7.5%, net interest income
increased by $3.3 million, or 9.0%, from $36.9 million in 1996 to $40.2 million
in 1997. The other significant factors affecting the change in net income was
an increase of $797,000 in non-interest income offset by an increase of
$699,000 in the provision for loan losses and an increase of $652,000 in
non-interest expense.
Interest Income. Interest income was $80.0 million in 1997, compared to
$74.1 million in 1996, an increase of $5.9 million, or 8.0%. This increase in
interest income resulted almost exclusively from interest-earning asset growth.
The yield on interest-earning assets increased three basis points in 1997 from
7.83% in 1996 to 7.86% in
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1997. A significant portion of the increase in interest-earning assets was
attributable to the indirect auto loan portfolio, which increased from $165.6
million at October 31, 1996 to $208.0 million at October 31, 1997, and the real
estate loan portfolios, which increased from $514.2 million to $536.1 million,
at those dates, respectively.
Interest Expense. Interest expense increased by $2.6 million, or 6.9%,
from $37.2 million in 1996 to $39.8 million in 1997. The increase resulted from
a $53.8 million, or 6.3%, increase in average interest-bearing liabilities and
a two basis point increase in the average rate paid on such liabilities. Total
average interest-bearing deposits increased by $35.6 million, or 4.4%, with
most of the increase occurring in certificates of deposit because of the higher
rates offered on such deposits in comparison to those offered on other types of
deposits. Because of the level of loan growth, Compass increased its borrowings
from the FHLB with the average amount of such borrowings outstanding increasing
by $14.2 million, or 38.1%, from $37.3 million in 1996 to $51.5 million in
1997.
Provision for Loan Losses. Seacoast Financial's provision for loan losses
increased by $699,000, or 60.0%, from $1.2 million in 1996 to $1.9 million in
1997. With net loan charge-offs of $1.6 million in 1997 (as compared to
$682,000 in 1996), Seacoast Financial's allowance for loan losses increased by
$308,000 in 1997. The total allowance of $10.6 million at October 31, 1997
represented 1.30% of total loans, a slight decrease from 1.38% at October 31,
1996.
The increase of $875,000 in net charge-offs in 1997 resulted from the
resolution of certain commercial and commercial real estate loans as well as
the impact of the increasing indirect auto loan portfolio.
Non-Interest Income. Total non-interest income was $5.9 million in 1997,
an increase of $797,000, or 15.5%, from $5.1 million in 1996. The increase in
deposit and other banking fees from $2.7 million in 1996 to $3.2 million in
1997 was primarily attributable to a $141,000 increase in monthly checking
account fees and $182,000 in additional returned check fees. An increase in the
monthly maintenance fee on basic checking accounts instituted in 1996 caused
higher monthly checking account fees in 1997. Returned check fees increased in
1997 because of price increases on check returns put into effect in July 1996.
The remaining growth in non-interest income resulted from gains on sales
of loans, which increased by $361,000, or 200%, from $181,000 in 1996 to
$542,000 in 1997. Of this increase, $255,000 was attributable to the initial
application of SFAS No.125. As more fully disclosed in Note 1 to the
accompanying consolidated financial statements of Seacoast Financial, SFAS No.
125 required that Seacoast Financial capitalize, for the first time, the value
of servicing rights on loans originated and sold to others with servicing
retained by Seacoast Financial. The remaining increase of $106,000 in gains on
sales of loans was attributable to an increase in the volume of loan sales from
$15.5 million in 1996 to $30.1 million in 1997.
Non-Interest Expense. Total non-interest expense was $24.8 million in
1997, compared to $24.2 million in 1996, an increase of $652,000, or 2.7%. This
increase was primarily attributable to an increase of $743,000, or 5.8%, in
salaries and employee benefits and an increase of $482,000, or 64.9%, in
marketing expenses, which increases were partially offset by a decrease of
$271,000 in deposit insurance premiums, $125,000 in other real estate owned
expenses, and a $416,000 recovery of life insurance premiums recognized when an
insurance company emerged from receivership in 1997.
The increase in salaries and employee benefits in 1997 was caused by an
increase of $415,000, or 3.4%, in salaries and employee benefits and a
$328,000, or 47.1%, increase in bonuses paid in accordance with Compass's bonus
plan. These increases were primarily driven both by individual and
institutional performance in 1997 as the average number of full-time equivalent
employees in 1997 remained almost flat at 336 compared to 334 in 1996.
The increase in marketing expense in 1997 was due to significant
promotional activities associated with the introduction of the Preferred
Checking and Prime for Life equity loan programs. In addition, Compass
introduced its website on the Internet.
FDIC insurance expense decreased by $271,000 in 1997 because of a
reduction in the annual premiums charged by the FDIC on insurable deposits.
Other real estate owned ("OREO") expenses declined by $125,000 in 1997
primarily due to a reduction in the number of properties held as OREO and
stable real estate market values.
Income Taxes. Total income tax expense was $7.7 million in 1997 compared
to $6.5 million in 1996. The effective tax rate was slightly higher in 1997
(39.5%) than in 1996 (39.2%) primarily because Compass's effective Federal
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statutory tax rate increased by 1% with the growth in taxable income partially
offset by a reduction in the effective state tax rate caused by Compass's
greater utilization of non-bank subsidiaries that were taxed at a lower rate.
Comparison of Operating Results for the Years Ended October 31, 1996 and
October 31, 1995
General. Net income increased by $2.7 million, or 35.7%, from $7.5 million
in 1995 to $10.2 million in 1996. Contributing to the increase in net income
was a $4.9 million, or 15.5%, improvement in net interest income, $462,000 more
in deposit and other banking fees, $428,000 less in expenses relating to other
real estate owned and an $806,000 reduction in premiums paid to the FDIC for
deposit insurance. Partially offsetting these additions to income was a $2.0
million increase in the provision for income taxes and a $1.5 million increase
in the provision for loan losses.
Interest Income. Interest income was $74.1 million in 1996, compared to
$66.5 million in 1995, an increase of $7.6 million, or 11.5%. Of this increase,
$710,000 resulted from higher asset yields and $6.9 million from a higher
volume of interest-earning assets. The 15 basis point increase in the average
yield on interest-earning assets was caused by the upward movement in the prime
rate throughout 1994 and most of 1995. This movement was beneficial to Seacoast
Financial since the interest rates on much of its commercial loan portfolio are
based on the prime rate. In addition, Seacoast Financial's growth in
interest-earning assets was entirely within the higher yielding loan portfolio
while the investment portfolio was reduced slightly in 1996. Total average
interest-earning assets increased by $80.7 million, or 9.3%, to $946.3 million
in 1996. Most of the loan growth was in real estate loans (up $46.7 million, or
10.3%) and in indirect auto loans (up $25.2 million, or 20.2%).
Interest Expense. Interest expense was $37.2 million in 1996, compared to
$34.5 million in 1995, an increase of $2.7 million, or 7.8%. This increase was
due to higher levels of deposits as the average rate paid on interest-bearing
liabilities was virtually unchanged. Average interest-bearing deposits
increased by $62.0 million, or 8.2%. Of this increase, $46.2 million, or 74.5%,
was attributable to certificates of deposit. With the gradual decline in money
market and other savings deposit account rates which began in 1995 and remained
flat in 1996, depositors continued to shift more of their funds to higher
paying certificate of deposit accounts. Consequently, NOW, savings and money
market accounts increased, in the aggregate, only $15.8 million, or 4.3%, in
1996. Despite the shift in deposit mix toward term certificates having higher
rates, the cost of funds for all deposits was only one basis point higher in
1996 at 4.24%. The average balance of borrowed funds decreased $1.9 million
from $40.9 million in 1995 to $39.0 million in 1996 while the average cost of
such borrowings increased from 6.57% in 1995 to 6.73% in 1996.
Provision for Loan Losses. In 1996, Seacoast Financial provided $1.2
million for loan losses. Because a credit of $351,000 was recognized in 1995,
the provision increased by $1.5 million in 1996. During 1995, Compass acquired
Martha's Vineyard National Bank which had an allowance for loan losses of $3.5
million at the date of acquisition. In assessing its overall reserve
requirements, management of Seacoast Financial determined that such reserves
could be reduced in 1995 and recorded a credit of $351,000. While the 1996
provision reflects a significant increase from 1995, such provision is
comparable to amounts recorded in recent years.
Non-Interest Income. Non-interest income increased to $5.1 million in 1996
from $4.4 million in 1995 primarily as a result of a $462,000 increase in basic
monthly fees and returned check charges on checking accounts. These increased
fees resulted from the introduction of a standard monthly fee assessed on
certain checking accounts and an increase in the fee charged on returned
checks, both of which changes were implemented during 1996. In addition, ATM
service fees contributed to the increase in non-interest income in 1996.
To a lesser extent, gains from the sale of both investment securities and
residential real estate loans contributed to the 1996 increase as Seacoast
Financial realized a net gain on security transactions as compared to a net
loss in 1995 and favorable rates on real estate loans made it possible to
increase sales of fixed rate loans in the secondary market.
Non-Interest Expense. Total non-interest expense was $24.2 million in
1996, compared to $24.7 million in 1995, a decrease of $532,000, or 2.2%. The
decrease was attributable to a $806,000 reduction in premiums paid to the FDIC
for deposit insurance, from $1.2 million in 1995 to $392,000 in 1996, and a
$428,000 decrease in net expenses related to other real estate owned, a
reduction consistent with the decline in foreclosed properties held. Other
categories of non-interest expense increased by an aggregate of $702,000, or
2.9%, in 1996, principally due to the impact of Seacoast Financial's
acquisition of Martha's Vineyard National Bank on December 28, 1994.
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Accordingly, the activities of the acquired bank are fully reflected in 1996
while 1995 includes only 10 months of combined operations.
Income Taxes. Income tax expense was $6.5 million in 1996 and $4.5 million
in 1995, an increase of $2.0 million, or 44.4%. The effective tax rate
increased from 37.6% in 1995 to 39.2% in 1996 primarily as a result of an
increase in state income taxes resulting from a relative decline in the portion
of income taxed at lower rates applicable to non-bank subsidiaries.
Liquidity and Capital Resources
Seacoast Financial's primary sources of funds are deposits, principal and
interest payments on loans and debt securities and borrowings from the FHLB.
While maturities and scheduled amortization of loans are predictable sources of
funds, deposit flows and mortgage prepayments are greatly influenced by
interest rate trends, economic conditions and competition.
Total assets increased by $70.0 million, $78.8 million, $43.8 million, and
$192.0 million (including $128.7 million resulting from the acquisition of
Martha's Vineyard National Bank) for the seven months ended May 31, 1998 and
the years ended October 31, 1997, 1996 and 1995. These increases included $64.2
million, $72.1 million, $72.1 million and $166.1 million (including $104.4
million resulting from the acquisition of Martha's Vineyard National Bank),
respectively, of growth in Seacoast Financial's gross loan portfolio.
During the past few years, the combination of generally low interest rates
on deposit products, and the attraction of alternative investments, such as
mutual funds and annuities, has significantly affected deposit mix and flows.
Seacoast Financial experienced a $44.4 million net deposit inflow for the seven
months ended May 31, 1998 and net deposit inflows of $55.3 million, $22.9
million and $172.4 million (including $116.1 million of deposits acquired in
the acquisition of Martha's Vineyard National Bank) for the years ended October
31, 1997, 1996 and 1995, respectively. During the period from November 1, 1994
to May 31, 1998, time deposits increased from 43.1% to 51.6% of total deposits.
Compass has expanded its use of borrowings from the FHLB as part of its
management of interest rate risk. Such borrowings increased by $13.6 million,
$5.6 million, $6.0 million and $7.9 million during the seven months ended May
31, 1998 and the years ended October 31, 1997, 1996 and 1995, respectively. At
May 31, 1998, total borrowings from the FHLB amounted to $64.6 million and
Compass had the capacity to increase that total to $358.6 million. Depending on
market conditions and Compass's liquidity and GAP position, Compass may
continue to borrow from the FHLB.
Seacoast Financial's most liquid assets are cash and due from banks,
short-term investments and debt securities. The levels of these assets are
dependent on Seacoast Financial's operating, financing, lending and investment
activities during any given period. At May 31, 1998, cash and due from banks,
short-term investments and debt securities maturing within one year amounted to
$77.8 million, or 6.6% of total assets.
At May 31, 1998, Compass had commitments to originate loans, unused
outstanding lines of credit, standby letters of credit and undisbursed proceeds
of loans totaling $105.9 million. Compass anticipates that it will have
sufficient funds available to meet its current loan commitments. Certificates
of deposit maturing within one year from May 31, 1998 amounted to $421.4
million. Compass expects that substantially all maturing certificate accounts
will be retained by Compass at maturity. At May 31, 1998, Compass exceeded all
of its regulatory requirements with a leverage capital of $102.6 million, or
8.89% of average assets, which is above the required level of $46.2 million or
4.00%, and total risk-based capital of $112.9 million, or 13.69% of adjusted
assets, which is above the required level of $66.0 million, or 8.00%. Seacoast
Financial also exceeded all regulatory capital requirements applicable to bank
holding companies. See "Regulation of Seacoast Financial and
Compass--Regulatory Capital Requirements" and "--Insurance of Accounts and
Regulation by the FDIC."
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollar amounts
without considering changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost of
Seacoast Financial's operations. Unlike industrial companies,
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nearly all of the assets and liabilities of Seacoast Financial are monetary in
nature. As a result, interest rates have a greater impact on Seacoast
Financial's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
Impact of New Accounting Standards
Accounting for Stock-Based Compensation. In November 1995, the FASB issued
SFAS No. 123, "Accounting for Stock Based Compensation." The statement
established financial accounting standards for stock-based employee
compensation plans. SFAS No. 123 permits Seacoast Financial to choose either a
new fair value based method or the Accounting Principles Board (the "APB")
Opinion 25 intrinsic value based method of accounting for its stock-based
compensation arrangements. SFAS No. 123 requires pro forma disclosures of net
earnings and earnings per share computed as if the fair value based method had
been applied in financial statements of companies that continue to follow
current practice in accounting for such arrangements under APB Opinion 25. SFAS
No. 123 applies to all stock-based employee compensation plans in which an
employer grants shares of its stock or other equity instruments to employees
except for employee stock ownership plans. SFAS No. 123 also applies to plans
in which the employer incurs liabilities to employees in amounts based on the
price of the employer's stock (e.g., stock option plans, stock purchase plans,
restricted stock plans and stock appreciation rights). The statement also
specifies the accounting for transactions in which a company issues stock
options or other equity instruments for services provided by nonemployees or to
acquire goods or services from outside suppliers or vendors. The recognition
provisions of SFAS No. 123 for companies choosing to adopt the new fair value
based method of accounting for stock-based compensation arrangements is
applicable to all transactions entered into in fiscal years that begin after
December 15, 1995. Any effect that this statement will have on Seacoast
Financial will be applicable upon consummation of the Offering.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996, the FASB issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." This statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. Many of these assets and liabilities
are components of financial assets that existed prior to the transfer. If a
transfer does not meet the criteria for a sale, the transfer is accounted for
as a secured borrowing with pledge of collateral. The Statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application of the Statement is not
permitted. In December 1996, the FASB issued SFAS No. 127, "Deferral of the
Effective Date of Certain Provisions of SFAS No. 125." That statement requires
the deferral of implementation as it relates to repurchase agreements,
dollar-rolls, securities lending and similar transactions until years beginning
after December 31, 1997. Earlier or retroactive application of SFAS No. 125 is
not permitted. Adoption of SFAS No. 125 and SFAS No. 127 has not had a material
impact on the financial position or operating results of Seacoast Financial.
Earnings Per Share. In February 1997, the FASB issued SFAS No. 128,
"Earnings Per Share." This statement, which supersedes APB Opinion 15,
simplifies the reporting of earnings per share by eliminating the presentation
of primary earnings per share and requiring the presentation of basic earnings
per share. The calculation of basic earnings per share excludes the effect of
potential common shares to be issued, thus resulting in no dilution. The
statement requires entities with complex capital structures to present basic
and diluted earnings per share on the face of the income statement and
eliminates the modified treasury stock method of computing potential common
shares. The statement is effective for financial statements issued for fiscal
years ending after December 15, 1997. Seacoast Financial will follow the
guidance of SFAS No. 128 when it is required to report earnings per share.
Reporting Comprehensive Income. In June 1997, the FASB issued SFAS No.
130, "Reporting Comprehensive Income." The statement requires entities
presenting a complete set of financial statements to include details of
comprehensive income that arise in the reporting period. Comprehensive income
consists of net income or loss for the current period and other comprehensive
income consisting of revenue, expenses, gains and losses that bypass the income
statement and are reported directly in a separate component of equity. Other
comprehensive income
61
<PAGE>
includes, for example, unrealized gains and losses on certain investment
securities, minimum pension liability adjustments and foreign currency items.
SFAS No. 130 requires that components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. At May 31, 1998, Seacoast Financial's other comprehensive
income consisted of unrealized gains on securities classified as available for
sale, net of taxes. The statement is effective for fiscal years beginning after
December 15, 1997 and requires restatement of prior period financial statements
presented for comparative purposes.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The statement changes the current practice
for reporting segment information under SFAS No. 14, "Financial Reporting for
Segments of an Enterprise." Public entities are required to report financial
and descriptive information about their reportable operating segments. An
operating segment is a component of an entity for which financial information
is developed and evaluated by the entity's chief operating decision maker to
assess performance and to make decisions about resource allocation. Disclosures
about operating segments should generally be based on the information used
internally. The statement is effective for financial statements for periods
beginning after December 15, 1997. On adoption, comparative information for
earlier years is to be restated.
Employers' Disclosures About Pensions and Other Postretirement Benefits.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which is to become effective for
fiscal years beginning after December 15, 1997. This statement revises
employers' disclosures about pension and other postretirement benefit plans. It
does not change the measurement or recognition of those plans. Restatement of
disclosures for earlier periods provided for comparative purposes is required
unless the information is not readily available.
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" which is effective for fiscal years beginning after June
15, 1999. The Statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statement requires
that changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting. Management does not anticipate that the adoption
of this statement will have a material impact on the financial position or
operating results of Seacoast Financial.
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<PAGE>
BUSINESS OF SEACOAST FINANCIAL
Seacoast Financial is a mutual holding company that was created in
connection with Compass's reorganization into the mutual holding company form
of organization in 1994. Seacoast Financial is registered with the FRB as a
bank holding company under the BHCA. Since the formation of Seacoast Financial,
it has owned 100% of Compass's outstanding capital stock, and will continue to
do so after consummation of the Conversion.
In addition to the capital stock of Compass, Seacoast Financial's assets
consist primarily of approximately $5.4 million in investment securities and
cash as of May 31, 1998. Seacoast Financial is subject to regulation and
supervision by the FRB and the Commissioner. See "Regulation of Seacoast
Financial and Compass--Holding Company Regulation."
Upon completion of the Conversion and the Merger, Seacoast Financial will
have no significant liabilities and no assets other than 100% of the shares of
Compass's outstanding common stock, its investment securities and any net
proceeds of the Conversion not contributed to Compass.
On a consolidated basis, Seacoast Financial's total assets and deposits
have grown from $1,027.8 million and $882.6 million, respectively, as of
October 31, 1996 to $1,106.6 million and $937.9 million, respectively, as of
October 31, 1997. At May 31, 1998, total assets and deposits were $1,176.6
million and $982.4 million, respectively. Seacoast Financial's gross loan
portfolio has increased from $748.1 million as of October 31, 1996 to $884.4
million on May 31, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Seacoast Financial--Comparison of
Financial Condition at October 31, 1997 and October 31, 1996" and "--Comparison
of Financial Condition at May 31, 1998 and October 31, 1997."
The management of Seacoast Financial is set forth under "Management of
Seacoast Financial and Compass." At the present time, Seacoast Financial does
not employ any persons other than certain officers who are also officers of
Compass but uses the support staff of Compass from time to time. Additional
employees may be hired as appropriate to the extent Seacoast Financial expands
its business in the future.
The fiscal years of both Seacoast Financial and Compass end on October 31.
63
<PAGE>
BUSINESS OF COMPASS
General
Based on total assets, Compass was the sixth largest savings bank in
Massachusetts as of October 31, 1997. Compass is principally engaged in the
business of attracting deposits from the general public and investing those
deposits in loans and investment securities. Individual and business customers
of Compass have a variety of deposit accounts with Compass, including NOW
(checking) and other demand deposit accounts, passbook savings accounts, money
market deposit accounts, Individual Retirement Accounts ("IRAs") and various
certificates of deposit. Compass's loan portfolio includes residential and
commercial real estate loans, indirect auto loans, construction loans and
consumer and commercial loans. With its emphasis on commercial and commercial
real estate lending as well as its indirect auto loan program, management
believes that Compass differs from the typical savings bank. Savings banks
normally concentrate to a greater degree on residential mortgage lending.
Compass's investment portfolio consists primarily of U.S. Government and Agency
securities, corporate debt obligations, mortgage-backed securities and, to a
lesser extent, marketable equity securities.
Compass's results of operations depend to a large degree on its net
interest income, which is the difference between interest income from loans and
investments and interest expense for deposits and borrowings. See "Risk
Factors--Potential Impact of Changes in Interest Rates on Seacoast Financial's
Earnings."
For a description of certain effects of the Merger on Seacoast Financial's
and Compass's business, see "Certain Effects of the Merger on Seacoast
Financial."
Market Area and Competition
Compass is a community-oriented savings bank offering a variety of
financial products and services to meet the needs of the communities it serves.
Compass's deposit gathering is concentrated in the communities surrounding its
23 full service branch offices located in the southeastern Massachusetts areas
of Greater New Bedford, Greater Fall River, Greater Plymouth and the island of
Martha's Vineyard. Compass also maintains four free-standing ATM machines and
two limited-service high school branches. Compass primarily originates loans
secured by one- to four-family residential properties and commercial real
estate, indirect auto loans, commercial loans and consumer loans within
southeastern Massachusetts and, to a much lesser degree, Rhode Island.
Compass's main office is located in New Bedford, Massachusetts. New
Bedford had an estimated population of 99,088 in 1995 and is located in the
southeastern, or "South Coast," region of Massachusetts, approximately 60 miles
south of Boston and 30 miles east of Providence, Rhode Island. The City of New
Bedford was historically a major center of the New England fishery and textile
industries. Compass also operates in the City of Fall River, another city with
a history of textile manufacturing. Fall River had an estimated population of
92,560 in 1995 and is located to the west of New Bedford and just north of the
southern Massachusetts coastline. Over the past several decades, the cities of
New Bedford and Fall River have experienced relatively flat economic activity
and higher unemployment rates than most of New England and the country,
primarily as a result of a reduction in manufacturing and marine-related jobs
there. Although the economy in New Bedford and Fall River has not generally
been as strong as that of the rest of Massachusetts and New England, neither
has it been as volatile. For example, these areas did not experience the rapid
economic growth and increase in real estate values that characterized much of
Massachusetts and New England during the 1980's, and therefore were not hit as
hard by the economic recession suffered by New England in the late 1980's and
early 1990's. Similarly, while the economies and real estate markets of parts
of New England have improved significantly since the end of the recession in
the early 1990's, the economies of and real estate markets in New Bedford and
Fall River, although relatively stable, lag behind the rest of the region.
However, many well-known manufacturers, such as Titleist Footjoy Worldwide,
American Flexible Conduit, Acushnet Rubber, Globe Manufacturing and Quaker
Fabrics, are still located in the New Bedford and Fall River areas. In
addition, the recent designation of the New Bedford Waterfront and adjoining
Historic District as a National Park dedicated to New Bedford's history as the
"Whaling Capital of the World" could have a positive impact on the local
economy.
Compass also operates in the towns surrounding New Bedford and Fall River,
which have experienced significant growth over the last decade. The University
of Massachusetts at Dartmouth has been a regional source for educational
opportunities and a catalyst for economic development. Single family home
construction has accelerated in the suburban towns of Dartmouth, Acushnet,
Westport, Somerset and Swansea during the past five years.
64
<PAGE>
Compass's market area also includes the resort island of Martha's
Vineyard. Compass opened a loan production office on Martha's Vineyard in 1986,
and acquired the Martha's Vineyard National Bank in December 1994. A well-known
and affluent vacation destination, the island's economy is cyclical, driven
primarily by the tourist industry, which includes second homes, restaurants,
inns, hotels, small service businesses and tradespeople.
In 1994, Compass entered Plymouth County through its acquisition of a
significant portion of the deposits of the Plymouth Federal Savings Bank
("Plymouth Federal") from the Resolution Trust Corporation. Plymouth is, by
area, the largest town in Massachusetts. Its size and direct highway and rail
access to Boston have created recent increased demand for mortgage and
residential construction loans there. Compass continues to operate one of the
former Plymouth Federal branch offices, and has opened three additional
branches in the area in order to increase deposit and lending opportunities,
one in the town of Carver, one in Manomet (a section of the town of Plymouth)
and the third in the town of Plymouth. Compass has also become an active real
estate lender in the communities north of Plymouth which are generally
desirable suburban towns populated by Boston commuters.
Compass's current business activity in the Cape Cod market is primarily
restricted to its indirect auto lending program. Following the Merger,
Compass's market area will expand to include Sandwich's substantial Cape Cod
market. Like Martha's Vineyard, Cape Cod is a tourist destination, with a
cyclical economy based primarily on second homes, restaurants, inns, hotels and
small service businesses. See "Certain Effects of the Merger on Seacoast
Financial."
Compass faces significant competition both in generating loans and in
attracting deposits. Compass's primary market area is highly competitive and
Compass faces direct competition from a significant number of financial
institutions, many with a state-wide, a regional and, in some cases, a national
presence. Many of these financial institutions are significantly larger and
have greater financial resources than Compass. Compass's competition for loans
comes principally from commercial banks, savings banks, credit unions, mortgage
brokers, mortgage banking companies and insurance companies. Its most direct
competition for deposits has historically come from savings, cooperative and
commercial banks and credit unions, particularly in Fall River and New Bedford.
In addition, Compass faces increasing competition for deposits from non-bank
institutions, such as brokerage firms and insurance companies which offer
instruments like short-term money-market funds, corporate and government
securities funds, mutual funds and annuities. Competition may also increase as
a result of the lifting of restrictions on the interstate operations of
financial institutions. Finally, credit unions do not pay federal or state
income taxes and are subject to fewer regulatory constraints than savings
banks. Numerous credit unions are located in Fall River and Rhode Island and,
because of their tax and regulatory status, they enjoy a competitive advantage
over Compass. This advantage places significant competitive pressure on the
prices of Compass's loan and deposits. See "Risk Factors--Competition."
Lending Activities
General. Compass's gross loan portfolio totaled $884.4 million as of May
31, 1998, representing 75.2% of Compass's total assets on that date. Compass
primarily makes residential real estate loans secured by one- to four-family
residences, indirect auto loans and commercial real estate loans. Such loans
represented 41.6%, 28.0% (net of unearned discounts) and 14.1%, respectively,
of Compass's gross loan portfolio as of May 31, 1998. Compass started making
indirect auto loans in 1985 and, between October 31, 1995 and May 31, 1998,
that portion of Compass's loan portfolio grew by 77.4%. Compass also makes home
equity line of credit loans, residential and commercial construction loans,
commercial loans, fixed rate home equity loans, personal installment loans,
education loans and passbook loans. Real estate secures a majority of Compass's
loans as of May 31, 1998, including some loans classified as commercial loans.
Compass makes loans throughout its market area and originated $363.7
million in loans during 1997 and $303.5 million in loans during the seven
months ended May 31, 1998. It sold, on a servicing retained basis, $33.7
million and $45.4 million in residential loans in the secondary market during
those same periods, respectively.
The types of loans that Compass may originate are subject to federal and
state law and regulations. Interest rates charged by Compass on loans are
affected primarily by the demand for such loans, the supply of money available
for lending purposes and the rates offered by competitors. These factors are,
in turn, affected by national, regional and local economic conditions, the
levels of federal government spending and revenue, monetary policies of the FRB
and tax policies.
65
<PAGE>
The following table summarizes the composition of Compass's gross loan
portfolio as of certain dates:
<TABLE>
<CAPTION>
At October 31,
At May 31, -----------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
----------------- ----------------- ------------------ ------------------ ----------------- -----------------
Percent Percent Percent Percent Percent Percent
Amount of total Amount of total Amount of total Amount of total Amount of total Amount of total
------- -------- ------- -------- -------- -------- -------- --------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential
(one- to
four-family) ........ $368,136 41.63% $363,030 44.26% $343,204 45.88% $336,489 49.78% $268,010 52.56% $251,623 55.78%
Commercial (1) ....... 125,089 14.14 124,059 15.13 128,707 17.20 103,096 15.25 67,784 13.30 61,938 13.73
Home equity lines
of credit ........... 15,941 1.80 15,133 1.85 17,288 2.31 18,857 2.79 11,448 2.25 13,016 2.89
Construction, net .... 41,925 4.74 33,894 4.13 25,007 3.34 15,877 2.35 14,844 2.91 13,719 3.04
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate
loans ............. 551,091 62.31 536,116 65.37 514,206 68.73 474,319 70.17 362,086 71.02 340,296 75.44
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Commercial loans ..... 58,200 6.58 51,371 6.26 46,211 6.18 43,402 6.42 20,763 4.07 17,061 3.78
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer loans:
Indirect auto loans .. 280,215 31.68 238,114 29.03 189,865 25.38 159,433 23.58 125,667 24.65 90,159 19.99
Other ................ 27,553 3.12 24,662 3.01 22,063 2.95 18,764 2.78 15,433 3.03 14,120 3.13
-------- -------- -------- -------- -------- --------
Consumer loans ...... 307,768 262,776 211,928 178,197 141,100 104,279
Less: unearned
discount ........... 32,637 30,066 24,232 19,911 14,081 10,522
-------- -------- -------- -------- -------- --------
Total consumer
loans ............. 275,131 31.11 232,710 28.37 187,696 25.09 158,286 23.41 127,019 24.91 93,757 20.78
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans ......... $884,422 100.00% $820,197 100.00% $748,113 100.00% $676,007 100.00% $509,868 100.00% $451,114 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
- --------
(1) In September 1996, Compass reclassified approximately $28.0 in multifamily
loans from residential real estate to commercial real estate. Corresponding
prior-period reclassifications have not been made.
66
<PAGE>
Loan Origination and Underwriting. Loan officers based in each of
Compass's four regions--Plymouth, Fall River, New Bedford and Martha's
Vineyard--originate and underwrite Compass's mortgage and commercial loans.
Compass underwrites consumer loans at its main office, although it originates
such loans at its branches and, in the case of indirect auto loans, through a
network of car dealers. Compass also employs nine traveling loan originators,
based in the four regions, who originate residential mortgage loans. Compass
has recently entered into agreements for the origination of, and has begun
purchasing, adjustable rate residential mortgage loans by Boston area mortgage
correspondents.
Compass relies on print, radio, television and cable advertising, on
referrals from existing customers, attorneys and real estate professionals and
on relationships with existing borrowers to originate loans. In addition,
Compass solicits consumer loans, including home equity loans, by direct mail to
existing deposit and residential mortgage loan customers. Compass tries to
develop relationships with its customers in which customers see Compass as a
source of support in the management of their personal finances or in the
conduct of their businesses. Based on those relationships, many customers have
more than one account with and/or loan from Compass. Finally, Compass relies on
relationships with automobile dealers operating throughout its current market
area, Rhode Island and on Cape Cod to generate new indirect auto loans. The
dealers originate the loans, send loan applications to Compass and Compass
underwrites them. Compass maintains frequent contact with its dealers through
its Senior Vice President, Consumer Lending, and through a sales officer who
devotes all of his time to servicing this business.
Compass's underwriting of loans varies depending on the types of loan
underwritten. It generally includes the use of credit applications, property
appraisals and verification of an applicant's credit history, employment and
banking relationships to the extent management deems appropriate in each case.
Additional information concerning the underwriting of specific types of loans is
set forth in sections that discuss those loans and in the discussion of
environmental factors that affect lending. See "--Lending Activities,"
"--Residential Real Estate Loans," "--Indirect Auto and Other Consumer Loans,"
"--Commercial Real Estate Loans," "--Commercial Loans," "--Construction Loans"
and "--Environmental Issues."
Four senior loan officers oversee loan origination and underwriting.
Individual loan officers may originate loans within certain approved lending
limits. A credit committee, consisting of senior loan officers, must approve
all commercial loans that exceed $300,000 and Compass's Board of Directors or
the executive committee thereof must approve all loans over $750,000. Pursuant
to its loan policy, Compass generally will not make loans aggregating more than
$5.0 million to any one borrower. Exceptions to this "house" lending limit are
approved by the Board. At May 31, 1998, two customers had aggregate borrowing
capacity with Compass which exceeded this limit, with outstanding loans (all of
which were performing in accordance with their terms), commitments and amounts
available under lines of credit totaling $8.2 million and $5.1 million at that
date. Compass's internal lending limit is significantly lower than the
Massachusetts legal lending limit, which is 20% of a bank's surplus and capital
stock accounts, or $20.1 million for Compass as of May 31, 1998.
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<PAGE>
The following table sets forth certain information concerning Compass's
origination of loans:
<TABLE>
<CAPTION>
Seven months
ended May 31, Year ended October 31,
------------------------- ---------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans outstanding at beginning of period ......... $820,197 $748,113 $748,113 $676,007 $509,868
Loans originated:
Mortgage loans:
Residential (1) ................................ 106,569 50,547 94,743 104,856 56,184
Commercial real estate (1) ..................... 6,842 10,392 12,292 21,761 15,502
Construction ................................... 35,196 23,421 46,659 26,784 19,645
Home Equity .................................... 8,168 2,450 7,644 5,934 3,542
-------- -------- -------- -------- --------
Total mortgage loans .......................... 156,775 86,810 161,338 159,335 94,873
Commercial loans ................................ 39,419 37,265 61,333 53,462 48,370
Indirect auto loans ............................. 97,143 62,073 128,117 100,305 85,558
Other consumer loans ............................ 10,122 7,523 12,877 13,518 10,486
-------- -------- -------- -------- --------
Total loans originated ........................ 303,459 193,671 363,665 326,620 239,287
-------- -------- -------- -------- --------
Purchases of mortgage loans ..................... 6,736 500 4,461 8,859 8,313
-------- -------- -------- -------- --------
Acquisition of Martha's Vineyard
National Bank ................................. -- -- -- -- 104,393
-------- -------- -------- -------- --------
Less:
Principal repayments ........................... 198,612 145,866 257,049 224,612 160,012
Loans sold or securitized ...................... 45,360 16,084 33,726 35,260 18,827
Transfers to other real estate owned ........... 1,098 2,023 3,333 2,430 5,783
Principal charged-off .......................... 900 839 1,934 1,071 1,232
-------- -------- -------- -------- --------
Loans outstanding at end of period .............. $884,422 $777,472 $820,197 $748,113 $676,007
======== ======== ======== ======== ========
</TABLE>
- ------------
(1) In September 1996, Compass reclassified as commercial real estate loans
approximately $28.0 million in multi-family loans that previously had been
classified as residential real estate. Corresponding reclassifications were
not made for prior periods.
Compass charges origination fees, or points, and collects fees to cover
the costs of appraisals and credit reports on most new residential mortgage
loans. Compass also collects late charges on real estate loans and prepayment
premiums on commercial mortgage loans. Compass generally charges availability
fees on lines of credit. For information regarding Compass's recognition of
loan fees and costs, see Note 1 of the notes to the Consolidated Financial
Statements of Seacoast Financial and Subsidiary presented elsewhere herein.
Loan Purchases. Compass occasionally purchases participation interests in
commercial and residential real estate loans originated by other banks in its
market area. Compass underwrites such loans as if it had originated them
itself. Compass's interest in participation loans as of May 31, 1998 totaled
$16.1 million, of which $11.2 million was acquired from a bank located on the
island of Nantucket, Massachusetts.
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<PAGE>
Loan Maturity and Repricing. The following table shows the contractual
maturity and repricing dates of Compass's loan portfolio at May 31, 1998. The
table does not reflect prepayments or scheduled principal amortization.
<TABLE>
<CAPTION>
At May 31, 1998
--------------------------------------------------------------------------------------------------
Real estate mortgage loans
-------------------------------------------------- Indirect Other
Home auto consumer Total
Residential Commercial Construction equity Commercial loans loans loans
------------- ------------ -------------- -------- ------------ ---------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due (1):
Within one year ............... $ 65,040 $ 44,940 $ 9,449 $13,267 $41,536 $ 4,215 $ 3,792 $182,239
-------- -------- ------- ------- ------- -------- ------- --------
After one year:
More than one year to
three years .................. 96,326 54,941 13,528 173 8,137 59,562 5,001 237,668
More than three years to
five years ................... 59,642 13,937 4,980 527 3,441 167,581 6,417 256,525
More than five years to
ten years .................... 41,817 8,009 4,409 1,058 4,817 16,220 10,812 87,142
More than ten years ........... 105,311 3,262 9,559 916 269 -- 1,531 120,848
-------- -------- ------- ------- ------- -------- ------- --------
Total due after
May 31, 1999 ................ 303,096 80,149 32,476 2,674 16,664 243,363 23,761 702,183
-------- -------- ------- ------- ------- -------- ------- --------
Total amount due ............. $368,136 $125,089 $41,925 $15,941 $58,200 $247,578 $27,553 884,422
======== ======== ======= ======= ======= ======== =======
Less:
Allowance for loan losses ..... (10,508)
Net loans .................... --------
$873,914
========
</TABLE>
- ------------
(1) Amounts due are net of unadvanced funds on loans.
The following table sets forth, at May 31, 1998, the dollar amount of
gross loans, net of unadvanced funds on loans, contractually due or scheduled
to reprice after May 31, 1999 and whether such loans have fixed interest rates
or adjustable interest rates:
<TABLE>
<CAPTION>
Due after May 31, 1999
----------------------------------------
Fixed Adjustable Total
----------- ------------ -----------
(In thousands)
<S> <C> <C> <C>
Real estate mortgage loans:
Residential ............................... $147,522 $155,574 $303,096
Commercial ................................ 13,666 66,483 80,149
Construction .............................. 14,276 18,200 32,476
Home equity ............................... 2,674 -- 2,674
-------- -------- --------
Total real estate mortgage loans ......... 178,138 240,257 418,395
Commercial loans ........................... 12,168 4,496 16,664
Indirect auto loans ....................... 243,363 -- 243,363
Other consumer loans ...................... 23,761 -- 23,761
-------- -------- --------
Total loans .............................. $457,430 $244,753 $702,183
======== ======== ========
</TABLE>
Residential Real Estate Loans. As of May 31, 1998, adjustable rate
mortgage loans represented approximately 60% and fixed-rate mortgage loans
represented approximately 40% of Compass's portfolio of residential mortgage
loans secured by one- to four-family owner-occupied properties. Compass
originated $104.9 million, $94.7 million and $106.6 million of such loans in
1996, 1997 and in the first seven months of 1998, respectively. Compass's
portfolio of residential loans totaled $368.1 million, which represented 41.6%
of Compass's total loan portfolio at May 31, 1998. Over 90% of this portfolio
is secured by single-family owner-occupied homes and the remainder is secured
primarily by two-, three- or four-family owner-occupied homes.
Compass currently sells most of the fixed-rate residential mortgage loans
it originates with terms of 15 years or longer to the Federal Home Loan
Mortgage Corporation ("FHLMC"). Compass is also authorized to sell loans to the
Federal National Mortgage Association ("FNMA") and to service those loans but
has not done so to date.
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<PAGE>
Compass continues to service loans that it sells to FHLMC and receives a
monthly fee for servicing such loans equal to 0.25% per annum of the amounts
outstanding on them. Compass serviced for others loans aggregating $238.2
million as of May 31, 1998 and it earned $571,000 and $305,000 in servicing
fees, representing 9.61% and 8.08%, respectively, of its non-interest income,
in 1997 and during the first seven months of 1998, respectively.
Compass generally retains for its own portfolio fixed-rate residential
mortgage loans with terms of less than 15 years and fixed-rate residential
mortgage loans that are amortized on a bi-weekly basis and have terms between
10 and 30 years. Compass had $56.0 million of such loans in its portfolio as of
May 31, 1998. Compass also retains in its portfolio fixed-rate mortgage loans
that exceed the size limits of FHLMC's underwriting criteria, and loans made
under its program for low-to-moderate income borrowers, as described below.
Compass originates adjustable-rate residential mortgage loans mostly for
its own portfolio. Compass originated $45.1 million and $26.4 million in such
loans during 1997 and during the first seven months of 1998, respectively, and
had $220.5 million of such loans in its residential loan portfolio,
representing approximately 60% of such portfolio, as of May 31, 1998. Compass
offers adjustable-rate mortgage loans that reprice annually, every three years
or after five years and annually thereafter. The interest rate adjustments on
these loans are indexed to the applicable one-year or three-year U.S. Treasury
CMT Index with corresponding add-on margins of varying amounts. Such loans are
subject to certain requirements and limitations set forth in guidelines issued
by the Commissioner, including limitations on the amount and frequency of
interest rate changes. Rates adjust by no more than one or two percentage
points in each adjustment period and by no more than five or six points over
the life of a loan. Adjustable rate loans are generally originated at a
discount, generally ranging from 1.25% to 2.75%, from the fully margined index
rate.
Compass's residential mortgage loans are written in amounts up to 95% of
the appraised value or selling price, whichever is less, of the property
securing the loan, although the majority of such loans are written with ratios
of 80% or less. Compass generally requires borrowers to obtain private mortgage
insurance with respect to loans with a greater than 80% loan-to-value ratio.
In 1994, Compass initiated a program to originate residential mortgage
loans to low-to-moderate income borrowers. The loans have fixed or adjustable
interest rates that are typically lower than prevailing market rates, are
closed without points, have substantially lower closing costs than Compass's
other residential loans and have terms of up to 30 years. The loans may have up
to a 95% loan-to-value ratio, although borrowers must obtain private mortgage
insurance if the loan-to-value ratio exceeds 80%. Compass does not sell these
loans in the secondary market. Compass makes the loans with funds borrowed
under the Community Investment Program ("CIP") and the New England Fund ("NEF")
housing programs of the Federal Home Loan Bank of Boston (the "FHLB"). These
programs permit Compass to borrow from the FHLB at below market rates to
finance the loans. Compass had $21.3 million of CIP-funded loans and $19.5
million of NEF-funded loans in its residential loan portfolio, representing
11.1% of such portfolio, as of May 31, 1998.
Compass originates, sells and services residential mortgage loans to low-
and moderate-income first-time home buyers with funds provided by the
Massachusetts Housing Finance Agency. As of May 31, 1998, Compass serviced $3.9
million of such loans.
Commercial Real Estate Loans. Compass makes commercial real estate loans
throughout its market area. Compass originated $12.3 million and $6.8 million
in commercial real estate loans in 1997 and during the first seven months of
1998, respectively, and had $125.1 million in commercial real estate loans in
its loan portfolio, representing 14.1% of such portfolio, as of May 31, 1998.
Properties that are used for borrowers' businesses, such as small office
buildings, warehouses, restaurants, inns, retail facilities, industrial
properties and multi-family income properties, normally collateralize Compass's
commercial real estate loans. The loans typically have terms of up to 20 years
and interest rates which adjust over periods of one to five years based on one
of various rate indices. Commercial real estate loans with fixed interest rates
have terms ranging from one to ten years, with the most frequent term lasting
from three to five years.
Compass primarily considers the quality of the borrower's management and
the borrower's cash flows when it underwrites commercial real estate loans.
Compass generally makes commercial real estate loans in an amount equal to no
more than 80% of the appraised value of the property securing the loan. Compass
generally requires the owners of businesses seeking commercial real estate
loans to personally guarantee those loans.
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At May 31, 1998, $24.3 million of the commercial real estate loans in
Compass's portfolio were secured by multi-family income properties. A majority
of these properties are located in Fall River and New Bedford and contain
between five and twelve units.
Commercial real estate lending entails greater credit risks than
residential mortgage lending to owner occupants. The repayment of commercial
real estate loans depends on the business and financial condition of the
borrower. Economic events and changes in government regulations, which Compass
and its borrowers cannot control, could have an adverse impact on the cash
flows generated by properties securing Compass's commercial real estate loans
and on the value of such properties. Commercial properties tend to decline in
value more rapidly than residential owner-occupied properties during economic
recessions. See "Risk Factors--Construction, Commercial Real Estate, Commercial
and Indirect Auto Lending Risks."
Construction Loans. Compass makes both residential and commercial
construction loans, primarily in Plymouth County, in and around New Bedford and
on Martha's Vineyard. Compass typically makes the loans to owner-borrowers who
will occupy the properties (residential construction) and to licensed and
experienced developers for the construction of single-family home developments
(commercial construction). Developers build homes in Plymouth County to
accommodate a growing population that commutes to work in Boston. There are few
developments on Martha's Vineyard but individuals regularly build secondary
residences there.
Compass makes construction loans only to developers who have successful
track records. Compass generally increases the loan-to-value ratios on such
loans as construction progresses. Before any work has commenced, and while a
construction loan's only collateral is a plot of land, Compass will finance
only up to 70% of the value of that land. Once construction has begun, Compass
will generally make residential construction loans in amounts up to 90% (for
primary homes) and 80% (for secondary homes) of the lesser of the appraised
value of the property, as completed, or the property's cost of construction.
Compass generally makes commercial construction loans in amounts up to 75% of
the lesser of the property's appraised value, as completed, or construction
cost and generally requires developers seeking commercial construction loans to
personally guarantee them. Compass typically makes commercial construction
loans only to finance construction on developments that have no more than 20
housing lots.
Compass disburses the proceeds of construction loans in stages and
requires developers to pre-sell a certain percentage of the properties they
plan to build before Compass will advance any construction financing. Compass
officials inspect each project's progress before Compass disburses additional
funds to verify that borrowers have completed project phases.
Residential construction loans to owner-borrowers generally convert to a
fully amortizing long-term mortgage loan upon completion of construction.
Commercial construction loans generally have terms of six months to a maximum
of two years. Some construction loans have fixed interest rates but Compass
originates mostly adjustable-rate construction loans.
Compass originated $46.7 million and $35.2 million in construction loans
during 1997 and during the first seven months of 1998, respectively, and had
$41.9 million in construction loans in its loan portfolio, representing 4.7% of
such portfolio, as of May 31, 1998.
Construction lending, particularly commercial construction lending,
entails greater credit risk than residential mortgage lending to owner
occupants. The repayment of construction loans depends on the business and
financial condition of the borrower and on the economic viability of the
project financed. A number of Compass's borrowers have more than one
construction loan outstanding with the bank. Economic events and changes in
government regulations, which Compass and its borrowers cannot control, could
have an adverse impact on the value of properties securing construction loans
and on the borrowers' ability to complete projects financed and, if not the
borrower's residence, sell them for expected amounts at the time the projects
were commenced. See "Risk Factors--Construction, Commercial Real Estate,
Commercial and Indirect Auto Lending Risks."
Home Equity Loans. Compass has a portfolio of home equity lines of credit
secured by one- to four-family owner-occupied properties. These loans are
revolving lines of credit and are typically secured by second mortgages.
Interest rates on home equity loans normally adjust based on Compass's prime
rate of interest. The lines of credit are available for up to ten years, at the
end of which they become term loans which are amortized for the same amount of
time as the original loan. Compass originates home equity line of credit loans
in amounts from $10,000 to $150,000 but not, in any event, more than the
difference between 80% (for primary homes) or 70% (for secondary
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homes) of the appraised value of the property securing the loan, or 70% (for
primary homes) or 60% (for secondary homes) of the value of such property as
assessed for tax purposes, and the outstanding balance of the first mortgage on
such property. Compass had $15.9 million in home equity lines of credit in its
loan portfolio, representing 1.8% of the portfolio, as of May 31, 1998. The
undrawn portion of home equity lines of credit totaled $18.0 million at May 31,
1998.
Commercial Loans. Compass primarily makes commercial loans to businesses
that operate in and around New Bedford and on Martha's Vineyard. In recent
months, Compass has increased its efforts to originate more such loans in
Plymouth and Fall River by adding a commercial loan officer dedicated to those
markets.
Compass reviews the financial resources, debt-to-equity ratios, cash flows
and Compass's own experience with businesses when underwriting commercial
loans. Compass generally requires business owners to personally guarantee
commercial loans.
Compass's commercial loans are generally collateralized by equipment,
leases, inventory and accounts receivable. Many of Compass's commercial loans
are also collateralized by real estate, but are not classified as commercial
real estate loans because such loans are not made for the purpose of acquiring,
refinancing or constructing the real estate securing the loan. Commercial loans
provide, among other things, working capital, equipment financing, financing
for leasehold improvements and financing for acquisitions. Compass offers both
term and revolving commercial loans. The former have either fixed or adjustable
rates of interest and, generally, terms of between four and seven years. Term
loans generally amortize during their life, although some loans require a lump
sum payment at maturity. Revolving commercial lines of credit typically have
one-year terms, renewable annually, and rates of interest which adjust on a
daily basis. Such rates are normally indexed to Compass's prime rate of
interest.
Compass's commercial borrowers are not concentrated in any one particular
industry. As of May 31, 1998, Compass's outstanding commercial loans included
floor plan loans to auto dealerships, loans to hotels, inns and other
tourism-related businesses on Martha's Vineyard, loans to building trade
companies and loans to liquor stores.
Compass originated $61.3 million and $39.4 million in commercial loans
during 1997 and during the first seven months of 1998, respectively, and had
$58.2 million in commercial loans in its loan portfolio, representing 6.6% of
such portfolio, as of May 31, 1998.
Commercial lending entails greater credit risks than residential mortgage
lending to owner occupants. Repayment of both secured and unsecured commercial
loans depends substantially on the borrower's underlying business, financial
condition and cash flows. Unsecured loans generally involve a higher degree of
risk of loss than do secured loans because, without collateral, repayment is
wholly dependent upon the success of the borrower's business. Secured
commercial loans are generally collateralized by equipment, leases, inventory
and accounts receivable. Compared to real estate, such collateral is more
difficult to monitor, its value is harder to ascertain, it may depreciate more
rapidly and it may not be as readily saleable if repossessed. See "Risk
Factors--Construction, Commercial Real Estate, Commercial and Indirect Auto
Lending Risks."
Indirect Auto and Other Consumer Loans. Compass emphasizes indirect auto
lending through a network of automobile dealers, and was actively doing
business with approximately 90 dealers at May 31, 1998. Compass has been in the
indirect auto lending business since 1985 and has increased its portfolio of
indirect auto loans from $79.6 million at October 31, 1993 to $247.6 million at
May 31, 1998, or 28.0% (net of unearned discount) of the loan portfolio on the
latter date. No one dealership originated more than $11.6 million of the loan
balances outstanding in Compass's loan portfolio at May 31, 1998. In developing
its network, Compass has continued to focus on dealers in its primary market
areas as well as on Cape Cod and in Rhode Island. Since November 1996, a
consumer lending sales officer has been dedicated full time to serving existing
dealers in order to expand on those relationships and to develop potential new
dealer relationships. The growth of the dealer network has been achieved
through an emphasis on quality service and the development of long-term
relationships with the owners and managers of the dealerships. Since the
program began, no dealer has voluntarily ceased doing business with Compass.
Compass does not currently engage in auto lease financing.
Management believes that indirect auto lending has several advantages,
including the following: (i) the dealer network creates numerous "loan centers"
throughout Compass's market area; (ii) Compass can increase the network without
increasing its operating expenses significantly; and (iii) the network develops
a pool of customers to whom Compass can cross-sell other products and services.
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Compass makes indirect auto loans to purchase both new and used cars. The
loans have terms of up to six years for those secured by new vehicles and five
and a half years for those secured by used vehicles. As of May 31, 1998,
approximately half of Compass's indirect auto loans were secured by new cars
and the other half by used cars. Compass originated $128.1 million and $97.1
million in indirect auto loans during 1997 and during the first seven months of
1998, respectively.
To underwrite its indirect auto loans, Compass reviews the credit history
of applicants and determines appropriate debt-to-equity and loan-to-value
ratios. Compass also believes that the quality of its indirect auto portfolio
is positively affected by its efforts to build and maintain relationships with
auto dealers who attract creditworthy customers. Compass tries to identify such
dealers based on Compass's knowledge of car dealers in its market area.
In connection with the origination of indirect auto loans, the interest
rate charged to the borrower on the underlying loan is generally one to two
percentage points higher than the "buy rate" or rate earned by Compass. The
difference between the two rates is referred to as the "spread". At loan
inception, the dollar value of the spread over the contractual term of the loan
is prepaid by Compass to the auto dealer. Such prepaid amounts are generally
subject to rebate to Compass in the event the underlying loan is prepaid or
becomes delinquent. The risk of loss of amounts previously advanced to the
dealer is primarily dependent upon loan performance but is also dependent upon
the financial condition of the dealer. Consequently, the dealer's ability to
refund any portion of the prepaid interest which is unearned is subject to
economic conditions, generally, and the financial condition of the dealer. To
mitigate this risk, Compass withholds a portion of the spread at loan
origination as a dealer reserve. The amount withheld, in the aggregate,
generally approximates 1% of the outstanding balance of loans originated by
each dealer. At May 31, 1998, the balance of the dealer reserve was $3.4
million, or 1.2% of the balance of indirect auto loans. Since its inception of
indirect auto lending in 1985, Compass has written-off interest spread prepaid
to auto dealers on only one occasion and the loss was less than $50,000.
Indirect auto lending entails greater risks than residential mortgage
lending to owner occupants. Although Compass has not experienced significant
delinquencies in this portfolio to date, borrowers may be more likely to become
delinquent on an automobile loan than on a residential mortgage loan secured by
their primary residence. Moreover, automobiles depreciate rapidly and, in the
event of default, principal loss as a percent of the loan balance depends upon
the mileage and condition of the vehicle at the time of repossession, over
which Compass has no control See "Risk Factors-- Construction, Commercial Real
Estate, Commercial and Indirect Auto Lending Risks."
Compass makes a variety of other consumer loans, including personal
installment loans, education loans, fixed-rate home equity loans, auto loans
directly to customers and passbook loans. Compass does not have any credit card
loans. Other consumer loans represented 3.1% of Compass's gross loan portfolio
as of May 31, 1998. Compass's fixed-rate home equity loans are collateralized
generally by second mortgages on residential properties. The loans have terms
of up to 15 years and are available in amounts up to $50,000. Compass generally
makes fixed-rate home equity loans that, together with any first mortgage loans
on the properties collateralizing such loans, have a loan-to-value ratio of 80%
or less (if the first mortgage is with another bank) or up to 90% (if the first
mortgage is with Compass).
Environmental Issues
Compass encounters certain environmental risks in its lending. Under
federal and state environmental laws, lenders may become liable for the costs
of cleaning up hazardous materials found on properties securing their loans. In
addition, the presence of hazardous materials on such properties may make it
unattractive for Compass to foreclose on them. Also, the presence of
environmentally hazardous materials near but not on properties in which Compass
has a security interest may have a negative effect on the values of those
properties. Commercial real estate loans typically involve such risks but
multi-family and other residential real estate loans are also subject to them.
Compass has procedures for the assessment of environmental risks and it
believes that those procedures are adequate. Before originating commercial real
estate loans in excess of $250,000, Compass requires prospective borrowers to
make a preliminary assessment of whether environmentally hazardous materials
are located on the properties that would collateralize such loans. If a
preliminary assessment raises concerns, Compass requires borrowers to conduct
further environmental analyses of the properties. Before originating a
commercial real estate loan below $250,000, a loan officer must review the
appraisal of the property that will collateralize the loan to make sure that
the borrower does not need to undertake a preliminary assessment of its
environmental condition.
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Compass does not know of any environmental problems that might expose it
to any material liabilities. No assurance can be given, however, that the
values of properties securing loans in Compass's portfolio will not be
adversely affected by environmental risks.
Delinquent Loans, Other Real Estate Owned, Classification of Assets and Loan
Review
Delinquent Loans. Management performs a monthly review of all delinquent
loans with a principal balance in excess of $150,000. Compass's Collection
Department Manager discusses the status of each account with Lending Department
Managers, the Senior Lending Officer and Account Officers. In addition,
Compass's Board of Directors reviews delinquency statistics by loan class on a
monthly basis.
The actions taken with respect to delinquencies vary depending upon the
nature of the delinquent loans and the period of delinquency. Compass's
collection philosophy is predicated upon early detection and response to
delinquent and default situations. Compass seeks to make arrangements to cure
the entire default over the shortest time frame. Generally, Compass requires
that a delinquency notice be mailed no later than the 10th day of delinquency.
A second notice is mailed on the 15th day of delinquency. A late charge is
usually assessed on loans where the scheduled payment is unpaid after 15 days.
After mailing the delinquency notices, Compass's loan collection personnel call
the borrower to ascertain the reasons for delinquency and the prospects for
payment. On loans secured by one- to four-family owner occupied properties,
Compass attempts to work out a payment schedule with the borrower in order to
avoid foreclosure. If these efforts do not achieve a satisfactory arrangement,
Compass refers the loan to legal counsel and counsel initiates foreclosure
proceedings. At any time prior to a sale of the property at foreclosure,
Compass will terminate foreclosure proceedings if the borrower and Compass are
able to work out a satisfactory payment plan. On loans secured by commercial
real estate properties, Compass also seeks to reach a satisfactory payment plan
so as to avoid foreclosure. Prior to foreclosure, Compass will generally obtain
an updated appraisal of the property.
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The following table sets forth delinquencies in Compass's loan portfolio as
of the dates indicated:
<TABLE>
<CAPTION>
At May 31, 1998 At October 31, 1997
--------------------------------------------- --------------------------------------------
60-89 days 90 days or more 60-89 days 90 days or more
---------------------- ---------------------- ---------------------- ---------------------
Principal Principal Principal Principal
Number balance Number balance Number balance Number balance
of loans of loans of loans of loans of loans of loans of loans of loans
---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential ......................... 5 $ 350 20 $ 1,626 6 $ 306 18 $ 1,463
Commercial real estate .............. 2 111 6 989 1 116 8 1,205
Construction ........................ -- -- -- -- -- -- 1 148
Home equity ......................... 1 41 2 53 -- -- 2 34
Commercial loans .................... 2 23 3 125 1 75 2 344
Indirect auto loans ................. 35 258 47 430 33 223 40 435
Other consumer loans ................ 7 12 18 30 13 19 14 20
-- ------- -- ------- -- ------- -- -------
Total .............................. 52 $ 795 96 $ 3,253 54 $ 739 85 $ 3,649
== ======= == ======= == ======= == =======
Delinquent loans to total loans ..... 0.09% 0.37% 0.09% 0.44%
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
At October 31, 1996 At October 31, 1995
--------------------------------------------- --------------------------------------------
60-89 days 90 days or more 60-89 days 90 days or more
---------------------- ---------------------- ---------------------- ---------------------
Principal Principal Principal Principal
Number balance Number balance Number balance Number balance
of loans of loans of loans of loans of loans of loans of loans of loans
---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential ......................... 17 $ 885 31 $ 2,100 12 $ 769 23 $ 1,390
Commercial real estate .............. 3 613 11 1,453 -- -- 2 499
Construction ........................ -- -- 1 147 1 156 3 343
Home equity ......................... 2 72 1 16 -- -- 5 209
Commercial loans .................... 1 102 8 620 4 470 6 584
Indirect auto loans ................. 24 180 43 339 13 96 14 101
Other consumer loans ................ 10 14 5 9 3 5 3 5
-- ------- -- ------- -- ------- -- -------
Total .............................. 57 $ 1,866 100 $ 4,684 33 $ 1,496 56 $ 3,131
== ======= === ======= == ======= == =======
Delinquent loans to total loans ..... 0.25% 0.63% 0.22% 0.46%
======= ======= ======= =======
</TABLE>
Other Real Estate Owned. Compass classifies property acquired through
foreclosure or acceptance of a deed in lieu of foreclosure as OREO in its
financial statements. When a property is placed in OREO, the excess of the loan
balance over the estimated fair market value of the collateral is charged to
the allowance for loan losses. Estimated fair value usually represents the
sales price a buyer would be willing to pay on the basis of current market
conditions, including normal loan terms from other financial institutions, less
estimated costs to sell the property. Management inspects all OREO properties
periodically. Subsequent writedowns in the carrying value of OREO are charged
to expense if the carrying value exceeds the OREO's fair value less estimated
selling costs.
At May 31, 1998, OREO totaled $1.4 million, the majority of which
consisted of properties sold by Compass from its OREO portfolio to buyers,
financed by Compass, whose cash downpayments were insufficient under GAAP to
permit such transactions to be accounted for as a sale. There were eleven loans
in this category all of which were substantially current at May 31, 1998.
Classification of Assets and Loan Review. Compass uses an internal rating
system to monitor and evaluate the credit risk inherent in its loan portfolio.
At the time of loan approval, all commercial, commercial real estate and
commercial construction loans are assigned a rating based on all of the factors
considered in originating the loan. The initial loan rating is recommended by
the loan officer who originated the loan and approved by the individuals or
committee responsible for approving it.
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Loan quality ratings are utilized as major criteria in the compilation of
Compass's asset Watch List. All loans with loan ratings of 4 (Special Mention),
5 (Substandard) or 6 (Doubtful) are included in a monthly asset Watch List.
Watch List ratings are an integral part of the evaluation of the adequacy of
Compass's loan loss reserve. Loan officers are expected to submit appropriate
rating changes to the Lending Administration Officer when facts come to their
attention that warrant an upgrade or downgrade in a loan rating. In addition,
loan ratings are generally reviewed on an annual basis.
Loans that are rated Substandard or Doubtful coincide with the
classifications used by federal regulators in their examination of financial
institutions. Generally, an asset is considered Substandard if it is
inadequately protected by the current net worth and paying capacity of the
obligers and/or the collateral pledged. Substandard assets include those
characterized by the distinct possibility that Compass will sustain some loss
if the deficiencies are not corrected. Assets classified as Doubtful have all
the weaknesses inherent in those classified Substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, highly questionable and
improbable. Assets classified as Loss are those considered uncollectible and of
such little value that their continuance as assets without establishment of a
specific loss reserve and/or charge-off is not warranted. Assets which do not
currently expose Compass to sufficient risk to warrant classification in one of
the aforementioned categories but possess weaknesses are designated "Special
Mention."
Compass has established a policy that an independent third party conduct a
semi-annual analysis of its commercial and commercial real estate loans. The
level of Classified Assets as determined by Compass is reconciled to the level
of Classified Assets as determined by the independent loan review. The
independent loan review also analyzes trends in loan delinquency and
non-performing loans.
On a quarterly basis, a management group comprised of the Senior Vice
President and Treasurer, the Senior Lending Officer and other key officers
reviews the status and classification of each loan assigned a rating of
Substandard, Doubtful or Loss. Loans, or portions of loans, classified Loss are
charged off against the reserve for loan losses. This group also assesses the
overall adequacy of the allowance for loan losses, including the general
valuation allowance established to recognize the inherent risk associated with
each specific category of lending.
Compass's classification of its loans and the amount of the valuation
allowances it sets aside for estimated losses is subject to review by the FDIC
and the Commissioner. Based on their reviews, these agencies can order the
establishment of additional general or specific loss allowances. The FDIC, in
conjunction with the other federal banking agencies, has adopted an interagency
policy statement on allowances for loan and lease losses. The policy statement
provides guidance for banks on both the responsibilities of management for the
assessment and establishment of adequate allowances and guidance for banking
agency examiners to use in determining the adequacy of a bank's valuation
methodology. Generally, the policy statement recommends that banks have
effective systems and controls to identify, monitor and address asset quality
problems; that management analyze all significant factors that affect the
collectibility of loans in a reasonable manner; and that management establish
acceptable valuation processes that meet the objectives set forth in the policy
statement. While Compass believes that it has established adequate specific and
general allowances for losses on loans, there can be no assurance that the
regulators, in reviewing Compass's loan portfolio, will not request Compass to
materially increase its allowances for losses, thereby negatively affecting
Compass's financial condition and earnings. Moreover, actual losses are
dependent upon future events and, as such, further additions to the allowance
for loan losses may become necessary. See "--Allowance for Loan Losses."
At May 31, 1998, loans designated as Substandard and Special Mention
totaled $10.3 million and $7.2 million, respectively. No loans were designated
Doubtful or Loss. The Substandard loans include 11 commercial loans with
individual borrower balances ranging from $4,000 to $600,000 and a total
outstanding principal balance of $1.2 million and 24 commercial real estate
loans with individual borrower balances ranging from $53,300 to $2,074,000 and
a total outstanding principal balance of $9.1 million. All of the 11 commercial
loans classified as Substandard at May 31, 1998 were substantially current. The
delinquency status of the 24 commercial real estate loans classified as
Substandard was as follows: current--$7,272,000; 30-60 days past due--$716,000;
60-90 days past due--$80,000; and >90 days past due--$989,000.
Included in Special Mention loans at May 31, 1998 were 12 commercial loans
with individual borrower balances ranging from $18,750 to $3.3 million and a
total outstanding principal balance of $4.2 million. The largest borrower was
an auto dealership whose floor plan loans were current. There were 16
commercial real estate loans
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with individual borrower balances ranging from $36,000 to $572,000 and a total
outstanding principal balance of $2.9 million classified as Special Mention at
May 31, 1998. Of these, all but $413,000 were either current or less than 30
days past due.
Non-Accrual Loans, Non-Performing Assets and Restructured Loans
The following table sets forth information regarding non-accrual loans,
other real estate owned and restructured loans:
<TABLE>
<CAPTION>
At May 31, At October 31,
------------ ----------------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans (1):
Mortgage loans:
Residential .............................. $ 1,707 $ 1,531 $ 2,330 $ 3,123 $ 6,827 $ 7,106
Commercial real estate ................... 7,198 8,501 6,835 4,115 6,997 2,573
Construction ............................. 93 148 147 107 269 --
Home equity .............................. -- -- -- 63 -- --
Commercial loan ........................... 495 745 1,014 1,098 1,078 227
Indirect auto loans (4) ................... -- -- -- -- -- --
Other consumer loans (4) .................. -- -- -- -- -- --
--------- -------- --------- --------- -------- --------
Total non-accrual loans .................. 9,493 10,925 10,326 8,506 15,171 9,906
Other real estate owned .................... 1,395 1,707 2,598 3,918 5,798 6,961
--------- -------- --------- --------- -------- --------
Total non-performing assets ............... $ 10,888 $ 12,632 $ 12,924 $ 12,424 $ 20,969 $ 16,867
========= ======== ========= ========= ======== ========
Restructured loans (2) ..................... $ -- $ 130 $ 4,267 $ 3,119 -- $ 10,953
========= ======== ========= ========= ======== ========
Allowance for loan losses as a percent
of total loans ............................ 1.19% 1.30% 1.38% 1.46% 1.37% 1.33%
Allowance for loan losses as a percent
of total non-performing loans (3) ......... 110.69% 97.41% 100.08% 115.80 46.15% 60.57%
Non-performing loans as a percent of total
loans ..................................... 1.07% 1.33% 1.38% 1.26% 2.98% 2.20%
Non-performing assets as a percent of total
assets .................................... 0.93% 1.14% 1.26% 1.26% 2.65% 2.39%
</TABLE>
- ------------
(1) Non-accrual loans include all loans 90 days or more past due and other
loans which have been identified by Compass as presenting uncertainty with
respect to the collectibility of interest or principal. See Note 4 for
exception to this policy.
(2) Restructured loans represent performing loans for which concessions (such
as reductions of interest rates to below market terms and/or extension of
repayment terms) have been granted due to a borrower's financial
condition.
(3) Non-performing loans are comprised of non-accrual loans.
(4) Consumer loans, including indirect auto loans, are not placed on
non-accrual status due to the expedited manner in which these loans are
resolved and the immaterial balance of individual loans.
77
<PAGE>
Allowance for Loan Losses
The allowance for loan losses is established through provisions for loan
losses based on management's on-going evaluation of the risks inherent in
Compass's loan portfolio. Factors considered in the evaluation process include
growth of the loan portfolio, the risk characteristics of the types of loans in
the portfolio, geographic and large borrower concentrations, current regional
economic and real estate market conditions that could affect the ability of
borrowers to pay, the value of underlying collateral and trends in loan
delinquencies and charge-offs. The allowance for loan losses is maintained at
an amount management considers adequate to cover estimated losses in its loan
portfolio which are deemed probable and estimable based on information
currently known to management. See "--Delinquent Loans, Other Real Estate
Owned, Classification of Assets and Loan Review--Classification of Assets and
Loan Review."
The following table sets forth activity in Compass's allowance for loan
losses for the periods indicated:
<TABLE>
<CAPTION>
Seven months
ended
May 31, Year ended October 31,
------------- ----------------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------- ---------- ----------- --------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period ............. $10,642 $ 10,334 $ 9,850 $7,002 $ 6,000 $ 5,395
Provision (credit) for loan losses ......... 536 1,865 1,166 (351) 2,524 3,838
Acquired allowance ......................... -- -- -- 3,541 -- --
Charge-offs:
Mortgage loans:
Residential .............................. 115 137 130 721 1,033 725
Commercial ............................... 295 761 250 150 661 1,988
Home equity lines of credit .............. -- -- 121 -- -- --
Construction ............................. -- -- -- -- -- --
Commercial loans .......................... 137 442 134 51 33 317
Indirect auto loans ....................... 310 546 373 227 191 279
Other consumer loans ...................... 43 48 63 83 93 134
------- -------- ------- ------ -------- --------
Total charge-offs . ...................... 900 1,934 1,071 1,232 2,011 3,443
------- -------- ------- ------ -------- --------
Recoveries:
Mortgage loans:
Residential .............................. 24 30 17 271 335 80
Commercial ............................... 20 117 174 485 34 23
Home equity lines of credit .............. -- -- -- -- -- --
Construction ............................. -- -- -- -- -- --
Commercial loans .......................... 83 57 96 2 28 30
Indirect auto loans ....................... 66 144 70 93 69 57
Other consumer loans ...................... 37 29 32 39 23 20
------- -------- ------- ------ -------- --------
Total recoveries ......................... 230 377 389 890 489 210
------- -------- ------- ------ -------- --------
Net charge-offs ............................ (670) (1,557) (682) (342) (1,522) (3,233)
------- -------- ------- ------ -------- --------
Balance at end of period ................... $10,508 $ 10,642 $10,334 $9,850 $ 7,002 $ 6,000
======= ======== ======= ====== ======== ========
</TABLE>
78
<PAGE>
The following tables set forth Compass's percent of allowance by loan
category and the percent of loans to total loans in each of the categories
listed at the dates indicated:
<TABLE>
<CAPTION>
At October 31,
--------------------------------------------------------------------
At May 31, 1998 1997 1996
----------------------------------- -------------------------------- ---------------------------------
Percent Percent
Percent Percent Percent of loans Percent of loans
of of loans of in each of in each
allowance in each allowance category allowance category
to total category to to total to gross to total to gross
Amount allowance gross loans Amount allowance loans Amount allowance loans
--------- ----------- ------------- --------- ----------- ---------- ---------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential .............. $ 1,945 18.51% 41.63% $ 1,929 18.13% 44.26% $ 2,171 21.01% 45.88%
Commercial real estate 3,932 37.42 14.14 4,313 40.53 15.13 4,036 39.06 17.20
Construction ............. 368 3.50 4.74 338 3.18 4.13 251 2.43 3.34
Home equity .............. 148 1.41 1.80 136 1.28 1.85 149 1.44 2.31
Commercial loans .......... 1,670 15.89 6.58 1,785 16.77 6.26 1,972 19.08 6.18
Indirect auto loans ....... 2,116 20.14 27.99 1,837 17.26 25.36 1,498 14.50 22.14
Other consumer loans ...... 329 3.13 3.12 304 2.85 3.01 257 2.48 2.95
------- ------ ------ ------- ------ ------ ------- ------ ------
Total allowance for
loan losses .............. $10,508 100.00% 100.00% $10,642 100.00% 100.00% $10,334 100.00% 100.00%
======= ====== ====== ======= ====== ====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
At October 31,
-------------------------------------------------------------------------------------------------
1995 1994 1993
------------------------------- ------------------------------- --------------------------------
Percent Percent Percent
Percent of loans Percent of loans Percent of loans
of in each of in each of in each
allowance category allowance category allowance category
to total to gross to total to gross to total to gross
Amount allowance loans Amount allowance loans Amount allowance loans
-------- ----------- ---------- -------- ----------- ---------- -------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential ............... $2,764 28.06% 49.78% $2,384 34.05% 52.56% $1,978 32.97% 55.78%
Commercial real estate 2,808 28.51 15.25 1,827 26.09 13.30 1,682 28.03 13.73
Construction .............. 318 3.23 2.35 315 4.50 2.91 284 4.73 3.04
Home equity ............... 418 4.25 2.79 170 2.43 2.25 194 3.24 2.89
Commercial loans ........... 1,883 19.11 6.42 975 13.92 4.07 749 12.49 3.78
Indirect auto loans ........ 1,403 14.25 20.63 1,123 16.04 21.88 894 14.89 17.65
Other consumer loans ....... 255 2.59 2.78 208 2.97 3.03 219 3.65 3.13
------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for
loan losses ............... $9,850 100.00% 100.00% $7,002 100.00% 100.00% $6,000 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
Investment Activities
The investment policy of Compass is reviewed and updated by senior
management and submitted to the Board of Directors for their approval on an
annual basis. The primary objective of the investment portfolio is to achieve a
competitive rate of return on the investments over a reasonable period of time
based on prudent management practices and sensible risk taking. In view of
Compass's lending capacity and generally higher rates of return on loans,
management prefers lending activities as its primary source of revenue with the
securities portfolio serving a secondary role. The investment portfolio,
however, is expected to continue to represent a significant portion of
Compass's assets, with such portfolio consisting of U.S. Government and Agency
securities, mortgage-backed securities, high quality corporate debt obligations
and a limited amount of corporate equities. The portfolio will continue to
serve Compass's liquidity needs as projected by management and as required by
regulatory authorities.
Compass's current investment strategy has emphasized the purchase of U.S.
Government and Agency obligations and corporate debt obligations generally
maturing within two to three years. Compass's investment policy permits
investments in mortgage-backed securities which are traditionally long-term
assets. However, the
79
<PAGE>
policy limits Compass's investment in these types of securities to 25% of total
assets. A substantial portion of the mortgage-backed securities held at May 31,
1998 were backed by loans originated by and securitized by Compass and placed
in the securities portfolio for the purpose of providing liquidity.
The investment policy prohibits the use of hedging with such instruments
as financial futures, interest rate options and swaps without specific approval
from Compass's Board of Directors. The President and Chief Executive Officer,
the Executive Vice President and Chief Operating Officer and the Senior Vice
President and Treasurer are authorized to execute portfolio transactions but
are limited in the amount they can purchase without Board approval. Portfolio
sales require the approval of any two of these three officers regardless of the
amount. It is the responsibility of Compass's Board of Directors to ensure
compliance with the investment policy and report such activity to Seacoast
Financial's Board. The status of Compass's investment portfolio is reviewed by
Compass's Board of Directors on a monthly basis and by Seacoast Financial's
Board of Trustees on a quarterly basis.
At May 31, 1998, Compass had $202.3 million, or 17.19% of total assets, in
securities consisting primarily of U.S. Government and Agency obligations
($94.1 million), corporate obligations ($46.0 million), mortgage-backed
securities ($41.4 million), other bonds and obligations ($6.0 million) and
marketable common and preferred equity securities ($9.5 million). Also included
in investments is $5.3 million in restricted equity securities, $4.9 million of
which is in the stock of the FHLB. To avail itself of services offered by that
organization, in particular the ability to borrow funds, Compass is required to
invest in the stock of the FHLB in an amount determined on the basis of
Compass's residential mortgage loans and borrowings from the FHLB. The stock is
redeemable at par and earns dividends at the discretion of the FHLB.
SFAS No. 115 requires Compass to designate its securities as held to
maturity, available for sale or trading depending on Compass's intent regarding
its investments at the time of purchase. Compass does not currently maintain a
trading portfolio of securities. Concurrent with the adoption of an
implementation guide on SFAS No. 115 in November 1995, Compass transferred debt
securities having a carrying value of $138.7 million from its held to maturity
portfolio to its available for sale portfolio. As of May 31, 1998, $183.3
million, or 90.64% of the portfolio, was classified as available for sale,
$13.6 million, or 6.75% of the portfolio, was classified as held for investment
and $5.3 million, or 2.61% of the portfolio, was invested in restricted equity
securities. The net unrealized gain on securities classified as available for
sale was $3.8 million, with $2.9 million of that amount attributable to
marketable equity securities as of May 31, 1998.
U.S. Government and Agency Obligations. At May 31, 1998, Compass's U.S.
Government and Agency securities portfolio totaled $94.1 million, $80.4 million
of which was classified as available for sale and $13.7 million of which was
classified as held to maturity. There were no structured notes in the
portfolio.
Corporate Obligations. At May 31, 1998, Compass's portfolio of corporate
obligations totaled $46.0 million, all of which was classified as available for
sale. Compass policy requires that investments in corporate obligations be
restricted only to those obligations rated "A" or better by a nationally
recognized rating agency at the time of purchase and are confined only to those
obligations that are readily marketable. As of May 31, 1998, $33.8 million of
Compass's investments in corporate obligations were invested in finance bonds,
$7.2 million in industrial bonds, $3.0 million in public utility bonds and $2.0
million in bank and trust company bonds. As of May 31, 1998, all corporate
obligations were rated "A" or better.
Mortgage-Backed Securities. At May 31, 1998, Compass's portfolio of
mortgage-backed securities totaled $41.4 million. Such securities are
guaranteed by the Government National Mortgage Association, FNMA and FHLMC. All
mortgage-backed securities were classified as available for sale.
Mortgage-backed securities generally yield less than the loans that underlie
such securities because of the cost of payment guarantees or credit
enhancements that reduce credit risk. Mortgage-backed securities are more
liquid than individual mortgage loans and may be used to collateralize
borrowings.
Other Bonds and Obligations. At May 31, 1998, Compass's portfolio of other
bonds and obligations totaled $6.0 million, $5.0 million of which was invested
in a liquidity fund managed by the Bank Investment Fund of Massachusetts and
$1.0 million of which was invested in a U.S. dollar denominated bond of a
Canadian issuer having a quality rating of "A." The liquidity fund is a
no-load, diversified, open-end money market fund whose objective is to achieve
a high level of current income but to do so in a manner that is consistent with
preservation of capital and liquidity by investing in short-term money market
instruments.
80
<PAGE>
Marketable Equity Securities. At May 31, 1998, Compass's marketable equity
securities portfolio totaled $9.5 million, $8.5 million of which was in common
stock and $1.0 million in preferred stock. Compass's policy requires that
investments in common stock be confined to quality issuers that have a past
record of profitability and growth with the prospect of continued performance.
The policy requires that Compass make investments in common stocks that are
liquid and traded on major exchanges, and that a reasonable and prudent
industry distribution of common stocks be maintained in the portfolio and held
for the long-term. Compass does not view short-term trading, short sales,
margin transactions and option speculation as prudent investment policy
objectives and does not permit them. Investments in preferred stocks, including
money market preferred, auction preferred and adjustable-rate preferred, are
subject to similar quality ratings and activities as common stocks. As of May
31, 1998, Compass held 90,000 shares of Sandwich Bancorp Common Stock in its
portfolio having a market value of $5.7 million and representing 4.4% of the
issued and outstanding shares of such stock. The majority of these shares were
purchased in February 1998, after Seacoast Financial and Sandwich Bancorp had
announced their original cash merger transaction but before the Merger was
restructured as a stock-for-stock exchange. See "The Conversion and the
Merger--Background of the Merger."
81
<PAGE>
The following table sets forth certain information regarding the amortized
cost and market value of Seacoast Financial's investment portfolio at the dates
indicated:
<TABLE>
<CAPTION>
At May 31, 1998 At October 31,
---------------------- ----------------------------------------------------------------------
1997 1996 1995
----------------------- ----------------------- ----------------------
Amortized Market Amortized Market Amortized Market Amortized Market
cost value cost value cost value cost value
----------- ---------- ----------- ----------- ----------- ----------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
U.S. Government and
Agency obligations ............ $ 80,172 $ 80,424 $113,231 $113,496 $111,861 $111,613 $ 65,336 $ 65,015
Corporate obligations .......... 45,799 46,033 44,773 44,966 22,632 22,520 6,085 6,051
Mortgage-backed securities ..... 40,998 41,362 45,652 46,157 64,760 64,650 6,470 6,496
Other bonds and obligations .... 6,001 6,001 1,001 1,001 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total debt securities ......... 172,970 173,820 204,657 205,620 199,253 198,783 77,891 77,562
-------- -------- -------- -------- -------- -------- -------- --------
Marketable equity securities:
Common stocks .................. 5,605 8,520 1,164 2,696 835 1,523 474 788
Preferred stocks ............... 1,000 1,000 1,000 1,000 -- -- 276 276
-------- -------- -------- -------- -------- -------- -------- --------
Total marketable equity
securities ................... 6,605 9,520 2,164 3,696 835 1,523 750 1,064
-------- -------- -------- -------- -------- -------- -------- --------
Total securities available
for sale .................... $179,575 $183,340 $206,821 $209,316 $200,088 $200,306 $ 78,641 $ 78,626
======== ======== ======== ======== ======== ======== ======== ========
Securities held to maturity:
U.S. Government and
Agency obligations ............ $ 13,649 $ 13,702 $ 12,633 $ 12,694 $ 11,752 $ 11,744 $ 85,936 $ 85,678
Corporate obligations .......... -- -- -- -- -- -- 36,540 36,284
Mortgage-backed securities ..... -- -- -- -- -- -- 29,329 29,299
Other bonds and obligations -- -- -- -- -- -- 2,000 1,997
-------- -------- -------- -------- -------- -------- -------- --------
Total securities held to
maturity ..................... $ 13,649 $ 13,702 $ 12,633 $ 12,694 $ 11,752 $ 11,744 $153,805 $153,258
======== ======== ======== ======== ======== ======== ======== ========
Restricted equity securities:
Federal Home Loan Bank of
Boston stock .................. $ 4,856 $ 4,856 $ 4,726 $ 4,726 $ 4,215 $ 4,215 $ 3,829 $ 3,829
Massachusetts Savings Bank
Life Insurance Company
stock ......................... 251 251 251 251 251 251 251 251
Depositors Insurance Fund ...... 179 179 179 179 179 179 179 179
-------- -------- -------- -------- -------- -------- -------- --------
Total restricted equity
securities .................. $ 5,286 $ 5,286 $ 5,156 $ 5,156 $ 4,645 $ 4,645 $ 4,259 $ 4,259
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
82
<PAGE>
The following table sets forth the composition of Seacoast Financial's
investment portfolio at the dates indicated:
<TABLE>
<CAPTION>
At October 31,
--------------------------------------------------------------------
At May 31, 1998 1997 1996 1995
----------------------- --------------------- --------------------- ----------------------
Carrying Percent Carrying Percent Carrying Percent Carrying Percent
value of total value of total value of total value of total
---------- ------------ ---------- ---------- ---------- ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government and
agency obligations ............ $ 94,073 46.51% $126,129 55.54% $123,365 56.93% $150,951 63.78%
Corporate obligations ........... 46,033 22.76 44,966 19.80 22,520 10.39 42,591 17.99
Mortgage-backed securities ...... 41,362 20.45 46,157 20.32 64,650 29.83 35,825 15.14
Other bonds and obligations ..... 6,001 2.96 1,001 0.44 -- -- 2,000 0.84
-------- ------ -------- ------ -------- ------ -------- ------
Total debt securities .......... 187,469 92,68 218,253 96.10 210,535 97.15 231,367 97.75
Marketable equity securities ..... 9,520 4.71 3,696 1.63 1,523 0.71 1,064 0.45
Restricted equity securities ..... 5,286 2.61 5,156 2.27 4,645 2.14 4,259 1.80
-------- ------ -------- ------ -------- ------ -------- ------
Total securities ............... $202,275 100.00% $227,105 100.00% $216,703 100.00% $236,690 100.00%
======== ====== ======== ====== ======== ====== ======== ======
Debt and equity securities
available for sale .............. $183,340 90.64% $209,316 92.17% $200,306 92.43% $ 78,626 33.22%
Debt securities held to
maturity ........................ 13,649 6.75 12,633 5.56 11,752 5.43 153,805 64.98
Restricted equity securities ..... 5,286 2.61 5,156 2.27 4,645 2.14 4,259 1.80
-------- ------ -------- ------ -------- ------ -------- ------
Total securities ............... $202,275 100.00% $227,105 100.00% $216,703 100.00% $236,690 100.00%
======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
The following table sets forth certain information regarding the carrying
value, weighted average yield and contractual maturities of Seacoast
Financial's investment portfolio as of May 31, 1998:
<TABLE>
<CAPTION>
After one year After five years
One year or less through five years through ten years After ten years Total
----------------- ------------------ ------------------ ------------------- --------------------
Weighted Weighted Weighted Weighted Weighted
Carrying average Carrying average Carrying average Carrying average Carrying average
value yield value yield value yield value yield value yield
-------- -------- -------- --------- -------- -------- -------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
Debt securities:
U.S. Government and
Agency obligations .......... $11,497 5.48% $ 62,950 5.64% $5,978 6.51% $ -- --% $ 80,425 5.68%
Corporate obligations ........ 11,049 6.09 32,961 6.22 2,023 6.20 -- -- 46,033 6.13
Mortgage-backed securities ... 1,218 6.42 12,488 6.71 585 6.65 27,070 6.21 41,361 6.37
Other bonds and obligations .. 5,000 5.45 1,001 6.39 -- -- -- -- 6,001 5.61
------- -------- ------ ------- --------
Total debt securities ....... 28,764 5.66 109,400 5.94 8,586 6.45 27,070 6.21 173,820 5.96
------- -------- ------ ------- --------
Marketable equity securities
Common stocks ................ 8,520 2.38
Preferred stocks ............. 1,000 4.05
--------
Total marketable
equity securities .......... 9,520 2.56
--------
Total securities available
for sale .................. 183,340 5.79
========
Securities held to maturity:
U.S. Government and
Agency obligations .......... 3,999 5.92 9,650 5.87 -- -- -- -- 13,649 5.88
------- -------- ------ ------- --------
Total securities held to
maturity .................... 3,999 5.92 9,650 5.87 -- -- -- -- 13,649 5.88
------- -------- ------ ------- --------
Restricted equity securities:
Federal Home Loan Bank of
Boston stock ................ 4,856 6.30
Massachusetts Savings Bank
Life Insurance Company
stock ....................... 251 2.90
Depositors Insurance Fund .... 179 5.60
--------
Total restricted equity
securities ................. 5,286 5.97
------- -------- ------ ------- --------
Total securities ............ $32,763 5.69% $119,050 5.93% $8,586 6.45% $27,070 6.21% $202,275 5.80%
======= ======== ====== ======= ========
</TABLE>
83
<PAGE>
Sources of Funds
General. Compass uses deposits, repayments and prepayments of loans,
proceeds from sales of loans and securities and proceeds from maturing
securities, borrowings and cash flows generated by operations to fund its
lending, investing and general operations. Deposits represent Compass's primary
source of funds.
Deposits. Compass offers a variety of deposit accounts with a range of
interest rates and other terms. The accounts include passbook savings accounts,
NOW accounts (checking), demand deposit accounts, money market deposit
accounts, club accounts and certificates of deposit. Compass also offers IRA,
Roth/IRA, Education IRA and Simple IRA accounts and SEP accounts. Both
individuals and commercial enterprises maintain accounts with Compass. The FDIC
insures deposits up to certain limits (generally, $100,000 per depositor). The
DIF fully insures amounts in excess of such limits.
At May 31, 1998, Compass's deposits of $982.4 million were comprised of
$59.4 million of non-interest-bearing checking accounts and $923.0 million of
interest-bearing deposit accounts, of which $507.4 million, or 55.0% were
certificates of deposit. Of this total of certificates of deposit at May 31,
1998, $421.4 million, or 83.1%, were scheduled to mature within one year.
However, based on Compass's monitoring of historical trends, its current
pricing strategy for deposits and its avoidance of brokered deposits,
management believes that Compass will retain a significant portion of its
certificate of deposit accounts upon maturity.
Deposit flows are influenced greatly by economic conditions, the general
level of interest rates and the relative attractiveness of competing deposit
and investment alternatives. During the past few years, the strength of the
stock market has affected deposit flows within the banking industry as some
customers have opted to place their funds in instruments--such as mutual funds
- --not directly offered by Compass (other than through its affiliation with
INVEST Financial Corporation), rather than in deposit accounts which they
perceive to have less attractive returns. See "Risk Factors--Competition."
Compass competes for deposits in four distinct market areas--New Bedford,
Fall River, Plymouth and Martha's Vineyard. Compass has experienced steady
deposit inflows during the last three years, primarily influenced by regional
bank consolidations and its strong community bank image. Compass's strategy has
been to grow deposit levels through targeted promotions, branch expansion and
bank acquisition. Compass has expanded its presence in Plymouth with one new
branch opened in 1995 and another in May 1998.
Compass places emphasis on sales of its products and quality of its
service to attract and retain customers. Management measures the sales
performance of customer service personnel based on the cross-sales of
additional products and services above the initial product that the customer
requests. Branch managers in all four markets actively participate in a
business development call program to develop new banking relationships.
In the interest of customer convenience and product alternatives, in 1995
Compass introduced a "call center" with extended hours, staffed with
individuals who are trained to answer telephone inquiries about customer
accounts and about Compass's various products and services. Compass also
introduced in 1995 a 24-hour automated touch-tone telephone voice response
system, which allows customers to obtain information about their accounts, to
make account transfers and to receive information about Compass's products and
services. In 1996 and 1997, Compass introduced relationship-based checking
account products, entitled Flagship Checking and Preferred Checking,
respectively, which offer a package of select benefits. The increase in
certificates of deposit is partially attributable to attractive pricing and
bonus CD programs offered to select customers participating in these and other
packaged checking account programs. Services to commercial customers have also
been enhanced through the introduction of a Sweep Account, Simple IRA accounts
and electronic tax filing service.
Compass uses direct mail and customer service personnel at each of its
branches and at its main office to solicit deposits and advertises its deposits
through the print media, on billboards and through radio and television.
Compass expects to offer on-line banking, including bill payment capability,
over the Internet by the end of 1998.
Compass has a contract with INVEST Financial Corporation ("Invest")
pursuant to which Invest offers Compass's customers investments in mutual funds
and securities. Invest representatives work out of Compass's main office and
branches and Compass's customer service personnel refer to Invest customers who
are looking for such investments. Compass receives a portion of commissions
earned by Invest from Invest's operations on Compass's premises.
84
<PAGE>
National, regional and local economic conditions, changes in money market
rates, prevailing interest rates and competing deposit and investment
alternatives all have a significant impact on the level of Compass's deposits.
See "Risk Factors--Potential Impact of Changes in Interest Rates on Seacoast
Financial's Earnings," "--Geographic Concentration of Loans in and Deposits
from Southeastern Massachusetts and Rhode Island" and "--Competition."
85
<PAGE>
The following table sets forth certain information regarding the
distribution of Compass's average deposit accounts and the weighted average
interest rate on each category of deposits:
<TABLE>
<CAPTION>
Year ended October 31,
---------------------------------
Seven months ended May 31, 1998 1997
--------------------------------- ---------------------------------
Percent Percent
of total Weighted of total Weighted
Average average average Average average average
balance deposits rate balance deposits rate
----------- ---------- ---------- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts ....................... $ 80,170 8.40% 1.45% $ 72,837 8.02% 1.46%
Savings accounts ................... 170,023 17.82 2.59 171,157 18.86 2.59
Money market savings accounts ...... 146,465 15.35 2.75 140,413 15.47 2.82
Non-interest-bearing demand
checking accounts ................. 56,213 5.89 -- 56,284 6.20 --
-------- ------ -------- ------
Total transaction deposit
accounts ......................... 452,871 47.46 2.12 440,691 48.55 2.15
-------- ------ -------- ------
Certificate of deposit accounts:
Six months or less ................ 143,740 15.06 5.44 122,934 13.54 5.39
Over six months through
12 months ........................ 219,617 23.02 5.75 209,668 23.10 5.70
Over 12 months through
24 months ........................ 56,497 5.92 5.78 52,157 5.75 5.83
Over 24 months .................... 81,470 8.54 6.15 82,183 9.06 6.12
-------- ------ -------- ------
Total certificates
of deposit accounts ............. 501,324 52.54 5.73 466,942 51.45 5.71
-------- ------ -------- ------
Total average deposits ........... $954,195 100.00% 4.02% $907,633 100.00% 3.98%
======== ====== ======== ======
<CAPTION>
Year ended October 31,
------------------------------------------------------------------
1996 1995
--------------------------------- --------------------------------
Percent Percent
of total Weighted of total Weighted
Average average average Average average average
balance deposits rate balance deposits rate
----------- ---------- ---------- ----------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts ....................... $ 68,156 7.84% 1.48% $ 61,366 7.71% 1.76%
Savings accounts ................... 176,311 20.28 2.64 173,700 21.84 2.94
Money market savings accounts ...... 136,322 15.68 2.85 129,920 16.33 3.01
Non-interest-bearing demand
checking accounts ................. 53,684 6.17 -- 41,824 5.26 --
-------- ------ -------- ------
Total transaction deposit
accounts ......................... 434,473 49.97 2.20 406,810 51.14 2.48
-------- ------ -------- ------
Certificate of deposit accounts:
Six months or less ................ 113,341 13.04 5.24 92,578 11.64 5.36
Over six months through
12 months ........................ 167,178 19.23 5.81 151,403 19.03 5.63
Over 12 months through
24 months ........................ 63,617 7.32 6.21 55,963 7.03 5.50
Over 24 months .................... 90,794 10.44 6.01 88,764 11.16 5.85
-------- ------ -------- ------
Total certificates
of deposit accounts ............. 434,930 50.03 5.76 388,708 48.86 5.60
-------- ------ -------- ------
Total average deposits ........... $869,403 100.00% 3.98% $795,518 100.00% 4.00%
======== ====== ======== ======
</TABLE>
86
<PAGE>
Compass had $88.4 million in certificates of deposit of $100,000 or more
outstanding as of May 31, 1998, maturing as follows:
<TABLE>
<CAPTION>
Weighted
Maturity Period Amount average rate
- ----------------------------------------------- ---------- -------------
(Dollars in thousands)
<S> <C> <C>
Three months or less .......................... $25,450 5.60%
Over three months through six months .......... 25,782 5.59
Over six months through twelve months ......... 22,763 5.88
Over twelve months ............................ 14,433 5.99
-------
$88,428 5.73%
=======
</TABLE>
Borrowings. Compass borrows funds from the FHLB. FHLB loans finance
Compass's loans to low- and moderate-income borrowers and other funding needs.
FHLB loans are collateralized primarily by certain of Compass's mortgage loans
and mortgage-backed securities and by Compass's holdings of FHLB stock. See "--
Investments." The maximum amount that the FHLB will loan fluctuates from time
to time based on the FHLB's policies. See "Regulation--Federal Home Loan Bank
System."
Compass had $64.6 million in outstanding loans from the FHLB as of May 31,
1998. The FHLB charges a fixed rate of interest on its loans. Compass may
borrow up to $358.6 million from the FHLB, including under a preapproved line
of credit of $20,000,000.
The following table sets forth certain information regarding borrowed
funds during the periods indicated:
<TABLE>
<CAPTION>
Seven months
ended May 31, Year ended October 31,
------------------------- ---------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Short term borrowings:
Securities sold under agreements to repurchase:
Average balance outstanding ........................... $ 9,605 $ 2,343 $ 3,923 $ 120 --
Maximum amount outstanding at any month
end during the period ............................... 11,616 3,147 9,533 1,925 --
Balance outstanding at end of period .................. 11,616 3,147 9,533 1,925 --
Weighted average interest rate during the period ...... 4.73% 4.57% 4.70% 4.09% --
Weighted average interest rate at end of period ....... 4.75% 4.75% 4.75% 4.75% --
Treasury Tax and Loan Notes:
Average balance outstanding ........................... $ 1,178 $ 1,152 $ 1,163 $ 1,078 $ 1,205
Maximum amount outstanding at any month
end during the period ............................... 2,071 2,117 2,117 2,175 2,190
Balance outstanding at end of period .................. 597 2,117 164 2,000 1,501
Weighted average interest rate during the period ...... 5.45% 4.64% 5.00% 4.90% 5.30%
Weighted average interest rate at end of period ....... 5.46% 5.36% 5.41% 5.10% 5.56%
Total short term borrowings:
Average balance outstanding ........................... $10,783 $ 3,495 $ 5,086 $ 1,198 $ 1,205
Maximum amount outstanding at any month
end during the period ............................... 12,213 5,264 9,742 3,925 2,190
Balance outstanding at end of period .................. 12,213 5,264 9,697 3,925 1,501
Weighted average interest rate during the period ...... 4.80% 4.59% 4.77% 4.82% 5.30%
Weighted average interest rate at end of period ....... 4.78% 5.00% 4.76% 4.93% 5.56%
Federal Home Loan Bank of Boston advances:
Average balance outstanding ........................... $61,986 $51,293 $51,490 $37,288 $39,552
Maximum amount outstanding at any month
end during the period ............................... 67,456 54,942 54,942 45,375 43,178
Balance outstanding at end of period .................. 64,572 54,017 51,006 45,375 39,364
Weighted average interest rate during the period ...... 6.52% 6.61% 6.68% 6.77% 6.58%
Weighted average interest rate at end of period ....... 6.43% 6.56% 6.63% 6.50% 6.64%
</TABLE>
87
<PAGE>
Subsidiary Activities
Compass Bank Securities Corporation. Compass Bank Securities Corporation
("CBS Corporation") is a wholly-owned subsidiary of Compass established in 1990
as a Massachusetts security corporation. CBS Corporation engages exclusively in
buying, selling and holding investment securities on its own behalf and not as
a broker. The income earned on CBS Corporation's investment securities is
subject to a significantly lower rate of state tax than that assessed on income
earned on investment securities maintained at Compass. At May 31, 1998, CBS
Corporation had total assets of $135.3 million, consisting primarily of cash
and investment securities.
Compass Credit Corporation. Compass Credit Corporation ("CC Corporation")
is a wholly-owned subsidiary of Compass established in 1997 as a Massachusetts
corporation. CC Corporation buys, sells, and originates auto loans in Rhode
Island. CC Corporation is a licensed lender in Rhode Island. At May 31, 1998,
CC Corporation had total assets of $15.9 million, consisting primarily of cash
and auto loans.
Buffinton Brook Realty Corporation. Buffinton Brook Realty Corporation
("BBR Corporation") is a wholly-owned subsidiary of Compass established in 1977
as a Massachusetts corporation. BBR Corporation purchases and holds real estate
and is the 99.9% owner of Compass Preferred Capital Corporation ("Compass
Preferred"). At May 31, 1998, BBR Corporation had total assets of $158.5
million, consisting primarily of its investment in Compass Preferred.
Compass Preferred Capital Corporation. Compass Preferred is a 99.9% owned
subsidiary of BBR Corporation. It was established in March, 1998 to engage in
real estate business activities (including the acquisition and holding of
securities and real estate loans) that enable it to be taxed as a "real estate
investment trust" under federal and Massachusetts tax laws. Compass Preferred
had total assets of $159.2 million at May 31, 1998, $145.9 million of which
were mortgage loans originated by and acquired from Compass.
The 1855 Corporation. The 1855 Corporation ("1855 Corporation") is a
wholly-owned subsidiary of Compass established in 1971 as a Massachusetts
corporation. 1855 Corporation is principally engaged in the acquisition and
holding of real estate which is used for banking purposes. At May 31, 1998,
1855 Corporation had total assets of $7.4 million of which $2.5 million
consisted of real estate used for banking purposes and $3.5 million consisted
of investments in subsidiaries.
Purchase Corporation. Purchase Corporation is a wholly-owned subsidiary of
1855 Corporation established in 1981 as a Massachusetts corporation. Purchase
Corporation acquires, manages and develops real estate, purchases equipment and
makes investments. At May 31, 1998, Purchase Corporation had total assets of
$2.4 million of which $2.3 million consisted of cash and $90,000 consisted of
real estate holdings.
North Front Street, Inc. North Front Street, Inc. ("NFS Inc.") is a
wholly-owned subsidiary of 1855 Corporation established in 1991 as a
Massachusetts corporation. NFS, Inc. acquires, manages, develops,
rehabilitates, leases, finances, holds and makes real estate investments. At
May 31, 1998, NFS Inc. had total assets of $1.1 million which consisted solely
of cash.
Year 2000 Issue
The Year 2000 Issue (commonly referred to as "Y2K") is the result of
computer programs being written using two digits, rather than four digits, to
define the applicable year. The Y2K issue, which is common to most
corporations, including banks, concerns the inability of information systems,
primarily (but not exclusively) computer software programs, to properly
recognize and process date-sensitive information as the Year 2000 approaches.
Since Compass's information systems functions are either outsourced to
service bureaus or processed in-house using programs developed by third-party
vendors, the direct effort to correct Y2K issues will be undertaken largely by
third parties and will therefore not be within Compass's direct control.
Compass expects to bring its mission critical operating systems into compliance
with Y2K requirements through the installation of updated or replacement
programs developed by third parties.
Bank regulatory agencies have recently issued additional guidance under
which they are assessing Y2K readiness. The failure of a financial institution,
such as Compass, to take appropriate action to address deficiencies in the Y2K
project management process may result in enforcement actions which could have a
material adverse effect on such institution, result in the imposition of civil
money penalties or result in the delay (or receipt of an
88
<PAGE>
unfavorable or critical evaluation of management of a financial institution in
connection with regulatory review) of applications seeking to acquire other
entities or otherwise expand the institution's activities.
Compass began addressing the Y2K issue in the Fall of 1996 when it formed
a Y2K Project Team comprised of financial, operations, information systems,
internal audit, compliance, lending, corporate services, loan servicing and
retail personnel. A formal Y2K Action Plan was developed by the Y2K Project
Team and approved by the Board of Directors in 1997. The Y2K Project Team meets
at least once every quarter and provides quarterly updates to 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 all systems utilized by Compass. Mission
critical systems include hardware, software, program interfaces, operating
systems as well as other mechanical or computer-generated requirements that are
beyond Compass's main central processing system and network. Based upon the
results of the assessment, Compass has determined that there will be a need to
replace portions of its existing hardware and upgrade a portion of its software
systems.
Compass's plan to resolve the Y2K issue was developed along the five phase
((i) awareness; (ii) assessment; (iii) renovation; (iv) validation; and (v)
implementation) project management process outlined in the Federal Financial
Institutions Examination Council (FFIEC) Year 2000 statement of May 5, 1997.
The awareness phase has been completed, a Y2K assessment was completed and
monitoring of service bureau and vendor progress is ongoing. Renovation of
third party systems that were identified as non-compliant is being undertaken
by those third parties and is scheduled to be completed by December 31, 1998.
The Y2K Project Team is in the process of creating formal test plans. Testing
has begun and testing of mission critical systems is expected to be completed
by June 30, 1999. Compass has not yet developed contingency plans to ensure
that critical operations continue in the event its service bureau or other
vendors are unable to achieve millenium requirements. Contingency plans will be
initiated if a vendor misses its target date or is not considered Y2K compliant
by December 31, 1998.
The chief components of Compass's expense related to the Y2K issue are
currently believed to be the replacement of personal computer equipment and the
purchase or upgrade of third-party software. External maintenance and internal
modification costs will be expensed as incurred. Costs of new hardware and
software will be capitalized and depreciated in accordance with Compass
policies. Although final costs have yet to be determined, management currently
expects to incur costs in the range of $750,000 to $1.0 million on its Year
2000 readiness efforts. Costs of the Y2K project are based on current estimates
and actual results could vary significantly from such estimates once detailed
testing is completed. If the resolution plan were unsuccessful, it would have a
material adverse effect on Compass's future operating results and financial
condition.
Ultimately, the success of Compass's efforts to address the Y2K issue
depends to a large extent not only on the corrective measures that Compass
undertakes, but also on the efforts undertaken by businesses and other
independent entities who provide data to, or receive data from, Compass such as
borrowers, vendors or customers. In particular, Compass's credit risk
associated with its borrowers may increase as a result of problems such
borrowers may have resolving their own Y2K issues. Although it is not possible
to evaluate the magnitude of any potential increased credit risk at this time,
the impact of the Y2K issue on borrowers could result in increases in problem
loans and credit losses in future years. Over the course of the next twelve
months, Compass will endeavor to monitor the Y2K efforts of its borrowers and
will implement a course of action and procedures designed to reduce any
increased potential risk as a result of Y2K issues.
Properties
Compass conducts its business through 23 full-service branches, two
seasonal high school offices, four remote ATMs and five non-branch properties,
including its corporate headquarters, an operations center, a mortgage office
and two other back-office facilities as of the date of this Prospectus.
In the Greater New Bedford market, Compass operates eight full service
branches, including six branches in the City of New Bedford (five of which are
owned by Compass or a subsidiary and one of which is operated under a land
lease), one owned branch in the town of Fairhaven and one leased branch in the
town of North Dartmouth. Compass's corporate headquarters and operations center
are also located in the city of New Bedford, as are two other back-office
facilities. All of these buildings are owned by Compass or a subsidiary. Two of
Compass's remote ATMs are located in the City of New Bedford. One of Compass's
limited service high school branches is located in the City of New Bedford.
89
<PAGE>
In the Greater Fall River market, Compass operates six full service
branches, including one owned and one leased branch in the city of Fall River,
one leased branch in Assonet and owned branches in each of Somerset, Swansea
and Westport. One of Compass's remote ATMs is also located in the City of Fall
River, as is one of Compass's limited service high school branches.
In the Greater Plymouth market, Compass operates four full service
branches, including one owned and one leased branch in the town of Plymouth and
leased branches in each of Carver and Manomet. Compass also leases a non-branch
mortgage office in the town of Lakeville, located in the Greater Plymouth
market.
In the Martha's Vineyard market, Compass operates five full service
branches, including one owned and one leased branch in the town of Edgartown,
and three owned branches in the towns of Chilmark, Vineyard Haven and Oak
Bluffs. One of Compass's remote ATMs is located in the Martha's Vineyard town
of West Tisbury.
Compass recognizes that its existing executive office facilities are not
sufficient--in either size or physical design--to house the personnel Compass
needs to support its recent and planned growth. Compass intends to use an
estimated $20 million of the Offering proceeds to fund the construction of a
new corporate headquarters.
Legal Proceedings
Compass is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business.
Management believes that those routine proceedings involve, in the aggregate,
amounts which are immaterial to the financial condition and results of
operations of Compass.
Personnel
As of May 31, 1998, Compass had 321 full-time and 51 part-time employees.
The employees are not represented by a collective bargaining unit and Compass
considers its relationship with its employees to be good. See "Management of
Seacoast Financial and Compass--Compensation of Officers and Directors through
Benefit Plans" for a description of certain compensation and benefit programs
offered to Compass's employees.
90
<PAGE>
CERTAIN EFFECTS OF THE MERGER ON SEACOAST FINANCIAL
Assuming that the Conversion and the Merger had been consummated as of May
31, 1998, Seacoast Financial would have had, on a pro forma basis assuming
issuance of 18,400,000 Conversion Shares at the maximum of the Estimated
Valuation Range, total assets of $1.9 billion, total deposits of $1.4 billion,
net loans of $1.2 billion and total stockholders equity of $307.8 million. For
pro forma income statements and balance sheets, see "Pro Forma Data." For
historical financial information about Sandwich Bancorp, see "Excerpts from
Annual Report on Form 10-K for the Year Ended December 31, 1997 " and "Excerpts
from Quarterly Report on Form 10-Q for the Quarter Ended June 30, 1998"
attached to this Prospectus.
Management of Seacoast Financial and Compass believe that the Merger
furthers Compass's expansion strategies regarding geographic market area,
customer base and asset size, while maintaining Compass's loan portfolio
diversification and its relatively low-cost sources of funds. In addition,
Compass's and Sandwich's product offerings and corporate cultures are
relatively similar, which management believes will facilitate a smooth
integration of the two banks.
Geographic Expansion and Marketing Opportunities
Geographic Expansion. Compass and Sandwich Bank currently operate in
markets that are, for the most part, contiguous and complementary to each other
in the "South Coast" and Cape Cod regions of southeastern Massachusetts along
the Atlantic shoreline. As of August 1998, Compass has eight full service
branches and one limited service branch in the Greater New Bedford market, six
full service branches and one limited service branch in the Greater Fall River
market, four full-service branches in Plymouth County and five full-service
branches on Martha's Vineyard. Sandwich has nine branches on Cape Cod and two
in Plymouth County. Compass believes that the combination of its market area
with that of Sandwich Bank will enable it to both better serve its existing
customers and attract new customers. Management believes that the acquisition
of Sandwich Bancorp is a more cost-effective, efficient means of expansion to
Cape Cod than establishing new branches would be.
Sandwich Bank operates primarily on Cape Cod. Although Compass generates
indirect auto loans through auto dealers on Cape Cod, to date it has not
concentrated its marketing efforts on other lending or deposit products because
Compass has no branches in that market area. After the Merger, Compass will
have nine branches on Cape Cod from which to market products and services. In
particular, Compass believes that there is opportunity to expand its commercial
loan portfolio by lending to businesses (primarily retail and tourism-related)
located on Cape Cod. Cape Cod's economy is substantially dependent on the
tourist industry, and is more cyclical than other regions in Compass's market
other than Martha's Vineyard. See "Risk Factors--Geographic Concentration of
Loans in and Deposits from Southeastern Massachusetts and Rhode Island." The
population of Cape Cod is also generally more affluent than that of Compass's
New Bedford and Fall River market areas.
Compass and Sandwich Bank both operate in Plymouth County. The four
branches of Compass and the two branches of Sandwich Bank in Plymouth County
are all expected to remain open after the Merger, thereby providing greater
convenience for Compass's existing and future Plymouth County customers. In
addition, management believes that the expansion of Compass's Plymouth County
market presence, together with its entrance into the Cape Cod market, will help
to connect its Cape Cod, Plymouth and New Bedford market areas. Many people
commute from Cape Cod to New Bedford or Plymouth, and others commute between
New Bedford and Plymouth. The Merger may enable Compass to attract new
customers who prefer a bank with branches near both home and work.
Marketing Opportunities. Seacoast Financial's management expects that the
contiguous nature of Compass's and Sandwich Bank's markets will create
efficiencies in advertising and marketing and enable Compass to reach a broader
audience without proportional increases in marketing expense or changes in
marketing strategies. For example, Compass currently advertises in local
newspapers and on radio stations that cover Sandwich Bank's market area as well
as Compass's. In addition, since Compass and Sandwich Bank use the same data
processor and marketing software, management expects to be able to merge the
two banks' databases, which will facilitate cross-marketing opportunities
through a better understanding of customer relationships and product use.
91
<PAGE>
Impact on Deposits
Compass and Sandwich Bank have relatively similar deposit mixes and
weighted average rates paid on deposits, as set forth in the following table.
<TABLE>
<CAPTION>
Seacoast Financial Historical Sandwich Bancorp Historical
Seven months ended May 31, 1998 Six months ended June 30, 1998
--------------------------------- --------------------------------
Percent Percent
of total Weighted of total Weighted
Average average average Average average average
balance deposits rate balance deposits rate
----------- ---------- ---------- ----------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
NOW accounts ................................. $ 80,170 8.40% 1.45% $ 41,327 9.65% 1.09%
Savings accounts ............................. 170,023 17.82 2.59 26,362 6.16 1.93
Money market savings accounts ................ 146,465 15.35 2.75 107,650 25.15 3.28
Non-interest-bearing demand checking
accounts .................................... 56,213 5.89 -- 40,156 9.38 --
-------- ------ -------- ------
Total transaction deposit accounts ......... 452,871 47.46 2.12 215,495 50.34 2.08
-------- ------ -------- ------
Certificate of deposit accounts:
6 months or less ............................ 143,740 15.06 5.44 91,778 21.44 5.37
Over 6 months through 12 months ............. 219,617 23.02 5.75 45,072 10.53 5.45
Over 12 months through 24 months ............ 56,497 5.92 5.78 34,806 8.13 5.68
Over 24 months .............................. 81,470 8.54 6.15 40,960 9.56 5.71
-------- ------ -------- ------
Total certificates of deposit accounts ..... 501,324 52.54 5.73 212,616 49.66 5.50
-------- ------ -------- ------
Total average deposits ..................... $954,195 100.00% 4.02% $428,111 100.00% 3.78%
======== ====== ======== ======
</TABLE>
In addition to having a similar deposit mix, Compass and Sandwich Bank
offer similar--although not identical--deposit products. Seacoast Financial
believes that its more extensive branch network and wider range of products
will not only preserve relationships with Sandwich Bank's existing customers
but will enhance those relationships and provide opportunities to cross sell
additional services not currently provided by Sandwich Bank, such as Sweep
Accounts and electronic tax payment services. In addition, it is expected that
certain popular deposit products currently offered by Sandwich Bank will be
retained and promoted by Compass.
Customer retention is expected to be facilitated because all of Sandwich
Bank's 11 branches will remain open following the Merger. Because the two
companies have relatively similar deposit pricing strategies, management does
not expect significant Sandwich Bank deposit runoff following the Merger.
92
<PAGE>
Impact on Loan Portfolio
Compass's and Sandwich Bank's loan products and lending operations are
relatively similar. The mix of the two banks' loan portfolios differs primarily
in that a larger proportion of Sandwich Bank's loan portfolio is comprised of
real estate loans (particularly residential mortgage loans, but also including
commercial real estate loans and construction and land loans) while Compass has
a significantly higher proportion of commercial and consumer loans in its
portfolio. Compass's ratio of non-performing assets to total assets is also
relatively similar to that of Sandwich Bank. The following table presents the
two companies' loan portfolios by category and asset quality ratios at the
dates indicated:
<TABLE>
<CAPTION>
Seacoast Financial Historical Sandwich Bancorp Historical At
At May 31, 1998 June 30, 1998
---------------------------------- -----------------------------------
Percent Average Percent Average
Amount of total yield Amount of total yield
------------- ---------- --------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential (one-to four-family) ................ $ 368,136 41.63% $ 242,709 67.30%
Commercial ...................................... 125,089 14.14 61,609 17.09
Home equity lines of credit ..................... 15,941 1.80 11,227 3.11
Construction, net ............................... 41,925 4.74 29,669 8.23
--------- ------ --------- ------
Total real estate loans ........................ 551,091 62.31 8.31% 345,214 95.73 7.92%
--------- ------ ----- --------- ------ -----
Commercial loans ................................. 58,200 6.58 9.86 8,161 2.26 10.06
--------- ------ ----- --------- ------ -----
Consumer loans:
Indirect auto loans, net ........................ 280,215 31.68 7.95 -- --
Other ........................................... 27,553 3.12 8.92 7,242 2.01 9.83
--------- ----- --------- -----
Consumer loans ................................. 307,768 7,242
Less: unearned discount ......................... 32,637 --
--------- ---------
Total consumer loans ........................... 275,131 31.11 8.05 7,242 2.01 9.83
--------- ------ ----- --------- ------ -----
Total loans .................................... $ 884,422 100.00% 8.33% $ 360,617 100.00% 8.01%
========= ====== ===== ========= ====== =====
Non-performing loans as a percent of total loans 1.07% 0.75%
Non-performing assets as a percent of total assets 0.93% 0.56%
</TABLE>
Seacoast Financial's average yield on average interest bearing assets for
its last fiscal year (ended October 31, 1997) was 7.86%, compared to Sandwich
Bancorp's average yield of 7.57% for its last fiscal year (ended December 31,
1997). Seacoast Financial expects that its average yield on interest-bearing
assets will initially decline upon consummation of the Conversion and Merger,
due both to Sandwich Bancorp's comparatively lower-yielding loan portfolio and,
more importantly, to the impact of the initial investment of the Offering
proceeds in investment securities (which generally have lower yields than
loans). This initial investment will result in a substantial increase in the
investment portfolio as a percent of total assets.
Seacoast Financial's management believes that, over time, the Merger will
provide additional lending opportunities. An integral part of Compass's
business strategy after the Merger will include expanding its indirect auto
lending program, adding quality auto dealers operating in Sandwich Bank's
market area and expanding commercial lending by combining Sandwich Bank's
strong customer base with Compass's greater lending capacity. Compass expects
to continue its current practice of having most loan underwriting decisions
(other than consumer ones) made locally in its various regions. Cape Cod will
become a separate market region for Compass, and local loan officers are
expected to retain the authority to make most credit decisions in that region.
93
<PAGE>
THE CONVERSION AND THE MERGER
THE BOARDS OF TRUSTEES AND CORPORATORS OF SEACOAST FINANCIAL AND THE BOARD
OF DIRECTORS OF COMPASS HAVE APPROVED THE CONVERSION PLAN AND THE MERGER
AGREEMENT. THE COMMISSIONER HAS ALSO APPROVED THE CONVERSION PLAN, SUBJECT TO
THE SATISFACTION OF CERTAIN OTHER CONDITIONS. HOWEVER, SUCH COMMISSIONER
APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN. IN
ADDITION, THE BOARDS OF DIRECTORS OF SANDWICH BANCORP AND SANDWICH BANK HAVE
APPROVED THE MERGER AGREEMENT.
Overview
The Conversion Plan, which Seacoast Financial's Board of Trustees adopted
on April 23, 1998, provides for the amendment of Seacoast Financial's charter
to authorize the issuance of capital stock (among other amendments) so that
Seacoast Financial will become a stock holding company rather than a mutual
holding company. The Conversion Plan further provides that Seacoast Financial
will offer the Conversion Shares for sale in the Subscription Offering to
depositors, the ESOP and directors, trustees, officers and employees. Subject
to the prior rights of holders of subscription rights, Seacoast Financial may
also offer Conversion Shares in a Community Offering to certain members of the
general public, with a preference given to residents of Compass's Community.
The Community Offering may commence concurrently with, during or after the
Subscription Offering. If any Conversion Shares remain unsold after the
Subscription and Community Offerings, Seacoast Financial expects to offer such
shares for sale to the general public in the Syndicated Community Offering. The
Purchase Price per share of all Conversion Shares sold in the Offerings will be
$10.00, and the aggregate price (and the aggregate number) of Conversion Shares
sold in the Offerings will be determined based upon an Independent Appraisal of
the estimated pro forma market value of the Conversion Shares, currently
estimated to be between $136.0 million and $184.0 million.
Seacoast Financial determined to undertake the Conversion in connection
with its decision to enter into the Merger Agreement with Sandwich Bancorp and
Sandwich Bank. The Merger Agreement provides for a stock-for-stock exchange. The
Conversion will result in Seacoast Financial becoming a stock company, thereby
having shares available to effect the exchange. The Exchange Shares to be issued
in the Merger are in addition to the Conversion Shares to be issued in the
Offerings.
The Boards of Trustees and Directors of Seacoast Financial and Compass
approved the Merger Agreement on March 22, 1998 and the Boards of Directors of
Sandwich Bancorp and Sandwich Bank approved it on March 23, 1998. The Merger
Agreement provides that, on the tenth trading day following consummation of the
Conversion, Sandwich Bancorp will merge with a corporate subsidiary of Seacoast
Financial. Upon consummation of the Merger, the outstanding shares of Sandwich
Bancorp Common Stock and outstanding Sandwich Bancorp Options will
automatically convert into and become exchangeable for the Exchange Shares
determined by application of the Exchange Ratio. Following the Merger, Seacoast
Financial expects to cause Sandwich Bancorp to merge into Seacoast Financial
and to cause Sandwich Bank to merge with Compass (the "Bank Merger") and cease
to be a separate bank.
The reason for the delay between the dates of consummation of the
Conversion and consummation of the Merger is that the calculation of the
Exchange Ratio for determining the number of Exchange Shares issuable to the
Sandwich Bancorp stockholders is based upon the average trading prices of the
Seacoast Financial Common Stock for a number of days following the consummation
of the Conversion. Notwithstanding this delay, the Conversion and the Merger
are interdependent transactions, and neither one will occur unless both of them
do. Although the Conversion and the Merger will not close simultaneously, it is
a condition to consummation of the Conversion that all conditions to
consummation of the Merger (other than the delivery of the Exchange Shares to
the Sandwich Bancorp stockholders and optionholders) shall have been satisfied
or waived and it is a condition to consummation of the Merger that the
Conversion shall have been consummated. Consummation of the Conversion and the
Merger are subject to a number of conditions, including final regulatory
approval of the Commissioner, the BBI, the FDIC and the FRB and the approval of
the Sandwich Bancorp stockholders. A special meeting of the Sandwich Bancorp
stockholders for purposes of voting on the Merger has been scheduled for
October 29, 1998.
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<PAGE>
The following is a brief summary of pertinent aspects of the Conversion
and the Merger as well as the Merger Agreement. The summary is qualified in its
entirety by reference to the provisions of the Conversion Plan and the Merger
Agreement. Copies of the Conversion Plan and the Merger Agreement are available
for inspection at the offices of Seacoast Financial and Compass and at the
offices of the FRB and the Commissioner, and the Conversion Plan and Merger
Agreement are filed as exhibits to the Registration Statement of which this
Prospectus is a part, copies of which may be obtained from the SEC. See
"Additional Information."
Seacoast Financial's Background of and Reasons for the Conversion and the
Merger
Over the past several years, the Board of Trustees of Seacoast Financial
and the Board of Directors of Compass have reviewed the various corporate forms
available to Compass, including remaining in mutual holding company form
without stock issuance, issuing shares of stock through the existing mutual
holding company structure and undertaking a full conversion to stock form of
organization. The Boards have consistently determined that a full
mutual-to-stock conversion might be appropriate but only if undertaken for a
valid business purpose.
In addition to considering the appropriate corporate form for Seacoast
Financial and Compass, the Board of Directors of Compass has considered various
growth alternatives from time to time, including the possible acquisition of
smaller banks as a means of expanding Compass's geographic market and asset
base. Particularly since 1994, when Compass successfully acquired Martha's
Vineyard National Bank, the Compass Board has sought acquisition opportunities
on Cape Cod, a market that Compass views as an attractive natural extension of
its New Bedford, Plymouth, Fall River and Martha's Vineyard markets.
In September 1997, Kevin G. Champagne, Compass's president, began
discussions with Frederic D. Legate, Sandwich Bank's president, regarding a
possible combination between the two banks and their respective parent
companies. The discussions, which continued through the fall, focused on the
benefits of such a combination to the two banks' respective constituencies and
on the type of consideration that Compass could pay to acquire Sandwich Bancorp
(in light of Seacoast Financial's mutual form). On January 8, 1998, in response
to a solicitation of bids to acquire Sandwich Bancorp by Sandwich Bancorp's
financial advisor, Compass formally offered $53.00, in cash, per outstanding
share of Sandwich Bancorp Common Stock. After considering Compass's offer along
with three other competing offers, Sandwich Bancorp informed Compass that it
was prepared to begin due diligence and begin negotiating an agreement. During
the week of January 26, 1998, the two companies performed due diligence reviews
of each others' businesses and, with the assistance of their respective counsel
and financial advisors, negotiated a definitive merger agreement.
At a meeting on February 1, 1998, the Board of Directors of Compass and
the Board of Trustees of Seacoast Financial voted to approve an Acquisition and
Merger Agreement with Sandwich Bancorp and Sandwich Bank, and that agreement
was executed by both parties on February 2, 1998 (the "February 2 Agreement").
Pursuant to the February 2 Agreement, Sandwich Bancorp was to have merged into
a corporate subsidiary of Compass, in exchange for cash consideration of $53.00
per share of Sandwich Bancorp Common Stock. In order to raise the capital
needed for such cash acquisition, Seacoast Financial and Compass planned to
undertake a so-called "minority stock issuance" through the existing mutual
holding company structure. In order to do so, Seacoast Financial planned to
form a "mid-tier" holding company that would own 100% of the common stock of
Compass. The mid-tier holding company would have issued at least 51% of its
common stock to Seacoast Financial, and would have issued the remaining
minority interest to Compass's depositors and others in a subscription and
public offering.
After the February 2 Agreement was announced, Sandwich Bancorp received
unsolicited expressions of interest from three other financial institutions who
had originally submitted bids in January, 1998, in each case proposing
stock-for-stock merger transactions at nominal values higher than Seacoast
Financial's cash transaction. As permitted by the February 2 Agreement,
Sandwich Bancorp's Board of Directors determined that its fiduciary duties
required it to consider the alternative proposals. The Sandwich Bancorp Board
provided the three interested parties with the opportunity to perform "due
diligence" in order to be in a position to make their best and final offers,
and also gave Seacoast Financial the opportunity to propose a revised
transaction.
Based upon its knowledge of the terms of the competing proposals, Seacoast
Financial's management, with the advice of its legal and financial advisors,
concluded that the only way Seacoast Financial could make a financially sound,
competitive proposal would be by undertaking a mutual-to-stock conversion
followed by a stock-for-stock exchange with Sandwich Bancorp's stockholders.
Since Seacoast Financial is currently a mutual corporation with no authority to
issue capital stock, the only way that Seacoast Financial could enter into a
transaction providing
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for a stock-for-stock exchange would be by undertaking a full conversion to
stock form. (A stock-for-stock merger would not have been possible under
Seacoast Financial's existing mutual holding company structure.) Seacoast
Financial and Compass held a series of meetings with their respective Boards to
consider such a proposal.
At a joint meeting held on March 22, 1998, the Board of Directors of
Compass and the Board of Trustees of Seacoast Financial confirmed their earlier
judgment that the acquisition of Sandwich Bancorp, a well-established banking
institution in an attractive contiguous market, represented the kind of
business opportunity that Seacoast Financial and Compass had been seeking. The
Boards were advised by management and by their investment advisors that, given
the levels to which the price of the Sandwich Bancorp Common Stock had been
bid, an acquisition of Sandwich Bancorp would only make sense, from a financial
point of view, if the transaction were structured as a stock-for-stock
exchange. The Boards determined that the ability to effect such an acquisition
was exactly the kind of valid business purpose that warranted a decision to
convert to stock form. At that meeting, the Boards approved the Merger
Agreement (which superseded the February 2 Agreement) and directed the officers
to prepare a plan of conversion for subsequent Board approval. At a meeting
held on April 23, 1998, the Board of Trustees of Seacoast Financial approved
the Conversion Plan. The Conversion Plan was subsequently approved by the
Corporators of Seacoast Financial and by the Commissioner, subject to certain
conditions.
The Boards of Compass and Seacoast Financial believe that the combination
with Sandwich Bancorp will enhance the competitive position of the combined
entities and will enable the resulting institution to compete more effectively
than either institution could on its own. The combined entity will have greater
financial resources and, as a result of the Offerings, increased capital
levels. At May 31, 1998, assuming the prior sale of the Conversion Shares at
the maximum of the Estimated Valuation Range and consummation of the Merger,
Seacoast Financial's pro forma stockholders' equity would amount to 16.5% of
pro forma total assets. The combination will result in increased funds being
available for lending purposes, greater resources for expansion of services and
better opportunities (through stock benefit plans) for attracting and retaining
qualified personnel.
The terms of the Merger Agreement were the result of arm's length
negotiations between representatives of Seacoast Financial and Sandwich
Bancorp. Among the factors considered by the Board of Trustees of Seacoast
Financial in considering the Merger were (i) the ability to expand Compass's
presence onto Cape Cod (upon consummation of the Merger, Compass will have nine
branches on Cape Cod); (ii) information concerning the financial condition,
results of operations, capital levels, asset quality and prospects of Compass
and Sandwich Bancorp; (iii) the short-term and long-term impact the Conversion
and the Merger will have on Seacoast Financial's consolidated results of
operations; (iv) the general structure of the transaction and the compatibility
of the respective managements and business philosophies; (v) the enhancement of
the franchise value of Seacoast Financial and Compass; (vi) the ability of the
combined enterprise to compete in relevant banking and non-banking markets;
(vii) industry and economic conditions; and (viii) the impact of the Conversion
and the Merger on the depositors, employees, customers and communities served
by Compass and Sandwich Bancorp through the contemplated expansion of Compass's
lending and retail banking services as a result of the Merger.
Compass and Sandwich Bank currently serve contiguous market areas. Compass
operates in the southeastern Massachusetts region just west of Cape Cod,
including New Bedford, Fall River and Plymouth, and also operates on the island
of Martha's Vineyard, off the coast of Cape Cod. Sandwich Bank, which has 11
full service offices, operates primarily on Cape Cod. As a result of the
Conversion and the Merger, Compass will operate 34 full-service banking
offices, and, based on pro forma total assets at May 31, 1998, would be the
third largest savings bank in Massachusetts and the largest financial
institution headquartered in southeastern Massachusetts.
In addition to enabling Seacoast Financial to effect the Merger, the
Conversion will structure Seacoast Financial in stock form, the organizational
structure used by most business entities, including commercial bank holding
companies. The Conversion will permit Compass's depositors and members of the
local community and of the general public to become equity owners and to share
in the future of Seacoast Financial and Compass. The Conversion will also
provide additional funds for lending and investment activities, facilitate
future access to the capital markets, enhance the ability of Seacoast Financial
to diversify and expand into other markets and enable Compass to compete more
effectively with other financial institutions.
After completion of the Conversion, the unissued common and preferred
stock authorized by Seacoast Financial's Articles of Organization will permit
Seacoast Financial, subject to market conditions and applicable regulatory
approvals, to raise additional equity capital through further sales of
securities, and to issue securities
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in connection with possible acquisitions. At the present time, Seacoast
Financial has no plans with respect to additional offerings of securities
(other than the issuance of the Exchange Shares in connection with the Merger),
although Seacoast Financial may consider the adoption of a stock option plan
and/or a recognition and retention plan that would provide for the granting of
shares of stock or stock options to management and the Board. The ability to
use stock-related incentive programs to attract and retain executive and other
personnel for itself and its subsidiaries is another benefit of operating in
stock form. See "Management of Seacoast Financial and Compass-- Compensation of
Officers and Directors through Benefit Plans."
In light of the foregoing, the Board of Trustees of Seacoast Financial and
the Board of Directors of Compass believe that the Conversion and the Merger
are in the best interests of Seacoast Financial, Compass and their depositors
and other customers and employees.
Description of the Conversion
The Offering and Sale of Conversion Shares. Seacoast Financial is offering
between 13,600,000 and 18,400,000 Conversion Shares (subject to adjustment to
up to 21,160,000 shares in the event the estimated pro forma market value of
the Conversion Shares increases immediately prior to the conclusion of the
Offering) in connection with the Conversion. Pursuant to applicable state and
federal regulations, Seacoast Financial is offering the Conversion Shares for
sale in the Subscription Offering pursuant to subscription rights in the
following order of priority to: (i) holders of deposit accounts at Compass with
an aggregate balance of $50 or more on December 31, 1996 ("Eligible Account
Holders"); (ii) holders of deposit accounts at Compass with an aggregate
balance of $50 or more on June 30, 1997 ("Supplemental Eligible Account
Holders"); (iii) Compass's ESOP; and (iv) employees, officers, directors and
trustees of Compass and Seacoast Financial. Concurrently with, during or
promptly after the Subscription Offering, and subject to the prior rights of
holders of subscription rights, Seacoast Financial may offer Conversion Shares
in the Community Offering to certain members of the general public with a
preference given to residents of Compass's Community (as defined below in "The
Offerings--Community Offering"). Seacoast Financial may offer Conversion Shares
not subscribed for in the Subscription and Community Offerings, if any, for
sale to the general public in the Syndicated Community Offering. For detailed
information about subscription priorities, purchase limitations and procedures
for placing an order for Conversion Shares, see "The Offerings."
Stock Pricing and Number of Conversion Shares to be Issued. Seacoast
Financial has established the Purchase Price per share of all Conversion Shares
sold in the Offerings at $10.00. The Conversion Plan requires that the
aggregate purchase price of the Conversion Shares must be based on the
appraised pro forma market value of the Conversion Shares as determined on the
basis of an independent appraisal. Seacoast Financial has retained RP Financial
to make such valuation. For its services in making such appraisal and for
preparation of a business plan, RP Financial will receive a fee of $45,000 for
the initial appraisal, $5,000 for any update and $12,500 for the business plan
plus out-of-pocket expenses not to exceed $10,000. Seacoast Financial has
agreed to indemnify RP Financial and any employees of RP Financial who act for
or on behalf of RP Financial in connection with the appraisal against any and
all loss, cost, damage, claim, liability or expense of any kind (including
claims under federal and state securities laws) arising out of any misstatement
or untrue statement of a material fact or an omission to state a material fact
in the information supplied by Compass to RP Financial, unless RP Financial is
determined to be negligent or otherwise at fault.
An appraisal has been made by RP Financial in reliance upon the
information contained herein, including the financial statements of Seacoast
Financial and Sandwich Bancorp. RP Financial also considered the following
factors, among others, in preparing its appraisal: the present and projected
operating results and financial condition of Seacoast Financial and Sandwich
Bancorp and the economic and demographic conditions in Compass's and Sandwich
Bank's existing marketing area; certain historical, financial and other
information relating to Seacoast Financial and Sandwich Bancorp; a comparative
evaluation of the operating and financial statistics of Seacoast Financial and
Sandwich Bancorp with those of other similarly situated publicly traded savings
and co-operative banks and other savings institutions located in Massachusetts
and other New England states; the aggregate size of the offering of the
Conversion Shares; the impact of the Conversion and the Merger on Seacoast
Financial's net worth and earnings potential; estimates of the number of
Exchange Shares to be issued in the Merger; and the trading market for
securities of comparable institutions and general conditions in the market for
such securities. In its review of the appraisal provided by RP Financial, the
Board of Trustees of Seacoast Financial reviewed the methodologies and the
appropriateness of the assumptions that RP Financial used, in addition to the
factors enumerated above, and the Board of Trustees believes that such
assumptions were reasonable.
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On the basis of the foregoing, RP Financial has advised Seacoast Financial
and Compass that in its opinion, dated September 4, 1998, the estimated pro
forma market value of the Conversion Shares ranged from a minimum of $136.0
million to a maximum of $184.0 million with a midpoint of $160.0 million (the
"Estimated Valuation Range"), giving effect to the Merger. The Board of
Directors of Compass and the Board of Trustees of Seacoast Financial determined
that the Conversion Shares should be sold at $10.00 per share, resulting in a
range of 13,600,000 to 18,400,000 Conversion Shares being offered. Upon
consummation of both the Conversion (assuming consummation occurs at the
maximum of the Estimated Valuation Range) and the Merger (assuming an Exchange
Ratio of 6.4), the Conversion Shares and the Exchange Shares will represent
approximately 59.2% and 40.8%, respectively, of the total shares of Seacoast
Financial Common Stock outstanding, assuming no fractional Exchange Shares, no
exercise of dissenters' rights and a Purchase Price of $10.00 per share.
Assuming an Exchange Ratio of 4.7407, the Conversion Shares and Exchange Shares
would represent 66.2% and 33.8%, respectively, of the total shares of Seacoast
Financial Common Stock outstanding. See "--Description of the Merger and the
Exchange Ratio." The Estimated Valuation Range may be amended with the approval
of the Commissioner, if required, or if necessitated by subsequent developments
in the financial condition of Seacoast Financial and Compass or market
conditions generally.
RP Financial's valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing the Conversion
Shares. RP Financial did not independently verify the consolidated financial
statements and other information provided by Seacoast Financial and Sandwich
Bancorp, nor did RP Financial value independently the assets or liabilities of
the parties. The valuation considers Seacoast Financial and Compass as a going
concern and should not be considered as an indication of the liquidation value
of Seacoast Financial. Moreover, because such valuation is necessarily based
upon estimates and projections of a number of matters, all of which are subject
to change from time to time, no assurance can be given that persons purchasing
Conversion Shares in the Conversion or receiving Exchange Shares in the Merger
will thereafter be able to sell such shares at prices at or above the Purchase
Price (or the Seacoast Financial Trading Price used to determine the Exchange
Ratio) or in the range of the foregoing valuation of the pro forma market value
thereof.
No sale of Conversion Shares may be consummated unless prior to such
consummation RP Financial confirms that nothing of a material nature has
occurred which, taking into account all relevant factors, would cause it to
conclude that the aggregate Purchase Price is materially incompatible with its
September 4, 1998 estimate of the pro forma market value of the Conversion
Shares upon consummation of the Conversion. If such is not the case, the
Offering can be terminated; a new Estimated Valuation Range may be set and
investors resolicited; new Subscription, Community and Syndicated Community
Offerings may be held; or such other action may be taken as Seacoast Financial
and Compass shall determine and the Commissioner may permit or require.
Depending upon market or financial conditions prior to conclusion of the
Offering, the total number of Conversion Shares to be sold will be established.
In the event market or financial conditions change so as to cause the aggregate
Purchase Price, supported by the updated appraisal, to be below the minimum of
the Estimated Valuation Range or more than 15% above the maximum of such range,
Seacoast Financial will resolicit subscribers (i.e., permit them to modify or
rescind their subscriptions, or permit them to continue their orders, in which
case they will need to affirmatively reconfirm their subscriptions prior to the
expiration of the resolicitation period or their subscription funds will be
promptly refunded, with interest at Compass's passbook rate of interest (2.15%
effective October 1, 1998), and their withdrawal authorizations will be
cancelled). Any change in the Estimated Valuation Range must be approved by the
Commissioner. If the number of Conversion Shares issued in the Conversion is
increased due to an increase of up to 15% in the Estimated Valuation Range to
reflect changes in market or financial conditions, no resolicitation of
subscribers will be made. See "The Offering--Limitations on Purchases of
Conversion Shares" as to purchase priorities with respect to additional shares
that may be issued in the event of an increase in the Estimated Valuation
Range.
The higher the number of Conversion Shares issued, the lower a
stockholder's ownership interest and per share pro forma net income and
stockholders' equity, and the higher Seacoast Financial's pro forma net income
and stockholders' equity on an aggregate basis. The lower the number of
Conversion Shares issued, the higher a stockholder's ownership interest and per
share pro forma net income and stockholders' equity and the lower Seacoast
Financial's pro forma net income and stockholders' equity on an aggregate
basis. See "Risk Factors--Dilution Resulting from Possible Issuances of
Additional Shares" and "Pro Forma Data--Pro Forma Conversion Data."
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Copies of the appraisal report of RP Financial, including any amendments
thereto, and the detailed report of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of Seacoast Financial and at the other locations specified under "Additional
Information."
Description of the Merger and the Exchange Ratio
Pursuant to the Merger Agreement, Sandwich Bancorp will merge with a
corporate subsidiary of Seacoast Financial. It is anticipated that, following
the merger of Sandwich Bancorp with a subsidiary of Seacoast Financial,
Sandwich Bancorp, as the surviving corporation, will merge with Seacoast
Financial and that Sandwich Bank will be merged with Compass and cease to be a
separate bank. Each outstanding share of Sandwich Bancorp Common Stock (other
than shares held by any dissenting stockholders and shares held by Seacoast
Financial or any subsidiary) and each outstanding Sandwich Bancorp Option will
automatically convert into and become exchangeable for a number of shares of
Seacoast Financial Common Stock determined by the application of the Exchange
Ratio (as described below), and cash in lieu of any fractional share of
Seacoast Financial Common Stock which such stockholders or optionholders
otherwise would be entitled to receive. The Exchange Ratio depends upon a
calculation of the average trading price of Seacoast Financial Common Stock on
certain specified days between the consummation of the Conversion and
consummation of the Merger, determined in the manner described below.
At the Merger Effective Time (as such term is defined in "--Description of
the Merger Agreement"), each share of Sandwich Bancorp Common Stock issued and
outstanding immediately prior thereto (other than those held by Seacoast
Financial, by Compass and by Sandwich Bancorp stockholders exercising
dissenters' rights) will convert into a number of Exchange Shares equal to one
share multiplied by the appropriate Exchange Ratio and cash in lieu of any
fractional share. The Exchange Ratio will be based on the Seacoast Financial
Trading Price and will be calculated as set forth below. The parties have
agreed to a range of possible Exchange Ratios so that, as the Seacoast
Financial Trading Price increases, the Exchange Ratio may decrease, as follows:
<TABLE>
<CAPTION>
Seacoast Financial
Trading Price Exchange Ratio Per Sandwich Bancorp Share Value
- ----------------------- -------------------------------------------- ---------------------------------
<S> <C> <C>
More than $15.00 Less than 4.7407 $71.11
($71.11 [divided by] Seacoast Financial
Trading Price)
$13.51-$15.00 4.7407 $ 64.05-$71.11
(4.7407 x Seacoast Financial
Trading Price)
$10.01-$13.50 6.3936-4.7407 $64.00
($64.00 [divided by] Seacoast Financial
Trading Price)
$10.00 or less 6.4000 $64.00 or less
(6.4000 x Seacoast Financial
Trading Price)
</TABLE>
The Seacoast Financial Trading Price (and therefore the Exchange Ratio)
will be determined in the period between the consummation of the Conversion and
the consummation of the Merger by averaging the closing bid and asked price of
the Seacoast Financial Common Stock for each of the second through the ninth
trading days (inclusive) following consummation of the Conversion (the average
of the closing bid and asked price for each such day is referred to as the
"Daily Closing Price"), discarding the two highest and two lowest Daily Closing
Prices and averaging the remaining Daily Closing Prices. The closing bid and
asked prices will be as quoted at the close of business on the Nasdaq National
Market. The market price of Seacoast Financial Common Stock at the Merger
Effective Time could be more or less than the Seacoast Financial Trading Price
used to determine the Exchange Ratio, and the actual value of the shares issued
in the Merger therefore could be more or less than the Per Sandwich Bancorp
Share Value indicated in the foregoing table.
In addition, each option to purchase a share of Sandwich Bancorp Common
Stock outstanding under the Sandwich Stock Option Plans will, as of the Merger
Effective Time, be automatically converted into and
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exchangeable for a number of Exchange Shares calculated by subtracting the per
share exercise price of such option from the Per Sandwich Share Value and
dividing the result by the Seacoast Financial Trading Price.
At any time prior to the Merger Effective Time, Seacoast Financial may
revise the structure of the Merger and the other transactions contemplated by
the Merger Agreement, provided that (i) there are no material adverse federal
or state income tax consequences to Sandwich Bancorp and its stockholders as a
result of a modification; (ii) the consideration to be paid to the holders of
the Sandwich Bancorp Common Stock under the Merger Agreement is not thereby
changed in kind or reduced in amount; (iii) there are no material adverse
changes to the benefits and other arrangements provided to or on behalf of
Sandwich Bancorp's directors, officers and other employees; and (iv) such
modification will not delay materially or jeopardize receipt of any required
regulatory approvals or other consents and approvals relating to the
consummation of the Merger. Seacoast Financial, Compass, Sandwich Bancorp and
Sandwich Bank have agreed to appropriately amend the Merger Agreement and any
related documents in order to reflect any such revised structure.
For additional information about the Merger Agreement and the terms of the
Merger, see "--Description of the Merger Agreement."
Effects of the Conversion and the Merger
Continuity. While the Conversion and Merger are pending, the normal
business of Compass and Sandwich Bank of accepting deposits and making loans
will continue without interruption. Compass and Sandwich Bank will continue to
be subject to regulation by the Commissioner and the FDIC. After the Conversion
and Bank Merger, Compass will continue to provide services for both Compass's
and Sandwich Bank's depositors and borrowers under Compass's current policies
by its present management and staff, as supplemented by Sandwich Bank
personnel.
The directors and officers of Compass at the time of the Conversion will
continue to serve as directors and officers of Compass after the Conversion.
The directors of Seacoast Financial following the Conversion will consist of
individuals currently serving as directors of Compass and the officers of
Seacoast Financial will consist of the persons currently serving as officers of
Seacoast Financial. Upon consummation of the Merger, certain of the officers
and directors of Sandwich Bancorp and Sandwich Bank will become officers and
directors of Seacoast Financial and/or Compass. See "Management of Seacoast
Financial and Compass--Directors of Seacoast Financial."
Effect on Deposit Accounts. The Conversion will have no effect on
Compass's deposit accounts, except to the extent that funds in the account are
withdrawn to purchase Conversion Shares and except with respect to liquidation
rights. Moreover, each depositor in Sandwich Bank at the time of the Bank
Merger will automatically become a depositor of Compass after the Bank Merger,
and each such deposit account will remain the same with respect to deposit
balance, interest rate and other terms, subject to Compass's right to conform
such account terms to comparable accounts offered by Compass. Subject to
certain limitations, each such account will be insured by the FDIC to the same
extent as before the Conversion and the Merger, and each such account will
continue to be insured in full for amounts in excess of FDIC limits by the
excess insurer of savings bank deposits, the DIF (as a co-operative bank,
Sandwich Bank currently offers its depositors similar excess deposit insurance
through the Share Insurance Fund of the Co-operative Central Bank). Depositors
will continue to hold their existing certificates, passbooks and other
evidences of their accounts.
Effect on Loans. No loan outstanding from either Compass or Sandwich Bank
will be affected by the Conversion or the Merger, and the amount, interest
rate, maturity and security for each loan will remain as they were
contractually fixed prior to the Conversion and the Merger.
Tax Effects. Seacoast Financial has received a favorable opinion regarding
the federal income tax consequences of the Conversion. See "--Tax Aspects of
the Conversion and Merger." Consummation of the Merger is conditioned on prior
receipt by Seacoast Financial and Sandwich Bancorp of an opinion with regard to
federal income taxation which indicates, among other things, that each of the
Merger and the merger of Sandwich Bank and Compass (the "Bank Merger") will
constitute or will be part of a tax-free reorganization and that Seacoast
Financial, Compass, Sandwich Bancorp, Sandwich Bank and the shareholders of
Sandwich Bancorp, by reason of the Merger or the Bank Merger, will recognize no
gain or loss for federal income tax purposes.
Liquidation Rights. At the completion of the Conversion, Seacoast
Financial will establish a liquidation account for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders who continue to
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maintain deposit accounts with Compass following the Conversion. The amount of
the liquidation account will be equal to the net worth of Seacoast Financial as
set forth in the most recent consolidated statement of financial condition
contained herein. In the unlikely event of a complete liquidation of Seacoast
Financial, and only in such event, each such account holder will be entitled to
receive a liquidating distribution from the liquidation account in the amount
of the then-adjusted account balances for such person's deposit accounts then
held following all liquidation payments to creditors.
The initial account balance for each Eligible Account Holder and
Supplemental Eligible Account Holder will be determined by multiplying the
opening balance in the liquidation account by a fraction, the numerator of
which is the amount of Qualifying Deposits or Supplemental Qualifying Deposits
held by such Eligible Account Holder or Supplemental Eligible Account Holder on
the Eligibility Record Date or the Supplemental Eligibility Record Date,
respectively, and the denominator of which is the aggregate amount of all
Qualifying Deposits or Supplemental Qualifying Deposits on such dates. For
deposit accounts in existence on both dates, separate account balances shall be
determined on the basis of the Qualifying Deposits and Supplemental Qualifying
Deposits in such deposit accounts on such dates.
If, however, on the last day of any fiscal year of Seacoast Financial
commencing after the Eligibility Record Date or Supplemental Eligibility Record
Date, as the case may be, the deposit balance in any deposit account of an
Eligible Account Holder or Supplemental Eligible Account Holder is less than
either (i) the amount of Qualifying Deposits of such Eligible Account Holder or
Supplemental Eligible Account Holder on the Eligibility Record Date or
Supplemental Eligibility Record Date, as the case may be, or (ii) the deposit
balance in such deposit account at the close of business on the last day of any
previous fiscal year of Seacoast Financial commencing after the Eligibility
Record Date or the Supplemental Eligibility Record Date, then such Eligible
Account Holder's or Supplemental Eligible Account Holder's account balance
would be reduced in an amount equal to the reduction in such deposit balance,
and such account balance will cease to exist if such deposit account is closed.
In addition, no interest in the liquidation account would ever be increased
despite any subsequent increase in the deposit balances of any Eligible Account
Holder or Supplemental Eligible Account Holder. Any assets remaining after the
above liquidation rights of Eligible Account Holders and Subsequent Eligible
Account Holders are satisfied would be distributed to the stockholders of
Seacoast Financial.
Neither Compass nor Seacoast Financial will be required to set aside funds
for the purpose of establishing the liquidation account, and the creation and
maintenance of the account will not operate to restrict the use or application
of any of the net worth accounts of Compass or Seacoast Financial, except that
neither Compass nor Seacoast Financial, as the case may be, shall declare or
pay a cash dividend on, or repurchase any of, its capital stock if the effect
of such a transaction would be to cause its net worth to be reduced below the
amount required for the liquidation account.
Required Approvals
Various regulatory approvals are required in order to consummate the
Conversion and the Merger. The Commissioner has approved the Conversion Plan,
subject to the satisfaction of certain conditions. The FRB has approved the
Merger (including the Conversion as a precondition to the Merger) and the FDIC
has approved the Bank Merger under the Bank Merger Act, and in each case the
required 15-day waiting period has passed. In addition, the Conversion and the
Merger cannot be consummated unless the BBI and the Commissioner approve the
Merger and the Bank Merger. There can be no assurances that the required
approvals will be obtained. Approvals, nonobjections and authorizations by the
FDIC, the FRB, the Commissioner or the BBI do not constitute recommendations or
endorsements of the Conversion or the Merger by such entities. There can be no
assurances that the requisite regulatory approvals will be received in a timely
manner. In the event the Merger is not consummated on or before February 20,
1999, the Merger Agreement may be terminated by either Seacoast Financial or
Sandwich Bancorp (subject to a possible one-month extension under certain
circumstances).
Pursuant to Massachusetts law, the Conversion Plan must be approved by at
least a majority of Seacoast Financial's Corporators, including a majority of
the "Independent Corporators," as such term is defined in Massachusetts banking
regulations. In addition, the Merger must be approved by at least two thirds
(2/3) of Seacoast Financial's Corporators. Such approvals were obtained at a
special meeting of Corporators held on August 24, 1998. In addition,
consummation of the Merger requires the approval of the Merger Agreement by the
stockholders of Sandwich Bancorp. Sandwich Bancorp has called a special meeting
of stockholders for the purpose of voting on
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the Merger on October 29, 1998. Under Massachusetts law, the Merger Agreement
must be approved by a two-thirds vote of the outstanding Sandwich Bancorp
Common Stock entitled to vote at such special meeting.
Seacoast Financial is required to make certain filings with state
securities regulatory authorities in connection with the issuance of Seacoast
Financial Common Stock in the Conversion and the Merger.
Description of the Merger Agreement
Representations and Warranties. The Merger Agreement contains
representations and warranties by Sandwich Bancorp and Seacoast Financial
regarding various legal, regulatory, financial and business matters which
generally include, but are not limited to, the following: (i) capital
structure, (ii) securities documents and regulatory reports, (iii) financial
statements, (iv) material adverse change, (v) environmental matters, (vi) tax
matters; (vii) legal proceedings, (viii) employee benefit plans; (ix)
properties, (x) loan portfolio and (xi) material interests of certain persons.
Except as otherwise provided in the Merger Agreement, these representations and
warranties will not survive the Merger Effective Time.
Conduct of Business Prior to the Closing Date. Under the terms of the
Merger Agreement, each of Seacoast Financial and Sandwich Bancorp and their
respective subsidiaries generally is prohibited from: (i) taking any action
that materially adversely affects the ability of either party to obtain any
necessary regulatory approvals or materially increases the period of time
necessary to obtain such approvals; (ii) taking any action that materially
adversely affects its ability to perform its covenants and agreements under the
Merger Agreement; (iii) knowingly taking any action that would result in its
representations and warranties not being true and correct on the date of the
Merger Agreement or at any future date on or prior to the closing date; or (iv)
taking or causing any act which disqualifies the Merger as a
pooling-of-interests for accounting purposes or as a tax free reorganization
under Section 368 of the Code.
Sandwich Bancorp, including its subsidiaries, is required to use
reasonable efforts to preserve intact its business organization and assets and
maintain its rights and franchises and operate its business in the usual,
regular and ordinary course. In addition, Sandwich Bancorp has agreed, except
as otherwise specifically permitted or required by the Merger Agreement or
consented to in writing, that Sandwich Bancorp may not: (i) declare or pay any
dividends or other distributions on capital stock (except for (a) a quarterly
cash dividend not in excess of $0.35 per share that is declared and paid in
accordance with applicable law, regulation, contractual and regulatory
commitments, and (b) dividends paid by any Sandwich Bancorp subsidiary to
Sandwich Bancorp); (ii) increase compensation or fringe benefits of, or pay
bonuses to, directors, officers or employees beyond certain stated limits;
(iii) change or waive any provision of its articles or by-laws; (iv) change the
number of shares authorized or issued capital stock (except for an issuance
pursuant to the Stock Option Agreement or upon exercise of outstanding Sandwich
Options); (v) issue or grant any option, warrant, call commitment,
subscription, right to purchase or agreement relating to the authorized and
issued capital stock of Sandwich Bancorp, or any subsidiary thereunder, or any
convertible securities, except for those shares issued to satisfy presently
outstanding options under and in accordance with the Stock Option Agreement and
the Sandwich Bancorp stock option plans; (vi) enter into or amend in any
material respect or terminate any contract, except in the ordinary course of
business consistent with past practice and as specified in the Merger
Agreement; (vii) amend, terminate, waive or provide consent under any
standstill agreement; (viii) incur any material liabilities or material
obligations, whether directly or by way of guaranty, or acquire any equity,
debt or other investment securities, except in the ordinary course of business
consistent with past practices; (ix) make capital expenditures beyond stated
limits, excluding binding commitments already existing as of the date of the
Merger Agreement; (x) make equity investments in real estate, other than in
foreclosed properties, settlements in lieu of foreclosure or troubled loan or
debt restructurings in the ordinary course of business consistent with
customary banking practices; (xi) make commercial or commercial real estate
loans or loans to one borrower above a certain stated size; (xii) open or close
any branch offices or automated banking facilities; (xiii) engage in certain
off-balance-sheet transactions; (xiv) change accounting method or practices,
except as required by GAAP or by regulatory policy; (xv) merge or consolidate
with, or be acquired by, another entity, except as the fiduciary duties of the
Board of Directors otherwise requires; or (xvi) agree to do any of the
foregoing.
Acquisition Proposals. Sandwich Bancorp has also agreed in the Merger
Agreement, subject to certain exceptions relating to the fiduciary duty of the
Sandwich Bancorp Board of Directors, that it will not (and will use all
commercially reasonable efforts to cause its representatives not to) directly
or indirectly encourage, solicit,
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initiate or participate in any discussions or negotiations with, or provide any
information to, any other person (other than Seacoast Financial and its
affiliates or representatives) concerning any merger, tender offer, sale of
substantial assets, sale of shares of capital stock or debt securities or
similar acquisition transaction involving Sandwich Bancorp or Sandwich Bank.
Sandwich Bancorp has agreed to notify Seacoast Financial immediately of any
such inquiry or proposal (including the terms thereof and the identity of the
other person making the inquiry or proposal) and has further agreed to consult
with Seacoast Financial after receipt of such proposal or commencement of such
discussion or negotiation relating to an acquisition transaction and not to
take any action with respect to such proposed acquisition transaction except
after reasonable consultation with Seacoast Financial.
Closing Date of the Merger. The Merger Agreement provides that the closing
of the Merger will occur on the tenth trading day following consummation of the
Conversion or such other time as Seacoast Financial and Sandwich Bancorp may
agree upon (the "Closing Date"). The reason for the delay between the dates of
consummation of the Conversion and consummation of the Merger is that the
calculation of the Exchange Ratio for determining the number of Exchange Shares
issuable to the Sandwich Bancorp stockholders is based upon the Seacoast
Financial Trading Price, which cannot be calculated until after the
consummation of the Conversion. Notwithstanding this delay, the Conversion and
the Merger are interdependent transactions, and neither one will occur unless
both of them do. As a result, the conditions to the Merger set forth in the
Merger Agreement (other than the delivery of the Exchange Shares), which would
typically need to have been met as of the closing date of the Merger, must
instead be met as of the date of consummation of the Conversion (the
"Pre-Closing Date"), which will be the date of the pre-closing (the
"Pre-Closing") for the Merger. Following completion of the Pre-Closing, which
completion will be acknowledged in writing by the parties at such time, neither
party will have the right to terminate the Merger Agreement. The Merger
Agreement provides that if, after the Pre-Closing Date, any party to the Merger
Agreement attempts to terminate such agreement or fails to take any action
necessary to consummate the Merger, the other party may seek injunctive relief
to enforce the Merger Agreement and the breaching party may not oppose or
contest such effort. Assuming that all conditions to the Merger have been
satisfied or waived as of the Pre-Closing Date, the Merger Effective Time shall
be the time on the Closing Date that the Merger becomes effective pursuant to
applicable provisions of Massachusetts law.
Seacoast Financial and Sandwich Bancorp each anticipates that the Merger
will be consummated in the fourth quarter of 1998. However, consummation could
be delayed as a result of delays in obtaining the necessary governmental and
regulatory approvals of the Conversion or the Merger or if any other condition
to consummation of the Merger is not satisfied or waived. There can be no
assurances as to if or when such approvals will be obtained or that the Merger
will be consummated. See "--Regulatory and Other Approvals."
Conditions to the Merger. The respective obligations of each party under
the Merger Agreement are subject to the fulfillment of the following conditions
at or prior to the Pre-Closing Date, none of which may be waived: (i) the
approval of the Merger Agreement by the Sandwich Bancorp stockholders; (ii) the
absence of orders, decrees or injunctions which enjoin or prohibit the Merger;
(iii) the receipt of all necessary regulatory approvals, authorizations and
consents and the expiration of all applicable waiting periods, without any
condition or requirement that materially and adversely affects the combined
enterprise or the value of Sandwich Bancorp or Sandwich Bank; (iv) the
effectiveness under the Securities Act of the Registration Statement
registering the Exchange Shares without having a stop order issued by either
the SEC or state securities regulators suspending the effectiveness or any
proceeding initiated or threatened by the SEC to suspend such effectiveness;
(v) the approval for listing on the Nasdaq National Market, subject to official
notice of issuance, of the Exchange Shares; (vi) the receipt of a tax opinion,
dated as of the Pre-Closing Date for federal income tax purposes, relating to
the Merger as described under "--Tax Aspects of the Conversion and the Merger";
and (vii) the consummation by Seacoast Financial of the Conversion, resulting
in net proceeds sufficient to enable Compass to remain "well-capitalized" under
applicable federal banking law and otherwise to meet regulatory capital
requirements, in each case after giving effect to the Merger.
The obligations of Seacoast Financial and Sandwich Bancorp under the
Merger Agreement are further subject to the satisfaction (or waiver), at or
prior to the Pre-Closing Date, of the following conditions: (i) the
representations and warranties of the other party shall continue to be true and
correct in all material respects as of the Pre-Closing Date; (ii) the other
party shall have performed in all material respects all obligations and
complied in all material respects with all of its agreements or covenants under
the Merger Agreement, except to the extent that failure to perform does not
have a material adverse effect; (iii) the other party shall have obtained any
and all material permits,
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authorizations, consents, waivers, clearances or approvals required for the
lawful consummation of the Merger by it; (iv) each party shall have received
the agreed legal opinion from counsel to the other party; (v) each party shall
have received the agreed "comfort" letter from the independent accountant to
the other party; and (vi) each party shall have furnished the other party with
such certificates of its officers or others and such other documents to
evidence fulfillment of the aforementioned conditions as shall be reasonably
requested.
The obligations of Seacoast Financial are further subject to the condition
that, as of the Pre-Closing Date, Seacoast Financial shall have received a
letter from its independent accountant to the effect that the Merger will
qualify for "pooling of interests" accounting treatment. Seacoast Financial
will be deemed to have waived this condition if it purchases any shares of
Sandwich Bancorp Common Stock between the date of the Merger Agreement and the
Pre-Closing Date. The obligations of Sandwich Bancorp are further subject to
the condition that Seacoast Financial shall have delivered to the exchange
agent, on or before the Closing Date of the Merger, certificates representing
the Exchange Shares and the cash in lieu of fractional shares to be delivered
to the Sandwich Bancorp stockholders and optionholders pursuant to the Merger
Agreement.
Termination and Termination Fees. The Agreement may be terminated at any
time prior to the Pre-Closing Date, whether before or after approval of the
Merger by the stockholders of Sandwich Bancorp: (i) at any time by the mutual
written agreement of Seacoast Financial and Sandwich Bancorp; (ii) by either
Sandwich Bancorp or Seacoast Financial in the event of a material breach by the
other party of any covenant, agreement, representation or warranty in the
Merger Agreement which breach by its nature cannot be cured prior to the
Pre-Closing Date or shall not have been cured within 30 business days after
written notice by Seacoast Financial to Sandwich Bancorp (or by Sandwich
Bancorp to Seacoast Financial) of such breach (provided that the terminating
party is not itself in material breach); (iii) at the election of either
Seacoast Financial or Sandwich Bancorp in the event that the Closing Date does
not occur on or before February 20, 1999, or such later date as Seacoast
Financial and Sandwich Bancorp have agreed to in writing, subject to a
one-month extension in certain circumstances specified in the Merger Agreement;
(iv) by either Sandwich Bancorp or Seacoast Financial if the stockholders of
Sandwich Bancorp shall not have approved the Merger Agreement; (v) by either
Sandwich Bancorp or Seacoast Financial if (a) either the Merger or the
Conversion is disapproved by a regulatory authority and such disapproval has
become unappealable or (b) if any court of competent jurisdiction or other
governmental authority issues an order, decree, ruling or takes any other
action restraining, enjoining or otherwise prohibiting the consummation of
Merger, the Bank Merger or the Conversion and such order or injunction has
become final and nonappealable; (vi) by either party if an event occurs that
would result in Sandwich Bancorp's obligation to pay to Seacoast Financial the
$6.0 million termination fee as described below; or (vii) by the Board of
Directors of either party in the event that any of the conditions precedent to
the obligations of such party to consummate the Merger cannot be satisfied or
fulfilled, provided that the terminating party is not then in material breach
of any representation, warranty, covenant or other agreement.
Termination due to mutual agreement shall be without liability, cost or
expense on the part of any party to the other, unless an event occurs requiring
the payment of a $6.0 million termination fee to Sandwich Bancorp or Seacoast
Financial, as described below. In the event termination upon the occurrence of
either party's material failure to comply with representations, warranties,
covenants or other agreements contained in the Merger Agreement as a result of
willful misconduct or gross negligence of a party, such party shall be
obligated to reimburse the other party for up to $1,000,000 of out-of-pocket
costs and expenses, including reasonable legal, accounting and investment
banking fees and expenses, in addition to any other rights or remedies
available at law or equity, unless under the Merger Agreement either Sandwich
Bancorp or Seacoast Financial is entitled to a $6.0 million dollar termination
fee, as described below.
As a condition of Sandwich Bancorp's willingness to enter into the Merger
Agreement, and to reimburse Sandwich Bancorp for incurring the damages, costs
and expenses related to entering into the Merger Agreement and consummating the
transactions contemplated thereby, Seacoast Financial has agreed to pay
Sandwich Bancorp, as liquidated damages, and in lieu of any other rights or
remedies under the Merger Agreement, a payment in the amount of $6.0 million if
the Merger does not occur because (i) either the Conversion does not occur or
it does occur but it does not result in net proceeds sufficient to enable
Compass to remain "well-capitalized" under applicable federal banking law and
otherwise to meet regulatory capital requirements, in each case after giving
effect to the Merger, or (ii) the Conversion has not been approved by
regulators, has been enjoined or is otherwise not completed by Seacoast
Financial by February 20, 1999 (subject to a one-month extension under certain
circumstances specified in the Merger Agreement), or if Sandwich Bancorp has
terminated the Merger Agreement
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as a result of Seacoast Financial's willful or intentional breach of its
representations and warranties, covenants or agreements. Seacoast Financial
will not be required to pay the termination fee if the triggering event is
primarily due to a breach by Sandwich Bancorp of its representations,
warranties, covenants or agreements that directly or adversely affects Seacoast
Financial's ability to consummate the Merger or to satisfy the conditions to
its obligation to consummate the Merger.
As a condition of Seacoast Financial's willingness to enter into the
Merger Agreement, and to reimburse Seacoast Financial for incurring the
damages, costs and expenses related to entering into the Merger Agreement and
consummating the transactions contemplated thereby, Sandwich Bancorp has agreed
to pay to Seacoast Financial, as liquidated damages, and in lieu of any other
rights or remedies under the Merger Agreement, a payment in the amount of $6.0
million, but if and only if a "payment event" (as such term is defined below)
has occurred before the "expense fee termination date" (as such term is defined
below).
A "payment event" would be any of the following events: (i) without
Seacoast Financial's prior written consent, Sandwich Bancorp shall have
authorized, proposed or entered into, or publicly announced an intention to
authorize, propose or enter into, an agreement with any person (other than
Seacoast Financial or any subsidiary thereof) to effect (a) a merger,
consolidation or similar transaction involving Sandwich Bancorp or any
subsidiary thereof, (b) the disposition, by sale, lease, exchange or otherwise,
of assets of Sandwich Bancorp or any subsidiary thereof representing in either
case 15% or more of the consolidated assets of Sandwich Bancorp and the
Sandwich subsidiaries or (c) the issuance, sale or other disposition (including
by way of merger, consolidation, share exchange or any similar transaction) of
securities representing 15% or more of the voting power of Sandwich Bancorp or
any subsidiary thereof or (ii) a person (other than Seacoast Financial or any
subsidiary thereof) shall have acquired beneficial ownership of, or the right
to acquire beneficial ownership of, or a group shall have been formed which
beneficially owns, or has the right to acquire beneficial ownership of, 25% or
more of the then outstanding shares of Sandwich Bancorp Common Stock.
The "expense fee termination date" would be the earliest to occur of (i)
the Merger Effective Time, (ii) the date that is 12 months after termination of
the Merger Agreement following the occurrence of a "time extension event" (as
such term is defined below) or (iii) the date on which the Merger Agreement is
terminated in accordance with its terms, but only if such termination takes
place prior to the occurrence of a payment event or a "time extension event." A
"time extension event" would be any of the following events: (i) a person
(other than Seacoast Financial or any subsidiary thereof) shall have commenced,
or shall have filed a registration statement under the Securities Act with
respect to, a tender offer or exchange offer to purchase any shares of Sandwich
Bancorp Common Stock such that, upon consummation of such offer, such person
would own or control 10% or more of the then outstanding shares of such stock;
(ii) following the public announcement of an "acquisition proposal" (which is
defined in the Merger Agreement, and which the parties acknowledge has already
taken place), the holders of the Sandwich Bancorp Common Stock shall not have
approved the Merger Agreement; (iii) following the occurrence of an
"acquisition proposal" (a) a meeting of Sandwich Bancorp's stockholders held
for the purpose of voting on the Merger Agreement shall not have been held or
shall have been canceled prior to termination of the Merger Agreement; (b)
Sandwich Bancorp's Board of Directors shall have withdrawn or modified in a
manner adverse to Seacoast Financial the recommendation of the Board of
Directors with respect to the Merger Agreement and the Merger; (c) Sandwich
Bancorp shall have willfully or intentionally breached any representation,
warranty, covenant or obligation contained in the Merger Agreement and such
breach would entitle Seacoast Financial to terminate the Merger Agreement
(without regard to the cure period otherwise provided for unless such cure is
promptly effected without jeopardizing consummation of the Merger pursuant to
the terms of the Merger Agreement); or (d) the Merger shall not have been
consummated by reason of failure of the pooling-of-interests condition, and
such failure is the result of the actions of a party not affiliated with either
Seacoast Financial or Sandwich Bancorp.
Amendment and Waiver. Subject to applicable law, at any time prior to the
Merger Effective Time, the parties to the Merger Agreement may amend the Merger
Agreement, extend the time for the performance of any of the obligations or
other acts of any other party, waive any inaccuracies in the representations
and warranties or any document delivered pursuant to the Merger Agreement or
waive compliance with any of the Merger Agreement's agreements or conditions,
except that after the Sandwich Bancorp stockholder meeting at which the Merger
is to be considered there may not be, without further approval by Sandwich
Bancorp's stockholders, any amendment of the Merger Agreement which reduces the
amount or changes the form of consideration to be delivered to Sandwich
Bancorp's stockholders.
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The Stock Option Agreement
Under the Stock Option Agreement, Sandwich Bancorp has granted an option
(the "Option") to Seacoast Financial to purchase up to 387,107 authorized but
unissued shares of Sandwich Bancorp Common Stock (constituting up to 19.9% of
the outstanding Sandwich Bancorp Common Stock on the date of grant of the
Option and 16.7% of the shares of Sandwich Bancorp Common Stock that would be
outstanding following the exercise of the Option) at a price of $57 per share.
In the event of any change in Sandwich Bancorp Common Stock by reason of stock
dividends, split-ups, recapitalizations, combinations, exchanges of shares or
the like, the type and number of shares subject to the Option and the purchase
price therefor will be adjusted appropriately. If any additional shares of
Sandwich Bancorp Common Stock are issued or otherwise become outstanding after
the date of the Stock Option Agreement (other than as contemplated in the Stock
Option Agreement), the number of shares of Sandwich Bancorp Common Stock
subject to the Option shall be adjusted so that, after such issuance, it does
not exceed 19.9% of the number of shares of Sandwich Bancorp Common Stock then
issued and outstanding without giving effect to any shares subject to or issued
pursuant to the Option. The $57 exercise price was based upon trading price
information for Sandwich Bancorp Common Stock on March 20, 1998, the trading
day immediately preceding the announcement of the Merger Agreement on March 23,
1998.
The Option is exercisable in whole or in part upon the occurrence of a
"Purchase Event" (as such term is defined below) and prior to an "Exercise
Termination Event" (as such term is defined below). A "Purchase Event" would be
any of the following events:
(i) without Seacoast Financial's prior written consent, Sandwich Bancorp
shall have authorized, recommend or publicly proposed or publicly
announced an intention to authorize, recommend or propose or enter
into, an agreement with any person (other than Seacoast Financial or
any subsidiary thereof) to effect (a) a merger, consolidation or
similar transaction involving Sandwich Bancorp or any subsidiary
thereof, (b) the disposition, by sale, lease, exchange or otherwise,
of assets of Sandwich Bancorp or any subsidiary thereof representing
in either case 15% or more of the consolidated assets of Sandwich
Bancorp or (c) the issuance, sale or other disposition (including by
way of merger, consolidation, share exchange or any similar
transaction) of securities representing 15% or more of the voting
power of Sandwich Bancorp or any subsidiary thereof (each, an
"Acquisition Transaction"), or
(ii) a person (other than Seacoast Financial or any subsidiary thereof)
shall have acquired beneficial ownership of, or the right to acquire
beneficial ownership of, or a group shall have been formed which
beneficially owns, or has the right to acquire beneficial ownership
of, 25% or more of the then outstanding shares of Sandwich Bancorp
Common Stock.
An "Exercise Termination Event" would be any of the following events: (i)
the Merger Effective Time, (ii) the date that is 12 months after termination of
the Merger Agreement following the occurrence of a "Purchase Event" or
"Preliminary Purchase Event" (as such terms are defined below), (iii) the date
on which the Merger Agreement is terminated in accordance with its terms, but
only if such termination takes place prior to the occurrence of a Purchase
Event or a Preliminary Purchase Event, or (iv) the passage of twelve months
after the Merger Agreement is terminated by Seacoast Financial as a result of a
material breach of any representation, covenant, warranty or agreement set
forth in the Merger Agreement, which breach by its nature cannot be cured prior
to the pre-closing date or shall not have been cured within 30 business days
after written notice by Sandwich Bancorp to Seacoast Financial of such breach.
A "Preliminary Purchase Event" would be any of the following events:
(i) a person (other than Seacoast Financial or any subsidiary thereof)
shall have commenced, or shall have filed a registration statement
under the Securities Act with respect to, a tender offer or exchange
offer to purchase any shares of Sandwich Bancorp Common Stock such
that, upon consummation of such offer, such person would own or
control 10% or more of the then outstanding shares of the Sandwich
Bancorp Common Stock;
(ii) following the public announcement or occurrence of an "acquisition
proposal" (which is defined in the Stock Option Agreement, and which
the parties acknowledge has already taken place): (a) the holders of
the Sandwich Bancorp Common Stock shall not have approved the Merger
Agreement; (b) a meeting of Sandwich Bancorp's stockholders held for
the purpose of voting on the Merger Agreement shall not have been held
or shall have been canceled prior to termination of the Merger
Agreement; (c) Sandwich Bancorp's
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Board of Directors shall have withdrawn or modified, or publicly
announced its intention to withdraw or modify, in a manner adverse to
Seacoast Financial the recommendation of the Board of Directors with
respect to the Merger Agreement and the Merger; (d) Sandwich Bancorp
shall have breached any representation, warranty, covenant or
obligation contained in the Merger Agreement and such breach would
entitle Seacoast Financial to terminate the Merger Agreement (without
regard to the cure period otherwise provided for unless such cure is
promptly effected without jeopardizing consummation of the Merger
pursuant to the terms of the Merger Agreement); (e) or the Merger
shall not have been consummated by reason of failure of the
pooling-of-interests condition, and such failure is the result of the
actions of a party not affiliated with either Seacoast Financial or
Sandwich Bancorp; or
(iii) any person, other than Seacoast Financial, or any subsidiary
thereunder, other than in connection with a transaction to which
Seacoast Financial has given prior written consent, shall have (a)
acquired beneficial ownership or the right to acquire beneficial
ownership of 10% or more of the outstanding shares of Sandwich Bancorp
Common Stock or (b) filed an application or notice with the FRB, or
other federal or state bank regulatory authority, which application or
notice has been accepted for processing, for approval to acquire
beneficial ownership of 10% or more of the outstanding shares of
Sandwich Bancorp Common Stock or otherwise to engage in an Acquisition
Transaction.
The Stock Option Agreement also provides that Sandwich Bancorp is required
to repurchase the Option from Seacoast Financial, together with any shares of
Sandwich Bancorp Common Stock purchased by Seacoast Financial pursuant thereto,
at the election of Seacoast Financial during the twelve months immediately
following (i) the acquisition by one or more third parties of 50% or more of
the outstanding shares of Sandwich Bancorp Common Stock (or the right to
acquire 50% or more of such outstanding shares) or (ii) the execution by
Sandwich Bancorp of an agreement to merge into or consolidate with a third
party following which transaction Sandwich Bancorp will not be the continuing
or surviving corporation or to sell 50% or more of the voting power of Sandwich
Bancorp to a third party or to sell or otherwise transfer all or substantially
all of the Sandwich Bancorp assets to a third party. The price of such
repurchase is specified in the Stock Option Agreement. The obligation for
Sandwich Bancorp to repurchase the Option terminates upon an Exercise
Termination Event, unless a Purchase Event occurs prior to an Exercise
Termination Event.
Although the shares issuable upon exercise of the Option represent
approximately 16.7% of the Sandwich Bancorp Common Stock that would be
outstanding after such exercise, Seacoast Financial may not acquire more than
5% of the Sandwich Bancorp Common Stock, pursuant to the exercise of the Option
or otherwise, without prior approval of the FRB. Seacoast Financial has
received approval from the FRB to exercise the Option following any applicable
event triggering the Option.
Interests of Certain Persons in the Conversion
General. In connection with the Conversion, the trustees, directors and
executive officers of Seacoast Financial and Compass, as a group (19 persons),
have proposed to purchase 405,000 Conversion Shares, or 3.0% and 2.2% of the
Conversion Shares at the minimum and maximum of the Estimated Valuation Range,
respectively. See "Purchases by Management of Seacoast Financial and Compass."
The ESOP. Compass has adopted the ESOP, a tax-qualified benefit plan for
officers and employees of Compass, which intends to purchase 8% of the
Conversion Shares, or 1,088,000 shares ($10.9 million) and 1,472,000 shares
($14.7 million) at the minimum and maximum of the Estimated Valuation Range,
respectively. See "Management of Seacoast Financial and Compass--Compensation
of Officers and Directors through Benefit Plans--Employee Stock Ownership Plan
and Trust."
Seacoast Financial Stock Compensation Plans. Following consummation of the
Conversion, the Board of Directors may consider the adoption of a stock option
plan for, and a stock plan for the recognition and retention of, officers and
directors of Compass and Seacoast Financial. Applicable banking regulations
would permit the Company to adopt such plans for presentation to Seacoast
Financial's stockholders at a meeting to be held no earlier than six months
after the completion of the Conversion. If such plans are adopted, no options
or stock awards would be granted under either plan until the date on which
stockholder approval of the respective plan is received. See "Management of
Seacoast Financial and Compass--Compensation of Officers and Directors through
Benefit Plans--Stock Option Plan" and "--Stock Plan."
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Seacoast Financial Employment Agreements. In connection with the
Conversion, Seacoast Financial and Compass expect to enter into employment and
change of control agreements with the following officers of Seacoast Financial
and Compass: Kevin G. Champagne; Arthur W. Short; John D. Kelleher; Francis S.
Mascianica, Jr.; and Carolyn A. Belanger. The employment agreements have
three-year (in the case of Mr. Champagne) and two-year (in the case of the
other officers) terms that are extended automatically unless one of the parties
thereto gives a notice of non-renewal. Such agreements also guarantee the
officers payments and benefits in the event the officers are terminated under
certain circumstances or in the event of their retirement, death or disability.
The change in control agreements guarantee the officers severance payments and
continuing benefits in case they are terminated for certain reasons following a
"change in control" (as such term is defined in such agreements) of Seacoast
Financial or Compass. Seacoast Financial and Compass also expect to enter into
change of control agreements providing for a lesser benefit with three other
executive officers. See "Management of Seacoast Financial and Compass--
Employment and Change of Control Agreements."
Interests of Certain Persons in the Merger
Boards of Directors. Upon consummation of the Merger, Seacoast Financial
will take all necessary action to appoint Frederic D. Legate, currently the
President and Chief Executive Officer of Sandwich Bancorp, and two other
members of Sandwich Bancorp's Board of Directors (to be designated by Seacoast
Financial after consultation with Sandwich Bancorp) to Seacoast Financial's
Board of Directors. Mr. Legate will also be appointed to Compass's Board and
the executive committee thereof.
Sandwich Bancorp Employees. At the Merger Effective Time, all employees of
Sandwich Bancorp and its subsidiaries shall be employed by Compass, with
employee benefits which in the aggregate are no less favorable than those
generally afforded to other employees of Compass holding similar positions,
subject to the terms and conditions under which those employee benefits are
made available to such employees and to certain other provisions of the Merger
Agreement. For purposes of determining eligibility for and vesting of such
employee benefits only (and not for pension benefit accrual purposes), service
with Sandwich Bancorp prior to the Merger Effective Time will be treated as
service with an "employer" as if such persons had been employees of Seacoast
Financial, to the extent permissible under the terms of Seacoast Financial's
employee benefit plans. Seacoast Financial has also agreed to continue to
provide post-retirement medical benefits to former employees of Sandwich
Bancorp who at the time of the Merger are receiving post-retirement medical
benefits in accordance with Sandwich Bancorp's retiree health care plans, and
Seacoast Financial will honor any and all vacation leave (but not sick leave)
accrued by employees of Sandwich Bancorp, except to the extent of any
duplication of benefits. No pre-existing condition exclusion that is currently
inapplicable to an employee of Sandwich Bancorp or a subsidiary thereof and/or
the employee's covered dependents shall affect their rights to health benefits
or coverage under Seacoast Financial's plans, to the extent permissible under
such plans.
The parties are working to identify operational efficiencies that may be
obtained through the consolidation of the entities in the Merger. It is
anticipated that some positions will be eliminated following the Merger
Effective Time, and Seacoast Financial and Compass are not under any continuing
obligation with respect to the employment of any specific employee of Sandwich
Bancorp or Sandwich Bank other than the officers whose employment contracts are
being assumed. See "--Sandwich Bancorp Employment Agreements." Seacoast
Financial and Compass have agreed that any employee of Sandwich Bancorp or
Sandwich Bank whose employment with Seacoast Financial or Compass is terminated
by Seacoast Financial within one year after the Merger Effective Time will
receive a lump-sum severance benefit in an amount equal to two weeks' pay for
each year of employment (with partial years of service included in the
calculation on a pro-rated basis), up to a maximum of 26 weeks' pay, and
continuation of health benefits, on the same terms and conditions applicable to
Seacoast Financial's active employees, for the same number of weeks factored
into the calculation of severance payments, and thereafter COBRA benefits for
an additional period of time.
Sandwich Bancorp Employment Agreements. Under the terms of the Merger
Agreement, Seacoast Financial and Compass have agreed to assume employment and
change of control agreements that Sandwich Bancorp and Sandwich Bank currently
have with Frederic D. Legate, President and Chief Executive Officer, and Dana
S. Briggs, George L. Larson and David A. Parsons, each a Senior Vice President,
of Sandwich Bancorp and Sandwich Bank, as well as comparable agreements with
certain other officers of Sandwich Bank. Pursuant to the employment and change
of control agreements, the officers are entitled to receive severance benefits
if, within a period of time following a "change in control" (as defined in the
agreements), such officers' employment is terminated
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involuntarily or voluntarily following certain specified events such as a
material change in responsibilities. The Merger constitutes a change in control
of Sandwich Bancorp and Sandwich Bank and a material change of such officers'
responsibilities and supervision under the agreements. The severance benefits
payable to the officers may be an amount equal to up to 2.99 times the
officer's average annual compensation received from Sandwich Bank during the
five year period immediately prior to the date of the change of control.
Assuming that the Seacoast Financial Trading Price is between $10.01 and
$13.50, and the Exchange Ratio therefore results in the exchange of
approximately $64 worth of Seacoast Financial Common Stock for each share of
Sandwich Bancorp Common Stock, management of Sandwich Bancorp estimates that
such payments could amount to up to $1,021,942, $394,496, $420,870 and $320,202
for Messrs. Legate, Briggs, Larson and Parsons, respectively, if made during
the year ending December 31, 1998. Seacoast Financial has also agreed to assume
certain deferred compensation plans, grantor trust agreements, supplemental
retirement plans and split dollar insurance agreements currently in effect for
certain officers and directors of Sandwich Bancorp.
Indemnification and Insurance. Pursuant to the Merger Agreement, Seacoast
Financial has agreed to indemnify the directors and officers of Sandwich
Bancorp and its subsidiaries with respect to claims arising in whole or in part
out of the fact that such person is or was a director, officer or employee of
Sandwich Bancorp or any of its subsidiaries if such claim pertains to any
matter of fact arising, existing or occurring before the Merger Effective Time.
In addition, Seacoast Financial has agreed for a period of not less than
six years following the Merger Effective Time to provide to those persons who
served as directors or officers of Sandwich Bancorp on or before the Merger
Effective Time Sandwich Bancorp's existing insurance against liabilities and
claims (and related expenses) made against them resulting from their service as
such prior to the Merger Effective Time, or comparable substitute coverage,
provided that Seacoast Financial is not required to expend more than $60,000 in
the aggregate for such insurance coverage.
Sandwich Bancorp Stock Option Plans. At the Merger Effective Time, each
outstanding option under the Sandwich Stock Option Plans will be automatically
converted into, and exchangeable for, a number of shares of Seacoast Financial
Common Stock determined by subtracting the per share exercise price of such
option from the value of the shares of Seacoast Financial Common Stock
receivable by Sandwich Bancorp stockholders in exchange for each outstanding
share of Sandwich Bancorp Common Stock and dividing the result by the Seacoast
Financial Trading Price. As of June 30, 1998, there were outstanding under the
Sandwich Stock Option Plans options to acquire an aggregate of 45,203 shares of
Sandwich Bancorp Common Stock at exercise prices ranging from $9.00 per share
to $30.6875 per share. Assuming that the Seacoast Financial Trading Price is
between $10.01 and $13.50, and the Exchange Ratio therefore results in the
exchange of approximately $64 worth of Seacoast Financial Common Stock for each
share of Sandwich Bancorp Common Stock, management of Sandwich Bancorp
estimates that the aggregate value of the Sandwich Stock Options held by each
executive officer of Sandwich Bancorp at the time the Merger Agreement was
executed was approximately as follows: Frederic D. Legate, President and Chief
Executive Officer, $2,241,299; Dana S. Briggs, Senior Vice President and
Corporate Secretary, $970,605; George L. Larson, Senior Vice President, Chief
Financial Officer and Treasurer, $1,199,040; David A. Parsons, Senior Vice
President, Senior Loan Officer, $904,756.
Delivery of Certificates
Conversion Shares. Certificates representing the Conversion Shares issued
in the Conversion will be mailed by Seacoast Financial's transfer agent to the
subscribers at the addresses provided by such persons appearing on the Order
Form as soon as practicable following consummation of the Conversion. Any
certificates returned as undeliverable will be held by Seacoast Financial until
claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law. Until certificates for the Conversion Shares
are available and delivered to subscribers, such subscribers may not be able to
sell the Conversion Shares for which they have subscribed, even though trading
of the Seacoast Financial Common Stock may have commenced.
Exchange Shares. After consummation of the Merger, each Sandwich Bancorp
stockholder, upon surrender of his or her stock certificate(s) to an agent,
duly appointed by Seacoast Financial (the "Exchange Agent"), will be entitled
to receive in exchange therefor a certificate or certificates representing the
number of full Exchange Shares for which the shares of Sandwich Bancorp Common
Stock surrendered shall have been converted based on the Exchange Ratio, and
cash in lieu of fractional shares. The Exchange Agent will promptly mail to
each
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Sandwich Bancorp stockholder a form of letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
stockholder's stock certificate(s) shall pass, only upon delivery of such
certificate(s) to the Exchange Agent) advising such holder of the terms of the
exchange effected by the Merger and of the procedure for surrendering to the
Exchange Agent such certificate(s) in exchange for a certificate or
certificates evidencing the Exchange Shares. The stockholders of Sandwich
Bancorp should not forward Sandwich Bancorp Common Stock certificates to
Seacoast Financial or the Exchange Agent until they have received the
transmittal letter.
No holder of a certificate representing shares of Sandwich Bancorp Common
Stock will be entitled to receive any dividends in respect of Seacoast
Financial Common Stock into which such shares shall have been converted by
virtue of the Merger until the certificate representing such shares of Sandwich
Bancorp Common Stock is surrendered in exchange for certificates representing
shares of Seacoast Financial Common Stock. In the event that dividends are
declared and paid by Seacoast Financial in respect of Seacoast Financial Common
Stock after the consummation of the Merger but prior to surrender of
certificates representing shares of Sandwich Bancorp Common Stock, dividends
payable in respect of shares of Seacoast Financial Common Stock not then issued
shall accrue (without interest). Any such dividends will be paid (without
interest) upon surrender of the certificates representing such shares of
Sandwich Bancorp Common Stock. Seacoast Financial will be entitled, after the
consummation of the Merger, to treat certificates representing shares of
Sandwich Bancorp Common Stock as evidencing ownership of the number of full
shares of Seacoast Financial Common Stock into which the shares of Sandwich
Bancorp Common Stock represented by such certificates shall have been
converted, notwithstanding the failure on the part of the holder thereof to
surrender such certificates.
Seacoast Financial will not be obligated to deliver a certificate or
certificates representing Exchange Shares to which a holder of Sandwich Bancorp
Common Stock would otherwise be entitled as a result of the Merger until such
holder surrenders the certificate or certificates representing the shares of
Sandwich Bancorp Common Stock for exchange as provided above, or, in default
thereof, an appropriate affidavit of loss and indemnity agreement and/or a bond
as may be required in each case by Seacoast Financial.
If any certificate evidencing Exchange Shares is to be issued in a name
other than that in which the certificate evidencing Sandwich Bancorp Common
Stock surrendered in exchange therefor is registered, it shall be a condition
of the issuance thereof that the certificate so surrendered is properly
endorsed or is accompanied by appropriate stock powers, in either case signed
exactly as the name of the record holder appears on such certificate, and is
otherwise in proper form for transfer, or is accompanied by appropriate
evidence of the authority of the person surrendering such certificate and
signing the letter of transmittal to do so on behalf of the record holder. The
person requesting any such exchange shall pay to the Exchange Agent in advance
any transfer or other taxes required by reason of the payment to a person other
than the registered holder of the certificate surrendered, or required for any
other reason, or shall establish to the satisfaction of the Exchange Agent that
such tax has been paid or is not payable.
Resale Restrictions
Resale of Exchange Shares. The Exchange Shares that will be issued in the
Merger will be registered under the Exchange Act and approved for listing on
the Nasdaq National Market and will be freely transferable, except for Exchange
Shares received in the Merger by persons, including directors and executive
officers of any of the parties to the Merger, who may be deemed to be
"affiliates" of any of the parties under Rule 145 under the Securities Act. The
term "affiliate" generally means any person who controls, is controlled by or
is under common control with, or is a member of a group that controls, is
controlled by or is under common control with, a party, and for purposes hereof
could be deemed to include all executive officers, directors and 10% or greater
stockholders of a party.
Rule 145 will restrict the sale of Exchange Shares received in the Merger
and beneficially owned by those stockholders who are deemed to be affiliates of
Sandwich Bancorp or Seacoast Financial and certain of their family members and
related interests. Such affiliates, provided they are not affiliates of
Seacoast Financial at or following the Merger Effective Time, may publicly
resell Exchange Shares received by them in the Merger subject to certain
limitations of Rule 144 under the Securities Act, which restrict, among other
things, the number of shares sold in any quarter and the manner of sale, during
the one year following the Merger Effective Time. After such one-year period,
such affiliates may resell their shares without restriction so long as there is
adequate current public
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information with respect to Seacoast Financial as required by Rule 144. Persons
who become affiliates of Seacoast Financial prior to, at or after the Merger
Effective Time may publicly resell the Exchange Shares received by them in the
Merger subject to similar limitations and subject to certain filing
requirements specified in Rule 144. Affiliates also would be permitted to
resell the Exchange Shares received in the Merger pursuant to an effective
registration statement under the Securities Act or another available exemption
from the Securities Act's registration requirements. This Prospectus does not
cover any resales of Exchange Shares received in the Merger by persons who may
be deemed to be affiliates of Seacoast Financial or Sandwich Bancorp.
Resale by Seacoast Financial and Sandwich Bancorp Affiliates During
"Pooling" Period. Affiliates of both Seacoast Financial and Sandwich Bancorp
will not be able to transfer shares of Seacoast Financial Common Stock
(including both Conversion Shares and Exchange Shares) or Sandwich Bancorp
Common Stock during the period beginning 30 days prior to the Merger Effective
Time and ending when financial results covering at least 30 days of post-Merger
combined operations of Seacoast Financial and Sandwich Bancorp have been
published, in order to satisfy certain requirements of the SEC in transactions
to be accounted for using pooling-of-interests accounting treatment under GAAP.
Under the Merger Agreement, Seacoast Financial has agreed to use its best
efforts to publish no later than 30 days after the end of the first month in
which there are at least 30 days of post-Merger combined operations (which may
be the month in which the Merger Effective Time occurs) combined revenues and
net income figures as contemplated by and in accordance with the SEC's
Accounting Series Release No. 135. The Merger Agreement provides that Seacoast
Financial and Sandwich Bancorp shall use all reasonable efforts to cause those
persons who may be deemed to be affiliates of Sandwich Bancorp to deliver to
Seacoast Financial, as soon as practicable after the date of the Merger
Agreement, and prior to the Sandwich Bancorp Special Meeting, a written
agreement providing that such persons will not sell, pledge, transfer or
otherwise dispose of any shares of Seacoast Financial Common Stock or Sandwich
Bancorp Common Stock for the period beginning 30 days prior to the Merger and
ending on the publication of financial results covering at least 30 days of
combined operations of Seacoast Financial and Sandwich Bancorp and in
compliance with the Securities Act and the rules and regulations promulgated
thereunder. Each director and executive officer of Sandwich Bancorp has
executed such an agreement. Certificates of Sandwich Bancorp Common Stock
surrendered for exchange pursuant to the Merger by any person deemed to be an
affiliate shall not be exchanged for certificates representing Exchange Shares
until Seacoast Financial has received from that person the written agreement
described in this paragraph.
One-Year Restriction on Sale of Conversion Shares by Seacoast Financial
Insiders. Pursuant to Massachusetts law, directors, trustees, officers and
Corporators of Seacoast Financial or Compass will not be able to sell any
Conversion Shares that they purchase in the Conversion for a period of one year
following the Conversion, except in the case of death or substantial
disability, as determined by the Commissioner, or upon the written approval of
the Commissioner. Each certificate for restricted shares will bear a legend
giving notice of this restriction on transfer, and instructions will be issued
to the effect that any transfer within such time period of any certificate or
record ownership of such shares other than as provided above is a violation of
the restriction. Any shares of Seacoast Financial Common Stock issued at a
later date within this one year period as a stock dividend, stock split or
otherwise with respect to such restricted Conversion Shares will be subject to
the same restrictions.
Certain Restrictions on Purchase of Shares After the Conversion
Three-Year Restriction on Certain Purchases of Seacoast Financial Common
Stock. Purchases of Seacoast Financial Common Stock by directors, officers and
their associates during the three-year period following completion of the
Conversion (i) may not be made directly from Seacoast Financial and (ii) may be
made only through a broker or dealer registered with the SEC, except with the
prior written approval of the Commissioner. The second restriction does not
apply, however, to negotiated transactions involving more than 1% of
outstanding Seacoast Financial Common Stock or to certain purchases of such
stock pursuant to an employee stock benefit plan.
Repurchases of Seacoast Financial Common Stock by Seacoast Financial. In
order to preserve pooling-of-interests accounting treatment for the Merger
under GAAP, Seacoast Financial's ability to repurchase shares of its common
stock may be limited during the two-year period following consummation of the
Merger.
Tax Aspects of the Conversion and Merger
General. As described below, Foley, Hoag & Eliot LLP ("FHE"), counsel to
Seacoast Financial, has opined on federal income tax consequences of the
Conversion and the Merger. Although these opinions are not complete
descriptions of all federal income tax consequences of the Conversion and the
Merger, they address all material
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federal income tax consequences of the Conversion and the Merger. Seacoast
Financial, Compass, Sandwich Bancorp, and Sandwich Bank have provided FHE with
facts, representations and assumptions on which FHE has relied in rendering its
opinions. These opinions are also based on laws, regulations, rulings and
judicial decisions as they existed as of the date of the opinions. These
authorities are all subject to change, and such change may be made with
retroactive effect. FHE cannot give any assurance that, after any such change,
its opinions would not be different, and FHE does not undertake any
responsibility to update or supplement its opinions. Unlike private rulings,
the opinions of FHE are not binding on the IRS, and the IRS could disagree with
conclusions reached therein. In the event of such disagreement, there can be no
assurance that the IRS would not prevail in a judicial or administrative
proceeding.
The Conversion. Subject to the foregoing, FHE has opined that, for federal
income tax purposes: (i) the Conversion will constitute a reorganization under
Section 368(a)(1)(F) of the Code (see Rev. Rul. 80-105, 1980-1 C.B. 78; Rev.
Rul. 96-29, 1996-24 I.R.B.); (ii) neither Compass nor Seacoast Financial will
recognize any gain or loss as a result of the Conversion; and (iii) eligible
subscribers will recognize no gain or loss upon the receipt of the subscription
rights.
The Merger. In addition, subject to the foregoing, FHE has opined that,
for federal income tax purposes, (i) the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code or will be
treated as part of a reorganization within the meaning of Section 368(a) of the
Code; (ii) no gain or loss will be recognized by Seacoast Financial, Compass,
Sandwich Bancorp or Sandwich Bank as a result of the Merger; (iii) no gain or
loss will be recognized by a shareholder of Sandwich Bancorp who exchanges all
of such shareholders Sandwich Bancorp Common Stock solely for Exchange Shares;
(iv) the basis of Exchange Shares to be received (including any fractional
shares deemed received for tax purposes) by a stockholder of Sandwich Bancorp
will be the same as the basis of the Sandwich Bancorp Common Stock surrendered
in exchange therefor; and (v) the holding period of the Exchange Shares to be
received by a shareholder of Sandwich Bancorp will include the period during
which the shareholder held the shares of Sandwich Bancorp Common Stock
surrendered in exchange therefor, provided that such Sandwich Bancorp Common
Stock is held as a capital asset by such stockholder at the Merger Effective
Time.
Accounting Treatment of the Conversion and Merger
Seacoast Financial and Sandwich Bancorp expect to account for the Merger
under the pooling-of-interests method of accounting under GAAP, and the
availability of this accounting method is a condition to Seacoast Financial's
obligation to consummate the Merger. Since the Conversion will not be
consummated until the conditions to consummation of the Merger have been met,
such accounting treatment is also effectively a condition to consummation of
the Conversion. Seacoast Financial will be deemed to have automatically waived
this condition if it acquires any shares of Sandwich Bancorp Common Stock
between the date of the Merger Agreement and the Pre-Closing Date of the
Merger.
As a result of pooling-of-interests accounting treatment, the historical
basis of the assets and liabilities of Sandwich Bancorp and Seacoast Financial
will be combined at the Merger Effective Time and carried forward at their
previously recorded amounts, and the stockholders' equity accounts of Sandwich
Bancorp and Seacoast Financial will also be combined. The consolidated income
and other financial statements of Seacoast Financial issued after consummation
of the Merger will be restated retroactively to reflect the consolidated
operations of Seacoast Financial and Sandwich Bancorp as if the Merger had
taken place prior to the periods covered by such financial statements. See
"Selected Unaudited Pro Forma Financial Data of Seacoast Financial."
Expenses of the Conversion and the Merger
The Merger Agreement provides, in general, that Seacoast Financial and
Sandwich Bancorp shall each bear and pay all their respective costs and
expenses incurred by them in connection with the transactions contemplated by
the Merger Agreement, including fees and expenses of their respective financial
consultants, investment bankers, accountants and counsel.
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FEDERAL AND STATE TAXATION OF SEACOAST FINANCIAL AND COMPASS
Federal Taxation
General. Seacoast Financial and Compass will be subject to federal income
taxation in the same general manner as other corporations, with some exceptions
discussed below. The following discussion of federal taxation is intended only
to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to Compass.
Method of Accounting. For federal income tax purposes, Compass currently
reports it income and expenses on the accrual method of accounting and uses a
fiscal year ending October 31 for filing its consolidated federal income tax
returns. The Small Business Protection Act of 1996 (the "1996 Act") eliminated
the use of the reserve method of accounting for bad debt reserves by savings
institutions, effective for taxable years beginning after 1995 (after October
31, 1996 in the case of Compass).
Bad Debt Reserves. Prior to the 1996 Act, Compass was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in
connection with the calculation of Compass's taxable income. As a result of the
1996 Act, Compass must use the specific charge-off method in computing its bad
debt deduction beginning with its 1996 federal tax return. In addition, the
federal legislation requires the recapture (over a six year period) of the
excess of tax bad debt reserves accumulated after October 31, 1988. The amount
of such reserve subject to recapture by Compass as of November 1, 1997 was
$987,000.
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to November 1, 1988 were subject to recapture into
taxable income should Compass fail to meet certain thrift asset and
definitional tests. New federal legislation eliminated these thrift related
recapture rules. However, under current law, pre-1988 reserves remain subject
to recapture should Compass make certain non-dividend distributions or cease to
maintain a bank charter. At October 31, 1997, Compass's total federal pre-1988
reserve was $9.1 million. This reserve reflects the cumulative effects of
federal tax deductions by Compass for which no federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax
may be used as credits against regular tax liabilities in future years. Compass
has not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Net Operating Loss Carryovers. For federal income tax purposes, a
financial institution may carry back net operating losses to the preceding two
taxable years and forward to the succeeding 20 taxable years. This provision
applies to losses incurred in taxable years beginning after 1996. At May 31,
1998, Compass had no net operating loss carryforwards for federal income tax
purposes, other than net operating losses attributable to its acquisition of
Martha's Vineyard National Bank in December 1994. Under Section 382 of the
Code, the utilization of such carryforwards is spread over seven tax years of
Compass. At October 31, 1997, the remaining balance of the foregoing
carryforwards was $2,702,317, to be utilized at an annual rate of approximately
$667,000 over the succeeding four tax years.
Corporate Dividends-Received Deduction. Seacoast Financial may exclude
from its income 100% of dividends received from Compass since they are both
members of the same affiliated group of corporations.
State Taxation
For Massachusetts income tax purposes, a consolidated tax return cannot be
filed. Instead, Seacoast Financial, Compass and each of its subsidiaries file
an annual income tax return. Compass is subject to an annual Massachusetts
excise tax at a rate of 11.72% of its net income as of the date of this
Prospectus and declining in increments to 10.50% for the fiscal year ending
October 31, 2000. In addition, five of Compass's wholly-owned subsidiaries are
subject to an excise tax at the rate of 9.50% of their net income plus a tax on
their net worth. CBS Corporation, a wholly-owned subsidiary of Compass, is a
securities corporation and, accordingly, is subject to an excise tax at the
rate of 1.32% of its gross income. For these purposes, Massachusetts net income
is currently defined as gross income from all sources without any exclusions,
less the following deductions: all deductions (but not credits) which
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are allowable under the Code except for those deductions under the Code
relating to (i) dividends received, (ii) losses sustained in other taxable
years and (iii) taxes on or measured by income, franchise taxes for the
privilege of doing business and capital stock taxes imposed by any state of the
United States, the District of Columbia, the Commonwealth of Puerto Rico, any
territory or possession of the United States or any foreign country or a
political subdivision of any of the foregoing. Compass is not permitted to
carry its losses forward or back for Massachusetts tax purposes. For Compass's
tax year beginning November 1, 1999 and thereafter, it will be allowed a
deduction equal to 95% of dividends received, as is permitted under the
corporate excise rules. Seacoast Financial may also qualify to be classified as
a Massachusetts securities corporation. Bank holding companies that are so
classified are subject to a state tax rate of 0.33% of their gross income.
Compass's wholly-owned subsidiary Compass Preferred is taxed as a real
estate investment trust ("REIT"). Shareholders of a REIT that are subject to
the Massachusetts corporate excise tax are entitled to a 95% dividends-received
deduction. A REIT corporation shareholder (such as Compass) subject to
Massachusetts corporate taxation will, therefore, pay income tax on only 5% of
the dividends received from the REIT.
Finally, one of Compass's wholly-owned subsidiaries is subject to Rhode
Island taxation on a portion of its net income at a rate of 9.0%.
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REGULATION OF SEACOAST FINANCIAL AND COMPASS
General
Compass is a Massachusetts-chartered stock savings bank and a wholly-owned
subsidiary of Seacoast Financial. Compass's deposits are insured up to
applicable limits by the FDIC through the BIF, except that certain deposits
that Compass acquired from savings associations are insured through the SAIF.
Compass's deposits are also insured by the DIF for amounts in excess of FDIC
insurance limits. Compass is subject to extensive regulation by the
Massachusetts Division of Banks (the "Division"), as its chartering agency, and
by the FDIC, as its deposit insurer. Compass is required to file reports with,
and is periodically examined by, the FDIC and the Division concerning its
activities and financial condition and must obtain regulatory approvals prior
to entering into certain transactions, including, but not limited to, mergers
with or acquisitions of other financial institutions. Compass is a member of
the FHLB and is subject to certain limited regulation by the FRB. Seacoast
Financial, as a bank holding company, is subject to regulation by the FRB and
is required to file reports with the FRB. Any change in such regulations,
whether by the Division, the FDIC or the FRB, could have a material adverse
impact on Compass or Seacoast Financial. See "Risk Factors--Regulatory
Oversight and Legislation." Certain of the regulatory requirements applicable
to Compass and Seacoast Financial are referred to below or elsewhere herein.
Massachusetts Bank Regulation
General. As a Massachusetts-chartered savings bank, Compass is subject to
supervision, regulation and examination by the Division and to various
Massachusetts statutes and regulations which govern, among other things,
investment powers, lending and deposit-taking activities, borrowings,
maintenance of surplus and reserve accounts, distribution of earnings and
payment of dividends. In addition, Compass is subject to Massachusetts consumer
protection and civil rights laws and regulations. The Commissioner's approval
is required for a Massachusetts bank to establish or close branches, merge with
other banks, organize a holding company, issue stock and undertake certain
other activities.
In response to a Massachusetts law enacted in 1996, the Commissioner
adopted rules that generally give Massachusetts banks powers equivalent to
those of national banks. The Commissioner also has adopted procedures reducing
regulatory burdens and expense and expediting branching by well-capitalized and
well-managed banks.
Investment Activities. As a Massachusetts-chartered savings bank, Compass
may invest in preferred and common stock of any corporation provided such
investments do not involve control of any corporation and do not, in the
aggregate, exceed 4% of Compass's deposits. Subject to certain limits, a
Massachusetts-chartered savings bank may invest up to 7% of its deposits in
investments not otherwise legally permitted, provided that any such amounts
which exceed 3% of deposits must be invested in companies organized for the
purpose of acquiring, constructing, rehabilitating, leasing, financing and
disposing of housing, in micro-lending to small businesses (including fishing
and farm loans) and in providing certain technical assistance. No investment in
the equity or debt securities of any one issuer made pursuant to such authority
may exceed 2% of the bank's deposits.
Regulatory Enforcement Authority. Any Massachusetts bank that does not
operate in accordance with the regulations, policies and directives of the
Commissioner may be subject to sanctions for non-compliance, including seizure
of the property and business of the bank and suspension or revocation of its
charter. The Commissioner may under certain circumstances suspend or remove
officers or directors who have violated the law, conducted Compass's business
in a manner which is unsafe, unsound or contrary to the depositors' interests
or been negligent in the performance of their duties. In addition, upon finding
that a bank has engaged in an unfair or deceptive act or practice, the
Commissioner may issue an order to cease and desist and impose a fine on the
bank concerned. Finally, Massachusetts consumer protection and civil rights
statutes applicable to Compass permit private individual and class action law
suits and provide for the rescission of consumer transactions, including loans,
and the recovery of statutory and punitive damages and attorneys' fees in the
case of certain violations or those statutes.
DIF. All Massachusetts-chartered savings banks are required to be members
of the DIF, a corporation that insures savings bank deposits not covered by
federal deposit insurance. The DIF is authorized to charge savings banks an
annual assessment of up to 1/16th of 1% of a savings bank's deposits.
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Insurance of Accounts and Regulation by the FDIC
Compass and Sandwich Bank are members of the BIF, which is administered by
the FDIC. Certain of Compass's and Sandwich Bank's deposits, acquired from
federal savings institutions, are insured by the SAIF. Deposits are insured up
to applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the U.S. Government. As an insurer, the FDIC charges deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity that the FDIC determines by
regulation or order to pose a risk to the insurance fund. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the Commissioner an opportunity to take such action, and may terminate deposit
insurance if it determines that the institution has engaged or is engaging in
unsafe or unsound practices or is in an unsafe or unsound condition.
In late 1995, the FDIC issued a final rule regarding deposit insurance
premiums which, effective with respect to the semi-annual premium assessment
beginning January 1, 1996, reduced deposit insurance premiums for BIF member
institutions to zero basis points (subject to an annual minimum of $2,000) for
institutions in the lowest risk category.
As a result of legislation passed in 1996 relating to the recapitalization
of the SAIF, FDIC-insured institutions will pay an insurance premium of
approximately 1.3 basis points of their BIF-assessable deposits and 6.4 basis
points of their SAIF-assessable deposits from 1997 through 1999. Based upon
assessable deposits at December 31, 1997, Compass and Sandwich Bank are paying
$34,000 and $38,000, respectively, in FDIC insurance premiums per quarter
during 1998.
Regulatory Capital Requirements
FDIC-insured savings banks are subject to risk-based capital guidelines
that establish a framework for making regulatory capital requirements more
sensitive to the risk profiles of each institution. Compass is required to
maintain certain levels of regulatory capital in relation to risk-weighted
assets. The ratio of such regulatory capital to risk-weighted assets is
referred to as Compass's "risk-based capital ratio." Risk-based capital ratios
are determined by allocating assets and specified off-balance sheet items to
four risk-weighted categories ranging from 0% to 100%, with higher levels of
capital being required for the categories perceived as representing greater
risk.
These guidelines divide a bank's capital into two tiers. The first tier
("Tier 1") includes common equity, retained earnings, certain non-cumulative
perpetual preferred stock (excluding auction rate issues) and minority
interests in equity accounts of consolidated subsidiaries, less goodwill and
other intangible assets (except mortgage servicing rights and purchased credit
card relationships subject to certain limitations). Supplementary ("Tier 2")
capital includes, among other items, cumulative perpetual and long-term
limited-life preferred stock, mandatory convertible securities, certain hybrid
capital instruments, term subordinated debt and the allowance for loan and
lease losses, subject to certain limitations, less required deductions. Banks
are required to maintain a total risk-based capital ratio equal to at least 8%
of risk-weighted assets, and at least half of such capital must be Tier 1
capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier 1 leverage capital ratio (Tier 1 capital to adjusted total assets as
specified in the regulations). These regulations provide for a minimum Tier 1
leverage ratio of 3% for banks that meet certain specified criteria, including
that they have the highest examination rating and are not experiencing or
anticipating significant growth. All other banks are required to maintain a
Tier 1 leverage ratio of 3% plus an additional cushion of at least 100 to 200
basis points. The FDIC may, however, set higher leverage and risk-based capital
requirements on individual institutions when particular circumstances warrant.
Savings banks experiencing or anticipating significant growth are expected to
maintain capital ratios, including tangible capital positions, well above the
minimum levels.
The FDIC has also proposed that a bank's interest rate risk exposure
should be quantified using either the measurement system set forth in the
proposal or the institution's internal model for measuring such exposure.
Management of Compass has not determined what effect, if any, the proposed
interest rate risk component would have on Compass's capital if adopted as
proposed.
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Standards for Safety and Soundness
The federal banking agencies have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness (the
"Guidelines") to implement safety and soundness standards required under
federal law. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set
forth in the Guidelines address (i) internal controls and information systems;
(ii) internal audit program; (iii) credit underwriting; (iv) loan
documentation; (v) interest rate risk exposure; (vi) asset growth; and (vii)
compensation, fees and benefits. The agencies also adopted additions to the
Guidelines which require institutions to examine asset quality and earnings
standards. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by federal law. The final
regulations establish deadlines for the submission and review of such safety
and soundness compliance plans.
Limitations on Dividends and Other Capital Distributions
The FDIC has the authority to use its enforcement powers to prohibit a
bank from paying dividends if, in its opinion, the payment of dividends would
constitute an unsafe or unsound practice. Federal law also prohibits the
payment of dividends by a bank that will result in the bank failing to meet its
applicable capital requirements on a pro forma basis. Massachusetts law also
restricts Compass from declaring a dividend which would reduce its capital
below (i) the amount required to be maintained by state and federal law and
regulations or (ii) the amount of Compass's liquidation account established in
connection with the Conversion.
Prompt Corrective Action
The federal banking agencies have promulgated regulations to implement a
system of prompt corrective action required by federal law. Under the
regulations, a bank is deemed to be: (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio of
6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier
1 risk-based capital ratio of 4.0% or more and a Tier 1 leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized"; (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital
ratio that is less than 4.0% or a Tier 1 leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier 1 risk-based capital ratio that is less than 3.0% or a Tier 1
leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Federal law and regulations also specify
circumstances under which a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution to comply with supervisory actions as if it were in the
next lower capitalization category (except that the FDIC may not reclassify a
significantly undercapitalized institution as critically undercapitalized).
"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a capital
restoration plan. A bank's compliance with such plan is required to be
guaranteed by any company that controls the undercapitalized institution. If an
"undercapitalized" bank fails to submit an acceptable plan, it is treated as if
it is "significantly undercapitalized." "Significantly undercapitalized" banks
are subject to one or more of a number of additional restrictions, including an
order by the FDIC to sell sufficient voting stock to become adequately
capitalized, requirements to reduce total assets and cease receipt of deposits
from correspondent banks or to dismiss directors or officers and restrictions
on interest rates paid on deposits, compensation of executive officers and
capital distributions by a parent holding company.
Based on the foregoing, both Compass and Sandwich Bank are currently
classified as "well capitalized" banks.
Activities and Investments of Insured State-Chartered Banks
Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks, notwithstanding state laws. Under regulations dealing with equity
investments, an insured state bank generally may not, directly or indirectly,
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. An insured state bank is not prohibited from,
among other things: (i) acquiring or retaining a majority interest in a
subsidiary; (ii) investing as a limited partner
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in a partnership, the sole purpose of which is direct or indirect investment in
the acquisition, rehabilitation or new construction of a qualified housing
project, provided that such limited partnership investments may not exceed 2%
of the bank's total assets; (iii) acquiring up to 10% of the voting stock of a
company that solely provides or reinsures directors', trustees' and officers'
liability insurance coverage or bankers' blanket bond group insurance coverage
for insured depository institutions; and (iv) acquiring or retaining, through a
subsidiary, up to 10% of the voting shares of a depository institution if
certain requirements are met.
Federal law and FDIC regulations permit certain exceptions to the
foregoing limitations. For example, certain state-chartered banks, such as
Compass and Sandwich Bank, may continue to invest, up to certain limits, in
common or preferred stock listed on a National Securities Exchange or the
National Market System of Nasdaq, and in the shares of an investment company
registered under the Investment Company Act of 1940, as amended. Such banks may
also continue to sell savings bank life insurance. As of May 31, 1998 and June
30, 1998, Compass and Sandwich Bank, respectively, held marketable equity
securities with a carrying value of $5.8 million and $6,000, respectively,
pursuant to this exception.
Transactions with Affiliates
Under current federal law, transactions between depository institutions
and their affiliates are governed by Sections 23A and 23B of the Federal
Reserve Act. An affiliate of a savings bank is any company or entity that
controls, is controlled by or is under common control with the savings bank,
other than a subsidiary. In a holding company context, at a minimum, the parent
holding company of a savings bank and any companies which are controlled by
such parent holding company are affiliates of the savings bank. Generally,
Section 23A limits the extent to which the savings bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such savings bank's capital stock and surplus, and contains an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus. The term "covered transaction" includes (i) the
making of loans or other extensions of credit to an affiliate; (ii) the
purchase of assets from an affiliate; (iii) the purchase of, or an investment
in, the securities of an affiliate; (iv) the acceptance of securities of an
affiliate as collateral for a loan or extension of credit to any person; or (v)
issuance of a guarantee, acceptance or letter of credit on behalf of an
affiliate. Section 23A also establishes specific collateral requirements for
loans or extensions of credit to, or guarantees, acceptances or letters of
credit issued on behalf of, an affiliate. Section 23B requires that covered
transactions and a broad list of other specified transactions be on terms
substantially the same, or no less favorable, to the savings bank or its
subsidiary as similar transactions with nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts the making of
loans by a savings bank to its directors, executive officers and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers and stockholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of
director approval is required is the greater of $25,000 or 5% of capital and
surplus or any loans over $500,000. Further, pursuant to Section 22(h), loans
to directors, executive officers and principal stockholders must generally be
made on terms substantially the same as offered in comparable transactions to
other persons. Section 22(g) of the Federal Reserve Act places additional
limitations on loans to executive officers.
Holding Company Regulation
General. Seacoast Financial, as a bank holding company, is subject to
comprehensive regulation and regular examinations by the FRB. The FRB also has
extensive enforcement authority over bank holding companies, including, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices. Seacoast Financial would also be regulated as a bank holding company
under Massachusetts law if it were to control two or more
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banking institutions. As a savings bank, Compass may elect to have Seacoast
Financial regulated as a savings and loan holding company by the Office of
Thrift Supervision ("OTS"). Regulation as a savings and loan holding company
would require application to, and prior approval of, the OTS.
Seacoast Financial is subject to capital adequacy guidelines for bank
holding companies (on a consolidated basis) which are substantially similar to
those of the FDIC for Compass. See "--Regulatory Capital Requirements." On a
pro forma consolidated basis after the Conversion and the Merger, Seacoast
Financial's pro forma stockholders' equity will exceed these requirements.
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary banks. Under this policy, the FRB may require, and
has required in the past, a holding company to contribute additional capital to
an undercapitalized subsidiary bank.
Seacoast Financial must obtain Massachusetts Board of Bank Incorporation
and FRB approval before: (i) acquiring, directly or indirectly, ownership or
control of any voting shares of another bank or bank holding company if, after
such acquisition, it would own or control more than 5% of such shares (unless
it already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by FRB regulation or order, have been identified as
activities closely related to the business of banking or managing or
controlling banks. The list of activities permitted by the FRB includes, among
other things: (i) operating a savings institution, mortgage company, finance
company, credit card company or factoring company; (ii) performing certain data
processing operations; (iii) providing certain investment and financial advice;
(iv) underwriting and acting as an insurance agent for certain types of
credit-related insurance; (v) leasing property on a full-payout, non-operating
basis; (vi) selling money orders, travelers' checks and United States Savings
Bonds; (vii) real estate and personal property appraising; (viii) providing tax
planning and preparation services; and (ix) subject to certain limitations,
providing securities brokerage services for customers. Seacoast Financial has
no present plans to engage in any of these activities.
Interstate Banking and Branching. Federal law allows the FRB to approve an
application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the
assets of, a bank located in a state other than such holding company's home
state, without regard to whether the transaction is prohibited by the laws of
any state. The FRB may not approve the acquisition of a bank that has not been
in existence for the minimum time period (not exceeding five years) specified
by the statutory law of the host state. The FRB is prohibited from approving an
application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in any
state in which the target bank maintains a branch. Individual states continue
to have authority to limit the percentage of total insured deposits in the
state which may be held or controlled by a bank or bank holding company to the
extent such limitation does not discriminate against out-of-state banks or bank
holding companies. Individual states may also waive the 30% state-wide
concentration limit referred to above.
Additionally, beginning on June 1, 1997, the federal banking agencies were
authorized to approve interstate merger transactions without regard to whether
such transactions are prohibited by the law of any state, unless the home state
of one of the banks "opted out" by adopting a law which applies equally to all
out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches are permitted only if
the law of the state in which the branch is located permits such acquisitions.
In 1996, the Massachusetts legislature enacted a new interstate banking
statute pursuant to which an out-of-state bank may (subject to various
regulatory approvals and to reciprocity in its home state) establish and
maintain bank branches in Massachusetts by (i) merging with a Massachusetts
bank that has been in existence for at least three years, (ii) acquiring a
branch or branches of a Massachusetts bank without acquiring the entire bank or
(iii) opening such branches de novo. Massachusetts banks' ability to exercise
similar interstate banking powers in other states depend upon the laws of those
other states. For example, according to the law of the bordering state
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of New Hampshire, out-of-state banks may acquire New Hampshire banks by merger
but may not acquire individual branches or establish de novo bank branches in
New Hampshire.
Federal law authorizes the FDIC to approve interstate branching de novo by
national and state banks, respectively, only in states which specifically allow
for such branching. The appropriate federal banking agencies are required to
prescribe regulations which prohibit any out-of-state bank from using the
interstate branching authority primarily for the purpose of deposit production.
The FDIC and FRB have adopted such regulations. These regulations include
guidelines to ensure that interstate branches operated by an out-of-state bank
in a host state are reasonably helping to meet the credit needs of the
communities which they serve. Should the FDIC determine that a bank's
interstate branch is not reasonably helping to meet the credit needs of the
communities serviced by the interstate branch, the FDIC is authorized to close
the interstate branch or not permit the bank to open a new branch in the state
in which the bank previously opened an interstate branch.
Dividends. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that the holding
company's net income for the past year is sufficient to cover both the cash
dividends and a rate of earnings retention that is consistent with the holding
company's capital needs, asset quality and overall financial condition. The FRB
also indicated that it would be inappropriate for a company experiencing
serious financial problems to borrow funds to pay dividends. Furthermore, under
the prompt corrective action regulations adopted by the FRB, the FRB may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized." See
"--Regulatory Capital Requirements."
Bank holding companies are required to give the FRB prior written notice
of any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding
12 months, is equal to 10% or more of the consolidated net worth of the bank
holding company. The FRB may disapprove such a purchase or redemption if it
determines that the proposal would constitute an unsafe or unsound practice or
would violate any law, regulation, FRB order or any condition imposed by, or
written agreement with, the FRB.
This notification requirement does not apply to any company that meets the
well-capitalized standard for banks, is "well managed" within the meaning of
the FRB regulations and is not subject to any unresolved supervisory issues.
Federal Securities Law
The Conversion Shares and Exchange Shares will be registered with the SEC
under the Securities Act. Seacoast Financial will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements of SEC regulations promulgated under the Exchange Act.
Seacoast Financial Common Stock held by persons who are affiliates
(generally officers, directors and 10% or more stockholders) of Seacoast
Financial may not be resold without registration, unless such stock is sold in
accordance with certain resale restrictions. If Seacoast Financial meets
specified current public information requirements, each affiliate of Seacoast
Financial is able to sell in the public market, without registration, a limited
number of shares in any three-month period.
In addition, "affiliates" of either Seacoast Financial or Sandwich Bancorp
may not sell their Exchange Shares, except pursuant to an effective
registration statement under the Securities Act covering such shares or in
compliance with Rule 145 or another applicable exemption from the registration
requirements of the Securities Act. See "The Conversion and the Merger--Resale
Restrictions--Resale of Exchange Shares."
Federal Reserve System
The FRB requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At May 31,
1998, Compass was in compliance with these reserve requirements. Banks are
authorized to borrow from the Federal Reserve Bank's "discount window," but FRB
regulations require banks to exhaust other reasonable alternative sources of
funds, including FHLB borrowings, before borrowing from the Federal Reserve
Bank.
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Community Reinvestment Act
Under the Community Reinvestment Act, as amended (the "CRA"), as
implemented by FDIC regulations, a bank has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA does
require the FDIC, in connection with its examination of a bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution, including applications to acquire branches and other financial
institutions. The CRA requires the FDIC to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating
system. Compass's latest FDIC CRA rating was "satisfactory" and Sandwich Bank's
was "outstanding."
Massachusetts has its own statutory counterpart to the CRA which is also
applicable to Compass and Sandwich Bank. The Massachusetts version is generally
similar to the CRA but utilizes a five-tiered descriptive rating system.
Massachusetts law requires the Commissioner to consider, but not be limited to,
a bank's record of performance under Massachusetts law in considering any
application by the bank to establish a branch or other deposit-taking facility,
to relocate an office or to merge or consolidate with or acquire the assets and
assume the liabilities of any other banking institution. Both Compass's and
Sandwich Bank's most recent rating under Massachusetts law was "outstanding."
Consumer Protection and Fair Lending Regulations
Compass and Sandwich Bank are subject to a variety of federal and
Massachusetts statutes and regulations that are intended to protect consumers
and prohibit discrimination in the granting of credit. These statutes and
regulations provide for a range of sanctions for non-compliance with their
terms, including imposition of administrative fines and remedial orders, and
referral to the Attorney General for prosecution of a civil action for actual
and punitive damages and injunctive relief. Certain of these statutes authorize
private individual and class action lawsuits and the award of actual, statutory
and punitive damages and attorneys' fees for certain types of violations.
Federal Home Loan Bank System
Compass is a member of the FHLB, which is one of 12 regional Federal Home
Loan Banks, that administer the home financing credit function of savings
institutions. Each Federal Home Loan Bank serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the Federal Home
Loan Bank system. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of each Federal
Home Loan Bank. These policies and procedures are subject to the regulation and
oversight of the Federal Housing Finance Board. All advances to Compass from
the FHLB are required to be fully secured by sufficient collateral as
determined by the FHLB.
As a member, Compass is required to purchase and maintain stock in the
FHLB. At May 31, 1998, Compass owned $4.9 million of FHLB stock. In past years,
Compass has received dividends on its FHLB stock. The dividend yield from FHLB
stock was 6.50% for the year ended October 31, 1997. No assurance can be given
that such dividends will continue in the future at such levels.
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MANAGEMENT OF SEACOAST FINANCIAL AND COMPASS
Directors of Seacoast Financial
Upon consummation of the Conversion, the Board of Directors of Seacoast
Financial will consist of 11 members (all of whom are currently trustees of
Seacoast Financial and directors of Compass). The following table sets forth
certain information about each such person as of June 30, 1998. Directors of
Seacoast Financial serve three-year staggered terms so that approximately
one-third of the Directors will be elected at each annual meeting of
stockholders.
<TABLE>
<CAPTION>
Term
Name (1) Age Expires Date Elected (2)
- --------------------------------- ----- --------- -----------------
<S> <C> <C> <C>
Manuel G. Camacho ............... 72 1999 1979
David P. Cameron ................ 72 2000 1976
Kevin G. Champagne .............. 48 1999 1993
Howard C. Dyer, Jr. ............. 69 2000 1963
Glen F. Johnson ................. 73 2001 1972
Thornton P. Klaren, Jr. ......... 62 2000 1968
J. Louis LeBlanc ................ 58 2001 1982
A. William Munro ................ 66 2001 1986
Carl Ribeiro .................... 51 1999 1991
Joseph H. Silverstein ........... 71 2000 1980
Gerald H. Silvia ................ 63 1999 1990
</TABLE>
- ------------
(1) In addition to the Directors set forth in this table, three members of
Sandwich Bancorp's Board of Directors will be appointed to Seacoast
Financial's Board of Directors upon consummation of the Merger, one of
whom will be Frederic D. Legate, the President and Chief Executive Officer
of Sandwich Bancorp, and the other two of whom will be selected by
Seacoast Financial after consultation with Sandwich Bancorp.
(2) "Date Elected" indicates the date the Director first joined the Board of
Trustees of Compass. All of such dates are prior to Seacoast Financial's
formation in 1994.
The principal occupation and business experience during at least the last
five years for each person who will be a Director of Seacoast Financial upon
consummation of the Conversion is set forth below. Seacoast Financial's Board
does not currently have a Chairman due to the death of Richard Marchisio on
September 10, 1998. Mr. Marchisio served as Chairman of the Boards of both
Seacoast Financial and Compass from 1994 until his death. He was President of
Compass from 1984 until his retirement in 1990. Mr. Marchisio first joined
Compass in 1946.
Manuel G. Camacho is a dentist in private practice in New Bedford,
Massachusetts. He is semi-retired.
David P. Cameron was President of Morse Cutting Tools in New Bedford,
Massachusetts until his retirement in 1982.
Kevin G. Champagne. See "Executive Officers," below.
Howard C. Dyer, Jr. was General Manager, New Bedford Storage Warehouse,
New Bedford, Massachusetts, until his retirement in 1996.
Glen F. Johnson was a General Manager, Goodyear Tire and Rubber, New
Bedford, Massachusetts, until his retirement in 1985.
Thornton P. Klaren, Jr. is retired.
J. Louis LeBlanc is an attorney in private practice in New Bedford,
Massachusetts.
A. William Munro is President of Munro Distributing, Inc., Fall River,
Massachusetts.
Carl Ribeiro is President, Luzo Foodservice Corp., New Bedford,
Massachusetts.
Joseph H. Silverstein was the President of Silverstein's Family Store, a
retail clothing store located in New Bedford, Massachusetts, until his
retirement in 1992.
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Gerald H. Silvia is the owner of Americana Travel, a travel agency located
in Fall River, Massachusetts.
Upon consummation of the Merger, Mr. Legate and two other directors of
Sandwich Bancorp to be selected by Seacoast Financial will be appointed as
directors of Seacoast Financial. Mr. Legate will also be appointed as a
director and a member of the Executive Committee of Compass. Set forth below is
certain biographical information with respect to Mr. Legate.
Frederic D. Legate has served Sandwich Bank in various capacities since
1977 and was appointed its President and Chief Executive Officer in 1981. Mr.
Legate became President and Chief Executive Officer of Sandwich Bancorp upon
its formation in 1997. Mr. Legate plans to retire as an executive officer
following consummation of the Merger.
Executive Officers
The names and ages of each of the executive officers of Seacoast Financial
and Compass and the principal occupation and business experience during at
least the last five years for each is set forth below. Each of Messrs.
Kelleher, Lambert, Rigby, Taber, Mascianica and Camara and Ms. Belanger serve
as a Vice President of Seacoast Financial, a position each has held since the
formation of Seacoast Financial in 1994.
Kevin G. Champagne has served as President and Chief Executive Officer of
Seacoast Financial since its formation in 1994 and as President and Chief
Executive Officer of Compass since 1994. Prior to 1994, Mr. Champagne was
Executive Vice President/Retail Banking of Compass. He joined Compass's
Management Training Program in 1971. Mr. Champagne is 48 years old.
Arthur W. Short served as Treasurer of Seacoast Financial since its
formation in 1994 until 1997. He currently serves as Vice President of Seacoast
Financial, as Executive Vice President of Compass, a position he has held since
1993, and as Chief Operating Officer of Compass, a position he has held since
1997. Prior to 1993, Mr. Short served as Senior Vice President/Treasurer and
Chief Financial Officer of Compass. He joined Compass in 1981. Mr. Short is 57
years old.
John D. Kelleher has served as Executive Vice President of Compass since
1993 and has headed Compass's Lending Division since 1984. Mr. Kelleher joined
Compass's Management Training Program in 1971. Mr. Kelleher is 53 years old.
James E. Lambert has served as Executive Vice President of Compass since
1994. Prior to joining Compass in 1990, Mr. Lambert served as President of
Martha's Vineyard National Bank, which merged with Compass in 1994. Mr. Lambert
is 53 years old.
Francis S. Mascianica, Jr. has served as Senior Vice President/Treasurer
and Chief Financial Officer of Compass since 1997 and as Treasurer of Seacoast
Financial since 1997. Mr. Mascianica has held various positions with Compass
since he joined the bank in 1981. He is 50 years old.
Carolyn A. Belanger has served as Senior Vice President and head of the
Retail Banking Division of Compass since 1994. Ms. Belanger has held various
positions with Compass since she joined the bank in 1966. She is 50 years old.
William D. Rigby has served as Senior Vice President since 1994 and
Manager of the Consumer Lending Department of Compass since 1985, when he
joined Compass. He is 50 years old.
Carl W. Taber has served as Senior Vice President since 1993 and head of
Mortgage Lending of Compass since 1984. Mr. Taber joined Compass's Management
Training Program in 1975. He is 45 years old.
Robert J. Camara has served as Senior Vice President and Loan Servicing
Manager of Compass since 1997. He joined Compass in 1987 as Assistant Vice
President and Auditor and became Vice President and Loan Servicing Manager in
1990. Mr. Camara is 41 years old.
The executive officers of Seacoast Financial and Compass are elected
annually and hold office until their successors are chosen and qualified.
Since the formation of Seacoast Financial in 1994, none of the executive
officers have received remuneration from Seacoast Financial. It is not
anticipated that the executive officers of Seacoast Financial will initially
receive
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any remuneration in their capacities as executive officers. For information
concerning compensation of executive officers of Compass, see "--Executive
Compensation."
Indemnification and Limitation of Liability
The Articles of Organization of Seacoast Financial provide that each
Director of Seacoast Financial and each officer appointed or elected by the
Board of Directors of Seacoast Financial shall be indemnified by Seacoast
Financial to the extent permitted by law against any expenses incurred by such
person in connection with any proceeding in which he or she is involved as a
result of (i) his or her serving or having served as a Director, officer or
employee of Seacoast Financial, (ii) his or her serving or having served as a
Director, officer or employee of any of Seacoast Financial's wholly owned
subsidiaries or (iii) his or her serving or having served in any capacity with
respect to any other corporation, organization, partnership, joint venture,
trust, employee benefit plan or other entity at the request or direction of
Seacoast Financial. The Board of Directors may, in its discretion, indemnify
non-officer employees of Seacoast Financial.
In accordance with Massachusetts law, the Articles of Organization provide
that no indemnification shall be provided with respect to a matter as to which
the indemnitee shall have been determined by final judicial decision from which
there is no further right to appeal that the indemnitee is not entitled to be
indemnified for such expenses.
If Seacoast Financial does not assume the defense or unless and until
Seacoast Financial assumes the defense of any proceeding of which Seacoast
Financial receives notice, Seacoast Financial has agreed to pay, in the case of
a Director or officer at the level of Vice President or above, and may agree to
pay, in the case of any other indemnitee, the expenses incurred by an
indemnitee in defending a proceeding or any appeal therefrom in advance of the
final disposition of such proceeding.
The Articles of Organization also provide that no Director of Seacoast
Financial shall be personally liable to Seacoast Financial or its stockholders
for monetary damages for breach of fiduciary duty as a Director notwithstanding
any provision of law imposing such liability. However, a Director shall be
liable (i) for any breach of the Director's duty of loyalty to Seacoast
Financial or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Sections 61 or 62 of Chapter 156B of the MGL, or (iv) with respect to any
transaction from which the Director derived an improper personal benefit.
Committees of the Boards of Seacoast Financial and Compass
The Boards of Seacoast Financial and Compass have two committees, an
Executive Committee and an Audit Committee. The current members of the
Executive Committee are Messrs. Champagne, Dyer, Johnson, LeBlanc, Munro and
Silverstein, and following the consummation of the Merger, Frederic D. Legate,
currently the President of Sandwich Bancorp, will join the Executive Committee.
The Executive Committee is vested with the authority of the Board in most
matters, except those powers which by law may not be delegated. The Executive
Committee also serves as the Compensation Committee, in which capacity it
reviews and establishes salaries and other compensation and benefit programs of
all officers and employees of Seacoast Financial and Compass, and as the
Nominating Committee, which recommends to the Boards of Seacoast Financial and
Compass nominees for election to the Boards of Seacoast Financial and Compass.
The Audit Committee, of which Messrs. Camacho, Cameron, Klaren, Ribeiro
and Silvia are members, reviews the results and scope of the audit and other
services provided by Seacoast Financial's and Compass's independent auditors.
Compensation Committee Interlocks and Insider Participation
The Executive Committee serves as the Compensation Committee. Its members
are Messrs. Champagne, Dyer, Johnson, LeBlanc, Munro and Silverstein. Mr.
Champagne, the President and Chief Executive Officer of Seacoast Financial and
Compass, does not participate in deliberations involving his own compensation.
No executive officer of Seacoast Financial or Compass served (i) as a
member of the compensation committee of another entity, one of whose executive
officers served on the Executive Committee of Seacoast Financial and Compass,
(ii) as a director of another entity, one of whose executive officers served on
the Executive Committee of Seacoast Financial and Compass, or (iii) as a member
of the compensation committee of another entity, one of whose executive
officers served as a trustee or director of Seacoast Financial or Compass.
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Compensation of Directors
Members of the Seacoast Financial and Compass Boards receive $500 for each
Board meeting that they attend. Prior to his death on September 10, 1998, the
Chairman of the Board of Seacoast Financial received an annual retainer of
$50,000. Seacoast Financial's Board has not elected a new Chairman nor has it
determined what the compensation of any future Chairman would be. Members of
Seacoast Financial's and Compass's Executive Committee receive an annual
retainer of $13,000 and members of Compass's Audit Committee receive an annual
retainer of $5,000. In addition, members of the Audit Committee (other than the
Chairman) are paid $500 for each Seacoast Financial Audit Committee meeting
that they attend and the Chairman of the Audit Committee is paid $600 for each
Seacoast Financial Audit Committee meeting that he attends. The most senior
member of the Board of Directors of Compass receives an annual retainer of
$7,000 for duties performed in connection with his appointment as a
non-operating Vice President of Compass. Mr. Champagne does not receive any
fees for service on the Board of Directors of Seacoast Financial or Compass or
for service on any committees of either Board.
Executive Compensation
Summary Compensation Table. The following table sets forth the cash
compensation paid by Compass as well as certain other compensation paid or
accrued for services rendered in all capacities during the year ended December
31, 1997 to the Chief Executive Officer of Seacoast Financial and Compass and
the four other executive officers of Seacoast Financial or Compass who received
total annual compensation in excess of $100,000 (such other executive officers,
"Named Executive Officers").
<TABLE>
<CAPTION>
All Other
Annual Compensation Compensation(4)
------------------------------------------ ----------------
Name and Principal
Position with Seacoast Financial and Compass Year(1) Salary Bonus(2) Other(3)
- ----------------------------------------------------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Kevin G. Champagne .................................. 1997 $230,002 $59,801 $5,794
President and Chief Executive
Officer of Seacoast Financial and Compass
A. William Short .................................... 1997 148,506 34,750 7,450
Vice President of Seacoast Financial;
Executive Vice President and Chief Operating Officer
of Compass
John D. Kelleher .................................... 1997 134,905 31,568 6,478
Vice President of Seacoast Financial;
Executive Vice President/Lending of Compass
James E. Lambert .................................... 1997 120,001 23,400 6,030
Vice President of Seacoast Financial;
Executive Vice President/Commercial Lending of
Compass
Carolyn A. Belanger ................................. 1997 105,346 24,651 4,829
Vice President of Seacoast Financial;
Senior Vice President/Retail Banking of Compass
</TABLE>
- ------------
(1) Because Seacoast Financial will not be a public company until the
Conversion, Summary Compensation information is not provided for 1996 and
1995 in accordance with the rules of the SEC.
(2) Represents bonuses paid in December 1997 for the fiscal year ended October
31, 1997.
(3) Perquisites and other personal benefits paid to each officer included in
the Summary Compensation Table in each instance aggregated less than 10% of
the total annual salary and bonus set forth in the columns entitled
"Salary" and "Bonus" for each officer, and accordingly, are omitted from
the table in accordance with the rules of the SEC.
(4) Includes Compass's matching contributions under its 401(k) plan of $4,750
for each of Messrs. Champagne, Short and Kelleher and of $4,302 and $3,900
for Mr. Lambert and Ms. Belanger, respectively. Also includes premiums paid
by Compass for group term life insurance of $1,044, $2,700, $1,728, $1,728
and $929 for Messrs. Champagne, Short, Kelleher and Lambert and Ms.
Belanger, respectively.
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Employment and Change in Control Agreements
In connection with the Conversion, Seacoast Financial and Compass will
enter into certain employment agreements (each such agreement, an "Employment
Agreement" and, such agreements collectively, the "Employment Agreements") and
certain change in control agreements (the "Change in Control Agreements") with
Messrs. Champagne, Short, Kelleher and Mascianica and Ms. Belanger
(collectively, the "Officers"). The Employment Agreements provide that the
Officers will receive certain benefits and a base salary equal to $270,003,
$156,505, $141,654, $103,382 and $110,346, respectively, subject to increases
in accordance with the usual practices of Seacoast Financial and Compass with
respect to review of compensation of their senior executives.
Mr. Champagne's Employment Agreement has a three-year term and the
Employment Agreements of the other Officers have two-year terms. The terms all
commence on the date of consummation of the Conversion, and each term extends
by one day for each day that an Officer remains employed by Compass or (in the
case of Mr. Champagne) by Compass or Seacoast Financial until either of the
Officer or Compass or (in the case of Mr. Champagne) Compass or Seacoast
Financial give a notice of non-renewal. Under each of the Employment
Agreements, Seacoast Financial (in the case of Mr. Champagne) and Compass (in
the case of the other Officers) may terminate an Officer's employment at any
time for "cause," as such term is defined in such agreements, without incurring
any continuing obligations to the Officer. If Seacoast Financial or Compass
terminates an Officer's employment for any reason other than for cause or if
the Officer terminates the Officer's employment for "good reason," as such term
is defined in the Employment Agreements, Seacoast Financial and Compass will
become obligated to provide the Officer: (i) an amount equal to the sum of (a)
the Officer's base salary or other compensation earned through the date of
termination, (b) the Officer's pro rata share of the Officer's highest annual
bonus paid during the three fiscal years preceding such termination and (c) all
accrued vacation and deferred compensation; (ii) a lump sum severance benefit
equal to three times (in the case of Mr. Champagne) or two times (in the case
of the other Officers) the sum of (a) the Officer's annual base salary and (b)
the highest annual bonus paid to the Officer in the three fiscal years
preceding the termination; (iii) disability and medical benefits specified in
the Officer's Employment Agreement for the duration of what otherwise would
have been the remaining term of the Employment Agreement (which, as a result of
the daily extension of the term of the Agreements, will always be three years
for Mr. Champagne and two years for the other Officers); and (iv) a pension
adjustment as specified in the Employment Agreement. The Employment Agreements
also provide certain retirement, death and disability benefits. Mr. Champagne's
Employment Agreement includes a provision reimbursing him, on an after-tax
basis, for any "golden parachute" excise taxes.
The Change in Control Agreements provide that an Officer may receive
certain benefits if the Officer is terminated within three years of a "Change
in Control" (as such term is defined in the Change in Control Agreements) of
either Seacoast Financial or Compass. An Officer would receive such termination
benefits if Seacoast Financial or Compass terminated the Officer for any reason
other than death or "cause," as such term is defined in the Employment
Agreements, or if the Officer terminated the Officer's employment following:
(i) a significant change in the nature or scope of the Officer's
responsibilities, authorities, powers, functions or duties; (ii) a
determination by the Officer that, as a result of a Change in Control, the
Officer is unable to exercise the responsibilities, authorities, powers,
functions or duties exercised by the Officer immediately prior to such Change
in Control; (iii) a reduction in the Officer's annual base salary; (iv) a
significant relocation of the offices of Seacoast Financial or Compass; (v) a
failure of either Seacoast Financial or Compass to pay any portion of
compensation due to the Officer; (vi) the termination of or a material
reduction in the Officer's benefits; or (vii) a failure of Seacoast Financial
or Compass to obtain a satisfactory agreement from any successor to assume and
agree to perform the Officer's Change in Control Agreement. The benefits in the
case of both Mr. Champagne and the other Officers are: (i) a lump sum severance
payment equal to three times the "base amount," as such term is defined in
Section 280G(b)(3) of the Code, applicable to the Officer minus $1.00 and (ii)
for a period of three years, continuation of the Officer's disability and
medical benefits existing on the date of the termination. Alternatively, an
Officer could elect to receive such termination benefits as the Officer would
be entitled to under the Officer's Employment Agreement, but may not receive
payments under both agreements. Seacoast Financial also expects to enter into
Change in Control Agreements with three other officers that are substantially
similar to the foregoing, except that the benefit is equal to two (rather than
three) times the "base amount" and is payable only if employment terminates
within one year after the Change in Control.
Cash and benefits paid to each Officer under the Change in Control
Agreements together with payments under other benefit plans following a change
in control of Seacoast Financial or Compass may constitute an "excess
parachute" payment under Section 280G of the Code, resulting in the imposition
of a 20% excise tax on the recipient and the denial of the deduction for such
excess amounts to Seacoast Financial or Compass. The Change in Control
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Agreements place limitations on the salary and benefits the Officers can
receive so that such payments do not exceed the Section 280G limits. However,
such limitations would not apply if an Officer elects to receive payments under
his or her Employment Agreement instead of his or her Change in Control
Agreement.
Compass also has a severance agreement with James E. Lambert, its
Executive Vice President/Commercial Lending. Mr. Lambert was formerly President
of Martha's Vineyard National Bank, which Compass acquired in December 1994.
Pursuant to this agreement, which Compass assumed from Martha's Vineyard
National Bank, Compass has agreed to pay Mr. Lambert one year's severance for
any termination of his employment by Compass, other than termination for
"cause", and for any termination by Mr. Lambert for "good reason," as such
terms are defined in the agreement.
Compensation of Officers and Directors Through Benefit Plans
Compass's current tax-qualified employee pension benefit plans consist of
a defined benefit pension plan and a 401(k) plan. As a result of the
Conversion, Seacoast Financial and Compass will be able to compensate employees
with stock-based compensation pursuant to the ESOP and pursuant to stock option
plans and other stock-based management recognition and retention plans
described below.
Defined Benefit Pension Plan. Compass maintains the Savings Banks
Employees Retirement Association Pension Plan, which is a qualified, tax-exempt
defined benefit plan (the "Retirement Plan"). All employees age 21 or older who
have worked at Compass for a period of two years and have been credited with
1,000 or more hours of service with Compass during the year are eligible to
accrue benefits under the Retirement Plan. Compass contributes annually an
amount to the Retirement Plan necessary to satisfy the actuarially determined
minimum funding requirements in accordance with ERISA.
The retirement benefit provided is an amount equal to 1.25% of a
participant's average compensation based on the average of the three
consecutive years providing the highest average compensation multiplied by the
participant's years of service (up to a maximum of 25 years) plus 0.6% of such
average compensation in excess of covered compensation multiplied by the
participant's total number of years of service (up to a maximum of 25 years).
Normal retirement age is 65. Retirement benefits are also payable upon
disability or death. A reduced benefit is payable upon early retirement at age
62, at age 55 and the completion of ten years of service with Compass or at age
50 and the completion of 15 years of such service. Benefits under the
Retirement Plan are payable in various annuity forms as well as in the form of
a single lump sum payment. As of October 31, 1997, the most recent date for
which information is available, the market value of the Retirement Plan's
assets was $8.4 million.
The following table indicates the annual retirement benefit that would be
payable under the Retirement Plan upon retirement by existing employees at age
65 between November 1, 1997 and October 31, 1998, expressed in the form of a
single life annuity for the final average salary and benefit service
classifications specified below:
Projected Annual Pension Benefit
Based on Years of Service
<TABLE>
<CAPTION>
Average 25 Years
Compensation 10 Years 15 Years 20 Years and After
- ---------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
$ 20,000 $ 2,500 $ 3,750 $ 5,000 $6,250
40,000 5,642 8,463 11,284 14,104
60,000 9,342 14,013 18,684 23,354
80,000 13,042 19,563 26,084 32,604
100,000 16,742 25,113 33,484 41,854
120,000 20,442 30,663 40,884 51,104
125,000 21,367 32,050 42,734 53,417
140,000 24,142 36,213 48,284 60,354
150,000 25,992 38,988 51,984 64,979
160,000(1) 27,842 41,763 55,684 69,604
</TABLE>
- ------------
(1) Beginning November 1, 1997, Federal law does not permit defined benefit
pension plans to recognize compensation in excess of $160,000 for plan
years (for SBERA plans).
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At October 31, 1997, the approximate years of credited service for the
named executive officers were as follows:
<TABLE>
<CAPTION>
Years of Credited Service
Name at Age 65
- ----------------------------- --------------------------
<S> <C>
Kevin G. Champagne .......... 25
Arthur W. Short ............. 25
John D. Kelleher ............ 25
James E. Lambert ............ 14
Carolyn A. Belanger ......... 25
</TABLE>
Executive Salary Continuation Agreements. Compass has entered into a
salary continuation agreement with four of its executive officers: Messrs.
Champagne, Short, Kelleher and Mascianica. The agreements provide each officer
with a supplemental retirement benefit in an amount equal to 25% of the average
of the three highest years of compensation paid to the officer in the ten years
of employment immediately preceding the officer's retirement. The benefit is
payable monthly, for a period of 15 years, commencing on the first day of the
month next following the officer's retirement. A reduced benefit is payable if
the officer retires prior to the age of 65, but after age 55. If the officer
dies while employed by Compass, a monthly benefit will be paid to the officer's
beneficiary for a period of 15 years in an amount equal to 25% of the officer's
salary on the date of his death. If the officer's employment with Compass is
terminated prior to the age of 55 other than for cause, the officer is entitled
to a benefit equal to 5% of the benefit he would have received upon retirement
at age 65, multiplied by the number of years of service between the age of 35
and termination of employment. The agreements provide that Compass may not
merge or consolidate into another corporation or sell substantially all of its
assets to another corporation unless such corporation agrees to assume and
discharge the obligations of Compass under the agreements. The agreements are
funded by life insurance policies, of which Compass is the owner and
beneficiary, held in a "rabbi" trust.
Executive Deferred Compensation Plan. Compass has a deferred compensation
plan for the benefit of certain of its senior management employees, as
designated from time to time by the President of Compass. At the current time,
17 employees are eligible to participate in the plan. Participants may defer 1%
to 15% of their base salary and 1% to 100% of any bonus to which they are
entitled. Deferred amounts are credited to each participant's account and are
held in a "rabbi" trust. The deferred compensation plan permits employees to
direct the investment of their own accounts into various investment options.
Compass has amended the plan to enable the participants to direct the
investment of their accounts into subscriptions for Conversion Shares in the
Offering, subject to participants' eligibility to so subscribe based on their
qualifying deposits with Compass. Distributions to a participant are made upon
the earliest of the participant's retirement, death or other termination of
employment, in the form requested by the participant in his or her salary
reduction deferral election. The plan permits, at the Committee's discretion,
withdrawals in the event of a financial hardship caused by an unforeseeable
emergency.
401(k) Plan. Compass maintains a Savings Banks Employees Retirement
Association 401(k) Plan, which is a qualified, tax-exempt plan. All employees
who have attained age 21 and have completed one year of employment during which
they worked at least 1,000 hours are eligible to participate.
Under the 401(k) Plan, participants are permitted to make salary reduction
contributions equal to the lesser of 15% of compensation or $10,000 (as indexed
annually). All employee contributions and earnings thereon are fully and
immediately vested. A participant may withdraw salary reduction contributions
in the event the participant suffers a financial hardship. The 401(k) Plan
permits employees to direct the investment of their own accounts into various
investment options. Compass matches 50% of the first 6% of compensation that a
participant contributes to the 401(k) Plan. Compass has amended the plan to
enable the participants to direct the investment of their accounts into
subscriptions for Conversion Shares in the Offering, subject to such
participants' eligibility to so subscribe under the subscription priorities set
forth in the Plan of Conversion.
Plan benefits will be paid to each participant in the form of a life
annuity (or joint and survivor annuity if married) upon retirement or death
unless an alternate form of distribution (lump sum or equal payments over a
fixed period) is selected. If a participant terminates employment prior to
retirement, his vested benefit will be held by the 401(k) Plan until the
participant elects to receive his benefit from the plan. If a participant (and
the participant's spouse, if married) elects to receive benefits after
termination of employment prior to normal or early retirement age, benefits
will be paid in a lump sum. Normal retirement age under the plan is age 65.
Early retirement age is age 59-1/2.
ESOP. Compass intends to implement the ESOP in connection with the
Conversion. Employees with at least one year of employment with Compass and who
have attained age 21 are eligible to participate. As part of the
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Conversion, the ESOP intends to borrow funds from Seacoast Financial and use
those funds to purchase a number of shares equal to up to 8% of the Conversion
Shares. Collateral for the loan will be the unallocated shares of Seacoast
Financial Common Stock purchased by the ESOP. The loan will be repaid
principally from Compass's discretionary contributions to the ESOP, over a
period of not less than 20 years. Shares purchased by the ESOP will be held in
a suspense account for allocation among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the ESOP loan will be allocated
among ESOP participants on the basis of compensation in the year of allocation.
Participants in the ESOP will receive credit for years of service prior to the
effective date of the ESOP. Benefits generally vest over a six-year period.
Benefits generally vest at the rate of 20% per year beginning in the second
year of service until a participant is 100% vested after six years or upon
normal retirement (as such term is defined in the ESOP), disability or death of
the participant or a change in control (as such term is defined in the ESOP). A
participant who terminates employment for reasons other than death, retirement
or disability prior to seven years of credited service will forfeit the
nonvested portion of his benefits under the ESOP. Benefits will be payable in
the form of Seacoast Financial Common Stock and cash upon death, retirement,
early retirement, disability or separation from service. Compass's
contributions to the ESOP are discretionary, subject to the loan terms and tax
law limits, and, therefore, benefits payable under the ESOP cannot be
estimated. Compass is required to record compensation expense in an amount
equal to the fair market value of the shares released from the suspense
account.
Compass has established a committee of three officers of Compass to
administer the ESOP, and has appointed its President and Chief Executive
Officer to serve as trustee of the ESOP. The ESOP committee may instruct the
trustee regarding investment of funds contributed to the ESOP. The ESOP
trustee, subject to his fiduciary duty, must vote all allocated shares held in
the ESOP in accordance with the instructions of participating employees. Under
the ESOP, nondirected shares and shares held in the suspense account will be
voted in a manner calculated to most accurately reflect the instructions it has
received from participants regarding the allocated stock so long as such vote
is in accordance with the provisions of ERISA.
Stock Option Plan. Following consummation of the Conversion, the Board of
Directors may consider the adoption of a stock option plan for directors and
officers of Compass and Seacoast Financial. Applicable banking regulations
would permit Seacoast Financial to adopt such a plan for presentation to
Seacoast Financial's stockholders at a meeting to be held no earlier than six
months after the completion of the Conversion. If such plan were adopted, it
would provide for the granting of options to purchase Seacoast Financial Common
Stock in an aggregate amount no greater than 10% of the Conversion Shares. Ten
percent of such shares would amount to 1,360,000 shares, 1,600,000 shares,
1,840,000 shares or 2,116,000 shares at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range, respectively. No options
would be granted under a stock option plan until the date on which stockholder
approval is received.
Stock Plan. Following consummation of the Conversion, the Board of
Directors may also consider the adoption of a stock plan for the recognition
and retention of officers and directors of Seacoast Financial and Compass.
Applicable banking regulations would permit Seacoast Financial to adopt such a
plan for presentation to Seacoast Financial's stockholders at a meeting to be
held no earlier than six months after the completion of the Conversion. If such
plan were adopted, it would provide for the award of shares of Seacoast
Financial Common Stock to executive officers and directors without their having
to pay cash for the shares, in a manner designed to encourage them to continue
their service with Compass. If the plan were adopted, Compass or Seacoast
Financial would contribute funds to the plan from time to time to enable it to
acquire shares of Seacoast Financial Common Stock for award under the plan
(either in open market purchases or directly from Seacoast Financial) in an
aggregate amount no greater than 4% of the Conversion Shares. Four percent of
the Conversion Shares would amount to 544,000 shares, 640,000 shares, 736,000
or 846,400 shares at the minimum, midpoint, maximum and 15% above the maximum
of the Estimated Valuation Range, respectively. In the event that additional
authorized but unissued shares were acquired by the plan, the interests of
existing stockholders would be diluted. No awards under the plan would be made
until the date of approval of the plan by Seacoast Financial's stockholders.
Indebtedness of Management
Compass makes loans to non-officer directors of Compass and Trustees of
Seacoast Financial. Such loans are made on the same terms and conditions as
those of comparable transactions with the general public and do not present
more than the normal risk of collectibility.
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PURCHASES BY MANAGEMENT OF SEACOAST FINANCIAL AND COMPASS
The following table sets forth information regarding intended Conversion
Share purchases by each person who will serve as a director of Seacoast
Financial upon consummation of the Conversion, by the non-director executive
officers of Seacoast Financial and Compass as a group and by all directors and
executive officers as a group, in each case including such person's associates.
This table excludes shares to be purchased by the ESOP. The directors and
executive officers of Compass and Seacoast Financial have indicated their
intention to purchase in the Conversion an aggregate of $4,050,000 of
Conversion Shares, equal to 3.0%, 2.5%, 2.2%, and 1.9% of the number of shares
to be issued in the Conversion at the minimum, midpoint, maximum and 15% above
the maximum of the Estimated Valuation Range, respectively.
<TABLE>
<CAPTION>
Aggregate Number Percent
Name Purchase Price of Shares at Midpoint
- ------------------------------------------- ---------------- ----------- ------------
<S> <C> <C> <C>
Manuel G. Camacho, D.D.S. ................. $ 100,000 10,000 *
David P. Cameron .......................... 50,000 5,000 *
Kevin G. Champagne ........................ 250,000 25,000 *
Howard C. Dyer, Jr. ....................... 40,000 4,000 *
Glen F. Johnson ........................... 150,000 15,000 *
Thornton P. Klaren, Jr. ................... 55,000 5,500 *
J. Louis LeBlanc .......................... 650,000 65,000 *
A. William Munro .......................... 1,500,000 150,000 *
Carl Ribeiro .............................. 300,000 30,000 *
Joseph Silverstein ........................ 300,000 30,000 *
Gerald H. Silvia .......................... 160,000 16,000 *
All non-director executive officers
(8 persons) as a group ................... 495,000 49,500 *
---------- -------
Total shares to be purchased by
directors and executive officers ......... $4,050,000 405,000 2.5%
========== =======
</TABLE>
- ------------
* Less than 1%.
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THE OFFERINGS
Pursuant to applicable state and federal regulation, the Conversion Shares
are being offered for sale in the Subscription Offering pursuant to
subscription rights in the following order of descending priority to: (i) the
Eligible Account Holders (holders of deposit accounts at Compass with an
aggregate balance of $50 or more on December 31, 1996) ("Qualifying Deposits");
(ii) the Supplemental Eligible Account Holders (holders of deposit accounts at
Compass with an aggregate balance of $50 or more on June 30, 1997)
("Supplemental Qualifying Deposits"); (iii) the ESOP; and (iv) employees,
officers, directors and trustees of Compass and Seacoast Financial. Subject to
the prior rights of holders of subscription rights, Seacoast Financial may
offer Conversion Shares in the Community Offering to certain members of the
general public with a preference given to residents of "Compass's Community"
(as such community is defined herein under "--Community Offering"). The
Community Offering may commence concurrently with, during or promptly after the
Subscription Offering. It is anticipated that shares not subscribed for in the
Subscription and Community Offerings, if any, will be offered for sale by
Seacoast Financial to the general public in the Syndicated Community Offering.
Subscription Offering
In accordance with the Conversion Plan, the following persons have the
right to subscribe for the purchase of Conversion Shares in the Subscription
Offering in the order of priority set forth below. All subscriptions received
will be subject to the availability of Conversion Shares after satisfaction of
all subscriptions of all persons having prior rights in the Subscription
Offering, to the maximum and minimum purchase limitations set forth in the
Conversion Plan and as described below under "--Limitations Upon Purchases of
Conversion Shares."
<TABLE>
<S> <C>
Priority 1: Each Eligible Account Holder will have an opportunity
Eligible to subscribe for a number of Conversion Shares equal to
Account the Individual Purchase Limit, defined as the greatest
Holders of (x) $750,000 of Conversion Shares, (y) one-tenth of
one percent (.10%) of the Conversion Shares or (z) 15
times the product (rounded down to the nearest whole
number) obtained by multiplying (1) the total number of
Conversion Shares to be issued in the Conversion by (2)
a fraction, of which the numerator is the Qualifying
Deposit of the Eligible Account Holder and the
denominator is the total amount of Qualifying Deposits
of all Eligible Account Holders. If there are
insufficient shares available to satisfy all
subscriptions of Eligible Account Holders, shares will
be allocated to Eligible Account Holders so as to
permit each such subscribing Eligible Account Holder to
purchase a number of shares sufficient to make his or
her total allocation equal to the lesser of 100 shares
or the number of shares subscribed for. Thereafter,
unallocated shares will be allocated pro rata to
remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the same proportion
that each such subscriber's Qualifying Deposits bears
to the total amount of Qualifying Deposits of all
subscribing Eligible Account Holders whose
subscriptions remain unfilled. Subscription rights to
purchase Conversion Shares received by executive
officers, trustees, Corporators, and directors of
Seacoast Financial and Compass, including associates of
executive officers, trustees, Corporators and
directors, based on their increased deposits in Compass
in the one-year period preceding the Eligibility Record
Date, shall be subordinated to the subscription rights
of other Eligible Account Holders. To ensure proper
allocation of stock, each Eligible Account Holder must
list on his Order Form all deposit accounts in which he
had an ownership interest as of the Eligibility Record Date.
</TABLE>
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<TABLE>
<S> <C>
Priority 2: Each Supplemental Eligible Account Holder will have the
Supplemental opportunity to purchase, to the extent there are
Eligible sufficient shares remaining after satisfaction of
Account subscriptions by Account Holders, the greatest of (x)
Holders $750,000 of Conversion Shares, (y) one-tenth of one
percent (.10%) of the Conversion Shares, or (z) 15
times the product (rounded down to the nearest whole
number) obtained by multiplying (1) the total number of
Conversion Shares to be issued in the Conversion by (2)
a fraction, of which the numerator is the Supplemental
Qualifying Deposit of the Supplemental Eligible Account
Holder and the denominator is the total amount of
Supplemental Qualifying Deposits of all Supplemental
Eligible Account Holders. In the event Eligible Account
Holders subscribe for all available shares,
subscriptions of Supplemental Eligible Account Holders
will not be filled. In the event Supplemental Eligible
Account Holders subscribe for more than the available
number of shares, the Conversion Shares available for
purchase will be allocated among subscribing
Supplemental Eligible Account Holders so as to permit
each subscribing Supplemental Eligible Account Holder
to purchase a number of shares sufficient to make his
total allocation equal to the lesser of 100 shares or
the number of shares subscribed for. Thereafter,
unallocated shares will be allocated to each
subscribing Supplemental Eligible Account Holder whose
subscription remains unfilled in the same proportion
that such subscriber's Supplemental Qualifying Deposits
bear to the total amount of Supplemental Qualifying
Deposits of all subscribing Supplemental Eligible
Account Holders whose subscriptions remain unfilled.
Priority 3: On a third priority basis, the ESOP intends to
Employee Stock subscribe for 8% of the Conversion Shares issued in the
Ownership Plan Offering, or 1,088,000 shares and 1,472,000 shares
based on the minimum and maximum of the Estimated
Valuation Range, respectively. Subscriptions by the
ESOP will not be aggregated with Conversion Shares
purchased directly, pursuant to subscription rights, by
any person eligible to receive allocations of shares
under the ESOP. In the event that the total number of
shares offered in the Conversion is increased to a
number of shares exceeding the maximum of the Estimated
Valuation Range, the ESOP will have a first priority
right to purchase any such shares up to an aggregate of
8% of the Conversion Shares issued.
Priority 4: To the extent there are sufficient shares remaining
Employees, after satisfaction of subscriptions by Eligible Account
Officers, Holders, Supplemental Eligible Account Holders and the
Trustees ESOP, each employee, officer, trustee and director of
Seacoast Financial and Compass will have the
opportunity to subscribe for up to $750,000 of
Conversion Shares. Shares purchased under this order of
priority will be aggregated with shares, if any,
purchased under the preceding priority categories when
calculating the $750,000 individual purchase limit for
such person. In the event that employees, officers,
trustees and directors subscribe under this order of
priority for more Conversion Shares than are available
for purchase by them, the Conversion Shares available
for purchase will be allocated by Seacoast Financial
among such subscribing persons on a equitable basis,
such as by giving weight to the period of service,
compensation and position of the individual subscriber,
provided that no fractional shares will be allocated or
issued.
</TABLE>
Community Offering
Any Conversion Shares not subscribed for in the Subscription Offering may
be offered for sale in the Community Offering. This will involve an offering of
unsubscribed Conversion Shares directly to the general public. The Community
Offering, if any, shall be for a period of not more than 45 days unless
extended by Seacoast Financial and Compass, and shall commence concurrently
with, during or promptly after the Subscription Offering. The Conversion Shares
will be offered and sold in the Community Offering, in accordance with the
Division regulations, so as to achieve the widest distribution of the
Conversion Shares. No person may subscribe for or purchase more than $750,000
of Conversion Shares in the Community Offering.
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<PAGE>
In the event of an oversubscription for Conversion Shares in the Community
Offering, available shares will be allocated first to natural persons residing
in Compass's Community so that each such person receives 100 shares, and
thereafter on a pro rata basis to such persons based on their respective
subscriptions or on such other reasonable basis as Seacoast Financial may
determine. If there are sufficient shares to fill orders of such Community
residents, but not to fill the orders of others subscribing in the Community
Offering, available shares will be allocated to such other persons in the
manner described for Community residents. Compass's Community consists of the
Massachusetts cities and towns of: Acushnet, Aquinnah, Barnstable, Bourne,
Brewster, Buzzard's Bay, Carver, Chatham, Chilmark, Dartmouth, Dennis, Eastham,
Edgartown, Fairhaven, Fall River, Falmouth, Freetown (Assonet), Gosnold,
Harwich, Hyannis, Kingston, Lakeville, Marion, Mashpee, Mattapoisett, New
Bedford, Oak Bluffs, Orleans, Plymouth (including Cedarville and Manomet),
Plympton, Pocasset, Rochester, Sandwich, South Sandwich, Somerset, Swansea,
Tisbury, W. Tisbury, Wareham, Westport, Yarmouth and South Yarmouth ("Compass's
Community").
The terms "residence," "reside" or "residing" as used herein with respect
to any person shall mean any person who occupies a dwelling within Compass's
Community, has an intent to remain in Compass's Community for a period of time
and manifests the genuineness of that intent by establishing an ongoing
physical presence within Compass's Community together with an indication that
such presence in Compass's Community is something other than merely transitory
in nature. To the extent the person is a corporation or other business entity,
the principal place of business or headquarters shall be in Compass's
Community. Seacoast Financial may utilize deposit or loan records or such other
evidence provided to it to make a determination as to whether a person is a
resident. In all cases, however, such a determination shall be in the sole
discretion of Seacoast Financial.
Seacoast Financial, in its sole discretion, may reject subscriptions, in
whole or in part, received from any person in the Community Offering.
Syndicated Community Offering
Any Conversion Shares not sold in the Subscription Offering or in the
Community Offering, if any, may be offered for sale to the general public by a
selling group of broker-dealers to be managed by Ryan Beck and McConnell Budd
in a Syndicated Community Offering, subject to terms, conditions and procedures
as may be determined by Seacoast Financial and Compass in a manner that is
intended to achieve the widest distribution of the Conversion Shares subject to
the rights of Seacoast Financial, in its sole discretion, to accept or reject
in whole or in part all orders in the Syndicated Community Offering. It is
expected that the Syndicated Community Offering, if any, would commence as soon
as practicable after termination of the Community Offering. The Syndicated
Community Offering shall be completed within 45 days after the termination of
the Subscription Offering, unless such period is extended as provided herein.
No person may purchase more than $750,000 of Conversion Shares in the
Syndicated Community Offering.
If for any reason the Syndicated Community Offering cannot be effected or
is not advisable and any shares remain unsold after the Subscription and
Community Offerings, if any, Seacoast Financial and Compass will seek to make
other arrangements for the sale of the remaining Conversion Shares. Such other
arrangements will be subject to the approval of the Division and the FDIC and
to compliance with applicable state and federal securities laws.
Restrictions on Agreements or Understandings Regarding Transfer of Conversion
Shares to Be Purchased in the Offering
Prior to the completion of the Offering, no depositor may transfer or
enter into an agreement or understanding to transfer the legal or beneficial
ownership of the Conversion Shares to be purchased by such person in the
Offering. Each depositor who submits an Order Form will be required to certify
that the purchase of Conversion Shares by such person is solely for the
purchaser's own account and that there is no agreement or understanding
regarding the sale or transfer of such shares. Seacoast Financial intends to
pursue any and all legal and equitable remedies in the event it becomes aware
of any such agreement or understanding, and will not honor orders that it
reasonably believes to involve such an agreement or understanding.
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<PAGE>
Purchasers' Consent to the Merger
The Conversion and the Merger are interdependent transactions, and neither
will be completed unless both of them are. By subscribing for or purchasing
Conversion Shares in the Offering, subscribers and other purchasers will be
approving and consenting to the consummation of the Merger, which is expected
to occur on the tenth trading day after completion of the Conversion. The Order
Form, which each subscriber will be required to sign, contains an
acknowledgment of such approval and consent.
Procedure for Purchasing Shares
To ensure that each purchaser receives this Prospectus at least 48 hours
before the Expiration Date, Prospectuses may not be mailed any later than five
days prior to such date or be hand delivered any later than two days prior to
such date. Order Forms may be distributed only with the Prospectus.
Expiration Date. The Subscription Offering will expire at 10:00 a.m.,
Boston time on November 2, 1998, unless extended by Seacoast Financial, with
regulatory approval, if necessary. The Community Offering, if held, may
commence during or promptly after the Subscription Offering. The Community and
Syndicated Community Offerings must be completed by December 17, 1998, unless
extended, with regulatory approval if necessary. If the Offerings are not
completed by that date and are not so extended, subscribers will have their
funds refunded promptly, with interest. Stock orders submitted are irrevocable
until consummation or termination of the Conversion. However, if the Offering
is not consummated by March 20, 1999 (or by the date the Merger Agreement
expires or is terminated, if earlier), the Offering will be terminated and
investors will have applicable subscription funds returned promptly with
interest (or have applicable withdrawal authorizations canceled).
Use of Order Forms. In order to purchase Conversion Shares, each purchaser
must complete an Order Form except for certain persons purchasing in the
Syndicated Community Offering as more fully described below. Any person
receiving an Order Form who desires to purchase Conversion Shares may do so by
delivering by mail to Seacoast Financial or by hand to any Compass office a
properly executed and completed Order Form, together with full payment for the
Conversion Shares purchased. The Order Form must be received prior to 10:00
a.m. Boston Time on November 2, 1998. Once tendered, a subscriber cannot modify
or revoke an Order Form without the consent of Seacoast Financial. Each person
ordering shares must represent that he is purchasing such shares for his own
account. Seacoast Financial's interpretation of the terms and conditions of the
Conversion Plan and of the acceptability of the Order Forms will be final.
Seacoast Financial is not required to accept copies or faxes of Order Forms.
Payment for Shares. Payment for all Conversion Shares must accompany all
completed Order Forms for the purchase to be valid. Subscribers may make
payment by (i) check or money order or (ii) authorization of withdrawal from
non-transaction deposit accounts maintained with Compass. Payments made by wire
transfer will not be allowed in the Subscription and Community Offerings.
Appropriate means by which withdrawals may be authorized are provided on the
Order Forms. Once such a withdrawal amount has been authorized, Compass will
place a hold on such funds, making them unavailable to the depositor. In the
case of payments authorized to be made through withdrawal from deposit
accounts, all funds authorized for withdrawal will continue to earn interest at
the contract rate until the Offering is completed or terminated. Interest
penalties for early withdrawal applicable to certificate accounts will not
apply to withdrawals authorized for the purchase of shares; however, if a
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate shall be canceled at
the time of withdrawal without penalty, and the remaining balance will earn
interest at Compass's passbook rate subsequent to the withdrawal. In the case
of payments made by check or money order, Seacoast Financial will place such
funds in a segregated savings account at Compass and such funds will earn
interest at Compass's passbook rate from the date payment is received until the
Offering is completed or terminated. Such interest will be paid by check
promptly upon completion or termination of the Offering. An executed Order
Form, once received by Seacoast Financial, may not be modified, amended or
rescinded without the consent of Seacoast Financial, unless the Offering is not
completed by December 17, 1998, in which event purchasers may be given the
opportunity to increase, decrease, confirm or rescind their orders for a
specified time period. If the Offering is not completed by March 20, 1999 (or
by the date the Merger Agreement expires or is terminated, if earlier), the
Offering will be terminated and Seacoast Financial will return subscription
funds promptly with interest (or cancel applicable withdrawal authorizations).
Depending on market conditions, the Seacoast Financial Common Stock may be
offered for sale to the general public on a best efforts basis in the
Syndicated Community Offering by a selling group (the "Selling Group") of
broker-dealers ("Selected Dealers") to be managed by Ryan Beck and McConnell
Budd. Ryan Beck and McConnell Budd, in their discretion, will instruct Selected
Dealers as to the number of shares to be allocated to each Selected
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<PAGE>
Dealer. Only upon allocation of shares to Selected Dealers may Selected Dealers
take orders from their customers. Investors who desire to purchase shares in
the Syndicated Community Offering directly through a Selected Dealer, which may
include Ryan Beck and McConnell Budd, are advised that the members of the
Selling Group are required either (i) upon receipt of an executed Order Form or
direction to execute an Order Form on behalf of an investor, to forward the
appropriate purchase price to Seacoast Financial for deposit in a segregated
account on or before twelve noon, Boston time, of the business day next
following such receipt or execution or (ii) upon receipt of confirmation by
such member of the Selling Group of an investor's interest in purchasing
shares, and following a mailing of an acknowledgment by such member to such
investor on the business day next following receipt of confirmation, to debit
the account of such investor on the third business day next following receipt
of confirmation and to forward the appropriate purchase price to Seacoast
Financial for deposit in the segregated account on or before 12:00 noon, Boston
time, of the business day next following such debiting. Payment for any shares
purchased pursuant to alternative (i) above must be made by check made out to
Seacoast Financial in full payment therefor. Payment for shares purchased
pursuant to alternative (ii) above may be made by wire transfer.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
Conversion Shares in the Offering. Individuals who are participants in
self-directed tax-qualified plans maintained by self-employed individuals
("Keogh Plans") may use the assets in their self-directed Keogh Plan accounts
to purchase Conversion Shares in the Offering. The provisions of ERISA and IRS
regulations require that executive officers, trustees and 10% stockholders who
use self-directed IRA funds and/or Keogh Plan accounts to purchase Conversion
Shares in the Offering make such purchase for the exclusive benefit of the IRA
and/or Keogh Plan participant.
The ESOP will not be required to pay for Conversion Shares that it orders
until consummation of the Offering, provided that there is in force, from the
time the order is received, a loan commitment to lend to the ESOP the amount of
funds necessary to purchase the number of shares ordered.
Delivery of Stock Certificates. Seacoast Financial will mail certificates
representing Conversion Shares issued in the Offering to the persons entitled
thereto at the registration address noted by them on the Order Form as soon as
practicable following consummation of the Offering. Seacoast Financial will
hold any certificates returned as undeliverable until claimed by persons
legally entitled thereto or otherwise disposed of in accordance with applicable
law. Until certificates for the Conversion Shares are available and delivered
to purchasers, purchasers may not be able to sell the shares of such stock
which they ordered.
Plan of Distribution and Selling Commissions
Seacoast Financial has initially distributed Offering materials for the
Offering to certain persons by mail, with additional copies made available at
Compass's offices and by Ryan Beck and McConnell Budd. All prospective
purchasers must send payments directly to Seacoast Financial. Such funds will
be held in a segregated special escrow account at Compass and not released
until the Offering is completed or terminated.
To assist in the marketing of the Conversion Shares, Seacoast Financial
has retained Ryan Beck and McConnell Budd, broker-dealers registered with the
National Association of Securities Dealers (the "NASD"). Ryan Beck and
McConnell Budd will assist Seacoast Financial and Compass in the Offering as
follows: (i) in training and educating Compass's employees regarding the
Conversion and their roles; (ii) assisting in design and implementation of a
marketing strategy; and (iii) managing a Stock Information Center and
coordinating selling efforts. Ryan Beck and McConnell Budd have agreed to use
their best efforts to assist Seacoast Financial and Compass in the solicitation
of subscriptions for Conversion Shares in the Offering. For these services,
Ryan Beck and McConnell Budd will receive an advisory and management fee of
$50,000 in the aggregate and an aggregate marketing fee of 1.0% of the dollar
amount of the Conversion Shares sold in the Subscription and Community
Offerings (other than shares purchased by the ESOP, officers, directors,
trustees, employees and immediate families of the preceding). In the event that
a selected dealers agreement is entered into in connection with a Syndicated
Community Offering, Seacoast Financial will pay a fee to such selected dealers
of 6.0%, including a management fee to Ryan Beck and McConnell Budd of no more
than 1.0% for shares sold by NASD member firms, other than Ryan Beck and
McConnell Budd. Seacoast Financial will also pay to McConnell Budd a $200,000
fee, plus out-of pocket expenses, for its ongoing investment advisory services
in connection with the Merger. McConnell Budd has previously performed
financial advisory services for Compass and been compensated for such services.
Ryan Beck has not provided (and will not provide) investment advisory services
in connection with the Merger.
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Seacoast Financial will also reimburse Ryan Beck and McConnell Budd for
their reasonable out-of-pocket expenses (including legal fees, up to a maximum
of $70,000 and up to $30,000 for other expenses) associated with their
marketing efforts. Seacoast Financial has made an advance payment to Ryan Beck
and McConnell Budd in the amount of $50,000 upon commencement of the Offering.
If the Conversion Plan is terminated by Seacoast Financial, the Offering is not
consummated by December 31, 1998, or if Ryan Beck and McConnell Budd terminates
the agreement with Seacoast Financial in accordance with the provisions of such
agreement, they will be entitled to receive a fee of $50,000 for their advisory
and administrative services, plus reimbursement of their reasonable
out-of-pocket expenses. Seacoast Financial will indemnify Ryan Beck and
McConnell Budd against liabilities and expenses (including legal fees) incurred
in connection with certain claims or litigation arising out of or based upon
untrue statements or omissions contained in the offering material for the
Conversion Shares, including liabilities under the Securities Act.
Trustees, directors and executive officers of Seacoast Financial and
Compass may participate in the solicitation of offers to purchase Conversion
Shares. Other trained employees of Compass may participate in the Offering in
ministerial capacities, providing clerical assistance or answering questions of
a ministerial nature. Other questions of prospective purchasers will be
directed to executive officers or Ryan Beck or McConnell Budd registered
representatives. Seacoast Financial will rely on Rule 3a4-1 of the Exchange Act
so as to permit officers, trustees, directors and employees to participate in
the sale of the Conversion Shares. No officer, trustee, director or employee of
Seacoast Financial or Compass will be compensated for his participation by the
payment of commissions or other remuneration based either directly or
indirectly on transactions in the Conversion Shares.
A Stock Information Center will be established at Compass's main office,
in an area separated from Compass's banking operations. Employees will inform
prospective purchasers to direct their questions to the Stock Information
Center and will provide such persons with the telephone number of the Stock
Information Center.
Other Restrictions. Notwithstanding any other provision of the Conversion
Plan, no person is entitled to purchase any Conversion Shares to the extent
such purchase would be illegal under any federal or state law or regulation
(including state "blue-sky" laws and regulations) or would violate regulations
or policies of the NASD, particularly those regarding free riding and
withholding. Seacoast Financial and/or its agents may ask for an acceptable
legal opinion from any purchaser as to the legality of such purchase and may
refuse to honor any such purchase order if such opinion is not timely
furnished. The Conversion Plan prohibits Compass from lending funds or
extending credit to any persons to purchase Conversion Shares in the Offering.
Stock Pricing and Number of Shares to be Issued
Seacoast Financial has established a fixed Purchase Price of $10.00 per
share for each Conversion Share sold in the Offering. Federal and state
regulations require that the aggregate Purchase Price of the Conversion Shares
offered in the Offering be based on the appraised pro forma market value of the
Conversion Shares, as determined by an independent appraiser. Seacoast
Financial has engaged RP Financial, an independent appraisal firm, to conduct
such valuation. The Independent Valuation is not a recommendation for the
purchase of Conversion Shares. RP Financial has estimated that the pro forma
market value of the Conversion Shares is between $136.0 million and $184.0
million. Based on this estimate, Seacoast Financial will issue a total of
between 13,600,000 and 18,400,000 Conversion Shares at the Purchase Price. RP
Financial will update its appraisal immediately prior to completion of the sale
of the Conversion Shares. As long as the estimated pro forma market value is
not increased by more than 15% above the maximum, or decreased below the
minimum, of the Estimated Valuation Range, no resolicitation of subscribers
will be made and subscribers will not be permitted to modify or cancel their
subscriptions. For more information about RP Financial's appraisal, see "The
Conversion and the Merger--Description of the Conversion--Stock Pricing and
Number of Conversion Shares to be Issued."
Limitations upon Purchases of Conversion Shares
Individual Purchase Limitation. No person may purchase more than the
Individual Purchase Limit, generally $750,000 of Conversion Shares, in all
phases of the Offering combined, except that (i) Seacoast Financial may, in its
sole discretion and without further notice to or solicitation of subscribers or
other prospective purchasers, (x) increase such individual purchase limitation
to up to 5% of the number of Conversion Shares offered in the Offering or (z)
decrease such individual purchase limitation to no less than one-tenth of one
percent (.10%) of the number of Conversion Shares offered in the Offering; (ii)
the ESOP may purchase up to 8% of Conversion Shares issued in the Offering; and
(iii) shares to be held by the ESOP and attributable to an employee or officer
of Compass
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shall not be aggregated with other shares purchased directly by or otherwise
attributable to such employee or officer. Prior to completion of the Offering,
if the maximum purchase limitation is increased, subscribers for the maximum
amount will be, and certain other large subscribers in the sole discretion of
Seacoast Financial and Compass may be, given the opportunity to increase their
subscriptions up to the then applicable limits.
Persons and Associates and Groups Acting in Concert. No person together
with his or her associates or group of persons acting in concert with one
another may purchase more than an aggregate of $1.5 million of Conversion
Shares in all phases of the Offering combined, except that: (i) Seacoast
Financial may, in its sole discretion and without further notice to or
solicitation of subscribers or other prospective purchasers, (x) increase or
decrease such overall maximum purchase limitation to up to 5% of the number of
Conversion Shares offered in the Offering or (z) decrease such overall maximum
purchase limitation to no less than one-tenth of one percent (.10%) of the
number of Conversion Shares offered in the Offering; (ii) the ESOP may purchase
up to 8% of Conversion Shares issued in the Offering; and (iii) shares to be
held by the ESOP and attributable to an employee or officer of Compass shall
not be aggregated with other shares purchased directly by or otherwise
attributable to such employee or officer. For purposes of this paragraph,
trustees and directors of Seacoast Financial and Compass shall not be deemed to
be associates or a group acting in concert solely as a result of their
membership on the boards of those companies.
Increase in the Total Number of Shares Offered. In the event of an
increase in the total number of Conversion Shares offered due to an increase in
the Estimated Valuation Range of up to 15%, the ESOP shall have a first
priority right to purchase any such additional shares necessary to fill its
order for Conversion Shares (up to 8% of the Conversion Shares issued in the
Conversion). Any remaining shares will be allocated to subscribers according to
their respective categories in the Offering.
Rejection of Orders. Seacoast Financial has the right in its sole
discretion to reject any order submitted by a person whose representations
Seacoast Financial believes to be false or who it otherwise believes, either
alone or acting in concert with others, is violating or circumventing, or
intends to violate, evade or circumvent, the terms and conditions of the
Conversion Plan.
Subscribers in Non-Qualified States or in Foreign Countries. Seacoast
Financial may make reasonable efforts to comply with the securities laws of any
state in the United States in which its depositors reside, and will only offer
and sell the Conversion Shares in states in which such offers and sales comply
with such states' securities laws. However, no person will be offered or
allowed to purchase any Conversion Shares if he or she resides in a foreign
country or in a state of the United States with respect to which any of the
following apply: (i) a small number of persons otherwise eligible to purchase
shares under the Conversion Plan reside in such state or foreign country; (ii)
the offer or sale of Conversion Shares to such persons would require Seacoast
Financial or its employees to register, under the securities laws of such state
or foreign country, as a broker or dealer or to register or otherwise qualify
its securities for sale in such state or foreign country; or (iii) such
registration or qualification would be impracticable for reasons of cost or
otherwise.
Directors, Trustees, Officers and Corporators. The aggregate number of
Conversion Shares purchased by officers, trustees, corporators, and directors
of Seacoast Financial and Compass and their associates may not exceed 30% of
the Conversion Shares issued in the Offering.
Interpretation of the Conversion Plan
Seacoast Financial shall have the right, in its sole discretion, to
determine whether prospective purchasers are "residents," "associates" or
"acting in concert" as defined by the Conversion Plan and in interpreting any
and all other provisions of the Conversion Plan. All such determinations are in
the sole discretion of Seacoast Financial and may be based on whatever evidence
Seacoast Financial chooses to use in making any such determination.
Termination of the Offering
The Board of Trustees of Seacoast Financial may terminate the Conversion
Plan in its sole discretion, by reason of the termination of the Merger
Agreement or otherwise, at any time with the concurrence of the Commissioner.
If the minimum number of Conversion Shares offered in the Offering (13,600,000
shares) is not sold by the Expiration Date, Seacoast Financial may terminate
the Offering and promptly refund all orders for Conversion Shares.
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DESCRIPTION OF CAPITAL STOCK OF SEACOAST FINANCIAL
General
Upon consummation of the Conversion, Seacoast Financial will be authorized
to issue up to 110 million shares of capital stock, consisting of 100 million
shares of Seacoast Financial Common Stock and 10 million shares of preferred
stock, par value $.01 per share ("Seacoast Financial Preferred Stock"). As of
the date of this Prospectus, Seacoast Financial has not issued any shares of
Seacoast Financial Common Stock or Seacoast Financial Preferred Stock. Seacoast
Financial currently expects to issue between 13,600,000 and 18,400,000
Conversion Shares, with an adjusted maximum of 21,160,000 shares, in the
Offerings, and between 12,686,225 and 8,817,053 Exchange Shares in the Merger
(based on 1,953,475 shares of Sandwich Common Stock, which is exclusive of
90,000 shares owned by Seacoast Financial, and 45,203 Sandwich Options
outstanding as of June 30, 1998 and assuming Exchange Ratios of 6.4 and 4.4444,
respectively). See "The Conversion and the Merger--Description of the Merger
and Exchange Ratio" and "Pro Forma Data--Pro Forma Outstanding Seacoast
Financial Common Stock." Seacoast Financial does not currently plan to issue
any shares of Seacoast Financial Preferred Stock, either pursuant to the
Conversion or the Merger or in the foreseeable future thereafter.
Seacoast Financial Common Stock
General. Each issued and outstanding share of Seacoast Financial Common
Stock will have the same rights as, and will be identical in all respects with,
each other share of such stock. Upon payment of the Purchase Price for the
Conversion Shares, in accordance with the Conversion Plan, and upon issuance of
the Exchange Shares, in accordance with the provisions of the Merger Agreement,
all such shares will be duly authorized, fully paid, validly issued and
non-assessable.
The Seacoast Financial Common Stock will represent nonwithdrawable
capital, will not be an account that is insurable and will not be insured by
the FDIC or by the DIF.
Voting Rights. Each holder of Seacoast Financial Common Stock will be
entitled to one vote for each share of such stock held by such holder.
Holders of Seacoast Financial Common Stock will not have cumulative voting
rights in connection with the election of directors. Such holders will be able
to elect directors by a plurality of votes cast.
Dividends. Holders of Seacoast Financial Common Stock will be entitled to
receive and share equally in such dividends as the Board of Directors of
Seacoast Financial may declare out of funds legally available therefor. If
Seacoast Financial issues Seacoast Financial Preferred Stock, holders of such
stock may have a priority over holders of Seacoast Financial Common Stock with
respect to the payment of dividends. See "--Seacoast Financial Preferred
Stock." State and federal laws and regulations place limitations on the payment
of dividends. See "Seacoast Financial's Dividend Policy."
Liquidation or Dissolution. Holders of Seacoast Financial Common Stock
will receive pro rata all assets of Seacoast Financial available for
distribution after payment or provision for payment of all debts and
liabilities of Seacoast Financial (including all deposits in Compass and
accrued interest thereon) and after distribution of the liquidation account
established upon the completion of the Conversion for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders who continue their
deposit accounts at Compass. If Seacoast Financial issues Seacoast Financial
Preferred Stock, holders of such stock may have a senior interest over holders
of Seacoast Financial Common Stock in such a distribution. See "--Seacoast
Financial Preferred Stock."
No Preemptive or Redemption Rights. Holders of Seacoast Financial Common
Stock will not have preemptive rights with respect to issuances of any shares
of the capital stock of Seacoast Financial and shares of Seacoast Financial
Common Stock shall not be redeemable.
Seacoast Financial Preferred Stock
Seacoast Financial's Board of Directors may, without stockholder approval
but subject to certain regulatory approvals, create and issue one or more
series of Seacoast Financial Preferred Stock. In connection with the creation
and issuance of such stock, the Board may establish or change the number of
shares in each such series, fix and state the voting powers, designations,
preferences and the relative or special rights or privileges of the shares of
any series so established and the qualifications thereon without further vote
or action by the stockholders.
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Any issuance of Seacoast Financial Preferred Stock may have an adverse
effect on the voting and other rights of holders of Seacoast Financial Common
Stock. Each series of Seacoast Financial Preferred Stock issued after the
Conversion may rank senior to shares of Seacoast Financial Common Stock as to
dividend rights, liquidation preferences or both, may have full, limited or no
voting rights and may be convertible into shares of Seacoast Financial Common
Stock.
RESTRICTIONS ON ACQUISITION OF SEACOAST FINANCIAL AND COMPASS
Certain provisions of Seacoast Financial's Articles of Organization and
By-Laws which will become effective upon the consummation of the Conversion, as
well as provisions of the ESOP and certain state and federal laws, may have
certain "anti-takeover" effects. The provisions and laws deal with matters of
corporate governance and certain rights of stockholders, including stock
ownership and transfer, Seacoast Financial's Board of Directors and business
combinations. The provisions and laws may impede efforts to acquire Seacoast
Financial, or stock purchases in furtherance of such an acquisition, which
might otherwise have a favorable effect on the price of shares of Seacoast
Financial Common Stock. Persons considering whether to purchase Seacoast
Financial Common Stock in connection with the Conversion should give careful
attention to these provisions and laws because they will affect the rights of
Seacoast Financial's stockholders.
Although the Board of Directors of Compass and Board of Trustees of
Seacoast Financial are not aware of any effort that might be made to obtain
control of Seacoast Financial following the Conversion, the Boards believe, as
discussed below, that it is appropriate to include certain provisions in the
Articles and By-Laws to protect the interests of Seacoast Financial and its
stockholders from takeovers which the Board might conclude are not in the best
interest of Compass, Seacoast Financial or Seacoast Financial's stockholders.
In addition, these provisions will increase protections available to Seacoast
Financial against transactions that, although not resulting in an acquisition
of a majority of Seacoast Financial's capital stock, nevertheless may harm
Seacoast Financial and its stockholders by disrupting Compass's operations and
management and by causing Seacoast Financial to incur substantial expenses.
The following discussion is a general summary of the material provisions
of the Articles and By-Laws that will become effective upon consummation of the
Conversion, and of certain provisions of the ESOP and certain laws, which may
be deemed to have an "anti-takeover" effect. The following description of
certain of these provisions is necessarily general and, with respect to
provisions contained in the Articles and By-Laws, reference should be made in
each case to the document in question, each of which is part of Seacoast
Financial's application to the Commissioner and Registration Statement on Form
S-1 filed with the SEC on May 15, 1998. See "Additional Information."
Certain Provisions of the Articles and By-Laws
Definition of "Interested Stockholder" and "Disinterested Director." As
used herein, the terms "Interested Stockholder" and "Disinterested Directors"
have the same meanings ascribed to them by the Articles and By-Laws. An
"Interested Stockholder" is any person (other than Seacoast Financial, any
direct or indirect subsidiary of Seacoast Financial or any employee stock
ownership plan formed by Seacoast Financial) who or which: (i) is the
beneficial owner, directly or indirectly, of 10% or more of the voting power of
the outstanding "voting stock" (as such term is defined in the Articles) of
Seacoast Financial; (ii) is an "affiliate" (as such term is defined in the
Articles) of Seacoast Financial and at any time within the two-year period
immediately prior to the date in question was the beneficial owner, directly or
indirectly, of 10% or more of the voting power of the then outstanding voting
stock of Seacoast Financial; or (iii) is an assignee of or has otherwise
succeeded to any shares of voting stock of Seacoast Financial which were at any
time within the two-year period immediately prior to the date in question
beneficially owned by any Interested Stockholder, if such assignment or
succession shall have occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning of the
Securities Act and was not approved by two-thirds (2/3) of the Disinterested
Directors. A "Disinterested Director" is any member of the Board of Directors
of Seacoast Financial at any time when there is no Interested Stockholder or,
when there is an Interested Stockholder, any Director who (i) is not, and was
not at any time during the two-year period immediately prior to the date in
question, an Affiliate or Associate (as such terms are defined in Rule 12b-2
promulgated under the Exchange Act) of an Interested Stockholder and (ii)
either (A) was a member of the Board prior to the time that the Interested
Stockholder became an Interested Stockholder or (B) thereafter received
favorable votes for his or her nomination or election as a Director by a
majority of the Disinterested Directors then
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serving on the Board. Throughout Seacoast Financial's Articles and By-Laws, a
vote of the Disinterested Directors may be required (in addition to the vote of
the full Board of Directors) when there is an Interested Stockholder. The
required percentage vote of Disinterested Directors varies from section to
section.
Directors. The Articles and By-Laws contain certain provisions which may
make it difficult to change majority control of Seacoast Financial's Board of
Directors. The Articles provide for three classes of Directors elected for
three-year staggered terms, so that ordinarily no more than approximately
one-third of Seacoast Financial's Directors will stand for election in any one
year. Thus, it would take two annual elections to replace a majority of
Seacoast Financial's Board. The Articles also provide that stockholders shall
not have cumulative voting rights in the election of Directors. The By-Laws
provide that, subject to the foregoing requirements and applicable law, the
Board of Directors may from time to time fix the number of Directors and their
respective classifications (unless there is an Interested Stockholder, in which
case an affirmative vote of Disinterested Directors shall also be required).
The By-Laws also provide that any vacancy occurring in the Board of Directors,
including vacancies resulting from an increase in the number of Directors, may
be filled only by a vote of a majority of the Directors (even if such Directors
do not constitute a quorum), unless at the time there is an Interested
Stockholder, in which case such vacancy may be filled only by vote of a
majority of the Disinterested Directors then in office. In addition, the
By-Laws impose certain advance notice and informational requirements on the
nomination by stockholders of candidates for election to the Board of
Directors. Finally, the Articles provide that Directors may be removed only for
cause and only by an affirmative vote of two-thirds (2/3) of the outstanding
shares of Seacoast Financial entitled to vote on such removal.
Meetings of Stockholders. The Articles and By-Laws provide that a special
meeting of stockholders may be called at any time only by a majority of the
Directors then in office (provided, however, that, if there is an Interested
Stockholder, any such call by the Board of Directors shall also require an
affirmative vote of Disinterested Directors) or upon application by one or more
stockholders who hold at least two-thirds (2/3) of the capital stock entitled
to vote at such meeting. Only those matters set forth in the call of the
special meeting may be considered or acted upon at such meeting, unless
otherwise provided by law. With respect to annual meetings of stockholders, the
By-Laws impose certain advance notice and informational requirements for any
business which a stockholder may wish to propose for consideration at such a
meeting.
Authorized Stock. The Articles authorize the Board of Directors to issue
any of the 100,000,000 shares of Seacoast Financial Common Stock not issued in
the Conversion and the Merger and any of the 10,000,000 shares of Seacoast
Financial Preferred Stock which are authorized but unissued. See "Description
of Capital Stock of Seacoast Financial--General." The Board of Directors may,
without approval of Seacoast Financial's stockholders, designate and issue
shares of one or more series of Seacoast Financial Preferred Stock, establish
or change from time to time the number of shares to be included in each such
series, fix and state the voting powers, designations, preferences and the
relative or special rights of the shares of any series so established and the
qualifications thereon. See "Description of Capital Stock of Seacoast Financial
- --General." In the event of a proposed merger, tender offer or other attempt to
gain control of Seacoast Financial that the Board of Directors does not
approve, it might be possible for the Board of Directors to authorize the
issuance of a series of Seacoast Financial Preferred Stock with rights and
preferences that might impede the completion of such a transaction. Seacoast
Financial has no present plans or understandings for the issuance of any shares
of Seacoast Financial Preferred Stock.
Vote Required to Approve Business Combinations Involving Interested
Stockholders. The Articles contain a so-called "fair price" provision pursuant
to which certain acquisitions, stock issuances, liquidations or
recapitalizations (such transactions being referred to as "Business
Combinations" in the Articles) involving an Interested Stockholder and Seacoast
Financial or any subsidiary thereof would require stockholder approval by the
affirmative vote of holders of at least 80% of the outstanding shares of
Seacoast Financial entitled to vote in elections of directors. The provision
does not require an 80% stockholder vote for approval of a Business Combination
if at least one Disinterested Director is then in office and such transaction
is approved by two-thirds (2/3) of Disinterested Directors or if certain
procedures and price requirements are met. An affirmative vote of the holders
of at least 80% of the outstanding voting stock shall be required to amend or
repeal, or adopt any provisions inconsistent with, the fair price provision.
Vote Required for Certain Transactions. The Articles further provide that
any (i) sale, lease or exchange of all or substantially all of Seacoast
Financial's property or assets, including goodwill or (ii) Seacoast Financial's
merger, share exchange or consolidation with or into any other entity, must be
approved by an affirmative vote of
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at least 75% of the total votes that may be cast by Seacoast Financial's
stockholders on such a transaction. However, only a majority vote of Seacoast
Financial's stockholders is necessary to approve a merger, share exchange or
consolidation if the voting stock of Seacoast Financial outstanding immediately
before such transaction will represent immediately after the transaction more
than 70% of the outstanding voting stock of the company that will survive the
transaction.
Restrictions on Acquisitions of Securities. The Articles provide that, for
a period of five years following the date of completion of Seacoast Financial's
initial issuance of Seacoast Financial Common Stock, no person shall directly
or indirectly offer to acquire or acquire the beneficial ownership of more than
10% of the issued and outstanding voting stock of Seacoast Financial. Shares
acquired in excess of this limitation will not be entitled to vote or to take
other stockholder action or to be counted in determining the total number of
outstanding shares for purposes of any matter involving stockholder action, and
such shares may be required to be sold through an independent trustee. The
foregoing limitation does not apply to: (i) any acquisition of shares of voting
stock which has been approved in advance by an affirmative vote of not less
than two-thirds (2/3) of the Directors then in office (plus an affirmative vote
of Disinterested Directors if there is an Interested Stockholder); (ii) any
offer with a view toward public resale made exclusively to Seacoast Financial
or to any underwriter acting on behalf of Seacoast Financial or to the selling
group acting on the underwriter's behalf in connection with a public offering
of Seacoast Financial's capital stock; or (iii) a corporate reorganization
without a change in the respective beneficial ownership interests of Seacoast
Financial's stockholders other than pursuant to the exercise of any dissenters'
appraisal rights.
Provisions for Amendment of Articles and By-Laws. The Articles provide
that, in general, they may be amended only by a vote of at least 75% of the
votes eligible to be cast by Seacoast Financial's stockholders or by a majority
of such votes if the Board of Directors recommends an amendment by an
affirmative vote of two-thirds (2/3) of the Disinterested Directors. In
addition, any provision of the Articles which requires a greater than majority
vote of stockholders will not be able to be amended except by such greater
vote. The Articles also provide that the By-Laws may be amended by a vote of
75% of the votes eligible to be cast by Seacoast Financial's stockholders or by
a majority of such votes if the Board of Directors recommends an amendment by
an affirmative vote of two-thirds (2/3) of the Directors (plus an affirmative
vote of Disinterested Directors if there is an Interested Stockholder). In
addition, the Directors may amend the By-Laws themselves by a majority vote
(plus an affirmative vote of Disinterested Directors if there is an Interested
Stockholder).
Matters to be Considered at Annual Meeting of Stockholders. The By-Laws
provide only two methods of placing proposals on the agenda of an annual
meeting of stockholders: (i) the Board of Directors, the Chairman of the Board
or the President of Seacoast Financial may present a proposal for consideration
or (ii) any stockholder may submit a proposal. However, stockholders can submit
a proposal only by delivering a notice thereof to the Clerk at least 60 days
(but not more than 150 days) in advance of such meeting. Such notice must state
the stockholder's name, the name of other stockholders who support the proposal
and the class and number of shares owned by them, must describe the matter
proposed and the reason for considering it at the annual meeting and must set
forth any financial interest that the proposing stockholder has in the
proposal. The Board of Directors may reject a stockholder's proposal if such
stockholder does not fully and timely comply with the foregoing notice
requirement.
Purpose and Takeover Defensive Effects of Articles and By-Laws. The Boards
of Seacoast Financial and Compass believe that the provisions described above
are prudent and will reduce Seacoast Financial's vulnerability to takeover
attempts and to certain other transactions which have not been negotiated with
and approved by Seacoast Financial's Board of Directors. These provisions will
also assist Seacoast Financial and Compass in the orderly deployment of the
Offering proceeds into productive assets during the initial period after the
Offering. The Boards believe these provisions are in the best interests of
Compass, Seacoast Financial and its stockholders. Attempts to acquire control
of financial institutions and their holding companies have become increasingly
common. Takeover attempts which have not been negotiated with and approved by
boards of directors present to stockholders the risk of a takeover on terms
which may be less favorable than might otherwise be available. A transaction
which is negotiated and approved by the Board of Directors of Seacoast
Financial, on the other hand, can be carefully planned and undertaken at an
opportune time in order to obtain maximum value for Seacoast Financial and its
stockholders, with due consideration given to matters such as the management
and business of the acquiring corporation and maximum strategic development of
Seacoast Financial's assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above then--
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current market prices, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous or retaining their investment in an enterprise
which is under different management and the objectives of which may not be
similar to those of the remaining stockholders.
Potential Anti-Takeover Effects. Despite the belief of Compass and
Seacoast Financial as to the benefits to stockholders of the provisions
described above, these provisions will have the effect of discouraging any
takeover attempt which would not be approved either by regulatory policy or by
Seacoast Financial's Board of Directors but pursuant to which stockholders may
receive a substantial premium for their shares over then-current market prices.
As a result, stockholders who might desire to participate in such a transaction
may not have any opportunity to do so. Such provisions will also make it more
difficult to remove the Board and Seacoast Financial's management. The Boards
of Compass and Seacoast Financial, however, have concluded that the potential
benefits outweigh the possible disadvantages.
Pursuant to applicable law, at any annual or special meeting of its
stockholders after the Offering, Seacoast Financial may amend the Seacoast
Financial Articles of Organization to add provisions regarding the acquisition
of its equity securities that would be permitted to a Massachusetts
corporation. Seacoast Financial and Compass do not presently intend to propose
the adoption of further restrictions on the acquisition of Seacoast Financial's
equity securities.
Employee Stock Ownership Plan
The ESOP, which expects to subscribe to purchase 8% of the Conversion
Shares sold in the Offering, contains certain provisions permitting
participating employees to direct the voting of shares held in the ESOP. Such
provisions may be considered to have anti-takeover effects. See "Management of
Seacoast Financial and Compass--Compensation of Officers and Directors Through
Benefit Plans--Employee Stock Ownership Plan and Trust."
FRB Regulations
The Change in Bank Control Act and the BHCA, together with FRB regulations
promulgated under those acts, require that the consent of the FRB be obtained
prior to any person or company acquiring "control" of a bank holding company.
Control is conclusively presumed to exist if an individual or company acquires
more than 25% of any class of voting stock of the bank holding company. Control
is rebuttably presumed to exist if the person acquires more than 10% of any
class of voting stock of a bank holding company and if either (i) the company
has registered securities under Section 12 of the Exchange Act or (ii) no other
person will own a greater percentage of that class of voting securities
immediately after the transaction. The regulations provide a procedure to rebut
the foregoing presumption. Since Seacoast Financial Common Stock will be
registered under Section 12 of the Exchange Act, any acquisition of 10% or more
of the outstanding Seacoast Financial Common Stock will give rise to a
rebuttable presumption that the acquiror of such stock controls Seacoast
Financial, requiring the acquiror, prior to acquiring such stock, to rebut the
presumption of control to the satisfaction of the FRB or obtain FRB approval
for the acquisition of control.
Restrictions applicable to the operations of bank holding companies may
also deter companies from seeking to obtain control of Seacoast Financial. See
"Regulation of Seacoast Financial and Compass."
Massachusetts Banking Law
Massachusetts banking law also prohibits any "company," defined to include
banking institutions as well as corporations, from directly or indirectly
controlling the voting power of 25% or more of the voting stock of two or more
banking institutions without the prior approval of the BBI. Additionally, an
out-of-state company which already directly or indirectly controls voting power
of 25% or more of the voting stock of two or more banking institutions may not
also acquire direct or indirect ownership or control of more than 5% of the
voting stock of a Massachusetts banking institution without the prior approval
of the BBI. Finally, for a period of three years following completion of a
conversion to stock form, no person may directly or indirectly offer to acquire
or acquire beneficial ownership of more than 10% of any class of equity
security of a converting mutual holding company without prior written approval
of the Commissioner.
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Massachusetts Anti-Takeover Laws
The Massachusetts General Laws contain two anti-takeover statutes that are
applicable to certain public corporations in Massachusetts--Chapter 110F, the
"business combinations" law and Chapter 110D, the "control share acquisition"
law. Seacoast Financial's Articles contain a provision opting out of the
applicability of Chapters 110F and 110D, in light of the provisions contained
in Seacoast Financial's Articles that provide similar anti-takeover
protections.
TRANSFER AGENT AND REGISTRAR FOR SEACOAST FINANCIAL COMMON STOCK
Registrar and Transfer Company will act as the transfer agent and
registrar for issued and outstanding shares of Seacoast Financial Common Stock.
LEGAL OPINIONS
The legality of the Conversion Shares and the Exchange Shares, and certain
tax matters, will be passed upon for Seacoast Financial by Foley, Hoag & Eliot
LLP, Boston, Massachusetts. Foley, Hoag & Eliot LLP has consented to the
references herein to its opinions. Certain legal matters will be passed upon
for Ryan Beck and McConnell Budd by Luse Lehman Gorman Pomerenk & Schick, P.C.,
Washington, D.C.
EXPERTS
The consolidated financial statements of Seacoast Financial as of October
31, 1997 and 1996 and for each of the years in the three-year period ended
October 31, 1997 appearing herein have been audited by Arthur Andersen LLP,
independent public accountants, as stated in its reports appearing elsewhere
herein, and have been so included in reliance upon the reports of such firm
given upon its authority as an expert in accounting and auditing.
The consolidated financial statements of Sandwich Bancorp and subsidiaries
as of December 31, 1997 and 1996 and for each of the years in the three-year
period ended December 31, 1997 have been included herein and in the
Registration Statement on Form S-1 of which this Prospectus represents a part
in reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
RP Financial has consented to the publication herein of the summary of its
report to Seacoast Financial setting forth its opinion as to the estimated pro
forma market value of the Conversion Shares upon their conversion and its
valuation with respect to subscription rights issued under the Conversion Plan.
ADDITIONAL INFORMATION
Seacoast Financial has filed with the SEC a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to the
Conversion Shares offered hereby. As permitted by the rules and regulations of
the SEC, this Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. Also, since
the effective date of the Registration Statement, Seacoast Financial has been
subject to the annual and periodic reporting requirements of the Exchange Act
pursuant to Section 15(d) of such act. In addition, Sandwich Bancorp is subject
to the informational requirements of the Exchange Act, and, in accordance
therewith, files reports, proxy statements and other information with the SEC.
The Registration Statement, and the reports and other information of
Seacoast Financial and Sandwich Bancorp, can be examined, without charge, and
copied, at prescribed rates, at the public reference facilities of the SEC
located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the Regional Offices of the SEC located at Suite 1400, 500 West
Madison Street, Chicago, Illinois 60661 and 7 World Trade Center, Thirteenth
Floor, New York, N.Y. 10048. In addition, the SEC maintains a web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of
this web site is http://www.sec.gov. Sandwich Bancorp's materials are also
available for inspection at the office of the Nasdaq Stock Market, Reports
Section, 1735 K Street, N.W., Washington, D.C. 20006.
The statements contained herein as to the contents of any contract or
other document are, of necessity, brief descriptions thereof and are not
necessarily complete but do contain all material information regarding such
documents. In each instance of such a statement, if such contract or document
is filed as an exhibit to the Registration
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Statement or to reports, proxy statements and other information filed by
Seacoast Financial and Sandwich Bancorp with the SEC, reference is made to the
copy of the contract or document filed as such exhibit, each of such statements
being qualified in all respects by such reference.
Seacoast Financial has filed the Conversion Application with the
Commissioner. Pursuant to the rules and regulations of the Commissioner, this
Prospectus omits certain information contained in the Conversion Application,
including the Conversion Plan and the Independent Valuation. The Conversion
Application may be examined at the office of the Commissioner, at 100 Cambridge
Street, Boston, Massachusetts, and at the main office of Seacoast Financial, at
791 Purchase Street, New Bedford, Massachusetts, without charge.
In connection with the Conversion, Seacoast Financial will register the
Seacoast Financial Common Stock with the SEC under Section 12(g) of the
Exchange Act. Upon such registration, Seacoast Financial and the holders of
Seacoast Financial Common Stock will become subject to the proxy solicitation
rules, reporting requirements and restrictions on stock purchases and sales by
directors, officers and greater than 10% stockholders and the annual and
periodic reporting and certain other requirements of the Exchange Act. Under
the Conversion Plan, Seacoast Financial has undertaken that it will not
terminate such registration for a period of at least three years following the
Offering.
A copy of the Articles of Organization and By-Laws of Seacoast Financial
are available without charge from Seacoast Financial by contacting Francis S.
Mascianica, Jr., Treasurer, at 791 Purchase Street, New Bedford, Massachusetts
02740 or at (508) 984-6000.
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SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Public Accountants ................................................... F-2
Consolidated Balance Sheets as of May 31, 1998 (Unaudited) and October 31, 1997 and 1996 ... F-3
Consolidated Statements of Income for the Seven Months ended May 31, 1998 and 1997
(Unaudited) and the Years Ended October 31, 1997, 1996 and 1995 ........................... F-4
Consolidated Statements of Changes in Surplus for the Seven Months Ended May 31, 1998
(Unaudited) and the Years Ended October 31, 1997, 1996 and 1995 ........................... F-5
Consolidated Statements of Cash Flows for the Seven Months Ended May 31, 1998 and 1997
(Unaudited) and the Years Ended October 31, 1997, 1996 and 1995 ........................... F-6
Notes to Consolidated Financial Statements ................................................. F-8
</TABLE>
All schedules are omitted because they are not required or applicable, or
the required information is shown in the financial statements or notes thereto.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Audit Committee of
Seacoast Financial Services Corporation:
We have audited the accompanying consolidated balance sheets of Seacoast
Financial Services Corporation (formerly The 1855 Bancorp) and subsidiary (the
Bank) as of October 31, 1997 and 1996, and the related consolidated statements
of income, changes in surplus and cash flows for each of the three years in the
period ended October 31, 1997. These consolidated financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted 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 consolidated financial position
of Seacoast Financial Services Corporation and subsidiary as of October 31,
1997 and 1996, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended October 31, 1997, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
November 25, 1997 (except with respect to
the matters discussed in Note 16, as to
which the date is March 31, 1998)
F-2
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
October 31,
-----------------------------
May 31,
1998 1997 1996
------------ ------------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS:
Cash and due from banks .................................. $ 34,561 $ 25,611 $ 34,511
Federal funds sold ....................................... 10,440 7,150 53
---------- ---------- ----------
Total cash and cash equivalents ...................... 45,001 32,761 34,564
Investment securities (Note 2)--
Available-for-sale, at fair value ....................... 183,340 209,316 200,306
Held-to-maturity, at amortized cost ..................... 13,649 12,633 11,752
Restricted equity securities ............................ 5,286 5,156 4,645
Loans held-for-sale (Note 1) ............................. 19,810 4,277 4,394
Loans, net (Notes 3 and 13) .............................. 873,914 809,555 737,779
Accrued interest receivable .............................. 6,782 5,805 5,422
Banking premises and equipment, net (Note 5) ............. 13,932 12,254 12,588
Other real estate owned (Note 4) ......................... 1,395 1,707 2,598
Net deferred tax asset (Note 9) .......................... 5,877 6,988 8,276
Other assets (Notes 1 and 12) ............................ 7,573 6,138 5,440
---------- ---------- ----------
Total assets ......................................... $1,176,559 $1,106,590 $1,027,764
========== ========== ==========
LIABILITIES AND SURPLUS:
Deposits (Note 6) ........................................ $ 982,351 $ 937,948 $ 882,608
Short-term borrowings (Notes 2 and 7) .................... 12,213 9,697 3,925
Federal Home Loan Bank advances (Note 8) ................. 64,572 51,006 45,375
Other borrowings (Note 12) ............................... 289 -- 648
Mortgagors' escrow payments .............................. 1,059 1,002 890
Accrued expenses and other liabilities (Note 12) ......... 9,565 8,796 9,401
---------- ---------- ----------
Total liabilities .................................... 1,070,049 1,008,449 942,847
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
(Notes 9, 10 and 13)
SURPLUS (Note 11) ........................................... 104,193 96,527 84,743
NET UNREALIZED GAIN ON INVESTMENT
SECURITIES AVAILABLE-FOR-SALE, NET OF
INCOME TAXES ............................................... 2,317 1,614 174
---------- ---------- ----------
Total surplus ........................................ 106,510 98,141 84,917
---------- ---------- ----------
Total liabilities and surplus ........................ $1,176,559 $1,106,590 $1,027,764
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Seven Months Ended
May 31, Years Ended October 31,
-------------------------- ------------------------------------
1998 1997 1997 1996 1995
------------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest on loans (Note 3) .............................. $41,580 $37,375 $65,499 $60,423 $52,459
Interest and dividends on investment securities ......... 7,523 7,560 13,298 12,756 12,756
Interest on federal funds sold .......................... 887 708 1,235 947 1,257
------- ------- ------- ------- -------
Total interest and dividend income .................. 49,990 45,643 80,032 74,126 66,472
------- ------- ------- ------- -------
INTEREST EXPENSE:
Interest on deposits .................................... 22,360 20,546 36,109 34,621 31,852
Interest on borrowed funds .............................. 2,672 2,106 3,722 2,624 2,687
------- ------- ------- ------- -------
Total interest expense .............................. 25,032 22,652 39,831 37,245 34,539
------- ------- ------- ------- -------
Net interest income ................................. 24,958 22,991 40,201 36,881 31,933
PROVISION (CREDIT) FOR POSSIBLE LOAN
LOSSES (Note 3) ........................................... 536 890 1,865 1,166 (351)
------- ------- ------- ------- -------
Net interest income after provision
(credit) for possible loan losses ................ 24,422 22,101 38,336 35,715 32,284
------- ------- ------- ------- -------
NONINTEREST INCOME:
Deposit and other banking fees .......................... 1,841 1,760 3,213 2,733 2,271
Loan servicing fees (Note 3) ............................ 305 342 571 607 584
Card fee income, net .................................... 195 138 398 354 402
Other loan fees ......................................... 277 250 449 412 386
Gain (loss) on sales of investment
securities, net ........................................ (3) 23 37 60 (84)
Gain on sales of loans, net ............................. 568 190 542 181 94
Other income ............................................ 590 405 733 799 750
-------- ------- ------- ------- -------
Total noninterest income ............................ 3,773 3,108 5,943 5,146 4,403
-------- ------- ------- ------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits (Note 12) ................ 8,534 8,041 13,633 12,890 12,747
Occupancy and equipment expenses (Notes 5
and 10) ................................................ 2,023 1,911 3,344 3,276 2,970
Data processing expenses ................................ 1,417 1,230 2,192 2,049 1,896
Marketing expenses ...................................... 792 542 1,225 743 901
Professional services expenses .......................... 645 647 1,044 975 950
Deposit insurance premiums .............................. 90 58 121 392 1,198
Other real estate owned expenses, net (Note 1) .......... 138 293 519 644 1,072
Other operating expenses ................................ 1,936 1,949 2,732 3,189 2,956
-------- ------- ------- ------- -------
Total noninterest expense ........................... 15,575 14,671 24,810 24,158 24,690
-------- ------- ------- ------- -------
Income before provision for
income taxes .................................... 12,620 10,538 19,469 16,703 11,997
PROVISION FOR INCOME TAXES (Note 9) ........................ 4,954 4,254 7,685 6,548 4,511
-------- ------- ------- ------- -------
Net income .......................................... $7,666 $ 6,284 $11,784 $10,155 $ 7,486
======== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SURPLUS
FOR THE SEVEN MONTHS ENDED MAY 31, 1998 (UNAUDITED)
AND FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(In Thousands)
<TABLE>
<CAPTION>
Net Unrealized Gain
(Loss) on Securities
Classified as
Available-for-Sale,
Surplus Net of Income Taxes Total Surplus
----------- --------------------- --------------
<S> <C> <C> <C>
BALANCE, OCTOBER 31, 1994 ............................... $ 67,102 $ (1,910) $ 65,192
Net income ........................................... 7,486 -- 7,486
Change in unrealized loss on securities
available-for-sale .................................. -- 1,926 1,926
-------- -------- --------
BALANCE, OCTOBER 31, 1995 ............................... 74,588 16 74,604
Net income ........................................... 10,155 -- 10,155
Change in unrealized gain on securities
available-for-sale .................................. -- 158 158
-------- -------- --------
BALANCE, OCTOBER 31, 1996 ............................... 84,743 174 84,917
Net income ........................................... 11,784 -- 11,784
Change in unrealized gain on securities
available-for-sale .................................. -- 1,440 1,440
-------- -------- --------
BALANCE, OCTOBER 31, 1997 ............................... 96,527 1,614 98,141
Net income (unaudited) ............................... 7,666 -- 7,666
Change in unrealized gain on securities available-for-
sale (unaudited) .................................... -- 703 703
-------- -------- --------
BALANCE, MAY 31, 1998 (UNAUDITED) ....................... $104,193 $ 2,317 $106,510
======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Seven Months Ended
May 31, Years Ended October 31,
------------------------- --------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................... $ 7,666 $ 6,284 $ 11,784 $ 10,155 $ 7,486
Adjustments to reconcile net income to net cash
provided by (used in) operating activities--
Depreciation and amortization of premises
and equipment ..................................... 847 818 1,420 1,301 1,066
Amortization and accretion, net ..................... 386 569 906 337 349
Provision (credit) for possible loan losses ......... 536 890 1,865 1,166 (351)
(Gain) loss on sale of investment securities ........ 3 (23) (37) (60) 84
Write-down of other real estate owned ............... 43 149 198 385 749
Provision for deferred (prepaid) taxes .............. 547 318 453 (757) 648
Originations of loans held-for-sale ................. (60,893) (15,650) (30,014) (19,006) (16,917)
Proceeds from sales of loans originated
for resale ........................................ 45,928 16,273 34,268 35,441 18,921
Gain on sales of loans .............................. (568) (190) (542) (181) (94)
Loss on sale of premises and equipment .............. -- -- -- 5 --
Changes in assets and liabilities, net of effects
from acquisition of Martha's Vineyard
National Bank
Net increase in accrued interest receivable ....... (977) (1,289) (383) -- (283)
Net (increase) decrease in other assets ........... 1,584 457 (714) 3,770 170
Net increase (decrease) in accrued expenses
and other liabilities ............................ 769 (1,447) (605) 1,932 1,154
--------- --------- ---------- ---------- ---------
Net cash (used in) provided by
operating activities ........................... (7,297) 7,159 18,599 34,488 12,982
--------- --------- ---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Martha's Vineyard National Bank,
net of cash acquired ................................ -- -- -- -- (7,301)
Purchase of securities classified as
available-for-sale .................................. (37,720) (47,190) (104,748) (77,055) (33,303)
Purchase of securities classified as
held-to-maturity .................................... (5,433) (3,489) (5,971) (6,924) (39,364)
Proceeds from sales, calls and maturities of
securities classified as available-for-sale ......... 54,194 32,262 87,831 105,166 46,969
Proceeds from maturities and calls of securities
classified as held-to-maturity ...................... 4,300 3,069 5,069 9,600 40,661
Purchase of premises and equipment ................... (2,525) (530) (1,123) (1,670) (2,019)
Purchase of loans .................................... (6,736) (500) (4,461) (8,859) (8,313)
Net increase in loans ................................ (58,637) (30,913) (78,620) (106,726) (64,016)
Recoveries of loans previously charged off ........... 230 227 377 389 890
Proceeds from sales of other real estate owned ....... 517 1,409 2,315 2,722 4,033
Principal receipts from mortgage-backed
investments classified as available-for-sale ........ 10,516 7,766 12,722 9,654 1,180
Principal receipts from mortgage-backed -- -- -- 676 5,491
investments classified as held-to-maturity ........... -- -- -- 4 --
Proceeds from sales of premises and equipment ........ -- -- -- 4 --
--------- --------- ---------- ---------- ---------
Net cash (used in) investing activities .......... (41,294) (37,889) (86,609) (73,023) (55,092)
--------- --------- ---------- ---------- ---------
</TABLE>
F-6
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(In Thousands)
<TABLE>
<CAPTION>
Seven Months Ended
May 31, Years Ended October 31,
----------------------- ---------------------------------------
1998 1997 1997 1996 1995
----------- ----------- ------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in NOW accounts and
demand deposits .................................... $ 8,362 $ 2,094 $ (11,072) $ 15,441 $ 19,949
Increase (decrease) in passbook and other
savings accounts ................................... 13,123 (630) 29,014 (7,743) (21,969)
Increase in term certificates ....................... 22,918 26,143 37,398 15,187 58,350
Advances from Federal Home Loan Bank ................ 21,586 15,192 17,007 16,992 55,719
Repayments of Federal Home Loan Bank
advances ........................................... (8,020) (6,550) (11,376) (10,981) (47,821)
Increase (decrease) in short-term and
other borrowings ................................... 2,805 1,361 5,124 2,759 (1,289)
Increase (decrease) in mortgagors'
escrow payments .................................... 57 22 112 (111) 119
-------- -------- --------- --------- ---------
Net cash provided by
financing activities ......................... 60,831 37,632 66,207 31,544 63,058
-------- -------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS .................................. 12,240 6,902 (1,803) (6,991) 20,948
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR ..................................... 32,761 34,564 34,564 41,555 20,607
-------- -------- --------- --------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD ......................................... $ 45,001 $ 41,466 $ 32,761 $ 34,564 $ 41,555
======== ======== ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid on deposits and borrowed funds ........ $ 24,982 $ 22,556 $ 39,734 $ 37,244 $ 34,492
Income taxes paid ................................... 3,868 4,076 8,434 6,264 3,342
SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS:
Transfers from loans to other real estate owned ..... 1,098 2,023 3,333 2,430 5,783
Financed other real estate owned sales .............. 850 809 1,460 638 2,881
Loans securitized into mortgage-backed
investments classified as available-for-sale ....... -- -- 3,595 20,837 2,532
Transfer of investments from held-to-maturity
to available-for-sale .............................. -- -- -- 138,701 --
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F-7
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Compass Bank for Savings was reorganized into a mutual bank holding
company operating under the name of Seacoast Financial Services Corporation,
formerly The 1855 Bancorp, (The Bancorp) on October 1, 1994 under the
provisions of Massachusetts general law. A new Massachusetts savings bank in
stock form, known as Compass Bank for Savings, was chartered as a wholly owned
subsidiary of the Bancorp. All deposits of the Bank, as defined below, are
insured by the Federal Deposit Insurance Corporation (FDIC) and the Depositors
Insurance Fund.
The accompanying consolidated financial statements include the accounts of
the Bancorp and its wholly owned subsidiary, Compass Bank for Savings,
(collectively referred to as the Bank). Compass Bank for Savings has four wholly
owned subsidiaries--Compass Credit Corporation which engages in buying, selling
and originating automobile loans and other extensions of credit; the 1855
Corporation which engages in leasing of property primarily for Bank use; CB
Securities Corporation which engages in the investment of securities; and
Buffinton-Brook Realty Corporation which is currently inactive. The 1855
Corporation has two wholly owned subsidiaries--Purchase Corporation and North
Front Street, Inc., which engage in the management of real estate acquired from
the Bank through foreclosure. All significant intercompany balances and
transactions have been eliminated in consolidation.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the balance sheets and
income and expenses during the reporting periods. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
change relate to the determination of the allowance for possible loan losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans.
In the opinion of management, the unaudited consolidated financial
statements presented herein reflect all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation. Interim results are
not necessarily indicative of the results to be expected for the entire year.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash, amounts due from banks and federal funds sold. Federal funds are sold
with maturities of one day.
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 cost, adjusted
for amortization of premiums and accretion of discounts, both computed by a
method that approximates the effective yield method; debt and equity securities
that are bought and held principally for the purpose of selling them in the
near term are classified as trading and reported at fair value, with unrealized
gains and losses included in earnings. The Bank has no securities held for
trading. 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 surplus, net of taxes. The Bank classifies its securities
based on the Bank's intention at the time of purchase.
Restricted equity securities are reported at cost.
Unrealized losses deemed to be other than temporary declines in value are
charged to operations. When securities are sold, the adjusted cost of the
specific security sold is used to compute gains or losses on the sale.
F-8
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans, Deferred Fees and Allowance for Possible Loan Losses
Loans are stated at the amount of unpaid principal, reduced by amounts due
to borrowers on unadvanced loans, net deferred loan fees, unearned discount and
the allowance for possible loan losses.
Unearned discount is recognized on the level-yield method for discounted
installment loans. All other interest on loans is recognized on a simple
interest basis.
Deferred loan origination fees and certain deferred loan origination costs
are amortized over the contractual life of the related loan using the
level-yield method. At May 31, 1998 and October 31, 1997 and 1996, the Bank had
net deferred loan fees of approximately $756,000, $805,000 and $740,000,
respectively.
It is the policy of the Bank to discontinue the accrual of interest on
loans delinquent in excess of 90 days or sooner if in the judgment of
management the ultimate collectibility of principal or interest becomes
doubtful and to reverse all interest previously accrued. Interest income is
subsequently recognized only to the extent cash payments are received.
Loans are considered impaired when it is probable that the Bank will not
be able to collect principal, interest and fees according to the contractual
terms of the loan agreement. Management considers the paying status, net worth
and earnings potential of a borrower, and the value and cash flow of the
collateral as factors to determine whether a loan will be paid in accordance
with its contractual terms. The amount judged to be impaired is the difference
between the present value of the expected cash flows using as a discount rate
the original contractual effective interest rate and the recorded investment of
the loan. If foreclosure on a collateralized loan is probable, impairment is
measured based on the fair value of the collateral compared to the recorded
investment. If appropriate, a valuation reserve is established to recognize the
difference between the recorded investment and the present value. Impaired
loans are charged off when management believes that the collectibility of the
loan is remote. The Bank generally considers nonaccrual loans, except for
smaller balance homogeneous residential and consumer loans, and troubled debt
restructures to be impaired. All impaired loans are classified as nonaccrual.
The allowance for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses. The allowance is increased by
provisions charged to operations, and realized losses, net of recoveries, are
charged directly to the allowance. The provision and the level of the allowance
are based on management's periodic review of the loan portfolio in light of
historical experience and prevailing economic conditions. The allowance is an
estimate, and ultimate losses may vary from current estimates. As adjustments
become necessary, they are reported in the results of operations of the period
in which they become known.
Loan Sales
Loans held for sale are valued at the lower of the recorded loan balance
or market value. The Bank enters into forward commitments to sell loans for the
purpose of reducing interest rate risk associated with the origination of loans
for sale. Unrealized losses on contracts used to hedge the Bank's closed loans
and pipeline of loans expected to close are considered in adjusting the
carrying value of loans held for sale. No adjustments for unrealized losses
were required at May 31, 1998 and October 31, 1997 and 1996.
Prior to November 1, 1996, gains and losses on sales of loans were
recognized based on the difference between the selling price and the carrying
value of the related loans sold. When the servicing of such loans was retained
by the Bank, gains and losses were adjusted by the present value of the
difference, if any, between the weighted average interest rate on the loans
sold, adjusted for a normal servicing fee, and the agreed yield to the buyer.
At October 31, 1996 and 1995, the deferred loan sale premium resulting from
such sales amounted to approximately $64,000 and $144,000, respectively, and is
included in other assets in the accompanying consolidated balance sheets.
Effective November 1, 1996, the Bank adopted Statement of Financial
Accounting Standards (SFAS No.) 122, Accounting for Mortgage Servicing Rights.
SFAS No. 122, requires entities that engage in mortgage banking
F-9
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
activities to recognize, as separate assets, rights to service mortgage loans
for others acquired through either the purchase or origination of mortgage
loans and sale or securitization of those loans with servicing retained. The
amount capitalized is based on an allocation of the total cost of the mortgage
loans to the mortgage servicing rights and the loans without the mortgage
servicing rights based on their relative fair values. In addition, capitalized
mortgage servicing rights are required to be assessed for impairment based on
the fair value of those rights. Effective January 1, 1997, SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, superseded SFAS No. 122. For servicing contracts in existence
before January 1, 1997, previously recognized servicing rights and excess
servicing receivables that do not exceed contractually specified servicing fees
were combined. Each time the Bank undertakes an obligation to service financial
assets it shall recognize either a servicing asset or a servicing liability for
that contract, unless it securitizes the assets, retains the resulting
securities and classifies them as debt securities held-to-maturity. For the
year ended October 31, 1997, the Bank capitalized approximately $255,000 in
mortgage servicing rights. The mortgage servicing rights are amortized in
proportion to, and over the period of, estimated net servicing income on loans
and are assessed for impairment based on the fair values of the underlying
servicing contracts. For purposes of measuring impairment, the rights are
stratified based on the following predominant risk characteristics of the
underlying loans; interest rates, type of interest and loan maturity dates.
Amortization of the mortgage servicing rights for the year ended October
31, 1997 was approximately $33,000. No impairment loss was recognized in 1997.
Banking Premises and Equipment
Land is stated at cost. Buildings, leasehold improvements and equipment
are stated at cost, less accumulated depreciation and amortization, which are
computed on the straight-line method over the estimated useful lives of the
assets or the terms of the leases, if shorter. Maintenance and repairs are
expensed when incurred; major expenditures for betterments are capitalized and
depreciated.
Other Real Estate Owned
Other real estate owned (OREO) is composed of properties acquired through
foreclosure or deed in lieu of foreclosure. After foreclosure, foreclosed
assets are presumed to be held-for-sale and are recorded at the lower of the
carrying value of the related loan or the fair value of property, less
estimated costs to sell. The excess, if any, of the loan balance over the fair
value of the property at the time of transfer from loans to OREO is charged to
the allowance for loan losses. Subsequent write-downs of the carrying value of
the foreclosed assets are charged to expense. Costs relating to the development
and improvement of the property are capitalized. Costs relating to holding the
property are charged to expense. Included in other real estate owned expenses
are losses on sale and write-downs of carrying value amounting to approximately
$198,000, $385,000 and $749,000 and net operating expenses of approximately
$321,000, $259,000 and $323,000 in 1997, 1996 and 1995, respectively. For the
seven months ended May 31, 1998 and 1997, OREO losses on sale and write-downs
were $43,000 and $149,000, respectively, and net operating expenses were
$95,000 and $144,000, respectively.
Income Taxes
The Bank utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
F-10
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Core Deposit Intangible Asset
The core deposit intangible asset, resulting from prior acquisitions, is
being amortized over periods ranging from six to ten years using the
straight-line method. Amortization expense was approximately $303,000, $337,000
and $349,000 in fiscal 1997, 1996 and 1995, respectively, and was approximately
$163,000 for each of the seven months ended May 31, 1998 and 1997. The core
deposit intangible asset is reported net of accumulated amortization and
amounted to approximately $1,523,000, $1,726,000 and $2,029,000 at May 31, 1998
and October 31, 1997 and 1996, respectively.
Recent Accounting Pronouncements
Effective November 1, 1996, the Bank adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long- Lived Assets To Be Disposed
Of. SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. SFAS No. 121 also requires that certain
long-lived assets and identifiable intangibles to be disposed of be reported at
the lower of the carrying amount or fair value less cost to sell. The adoption
of this standard did not have an impact on the results of operations or
financial condition for the year ended October 31, 1997.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components. Comprehensive
income is the total of net income and all other nonowner changes in equity.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997
and requires restatement of prior period financial statements presented for
comparative purposes.
Reclassifications
Certain reclassifications have been made to the 1995 and 1996 financial
statements to conform to the 1997 presentation. Such reclassifications have no
effect on previously reported net income.
(2) INVESTMENT SECURITIES
The amortized cost and estimated fair value of securities
available-for-sale at May 31, 1998 and October 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
May 31, 1998
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. government and agency
obligations ......................... $ 80,172 $ 335 $ 83 $ 80,424
Other bonds and obligations .......... 51,800 283 49 52,034
Mortgage-backed investments .......... 40,998 391 27 41,362
-------- ------ ---- --------
Total debt securities ............. 172,970 1,009 159 173,820
Marketable equity securities ......... 6,605 2,916 1 9,520
-------- ------ ---- --------
Total securities available for sale $179,575 $3,925 $160 $183,340
======== ====== ==== ========
</TABLE>
F-11
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(2) INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
October 31, 1997
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. government and agency
obligations ......................... $113,231 $ 392 $127 $113,496
Other bonds and obligations .......... 45,774 239 46 45,967
Mortgage-backed investments .......... 45,652 555 50 46,157
-------- ------ ---- --------
Total debt securities ............. 204,657 1,186 223 205,620
Marketable equity securities ......... 2,164 1,532 -- 3,696
-------- ------ ---- --------
Total securities available for sale $206,821 $2,718 $223 $209,316
======== ====== ==== ========
</TABLE>
<TABLE>
<CAPTION>
October 31, 1996
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. government and agency
obligations ......................... $111,861 $ 188 $436 $111,613
Other bonds and obligations .......... 22,632 14 126 22,520
Mortgage-backed investments .......... 64,760 324 434 64,650
-------- ------ ---- --------
Total debt securities ............. 199,253 526 996 198,783
Marketable equity securities ......... 835 689 1 1,523
-------- ------ ---- --------
Total securities available for sale $200,088 $1,215 $997 $200,306
======== ====== ==== ========
</TABLE>
A schedule of the maturity distribution of debt securities
available-for-sale at October 31, 1997 is as follows:
<TABLE>
<CAPTION>
Amortized Percent of Estimated
Cost Total Fair Value
----------- ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C>
One year or less ................. $ 27,828 14% $ 27,836
Over 1 year to 5 years ........... 140,220 68 140,757
Over 5 years to 10 years ......... 5,722 3 5,719
Over 10 years .................... 30,887 15 31,308
-------- -- --------
$204,657 100% $205,620
======== === ========
</TABLE>
Mortgage-backed investments are shown at their contractual maturity dates,
but actual maturities may differ as borrowers have the right to prepay
obligations without incurring prepayment penalties.
F-12
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(2) INVESTMENT SECURITIES (Continued)
The amortized cost and estimated fair value of securities held-to-maturity
at May 31, 1998 and October 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
May 31, 1998
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. government and agency obligations ......... $13,649 $55 $2 $13,702
------- --- -- -------
Total debt securities ....................... $13,649 $55 $2 $13,702
======= === == =======
</TABLE>
<TABLE>
<CAPTION>
October 31, 1997
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. government and agency obligations ......... $12,633 $68 $7 $12,694
------- --- -- -------
Total debt securities ....................... $12,633 $68 $7 $12,694
======= === == =======
</TABLE>
<TABLE>
<CAPTION>
October 31, 1996
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. government and agency obligations ......... $11,752 $40 $48 $11,744
------- --- --- -------
Total debt securities ....................... $11,752 $40 $48 $11,744
======= === === =======
</TABLE>
A schedule of the maturity distribution of debt securities
held-to-maturity at October 31, 1997 is as follows:
<TABLE>
<CAPTION>
Amortized Percent of Estimated
Cost Total Fair Value
----------- ------------ -----------
(Dollars in Thousands)
<S> <C> <C> <C>
One year or less ............... $ 5,298 42% $ 5,301
Over 1 year to 5 years ......... 7,335 58 7,393
------- -- -------
$12,633 100% $12,694
======= === =======
</TABLE>
Included in restricted equity securities at May 31, 1998, and October 31,
1997 and 1996 are Federal Home Loan Bank (FHLB) stock, Savings Bank Life
Insurance Company of Massachusetts stock and the Depositors Insurance Fund.
F-13
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(2) INVESTMENT SECURITIES (Continued)
Proceeds from the sales of investment securities and related gains and
losses for the seven months ended May 31, 1998 and 1997 and for the years ended
October 31, 1997, 1996 and 1995 (all classified as available-for-sale) were as
follows:
<TABLE>
<CAPTION>
Seven Months Ended
May 31, Years Ended October 31,
--------------------- ------------------------------------
1998 1997 1997 1996 1995
--------- --------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Proceeds from sales ......... $6,010 $9,223 $22,017 $26,051 $46,884
Gross gains ................. 14 31 58 101 330
Gross losses ................ 17 8 21 41 414
</TABLE>
At October 31, 1997, investment securities carried at approximately
$3,000,000 were pledged to secure public deposits under the Treasury, Tax and
Loan program, as required by law, securities carried at $5,865,000 were pledged
to secure deposits held by various municipalities and securities carried at
$9,980,000 were pledged against various repurchase agreements.
In November 1995, concurrent with the adoption of its implementation guide
on SFAS No. 115, the FASB allowed a one-time reassessment of SFAS No. 115
classifications of all investment securities held. Any reclassifications are
accounted for at fair value in accordance with SFAS No. 115, and any
reclassifications from the held-to-maturity portfolio that resulted from this
one-time reassessment did not call into question the intent of the Bank to hold
other debt securities to maturity in the future. The Bank used the opportunity
under this one-time reassessment to reclassify securities with an amortized
cost of approximately $138,701,000 from held-to-maturity to the
available-for-sale portfolio. In connection with this reclassification, a new
unrealized gain of $117,000 was recorded in available-for-sale securities and
in surplus (on a net-of-tax basis).
(3) LOANS
The Bank's loan portfolio consisted of the following:
<TABLE>
<CAPTION>
October 31,
May 31, -------------------------
1998 1997 1996
----------- ----------- -----------
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
Residential (one-to-four family) ................ $368,136 $363,030 $343,204
Commercial ...................................... 125,089 124,059 128,707
Home equity lines of credit ..................... 15,941 15,133 17,288
Construction .................................... 41,925 33,894 25,007
-------- -------- --------
Total real estate loans ..................... 551,091 536,116 514,206
-------- -------- --------
Commercial loans ................................. 58,200 51,371 46,211
-------- -------- --------
Consumer loans:
Indirect auto loans ............................. 280,215 238,114 189,865
-------- -------- --------
Other ........................................... 27,553 24,662 22,063
-------- -------- --------
Total consumer loans ........................ 307,768 262,776 211,928
-------- -------- --------
Less--Unearned discount .......................... 32,637 30,066 24,232
-------- -------- --------
Total consumer loans, net ................... 275,131 232,710 187,696
-------- -------- --------
Total loans ................................. 884,422 820,197 748,113
Less--Allowance for possible loan losses ......... 10,508 10,642 10,334
-------- -------- --------
Total loans, net ............................ $873,914 $809,555 $737,779
======== ======== ========
</TABLE>
F-14
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(3) LOANS (Continued)
Nonaccrual loans consisted of the following:
<TABLE>
<CAPTION>
October 31,
May 31, ----------------------
1998 1997 1996
--------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
Real estate ......... $8,998 $10,180 $ 9,312
Commercial .......... 495 745 1,014
------ ------- -------
$9,493 $10,925 $10,326
====== ======= =======
</TABLE>
As a result of nonaccrual loans, interest income was reduced by
approximately $203,000, $200,000 and $331,000 in 1997, 1996 and 1995,
respectively. At October 31, 1997 and 1996, restructured loans totaled
approximately $4,619,000 and $10,178,000, respectively, of which $4,489,000 and
$5,911,000, respectively, were included in nonaccrual loans. If these loans had
been paying in accordance with their original contractual terms, approximately
$36,000, $37,000 and $28,000 of additional interest income would have been
recorded in 1997, 1996 and 1995, respectively. There are no commitments to
extend additional credit on these loans.
During fiscal 1997, the average recorded investment in impaired loans was
approximately $10,844,000 and the income recognized related to impaired loans
while impaired was $778,000. At October 31, 1997, the Bank classified
approximately $10,560,000 of its loans as impaired. A portion of these impaired
loans, approximately $7,912,000, had a related valuation reserve of
approximately $1,114,000 included in the allowance for possible loan losses. In
addition, approximately $2,648,000 of impaired loans did not, in the opinion of
the Bank's management, require a related valuation reserve.
During fiscal 1996, the average recorded investment in impaired loans was
approximately $9,174,000, and the income recognized related to impaired loans
while impaired was $671,000. At October 31, 1996, the Bank classified
approximately $11,203,000 of its loans as impaired. A portion of these impaired
loans, approximately $7,341,000, had a related valuation reserve of
approximately $752,000 included in the allowance for possible loan losses. In
addition, approximately $3,862,000 of impaired loans did not, in the opinion of
the Bank's management, require a related valuation reserve.
In the ordinary course of business, the Bank makes loans to its trustees,
executive officers, directors and related parties at substantially the same
terms as loans made to nonrelated borrowers. Generally, the Bank rarely extends
credit to officers of the Bank. An analysis of related party loans for the
years ended October 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
Years Ended October 31,
-------------------------
1997 1996
----------- -----------
(In Thousands)
<S> <C> <C>
Balance, beginning of year ......... $ 5,807 $ 1,961
New loans ......................... 442 5,123
Payments .......................... (1,133) (1,277)
-------- --------
Balance, end of year ............... $ 5,116 $ 5,807
======== ========
</TABLE>
Loans serviced for others at October 31, 1997 and 1996 amounted to
approximately $204,162,000 and $192,114,000, respectively. At October 31, 1997
and 1996, there were no loans outstanding subject to formal recourse
provisions.
F-15
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(3) LOANS (Continued)
An analysis of the allowance for possible loan losses follows:
<TABLE>
<CAPTION>
Seven Months Ended
May 31, Years Ended October 31,
----------------------- --------------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ----------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of year .......................... $10,642 $10,334 $ 10,334 $ 9,850 $ 7,002
Acquired allowance for possible loan losses ......... -- -- -- -- 3,541
Provision for possible loan losses .................. 536 890 1,865 1,166 (351)
Charge-offs--
Real estate ........................................ (410) (475) (898) (501) (871)
Commercial ......................................... (137) (113) (442) (134) (51)
Consumer ........................................... (353) (251) (594) (436) (310)
------- ------- -------- -------- --------
(900) (839) (1,934) (1,071) (1,232)
------- ------- -------- -------- --------
Recoveries--
Real estate ........................................ 44 104 147 191 756
Commercial ......................................... 83 36 57 96 2
Consumer ........................................... 103 87 173 102 132
------- ------- -------- -------- --------
230 227 377 389 890
------- ------- -------- -------- --------
Net charge-offs ................................ (670) (612) (1,557) (682) (342)
------- ------- -------- -------- --------
Balance, end of year ................................ $10,508 $10,612 $ 10,642 $ 10,334 $ 9,850
======= ======= ======== ======== ========
</TABLE>
On December 28, 1994, the Bank acquired all the outstanding voting stock
of Martha's Vineyard National Bank (MVNB). At the date of purchase, the Bank's
allowance for possible loan losses was increased by the MVNB allowance for
possible loan losses of $3,541,000.
(4) OTHER REAL ESTATE OWNED
Other real estate owned acquired through foreclosure consisted of the
following:
<TABLE>
<CAPTION>
October 31,
May 31, -------------------
1998 1997 1996
--------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Land and construction ........... $ -- $ -- $ 43
Residential real estate ......... 794 1,227 1,769
Commercial real estate .......... 601 480 786
------ ------ ------
$1,395 $1,707 $2,598
====== ====== ======
</TABLE>
F-16
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(5) BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
banking premises and equipment and their estimated useful lives is as follows:
<TABLE>
<CAPTION>
October 31,
May 31, --------------------- Estimated
1998 1997 1996 Useful Lives
--------- --------- --------- ---------------
(In Thousands)
<S> <C> <C> <C> <C>
Land ............................. $ 2,503 $ 2,503 $ 2,503 --
Buildings ........................ 10,147 9,378 9,139 30 to 50 years
Leasehold improvements ........... 2,075 2,143 1,774 8 to 10 years
Furniture and equipment .......... 8,039 7,026 6,572 3 to 20 years
Construction-in-progress ......... 967 156 194
------- ------- -------
23,731 21,206 20,182
Less--Accumulated depreciation and
amortization .................... 9,799 8,952 7,594
------- ------- -------
$13,932 $12,254 $12,588
======= ======= =======
</TABLE>
Total depreciation and amortization expense of banking premises and
equipment for the seven months ended May 31, 1998 and 1997 amounted to
approximately $847,000 and $818,000, respectively, and for the years ended
October 31, 1997, 1996 and 1995 amounted to approximately $1,420,000,
$1,301,000 and $1,066,000, respectively, and is included in occupancy and
equipment expenses.
(6) DEPOSITS
A summary of deposit balances is as follows:
<TABLE>
<CAPTION>
October 31,
May 31, -----------------------
1998 1997 1996
----------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Demand deposit accounts ......................... $ 59,378 $ 58,840 $ 48,466
NOW and money market deposit accounts ........... 238,684 223,580 211,215
Passbook and other savings accounts ............. 176,915 171,072 175,869
-------- -------- --------
Total noncertificate accounts ................ 474,977 453,492 435,550
Term certificates--
Term certificates of $100,000 and over ......... 88,428 82,647 71,729
Term certificates less than $100,000 ........... 418,946 401,809 375,329
-------- -------- --------
Total term certificate accounts .............. 507,374 484,456 447,058
-------- -------- --------
Total deposits .................................. $982,351 $937,948 $882,608
======== ======== ========
</TABLE>
F-17
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(6) DEPOSITS (Continued)
A schedule of the maturity distribution of term certificates with weighted
average interest rates is as follows:
<TABLE>
<CAPTION>
October 31,
--------------------------------------------
May 31,
1998 1997 1996
---------------------- ---------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Interest Interest Interest
Amount Rate Amount Rate Amount Rate
----------- ---------- ----------- ---------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Within 1 year ............. $421,364 5.62% $408,291 5.69% $354,969 5.50%
Over 1 to 2 years ......... 46,830 5.86 46,405 6.17 58,012 5.94
Over 2 to 3 years ......... 30,831 5.98 18,129 5.90 22,994 6.45
Over 3 to 5 years ......... 8,349 5.97 11,631 6.05 11,083 5.82
-------- -------- --------
$507,374 5.67% $484,456 5.75% $447,058 5.62%
======== ======== ========
</TABLE>
(7) SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following:
<TABLE>
<CAPTION>
October 31,
---------------------
May 31,
1998 1997 1996
---------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Securities sold under agreements to repurchase ......... $11,616 $9,533 $1,925
Treasury tax and loan note account ..................... 597 164 2,000
------- ------ ------
$12,213 $9,697 $3,925
======= ====== ======
</TABLE>
The average daily outstanding short-term borrowings were approximately
$5,086,000 in 1997 and $1,198,000 in 1996. The maximum amount of short-term
borrowings outstanding at any month-end was approximately $9,742,000 in 1997
and $3,925,000 in 1996. The weighted average interest rates during 1997 and
1996 were 4.77% and 4.82%, respectively. For the seven months ended May 31,
1998, the average daily outstanding short-term borrowings were approximately
$10,783,000 with the maximum amount outstanding at any month end of
approximately $12,213,000. The weighted average interest rate during the seven
months ended May 31, 1998 was 4.80%.
(8) FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank (FHLB) advances are collateralized by a
blanket-type pledge agreement on the Bank's FHLB stock, certain qualified
investment securities, deposits at the FHLB, and first mortgages on residential
property. As a member of the FHLB, the Bank is required to invest in stock of
the FHLB at an amount equal to the greater of 1% of its outstanding first
mortgage residential loans, .3% of total assets, or 5% of its outstanding
advances from the FHLB divided by a leverage factor of 20. When such stock is
redeemed, the Bank will receive from the FHLB an amount equal to the par value
of the stock. The Bank also has access to a preapproved line of credit of
$20,000,000. No funds were advanced under this line of credit at May 31, 1998
and October 31, 1997 and 1996.
F-18
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(8) FEDERAL HOME LOAN BANK ADVANCES (Continued)
A schedule of the maturity distribution of FHLB advances with weighted
average interest rates is as follows:
<TABLE>
<CAPTION>
October 31,
------------------------------------------------
May 31,
1998 1997 1996
----------------------- ----------------------- ----------------------
(Dollars in Thousands)
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
---------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Within 1 year .............. $ 2,719 5.54% $ 6,087 6.40% $ 4,291 5.46%
Over 1 to 5 years .......... 32,979 6.02 16,528 6.02 15,030 5.84
Over 5 to 10 years ......... 9,775 6.64 10,741 6.61 11,317 6.52
10 years and over .......... 19,099 7.16 17,650 7.29 14,737 7.47
------- ------- -------
$64,572 6.43% $51,006 6.63% $45,375 6.50%
======= ======= =======
</TABLE>
The Bank may be subject to a substantial penalty upon prepayment of FHLB
advances.
(9) INCOME TAXES
The components of the provision for income taxes for the years ended
October 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Current--
Federal ............................ $5,762 $5,448 $3,122
State .............................. 1,470 1,857 741
------ ------ ------
Total current .................... 7,232 7,305 3,863
Deferred (prepaid)--
Federal ............................ 231 (560) 532
State .............................. 222 (197) 116
------ ------ ------
Total deferred (prepaid) ......... 453 (757) 648
------ ------ ------
Total ............................ $7,685 $6,548 $4,511
====== ====== ======
</TABLE>
The difference between the income tax rate computed by applying the
statutory federal income tax rate to income before income taxes and the actual
effective income tax rate is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Statutory rate ............................... 35.00% 34.00% 34.00%
State taxes, net of federal benefit .......... 5.68 6.56 4.72
Other, net ................................... (1.21) (1.36) (1.12)
----- ----- -----
Effective tax rate ........................ 39.47% 39.20% 37.60%
===== ===== =====
</TABLE>
The Bank does not separately determine its current and deferred tax
provision on an interim basis. The change in net deferred tax assets between
year ends is attributable to the change in unrealized gain on securities
available-for-sale and changes in estimated temporary differences from those
included in filed tax returns. The Bank's provision for income taxes for the
seven months ended May 31, 1998 and 1997 and the related effective tax rate
were $4,954,000 (39.3%) and $4,254,000 (40.4%), respectively.
F-19
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(9) INCOME TAXES (Continued)
At October 31, the Bank's net deferred tax asset, as presented in the
accompanying consolidated balance sheets, consisted of the following
components:
<TABLE>
<CAPTION>
October 31,
---------------------
1997 1996
--------- ---------
(In Thousands)
<S> <C> <C>
Allowance for loan losses ................................ $4,114 $4,009
Deferred compensation .................................... 2,239 2,180
Net operating loss carryforward .......................... 946 1,179
Accrued liabilities ...................................... 547 780
Unrealized gain on available-for-sale securities ......... (898) (49)
Other .................................................... 40 177
------ ------
$6,988 $8,276
====== ======
</TABLE>
In August 1996, Congress passed the Small Business Job Protection Act of
1996. Included in this bill was the repeal of IRC Section 593, which allowed
thrift institutions special provisions in calculating bad debt deductions for
income tax purposes. Thrift institutions now will be viewed as commercial banks
for income tax purposes. The repeal is effective for tax years beginning after
December 31, 1995.
One effect of this legislative change is to suspend the Bank's bad debt
reserve for income tax purposes as of its base year (October 31, 1988). Any bad
debt reserve in excess of the base year amount is subject to recapture over a
six-year time period. The suspended (i.e., base year) amount is subject to
recapture upon the occurrence of certain events, such as complete or partial
redemption of the Bank's stock or if the Bank ceases to qualify as a bank for
income tax purposes.
At October 31, 1997, the Bank's surplus includes approximately $9,085,000
of bad debt reserves, representing the base year amount, for which income taxes
have not been provided. Since the Bank does not intend to use the suspended bad
debt reserve for purposes other than to absorb the losses for which it was
established, deferred taxes in the amount of $3,800,000 have not been recorded
with respect to such reserve.
(10) COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingencies that are not reflected in the accompanying consolidated financial
statements. On March 21, 1996, the Bank entered into a Master Commitment to
deliver or sell $40,000,000 in residential mortgage loans to a federal agency
on or before March 31, 1998. At October 31, 1997, the unfulfilled portion that
remained to be delivered under this commitment was approximately $17,076,000.
Pursuant to the terms of noncancelable lease and sublease agreements
pertaining to banking premises and equipment, future minimum lease payments and
sublease income commitments are as follows:
<TABLE>
<CAPTION>
Years Ending Future Minimum Future Lease
October 31, Lease Payments Income
- ------------------------ ---------------- -------------
(In Thousands)
<S> <C> <C>
1998 ............... $388 $165
1999 ............... 432 88
2000 ............... 431 59
2001 ............... 285 54
2002 ............... 285 --
Thereafter ......... 840 --
</TABLE>
F-20
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(10) COMMITMENTS AND CONTINGENCIES (Continued)
The leases contain renewal options for periods ranging from 8 to 85 years,
the cost of which is not included above. Rent expense for the years ended
October 31, 1997, 1996 and 1995 amounted to approximately $370,000, $403,000
and $387,000 respectively, and is included in occupancy and equipment expenses
in the accompanying consolidated statements of income.
Aggregate reserves (in the form of deposits with the Federal Reserve Bank
and vault cash) of $6,754,000 and $12,537,000 were maintained to satisfy
regulatory requirements at October 31, 1997 and 1996, respectively.
In the ordinary course of business, the Bank is involved in litigation.
Based on its review of current litigation and discussion with legal counsel,
management does not expect any material adverse impact on the consolidated
financial position or results of operations resulting from the resolution of
pending litigation.
(11) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements
administered by the 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 I capital (as defined) to
average assets (as defined). Management believes, as of October 31, 1997, that
the Bancorp and the Bank met all capital adequacy requirements to which they
are subject.
As of October 31, 1997, the most recent notification from the Federal
Reserve Bank of Boston relating to the Bancorp classified the Bancorp's capital
as satisfactory, and the most recent notification from the FDIC relating to the
Bank categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, an insured
depository institution must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed the Bancorp's and the Bank's category.
F-21
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(11) REGULATORY CAPITAL REQUIREMENTS (Continued)
The Bancorp's and the Bank's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
----------------------- ----------------------------------
Amount Ratio Amount Ratio
----------- ----------- ---------------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
As of October 31, 1997:
Bancorp (consolidated)--
Total capital (to risk weighted assets) ...... $104,158 13.92% greater than or greater than or
equal to $59,867 equal to 8.0%
Tier I capital (to risk weighted assets) ..... $ 94,788 12.67% greater than or greater than or
equal to $29,933 equal to 4.0%
Tier I capital (to average assets) ........... $ 94,788 8.60% greater than or greater than or
equal to $44,092 equal to 4.0%
Bank--
Total capital (to risk weighted assets) ...... $100,637 13.47% greater than or greater than or
equal to $59,766 equal to 8.0%
Tier I capital (to risk weighted assets) ..... $ 91,283 12.22% greater than or greater than or
equal to $29,883 equal to 4.0%
Tier I capital (to average assets) ........... $ 91,283 8.29% greater than or greater than or
equal to $44,045 equal to 4.0%
As of October 31, 1996:
Bancorp (consolidated)--
Total capital (to risk weighted assets) ....... $ 91,005 13.73% greater than or greater than or
equal to $52,948 equal to 8.0%
Tier I capital (to risk weighted assets) ...... $ 82,693 12.47% greater than or greater than or
equal to $26,525 equal to 4.0%
Tier I capital (to average assets) ............ $ 82,693 8.13% greater than or greater than or
equal to $40,685 equal to 4.0%
Bank--
Total capital (to risk weighted assets) ....... $ 87,252 13.19% greater than or greater than or
equal to $52,920 equal to 8.0%
Tier I capital (to risk weighted assets) ...... $ 78,959 11.94% greater than or greater than or
equal to $26,452 equal to 4.0%
Tier I capital (to average assets) ............ $ 78,959 7.79% greater than or greater than or
equal to $40,544 equal to 4.0%
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
-----------------------------
Amount Ratio
---------------- ----------
<S> <C> <C>
As of October 31, 1997:
Bancorp (consolidated)--
Total capital (to risk weighted assets) ...... N/A N/A
Tier I capital (to risk weighted assets) ..... N/A N/A
Tier I capital (to average assets) ........... N/A N/A
Bank--
Total capital (to risk weighted assets) ...... greater than or 10.0%
equal to $74,796
Tier I capital (to risk weighted assets) ..... greater than or 6.0%
equal to $44,877
Tier I capital (to average assets) ........... greater than or 5.0%
equal to $55,056
As of October 31, 1996:
Bancorp (consolidated)--
Total capital (to risk weighted assets) ....... N/A N/A
Tier I capital (to risk weighted assets) ...... N/A N/A
Tier I capital (to average assets) ............ N/A N/A
Bank--
Total capital (to risk weighted assets) ....... greater than or 10.0%
equal to $66,150
Tier I capital (to risk weighted assets) ...... greater than or 6.0%
equal to $39,678
Tier I capital (to average assets) ............ greater than or 5.0%
equal to $50,680
</TABLE>
(12) EMPLOYEE BENEFITS
The Bank provides basic and supplemental pension benefits for eligible
employees through the Savings Bank's Employees Retirement Association Pension
Plan (the Plan). Each employee having reached the age of 21 and having
completed at least 1,000 hours of service in two consecutive 12-month periods
beginning with such employee's date of employment automatically becomes a
participant in the Plan. Benefits are based on employees' years of service and
annual compensation, as defined in the Plan. The Bank's funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes. Contributions made under the Plan totaled approximately $609,000,
$425,000 and $112,000 for 1997, 1996 and 1995, respectively.
F-22
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(12) EMPLOYEE BENEFITS (Continued)
Net pension cost under the Plan for the years ended October 31 included
the following components:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Service cost during year .............................. $ 517 $ 500 $ 603
Interest cost on projected benefit obligation ......... 656 618 677
Return on plan assets ................................. (544) (439) (367)
Net amortization and deferral ......................... (57) (28) 59
------ ------ ------
Net pension cost .................................. $ 534 $ 651 $ 972
====== ====== ======
</TABLE>
According to the Plan's actuary, the funded status of the Plan was as
follows at October 31 (latest available data):
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(In Thousands)
<S> <C> <C>
Plan assets at fair value ................................... $ 8,369 $ 6,806
Actuarial present value of projected benefit obligation
(substantially all vested) ................................. 9,884 8,748
Excess of projected benefit obligation over assets .......... (1,515) (1,942)
Unrecognized net asset existing at transition ............... (398) (425)
Unrecognized net gain ....................................... (1,172) (763)
-------- --------
Accrued pension liability included on balance sheet ......... $ (3,085) $ (3,130)
======== ========
</TABLE>
The accumulated benefit obligation (all vested) at October 31, 1997 and
1996 amounted to $5,258,499 and $4,651,406, respectively. Plan assets consist
primarily of common stock, U.S. government and agency obligations and a
guaranteed investment contract.
Actuarial assumptions used in determining plan obligations and net pension
expense are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Discount rate used to calculate projected benefit obligation .......... 7.5% 7.5% 7.5%
Expected long-term rate of return on plan assets ...................... 8.0 7.5 7.0
Annual salary increases ............................................... 5.0 5.0 6.0
</TABLE>
F-23
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(12) EMPLOYEE BENEFITS (Continued)
In addition to the Bank's defined benefit pension plan, the Bank sponsors
a noncontributory defined benefit postretirement life insurance plan (the Life
Insurance Plan) that covers all pre-1996 retirees and active employees
designated by the Bank for coverage. The Life Insurance Plan generally provides
lifetime coverage to retired employees equal to retiring employees' final rate
of pay, but not more than $50,000, and to active employees equal to three times
the employees' annual salary, but not more than $350,000. The Bank funds the
Life Insurance Plan in combination with its active employee coverage. The
status of this Life Insurance Plan is as follows:
<TABLE>
<CAPTION>
October 31,
-----------------------
1997 1996
---------- ----------
(In Thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation--
Retirees ............................................................. $ (288) $ (269)
Eligible plan participants ........................................... (26) (24)
------ ------
Total .......................................................... $ (314) $ (293)
====== ======
Plan assets .......................................................... $ -- $ --
------ ------
Accumulated postretirement benefit obligation in excess of plan assets (314) (293)
Unrecognized transition obligation ................................... 25 27
Unrecognized prior service cost ...................................... 62 64
Unrecognized net gain ................................................ (31) (30)
------ ------
Accrued postretirement benefit cost .................................. $ (258) $ (232)
====== ======
</TABLE>
Net periodic postretirement benefit cost included the following
components:
<TABLE>
<CAPTION>
Years Ended October 31,
-----------------------
1997 1996 1995
------ ------ -----
(In Thousands)
<S> <C> <C> <C>
Service cost--benefits attributed to service during the period ........ $-- $-- $--
Interest cost on accumulated postretirement benefit obligation ........ 22 21 16
Amortization of transition obligation over 20 years ................... 2 2 2
Amortization of unrecognized prior service cost ....................... 2 2 --
--- --- ---
Net periodic postretirement benefit cost .............................. $26 $25 $18
=== === ===
</TABLE>
The discount rate used in determining the accumulated postretirement
benefit obligation was 7%, and the assumed rate of compensation increase was
4.5% in all years presented.
The Bank has entered into agreements with certain officers to provide
supplemental retirement benefits based on 25% of average compensation computed
over a three-year period. The present value of these future payments is
presently being accrued over the estimated remaining terms of employment. The
accrued supplemental retirement expense is approximately $1,332,000 and
$1,281,000 at October 31, 1997 and 1996, respectively. The agreements are being
funded through a life insurance program with policy benefits accruing to the
Bank. The cash surrender value of the policies is approximately $1,567,000 and
$1,245,000 at October 31, 1997 and 1996, respectively, and is included in other
assets in the accompanying consolidated balance sheets. Borrowings made against
the life insurance policies are approximately $0 and $648,000 at October 31,
1997 and 1996, respectively, and are included in other borrowings in the
accompanying consolidated balance sheets. Net expense for these supplemental
retirement benefits for the years ended October 31, 1997, 1996 and 1995 was
approximately $70,000, $222,000 and $157,000, respectively, and is included in
salaries and employee benefits in the accompanying consolidated statements of
income.
F-24
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(12) EMPLOYEE BENEFITS (Continued)
The Bank has an Employee Bonus and Management Incentive Compensation Plan
(the Bonus Plan) in which employees are eligible to participate. The Bonus Plan
provides for awards based on a combination of Bank and individual performance
objectives being met, subject to the approval of the Board of Directors.
Amounts charged to operations under the Bonus Plan amounted to approximately
$1,024,000, $696,000 and $581,000 for the years ended October 31, 1997, 1996
and 1995, respectively.
The Bank offers a 401(k) Retirement Savings Plan (the Savings Plan) for
employees. Participating employees are able to contribute up to 15% of their
salary, and the Bank matches 50% of a participant's deferral contribution on
the first 6% of the deferral amount subject to the maximum allowable under
federal regulations. The Bank's matching contribution expense was approximately
$218,000, $193,000 and $103,000 for the years ended October 31, 1997, 1996 and
1995, respectively, and is included in salaries and employee benefits in the
accompanying consolidated statements of income.
(13) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION OF
CREDIT RISK
The Bank is a 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 extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amounts recognized in the accompanying
consolidated balance sheets.
The contract amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit 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.
Off-balance-sheet financial instruments whose contract amounts present
credit risk included the following:
<TABLE>
<CAPTION>
October 31,
-----------------------
May 31,
1998 1997 1996
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Unused portion of existing lines of credit ......... $38,551 $37,744 $32,839
Standby letters of credit .......................... 1,428 1,110 1,265
Unadvanced construction loans ...................... 19,486 16,327 10,542
Firm commitments to extend credit:
Residential mortgage loans--
Fixed rate ...................................... 20,267 12,245 3,980
Adjustable rate ................................. 5,937 5,447 5,099
Commercial loans ................................... 20,273 11,207 16,047
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as 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 some of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
require future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained
upon extension of the credit
F-25
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(13) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION OF
CREDIT RISK (Continued)
is based on management's credit evaluation of the customer. Collateral held
varies but may include accounts receivable, inventory, property, plant and
equipment and income-producing commercial real estate.
Standby letters of credit are conditional commitments issued by the Bank
to guarantee performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. Most
guarantees extend for one year. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers.
The collateral supporting those commitments varies and may include real
property, accounts receivable or inventory. The Bank originates primarily
residential and commercial real estate loans and, to a lesser extent,
installment loans to customers primarily located in southeastern Massachusetts.
In order to diversify its geographic risk, the Bank buys and sells loans
to/from other financial institutions operating in other states. The Bank
estimates that 95% of its loan portfolio is based in the state of
Massachusetts, of which the majority is located in southeastern Massachusetts.
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported fair values of financial instruments are based on a variety
of valuation techniques. In some cases, fair values represent quoted market
prices for identical or comparable instruments. In other cases, fair values
have been estimated based on assumptions concerning the amount and timing of
estimated future cash flows, assumed discount rates reflecting varying degrees
of risk and future expected loss assumptions. These estimates involve a high
degree of judgment. The estimates do not reflect any premium or discount that
could result from offering significant holdings of financial instruments at
bulk sale. Tax implications of unrealized gains and losses can also have a
significant effect on fair value of the financial instruments that could have
been realized as of October 31, 1997 and 1996 or that will be realized in the
future. Changes in economic conditions may dramatically affect the fair value
of financial instruments.
The following methods and assumptions were used to estimate the fair value
of the Bank's instruments:
For cash and due from banks and federal funds sold, the carrying amount
approximates fair value due to the short maturity of those instruments.
The fair values of investment securities are based on published market
prices or quotations received from securities dealers.
The fair values of loans are estimated for loan portfolios with similar
financial characteristics. Loans are segregated by type, fixed- and
adjustable-rate interest terms and by performing and nonperforming status.
The fair values of performing residential real estate loans are estimated
by discounting the anticipated future cash flows at rates currently required by
the secondary mortgage market for the purchase of similar loans. For performing
commercial real estate loans and performing business loans, fair values are
estimated by discounting the anticipated future cash flows using estimated
market discount rates that reflect the credit and interest rate risk inherent
in the loan as determined by the loan's terms and credit rating. For home
equity loans and certain consumer loans, the recorded book values approximate
fair value because the majority of these loans reprice with changes in market
rates.
For collateral dependent nonperforming loans, the fair values are
estimated based on the fair values of the underlying collateral as determined
generally by recent appraisals. For other nonperforming loans, the fair values
are estimated by discounting the expected future cash flows using a discount
rate commensurate with the higher credit risk associated with these loans.
The fair value of noncertificate deposits does not include the value of
the Bank's long-term relationships with its depositors and does not reflect the
value associated with possessing this relatively inexpensive source of funds
F-26
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
that may be available for a considerable length of time. The fair value of
noncertificate deposits is equal to the amount payable on demand at the
reporting date. The fair values of fixed-maturity certificate deposits are
estimated by discounting the contractual future cash flows at rates currently
offered for certificate deposits with similar remaining maturities.
The fair values of FHLB advances are determined by discounting the
anticipated future cash payments by using the rates currently available to the
Bank for advances with similar terms and remaining maturities. For other
borrowings, the carrying amount approximates fair value due to the short
maturity of those instruments.
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
The fair value of financial standby letters of credit is based on fees
currently charged for similar agreements or on the estimated cost to terminate
them or otherwise settle the obligations with the counterparties. While these
commitment fees have value, the Bank has not estimated their value due to the
short-term nature of the underlying commitments and their immateriality.
Certain assets are excluded from disclosure requirements, including
banking premises and equipment, the intangible value of the Bank's portfolio of
loans serviced for others and the intangible value inherent in the Bank's
deposit relationships (i.e., core deposits) among others. Accordingly, the
aggregate fair value amounts presented below do not represent the underlying
value of the Bank.
The estimated fair values of the Bank's financial instruments at October
31 are as follows (the amounts in the book value column represent the amounts
at which such instruments are carried in the accompanying consolidated balance
sheets):
<TABLE>
<CAPTION>
1997 1996
--------------------------- --------------------------
Estimated Estimated
Book Value Fair Value Book Value Fair Value
------------ ------------ ------------ -----------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Financial instrument assets:
Cash and due from banks ..................... $ 25,611 $ 25,611 $ 34,511 $ 34,511
Federal funds sold .......................... 7,150 7,150 53 53
Investment securities ....................... 227,105 227,166 216,703 216,695
Loans held-for-sale ......................... 4,277 4,305 4,394 4,414
Loans--
Residential ................................ 377,362 383,772 355,517 353,316
Commercial real estate ..................... 143,621 143,503 141,401 139,524
Commercial ................................. 51,371 51,682 46,211 46,184
Home equity lines of credit ................ 15,133 15,655 17,288 17,550
Consumer ................................... 232,710 233,629 187,696 189,513
Allowance for possible loan losses ......... (10,642) -- (10,334) --
--------- -------- --------- --------
Total loans, net ........................ $ 809,555 $828,241 $ 737,779 $746,087
========= ======== ========= ========
Financial liabilities:
Noncertificate deposits ..................... 453,492 453,492 435,550 435,550
Certificate deposits ........................ 484,456 485,202 447,058 447,726
Borrowings .................................. 9,697 9,697 4,573 4,573
FHLB advances ............................... 51,006 51,941 45,375 47,171
</TABLE>
F-27
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(15) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The balance sheets of the Bancorp are as follows:
<TABLE>
<CAPTION>
October 31,
May 31, ----------------------
1998 1997 1996
----------- ---------- ---------
(In Thousands)
<S> <C> <C> <C>
ASSETS:
Cash and due from banks ......................................... $ 87 $ 142 $ 111
Investment securities available-for-sale, at fair value ......... 5,313 4,856 3,904
Accrued interest receivable ..................................... 55 62 62
Investment in Subsidiary ........................................ 101,738 93,603 81,046
Other assets .................................................... 42 41 61
-------- ------- -------
Total assets ............................................... $107,235 $98,704 $85,184
======== ======= =======
LIABILITIES AND SURPLUS:
Accrued expenses and other liabilities .......................... $ 725 $ 563 $ 267
Surplus ......................................................... 106,510 98,141 84,917
-------- ------- -------
Total liabilities and surplus .............................. $107,235 $98,704 $85,184
======== ======= =======
</TABLE>
The income statements of the Bancorp are as follows:
<TABLE>
<CAPTION>
Seven Months Ended
May 31, Years Ended October 31,
------------------- ---------------------------------
1998 1997 1997 1996 1995
-------- -------- --------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and dividends on investment securities ......... $ 115 $ 121 $ 217 $ 195 $ 179
NONINTEREST INCOME:
Gain on sales of investment securities .................. -- -- -- -- 11
NONINTEREST EXPENSE:
Salaries and employee benefits .......................... 71 34 58 62 59
Amortization of organization costs ...................... 8 12 21 43 --
Other operating expenses ................................ 22 1 14 23 12
------ ------ ------- ------- ------
Total noninterest expense .......................... 101 47 93 128 71
------ ------ ------- ------- ------
Income before income taxes and equity in
undistributed net income of subsidiary ................. 14 74 124 67 119
PROVISION FOR INCOME TAXES ................................. 5 26 18 23 41
------ ------ ------- ------- ------
Income before equity in undistributed net
income of subsidiary ................................... 9 48 106 44 78
EQUITY IN UNDISTRIBUTED NET INCOME
OF SUBSIDIARY ............................................. 7,657 6,236 11,678 10,111 7,408
------ ------ ------- ------- ------
Net income .............................................. $7,666 $6,284 $11,784 $10,155 $7,486
====== ====== ======= ======= ======
</TABLE>
F-28
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(15) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS (Continued)
The cash flow statements of the Bancorp are as follows:
<TABLE>
<CAPTION>
Seven Months Ended
May 31, Years Ended October 31,
------------------------ --------------------------------------
1998 1997 1997 1996 1995
----------- ------------ ------------- ------------ -----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 7,666 $ 6,284 $ 11,784 $ 10,155 $ 7,486
Adjustments to reconcile net income to net
cash provided by operating activities:
Gain on sales of investments ....................... -- -- -- -- (11)
Net (accretion) amortization of
investment securities ............................. 3 (2) (2) (17) 17
Equity in undistributed earnings of subsidiary ..... (7,657) (6,236) (11,678) (10,111) (7,408)
Net increase in other liabilities .................. 17 19 3 (12) 44
Net decrease in other assets ....................... 6 17 20 4 (61)
-------- --------- ---------- --------- --------
Net cash provided by operating
activities .................................. 35 82 127 19 67
-------- --------- ---------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturities of
held-to-maturity and available-for-sale
securities ........................................ 496 -- -- 2,017 551
Purchase of securities classified as
held-to-maturity .................................. -- -- (96) -- (497)
Purchase of securities classified as
available-for-sale ................................ (586) -- -- (2,071) --
-------- --------- ---------- --------- --------
Net cash provided by (used in)
investing activities ........................ (90) -- (96) (54) 54
-------- --------- ---------- --------- --------
Net increase (decrease) in cash and
cash equivalents .................................. (55) 82 31 (35) 121
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR .................................... 142 111 111 146 25
-------- --------- ---------- --------- --------
CASH AND CASH EQUIVALENTS,
END OF PERIOD ........................................ $ 87 $ 193 $ 142 $ 111 $ 146
======== ========= ========== ========= ========
SUPPLEMENTAL CASH DISCLOSURE:
Income taxes paid .................................. $ 1 $ 10 $ 27 $ 43 $ 62
======== ========= ========== ========= ========
Transfer of investments from held-to-
maturity to available-for-sale .................... $ -- $ -- $ -- $ 496 $ --
======== ========= ========== ========= ========
</TABLE>
F-29
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(16) EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS
Stock Conversion
On April 23, 1998, the Board of Trustees of the Bancorp adopted a Plan of
Conversion (the Conversion) pursuant to which the Bancorp will convert to a
stock form of ownership and offer for sale 100% of its common stock in a
subscription offering initially to Bank depositors, employee benefit plans of
the Bank and certain other eligible subscribers. Any shares of stock not sold
in the subscription offering are expected to be sold to the public by
underwriters.
One of the primary purposes of the Conversion is to enable the Bancorp to
acquire Sandwich Bancorp, Inc. (Sandwich) as more fully described below. The
Bancorp will not proceed with the Conversion unless all preconditions to the
closing of the acquisition of Sandwich have been satisfied or waived. As part
of the Conversion, the Bank will establish a liquidation account in an amount
equal to the net worth of the Bank as of the date of the latest consolidated
balance sheet appearing in the final prospectus. The liquidation account will
be maintained for the benefit of eligible account holders and supplemental
eligible account holders who maintain their accounts at the Bank after the
Conversion. The liquidation account will be reduced annually to the extent that
such account holders have reduced their qualifying deposits as of each
anniversary date. Subsequent increases will not restore an account holder's
interest in the liquidation account. In the event of a complete liquidation,
each eligible account holder will be entitled to receive balances for accounts
then held.
Subsequent to the Conversion, the Bancorp may not declare or pay dividends
on and may not repurchase any of its common stock if the effect thereof would
cause its capital to be reduced below applicable regulatory capital maintenance
requirements or if such declaration, payment or repurchase would otherwise
violate regulatory requirements.
Pending Acquisition
On February 2, 1998, the Bancorp and the Bank entered into a definitive
agreement under which the Bank would acquire Sandwich, a one-bank holding
company with approximately $519,000,000 in total assets at December 31, 1997.
On February 24, 1998, Sandwich announced that its Board of Directors determined
that it was appropriate to request additional information and a clarification
of the renewed expressions of interest that it had received from the three
other parties subsequent to February 2, 1998.
Following a review of the other expressions of interests for Sandwich, the
Bancorp and Sandwich jointly announced on March 23, 1998 that they had signed
an amendment to their previously announced agreement of February 2, 1998 (the
Amended Agreement) by which the Bancorp would acquire Sandwich. Under the terms
of the Amended Agreement, the 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 shareholders in a tax-free exchange of common stock. The
value to be received by Sandwich shareholders is subject to adjustment pursuant
to a formula based on the value of the stock of the Bancorp near the
transaction date. Based on the Bancorp's assumed initial public offering price
of $10.00 per share, each Sandwich share will be exchanged for Bancorp stock
having a value of $64.00 per share so long as 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
shareholders will increase proportionately up to a maximum value of $71.11
until 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 shares will
be exchanged for 6.4 shares of Bancorp stock.
Sandwich and the Bancorp also entered into a Stock Option Agreement,
granting to the Bancorp an option to acquire up to 19.9% of Sandwich common
stock under certain circumstances. The transaction is conditioned upon its
being eligible to be accounted for as a pooling of interests and is subject to
all necessary regulatory and shareholder approvals. It is expected to close in
the fourth quarter of 1998.
F-30
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MAY 31, 1998 AND 1997 (UNAUDITED) AND
OCTOBER 31, 1997, 1996 AND 1995
(16) EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (Continued)
Formation of New Subsidiary
Compass Preferred Capital Corporation (CPCC) was established in March 1998
to engage in real estate business activities (including the acquisition and
holding of securities and mortgage loans) that enable it to be taxed as a real
estate investment trust (REIT) for federal and Massachusetts tax purposes. At
March 31, 1998, CPCC had total assets of $157.1 million of which $157 million
were residential mortgage loans originated by and acquired from the Bank. CPCC
is currently a 100% owned subsidiary of Buffinton Brook Realty Corporation. It
is anticipated that its ownership interest will be reduced to 99.9% through the
issuance of shares to certain Bank employees, as required by tax regulation.
F-31
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
SANDWICH BANCORP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION
<TABLE>
<S> <C> <C>
I. Excerpts from Sandwich Bancorp's Annual Report on Form 10-K for the Year
Ended December 31, 1997
Part II, Item 8. Audited Consolidated Financial Statements of Sandwich
Bancorp, Inc. and Subsidiaries and Independent Auditors' Report Thereon:
Independent Auditors' Report ................................................. G-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 ................. G-3
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995. ............................................................... G-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995. ............................................ G-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995. ............................................................... G-6
Notes to Consolidated Financial Statements ................................... G-8
Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations. .................................................................. G-28
Part I, Item 1. Business ..................................................................... G-38
II. Excerpts from Sandwich Bancorp's Quarterly Report on Form 10-Q for the
Quarter Ended June 30, 1998
Part I, Item 1. Unaudited Consolidated Financial Statements of Sandwich Bancorp, Inc. and
Subsidiaries:
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 ........ G-54
Consolidated Statements of Operations for the three and six months ended
June 30, 1998 and 1997 ....................................................... G-55
Consolidated Statements of Changes in Stockholders' Equity for the six months
ended June 30, 1998 and 1997 ................................................. G-56
Consolidated Statements of Cash Flows for the six months ended June 30, 1998
and 1997 ..................................................................... G-57
Notes to Consolidated Financial Statements ................................... G-59
Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations. .................................................................. G-61
</TABLE>
G-1
<PAGE>
KPMG PEAT MARWICK LLP
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.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
January 26, 1998, except as to note 17,
which is as of March 23, 1998
G-2
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------- -------------
(In thousands)
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
G-3
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------
1997 1996 1995
------------ ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
G-4
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net unrealized
gain (loss) on
investment
Additional securities
Common paid-in Retained available
stock capital earnings for sale, net Total
-------- ------------ ---------- --------------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
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
====== ======= ======== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
G-5
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------
1997 1996 1995
----------- ------------ -----------
(In thousands)
<S> <C> <C> <C>
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)
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
G-6
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------
1997 1996 1995
------------- ------------ ------------
(In thousands)
<S> <C> <C> <C>
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
========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
G-7
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
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.
G-8
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
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.
G-9
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
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.
G-10
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------- -------------
(In thousands)
<S> <C> <C>
Tax anticipation notes ......... $ -- $570
Money market funds ............. 101 66
---- ----
$101 $636
==== ====
</TABLE>
(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.
<TABLE>
<CAPTION>
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
----------- ---------- ------------ --------- ----------- ---------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 -- --
------- ------- --- --- ------- ------- ------ ------
</TABLE>
G-11
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(3) INVESTMENT SECURITIES (Continued)
<TABLE>
<CAPTION>
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
----------- --------- ------------ --------- ----------- --------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
A comparative summary of mortgage-backed securities and CMO's follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ ------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ---------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C>
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
======= ======= ======= =======
</TABLE>
G-12
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(3) INVESTMENT SECURITIES (Continued)
A comparative summary of gross unrealized gains and losses pertaining to
investment securities are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ---------
(In thousands)
<S> <C> <C> <C> <C>
Held to Maturity
- --------------------------------------
U.S. Government obligations .......... $15,480 $ 36 $ (6) $15,510
Collateralized mortgage
obligations ......................... 50,209 269 (223) 50,255
Mortgage-backed securities ........... 33,888 331 (209) 34,010
------- ---- ----- -------
$99,577 $636 $(438) $99,775
======= ==== ===== =======
Available for Sale
- ---------------------------------------
U.S. Government obligations .......... $ -- $ -- $ -- $ --
Mortgage-backed securities ........... 10,861 137 (9) 10,989
Marketable equity securities ......... 2 4 -- 6
------- ---- ------- -------
$10,863 $141 $ (9) $10,995
======= ==== ======= =======
<CAPTION>
December 31, 1996
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ------------ ------------ ----------
(In thousands)
<S> <C> <C> <C> <C>
Held to Maturity
- ---------------------------------------
U.S. Government obligations .......... $22,477 $ 50 $ -- $22,527
Collateralized mortgage
obligations ......................... 64,780 209 (780) 64,209
Mortgage-backed securities ........... 12,391 88 (87) 12,392
------- ---- ------ -------
$99,648 $347 $ (867) $99,128
======= ==== ====== =======
Available for Sale
- ---------------------------------------
U.S. Government obligations .......... $ 2,000 $ -- $ (6) $ 1,994
Mortgage-backed securities ........... 8,418 112 (40) 8,490
Marketable equity securities ......... 2,844 20 (36) 2,828
------- ---- ------ -------
$13,262 $132 $ (82) $13,312
======= ==== ====== =======
</TABLE>
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.
G-13
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(4) LOANS (Continued)
A comparative summary of loans follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------- -------------
(In thousands)
<S> <C> <C>
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
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1997 1996 1995
------ ------ -------
(In thousands)
<S> <C> <C> <C>
Income in accordance with original terms ......... $321 $403 $551
Income recognized ................................ 144 203 312
---- ---- ----
Reduction in interest income .................... $177 $200 $239
==== ==== ====
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1997 1996 1995
------ ------ -------
(In thousands)
<S> <C> <C> <C>
Income in accordance with original terms ......... $67 $148 $141
Income recognized ................................ 23 84 72
--- ---- ----
Reduction in interest income .................... $44 $ 64 $ 69
=== ==== ====
</TABLE>
G-14
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(4) LOANS (Continued)
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.
(5) ALLOWANCE FOR LOAN LOSSES
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
(6) OFFICE PROPERTIES AND EQUIPMENT
A summary of office properties and equipment follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------- -------------
(In thousands)
<S> <C> <C>
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
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
Years ending December 31,
---------------------------------------------------------------------
1997 1998 1999 2000 2001 Thereafter Total
------ ------ ------ ------ ------ ------------ ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Capital Lease Payments ......... $15 182 182 182 182 995 $1,738
</TABLE>
G-15
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(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:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------- -------------
(In thousands)
<S> <C> <C>
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
======== ========
</TABLE>
A summary of certificates of deposit, by periods of maturity follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------- -------------
(In thousands)
<S> <C> <C>
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
======== ========
</TABLE>
Individual certificates of deposit of $100,000 or more, by periods of
maturity, are summarized below:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------- -------------
(In thousands)
<S> <C> <C>
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
======= =======
</TABLE>
G-16
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(9) BORROWED FUNDS
Advances from the Federal Home Loan Bank of Boston are summarized as
follows:
<TABLE>
<CAPTION>
Maturing in December 31, December 31,
Interest rate year ending 1997 1996
- ---------------------------------- ------------- -------------- -------------
(In thousands)
<S> <C> <C> <C>
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%
======== ========
</TABLE>
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:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1997 1996 1995
--------- ------------ ---------
(In thousands)
<S> <C> <C> <C>
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
====== ======= ======
</TABLE>
G-17
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(10) INCOME TAXES (Continued)
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:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1997 1996 1995
---------- ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C>
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%
====== ======= ======
</TABLE>
The Bank had gross deferred tax assets and gross deferred tax liabilities
as follows:
<TABLE>
<CAPTION>
December 31, At December 31,
1997 1996
-------------- ----------------
(In thousands)
<S> <C> <C>
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
====== ======
</TABLE>
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
G-18
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(10) INCOME TAXES (Continued)
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.
(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:
<TABLE>
<CAPTION>
To Be Well
Minimums Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Action Provisions
----------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ---------- ---------- --------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
G-19
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(11) RETAINED EARNINGS (Continued)
<TABLE>
<CAPTION>
To Be Well
Minimums Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Action Provisions
-------------------- ------------------ --------------------
Amount Ratio Amount Ratio Amount Ratio
-------- --------- -------- ------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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.
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.
G-20
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(12) EMPLOYEE BENEFITS (Continued)
A summary of the activity under the Plan follows:
<TABLE>
<CAPTION>
Number of Average
shares exercise price
----------- ---------------
<S> <C> <C>
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
======= ========
</TABLE>
Stock options outstanding and exercisable:
<TABLE>
<CAPTION>
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
------------- ------------------ ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
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 -- --
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(Dollars in thousands except per share
data)
<S> <C> <C> <C> <C>
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
</TABLE>
G-21
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(12) EMPLOYEE BENEFITS (Continued)
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.
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
G-22
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(13) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ------------ ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ------------ ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
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
</TABLE>
The fair value of financial instruments with no maturity or short-term
maturities approximates its carrying value as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ------------ ---------- -----------
(In thousands)
<S> <C> <C> <C> <C>
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
</TABLE>
G-23
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(13) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
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:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------------- -------------------------------
Contract or Estimated Contract or Estimated
Notional Amount Fair Value Notional Amount Fair Value
----------------- ------------ ----------------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Commitments to extend credit ......... $46,190 $490 $51,976 $539
Commitments to sell loans ............ 6,149 20 1,232 0
</TABLE>
(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.
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:
<TABLE>
<CAPTION>
Contract or
Notional Amount
------------------------------
December 31, December 31,
1997 1996
-------------- -------------
(In thousands)
<S> <C> <C>
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
</TABLE>
G-24
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(14) COMMITMENTS AND CONTINGENCIES (Continued)
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:
<TABLE>
<CAPTION>
1997
BALANCE SHEET ---------------
(In thousands)
<S> <C>
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
=======
</TABLE>
G-25
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(15) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Three Months
Ended
December 31, 1997
STATEMENT OF OPERATIONS ------------------
(in thousands)
<S> <C>
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
======
</TABLE>
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.
<TABLE>
<CAPTION>
Three Months
Ended
December 31, 1997
STATEMENT OF CASH FLOWS ------------------
(in thousands)
<S> <C>
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
======
</TABLE>
G-26
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
SANDWICH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995--(Continued)
(16) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
1997 Quarters 1996 Quarters
Three Months Ended Three months ended
-------------------------------------------- ---------------------------------------------
Dec. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
Periods ended ---------- ----------- ---------- ---------- ---------- ----------- ---------- -----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(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.
G-27
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
PART II, ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 portfolio. At 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.
G-28
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
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:
<TABLE>
<CAPTION>
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
--------- -------- ---------- ---------- -------- --------- ----------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
==== ==== ====
</TABLE>
- ------------
(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.
G-29
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
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.
<TABLE>
<CAPTION>
Years ended December 31, Years ended December 31,
1997 vs. 1996 1996 vs. 1995
------------------------------------------ -----------------------------------------
Changes due to increase/(decrease) Changes due to increase/(decrease)
------------------------------------------ -----------------------------------------
Rate/ Rate/
Total Volume Rate Volume Total Volume Rate Volume
--------- -------- ---------- ------------ --------- ---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
====== ====== ====== ======= ====== ====== ====== =====
</TABLE>
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.
G-30
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
<TABLE>
<CAPTION>
December 31, December 31, December 31,
1997 1996 1995
-------------- -------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
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%
======= ======= =======
</TABLE>
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
G-31
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
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
G-32
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
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.
G-33
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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 interest 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%
======== ========= ========= ========= ========
</TABLE>
- ------------
(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.
G-34
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
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)
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Thereafter Total Fair Value
-------- ------ ------ ------- ------ ---------- ------- ----------
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
====== ====== ====== ======== ====== ===== ====== ====
</TABLE>
(footnotes on the following page)
G-35
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
(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".
G-36
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
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.
G-37
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
PART I, ITEM 1. BUSINESS
General
The Company. Sandwich Bancorp, Inc. (the "Company"), a Massachusetts
corporation, was organized by The Sandwich Co-operative Bank (the "Bank") to be
a bank holding company. The Company was organized at the direction of the Bank
in June 1997 to acquire all of the capital stock of the Bank upon the
consummation of the reorganization of the Bank into the holding company form of
ownership (the "Reorganization"), which was completed on September 30, 1997.
The Company's common stock, par value $1.00 per share (the "Common Stock")
became registered under the Securities Exchange Act of 1934 on September 30,
1997. The Company has no significant assets other than the corporate stock of
the Bank. For that reason, substantially all of the discussion in this Form
10-K relates to the operations of the Bank and its subsidiaries.
The executive offices of the Company are located at 100 Old Kings Highway,
Sandwich, Massachusetts 02563. The telephone number is (508) 888-0026.
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"). Since 1986, the Bank's deposits have been
insured by the Federal Deposit Insurance Corporation ("FDIC"), an agency of the
federal government, up to $100,000 per insured depositor, with additional
insurance to the total amount of the deposit provided by the Share Insurance
Fund of The Co-operative Central Bank (the "Central Bank"), a deposit insuring
entity chartered by the Commonwealth of Massachusetts. The Bank is subject to
regulation by the Massachusetts Commissioner of Banks ("Commissioner") and the
FDIC.
The business of the Bank consists primarily of attracting deposits from
the general public and originating both construction and permanent loans on
one-to-four family homes. The Bank also makes consumer loans, home equity loans
and commercial loans and mortgages. The Bank invests a portion of its funds in
money market instruments, federal government and agency obligations, and
various types of corporate securities and other authorized investments.
The principal sources of funds for the Bank's lending and investment
activities are deposits, loan payments and payoffs, investment income and
maturities, and principal payments on investments, mortgage-backed securities
and collateralized mortgage obligations. As additional sources of funds, the
Bank has access to advances from the Federal Home Loan Bank of Boston and other
borrowings. The Bank's principal sources of income are interest on loans and
loan origination fees, interest and dividends on investment securities,
mortgage-backed securities and collateralized mortgage obligations and
short-term investments, customer service charges and gains on the sale of loans
in the secondary market, as well as income from servicing loans sold. Its
principal expenses are interest paid on deposits and general and administrative
expenses.
The Bank's deposit and lending operations are conducted through eleven
full service office facilities located in Sandwich, South Sandwich, Buzzards
Bay, Pocasset, Wareham, Cedarville, Falmouth, Hyannis, Chatham, Orleans and
South Yarmouth, Massachusetts. In addition, the Bank maintains a loan
production office in Plymouth, Massachusetts. Significant events contributing
to the structure of the current branch network are described below.
In February 1996 and May 1996 the Bank opened free standing ATMs in
Cedarville and South Sandwich, Massachusetts, respectively, in order to provide
greater convenience and access to accounts for its customers. In addition to
its existing ATM network offerings of X-Press 24, NYCE, CIRRUS/MasterCard, the
Bank recently added the Plus/VISA networks for users of Bank ATMs.
In June 1996, the Bank entered into an agreement with FISCO, a national
financial services group that provides a variety of investment services through
community banks to offer expanded retirement investments and financial
planning. FISCO will provide Bank customers with access to alternative
investments, including mutual funds and annuities from a number of highly rated
companies.
The Bank also established a referral arrangement with State Street Global
Advisors which enables customers to avail themselves of the estate planning and
trust services of a nationally respected trust institution.
G-38
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
The Bank's main office is located at 100 Old Kings Highway, Sandwich,
Massachusetts 02563 and its telephone number is (508) 888-0026.
Recent 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.
For additional information, reference is made to the Amended and Restated
Affiliation and Merger Agreement, dated as of March 23, 1998, attached hereto
as Exhibit 2.1, and the Stock Option Agreement dated as of March 23, 1998,
attached hereto as Exhibit 2.2.
Lending Activities
General. The Bank's net loan portfolio totaled $366.6 million as of
December 31, 1997, which represented 70.7% of total assets. The Bank offers
residential and home equity mortgage loans, commercial real estate loans,
commercial business loans, construction loans, and personal, automobile, boat,
education and other types of consumer loans. During the year ended December 31,
1997, the Bank originated mortgage loans totaling $123.2 million and purchased
loans totaling $18.3 million for total mortgage loan originations and purchases
of $141.5 million, compared to $117.4 million in mortgage loans originated, and
$23.7 million in mortgage loans purchased for total mortgage loan originations
and purchases of $141.1 million during the year ended December 31, 1996.
Included in the Bank's mortgage loan originations for the year ended December
31, 1997 were $20.8 million of fixed rate residential loans of which $17.4
million were sold in the secondary mortgage market and the difference of $3.4
million was placed into the loan portfolio under the direction of senior
management, as "fixed construction" and "fixed upon completion" mortgage loans.
The increase in mortgage loan originations during fiscal 1997 as compared to
fiscal 1996 was a direct result of a strong residential real estate market.
Residential construction mortgages decreased from 175 loans totaling $27.9
million in 1996 to 156 loans totaling $19.8 million in 1997. In addition, the
purchase of new homes and re-sales of existing homes increased over 1997. In
early 1996, the Bank
G-39
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
began a correspondent relationship with Anchor Mortgage Co., Conway Financial
Services and National City Mortgage (formerly known as Commonwealth United
Mortgage), which generated an additional $25.2 million (164 loans) in loan
volume during 1997.
The following table shows the composition of the Bank's loan portfolio by
type of loan and the percentage each type represents of the total loan
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------- ------------------ ------------------- --------------------
Amount % Amount % Amount % Amount % Amount %
-------- ------- --------- ----- --------- ------ -------- ------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential ................ $247,881 67.6% $202,032 63.7% $162,974 60.3% $150,788 60.1% $ 124,420 59.9%
Commercial real estate ..... 62,579 17.0 61,088 19.3 59,597 22.0 49,919 19.9 40,501 19.5
Commercial and land ........ 38,823 10.6 38,858 12.2 26,486 9.8 26,920 10.8 23,367 11.3
-------- ------ -------- ------ -------- ----- -------- ------ ---------- ------
349,283 95.2 301,978 95.2 249,057 92.1 227,627 90.8 188,288 90.7
Unadvanced portion of loans
in process ................. (7,188) (2.0) (9,763) (3.1) (6,573) ( 2.4) (5,810) (2.3) (5,520) (2.7)
Deferred loan origination
(fees) costs ............... 1,030 0.3 542 0.2 56 -- (42) -- (159) (0.1)
Unearned discount ........... -- -- -- -- (171) ( 0.1) (239) (0.1) -- --
-------- ------ -------- ------ -------- ----- -------- ------ ---------- ------
Total mortgage loans,
net ...................... 343,125 93.5 292,757 92.3 242,369 89.6 221,536 88.4 182,609 87.9
-------- ------ -------- ------ -------- ----- -------- ------ ---------- ------
Other loans:
Home equity ................ 12,438 3.4 12,278 3.9 13,188 4.9 14,961 6.0 15,746 7.6
Consumer ................... 4,847 1.3 5,393 1.7 6,032 2.2 4,903 1.9 2,306 1.1
Commercial ................. 8,060 2.2 7,933 2.5 9,671 3.6 8,114 3.2 6,385 3.1
Secured by deposits ........ 1,182 0.3 1,160 0.4 992 0.3 972 0.4 760 0.4
Education .................. 826 0.2 1,123 0.3 1,660 0.6 3,193 1.3 2,397 1.1
-------- ------ -------- ------ -------- ----- -------- ------ ---------- ------
27,353 7.6 27,887 8.8 31,543 11.6 32,143 12.8 27,594 13.3
Deferred loan origination
costs ...................... 264 0.1 200 0.1 183 0.1 169 0.1 128 0.1
-------- ------ -------- ------ -------- ----- -------- ------ ---------- ------
Total other loans, net .... 27,617 7.6 28,087 8.9 31,726 11.7 32,312 12.9 27,722 13.4
-------- ------ -------- ------ -------- ----- -------- ------ ---------- ------
Premium paid on loans, net
of accumulated
amortization ............... -- -- -- -- -- -- 137 -- 287 0.1
Allowance for loan losses ... (4,100) ( 1.1) (3,741) (1.2) (3,674) ( 1.3) (3,255) (1.3) (2,983) (1.4)
-------- ------ -------- ------ -------- ----- -------- ------ ---------- ------
Loans, net .................. $366,642 100.00% $317,103 100.00% $270,421 100.0% $250,730 100.00% $ 207,635 100.00%
======== ====== ======== ====== ======== ===== ======== ====== ========== ======
</TABLE>
Loan Maturity or Repricing Analysis. The following table sets forth
certain information at December 31, 1997 regarding the dollar amount of loans
maturing or repricing in the Bank's portfolio. Demand loans, loans having no
schedule of repayments or no stated maturity are reported as due in one year or
less.
G-40
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
<TABLE>
<CAPTION>
Due after 3 Due after 5
Due in Year Ended December 31, through 5 through 10 Due after 10
--------------------------------- years after years after years after
1998 1999 2000 12/31/97 12/31/97 12/31/97 Total
----------- ---------- ---------- ------------- ------------- ------------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
Residential .................. $101,623 $40,255 $26,057 $68,511 $7,193 $5,272 $248,911
Commercial real estate ....... 44,975 8,589 8,697 153 111 54 62,579
Construction and land ........ 13,384 3,497 2,881 11,850 23 -- 31,635
-------- ------- ------- ------- ------ ------ --------
Total ....................... 159,982 52,341 37,635 80,514 7,327 5,326 343,125
Other:
Home equity .................. 12,358 57 287 -- -- -- 12,702
Consumer ..................... 626 846 1,167 1,278 709 221 4,847
Commercial ................... 6,074 246 416 1,324 -- -- 8,060
Secured by deposits .......... 1,172 10 -- -- -- -- 1,182
Education .................... -- -- -- -- -- 826 826
-------- ------- ------- ------- ------ ------ --------
Total ....................... 20,230 1,159 1,870 2,602 709 1,047 27,617
-------- ------- ------- ------- ------ ------ --------
Total loans ................. $180,212 $53,500 $39,505 $83,116 $8,036 $6,373 $370,742
======== ======= ======= ======= ====== ====== ========
</TABLE>
Residential Lending. The Bank's residential mortgage loan program
currently includes the origination of a variety of adjustable rate loans which
are retained in the Bank's loan portfolio. At December 31, 1997, the Bank's
adjustable rate residential mortgages totaled $232.9 million, or 63.5%, of the
residential mortgage loan portfolio. Fixed-rate loans accounted for $15.0
million, or 4.1%, of the residential mortgage loan portfolio at that date. The
Bank stresses the origination of adjustable rate mortgages for retention in its
portfolio. The Bank continued to actively originate fixed rate loans for sale
in the secondary mortgage market. By retaining the servicing on loans sold, the
Bank generates loan servicing fee income.
The Bank's adjustable rate residential mortgage loans have a maximum term
of 35 years, and allow for periodic interest rate adjustments. The initial
offering rates on these loans may be discounted to remain competitive prior to
their first interest rate adjustment. The payment amount and the interest rate
on the one year adjustable rate loan adjusts annually to 2.75% above the weekly
average yield of the one year U.S. Treasury Securities (at time of adjustment)
with a maximum interest rate adjustment of 2% per year and 6% over the term of
the loan. Interest rates on the three year adjustable rate loans are fixed for
the first three years by reference to various market indices and competitive
rates, and rates are adjusted every three years thereafter to 2.875% above the
weekly average yield of three year U.S. Treasury Securities (at time of
adjustment) with a maximum interest rate adjustment of 2% every three years,
and 6% over the term of the loan. In 1997, the Bank began offering a 4/3
adjustable rate mortgage loan. The interest rate is fixed for the first four
years and then becomes a three year adjustable rate mortgage which adjusts
every three years at 2.875% above the weekly average yield of the three year
U.S. Treasury Securities, with a maximum interest rate adjustment of 2% per
year and 3% over the remaining term of the loan. The Bank also offers a 5/1
year adjustable rate mortgage. The interest rate is fixed for the first five
years and then becomes a one year adjustable rate mortgage which adjusts
annually at 2.75% above the weekly average yield of the one year U.S. Treasury
Securities, with a maximum interest rate adjustment of 2% per year and 5% over
the remaining term of the loan.
Residential loans may be made as construction loans or as permanent loans
on one-to-four family residential properties and are typically written in
amounts up to 95% of appraised value. The Bank makes fixed and adjustable rate
mortgage loans of up to 95% of appraised value, if the property is owner
occupied. All loans in excess of 80% of appraised value require private
mortgage insurance, with the exception of the Bank's adjustable rate First-Time
Home Buyer products, which does not require private mortgage insurance.
As noted above, adjustable rate residential mortgage loans originated for
retention in the Bank's loan portfolio provide for periodic interest rate
adjustments. Despite the benefits of adjustable rate mortgages to the Bank's
asset and liability management program, such mortgages pose risks, because as
interest rates rise, the underlying payments by the borrowers rise, increasing
the potential for default. At the same time, the marketability of the
underlying property may be adversely affected by higher interest rates. One of
the ways the Bank seeks to protect itself on these loans is by generally
requiring private mortgage insurance as stated above.
G-41
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
Construction Lending. The Bank's construction loans totaled $32.5 million,
or 8.9%, of the Bank's total loan portfolio at December 31, 1997. Construction
loans originated during the years ended December 31, 1997 and 1996 totaled
$34.4 million and $36.0 million, respectively.
The Bank lends to individuals for the construction of residential
properties which they intend to occupy as a primary or secondary residence.
Borrowers are required to have a firm contract with a qualified builder. Such a
construction loan is generally made with the first twelve months designated as
the construction period (six months for fixed construction) after which time
the loan converts to a 30-35 year permanent residential real estate loan. A
maximum loan to value ratio of 95% of the value of the completed property, or
95% of the total cost to construct, whichever is less, is permitted as
determined by appraisers. The majority of the Bank's construction loans are
made for the construction of pre-sold, pre-approved residential homes.
Inspections of the construction sites are primarily performed by independent
inspectors.
Due to the active real estate market in 1997, the Bank provided financing
to established, credit worthy builders for the purpose of funding construction
of residential homes which had either been pre-sold or constructed on
speculation. Sound underwriting standards were adhered to, minimizing the
inherent risks associated with construction lending. The total loan exposure to
any one builder was well within the prudent levels established by management.
All builder construction loans are performing as anticipated.
Commercial Real Estate Lending. The Bank also originates loans secured by
real estate other than one-to-four family residential properties. These
commercial real estate loans generally bear interest at variable rates based
upon a margin of one to two percent above the prime interest rate as quoted in
The Wall Street Journal, and such rates adjust when The Wall Street Journal
prime rate changes. In June 1996, the Bank started offering three year
adjustable rate commercial real estate loans where the interest rate is fixed
for the first three years, generally at 9-1/4%. After the initial three year
period, the interest rate adjusts every three years thereafter to a margin of
one and one half percent above the prime interest rate as quoted in The Wall
Street Journal. This product has enabled the Bank to be more competitive with
its product offerings. There were $62.6 million in commercial real estate loans
outstanding, which comprised 17.1% of the Bank's total loan portfolio at
December 31, 1997. In some cases, commercial real estate loans are made through
participations with other banks. Commercial real estate loans are generally
written in amounts of up to 75% of the appraised value of the property and all
commercial real estate loans over $100,000 are appraised by independent
appraisers. In addition, the Bank's underwriting procedures require
verification of the borrower's credit history and income, banking
relationships, references and income projections for the property. In certain
cases, borrowers may be required to provide additional collateral for loans
made. All property securing commercial loans is revalued or inspected
periodically as required under Massachusetts law. It is the Bank's policy to
use the same underwriting procedures for loan participations as for loans
originated by the Bank. The Bank grants loans guaranteed by the Small Business
Administration as well as by the Massachusetts Business Development
Corporation's Capital Access Program. Although the Bank is permitted to grant
commercial real estate loans in substantially greater amounts, the Bank's
current policy generally limits new commercial real estate loan originations to
$2,000,000 to any individual or entity.
Consumer and Other Loans. The Bank's consumer and other loans totaled
$27.4 million on December 31, 1997, representing 7.5% of the total loan
portfolio on that date. In addition to consumer loans, including personal and
automobile loans, the Bank makes education loans under the American Student
Assistance Corporation ("A.S.A.") program, which are serviced by Sallie Mae,
Inc. The interest on education loans is partially subsidized by the Federal
Government and the principal is fully guaranteed by A.S.A. The Bank sells its
student loans to Sallie Mae once the loan has begun repayment.
The Bank offers a home equity line of credit whereby the Bank makes
monthly adjustable rate loans, secured by the borrower's equity in their
residence, whether or not the loans are to be used for home improvements. As of
December 31, 1997, the Bank had $12.4 million in home equity loans outstanding
or 3.4% of the Bank's total loan portfolio, as compared with $12.3 million in
such loans outstanding at December 31, 1996 or 3.9% of the Bank's total loan
portfolio at that date. Home equity loans are currently written in amounts up
to 80% of the appraised value of the property less the outstanding balance of
the existing first mortgage.
The Bank offers a three year adjustable home equity loan. The interest
rate for each three year period is based upon a margin of 3.0% above the prime
interest rate as quoted in The Wall Street Journal. The home equity loan
G-42
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
has a maximum interest rate adjustment of 3.0% per adjustment, and a ceiling
interest rate of 18.0%. The home equity loan amount is fully drawn down at
closing.
The Bank offers a commercial line of credit program for its established
business customers with seasonal cash flow needs. The Bank's home equity line
of credit loans and commercial lines of credit accounts generally bear interest
at variable rates based upon a margin 1-3% above the prime interest rate as
quoted in The Wall Street Journal, while other loans are generally priced based
on market conditions.
The Bank believes its consumer lending programs create diversity and
interest rate sensitivity within its asset mix and offer attractive yields. The
Bank is currently promoting its construction, consumer and home equity lending
programs through the activities of its loan officers, branch managers and
customer service personnel, and is utilizing careful underwriting and
monitoring procedures in these programs.
Risks of Commercial Construction and Consumer Lending. Commercial real
estate, construction and consumer lending may entail additional risks compared
to residential mortgage lending. Commercial real estate and construction loans
may involve large loan balances to single borrowers or groups of related
borrowers. In addition, the payment experience on loans secured by income
producing properties is typically dependent on the successful operation of the
properties and thus may be subject to a greater extent to adverse conditions in
the local real estate market or in the economy generally. Construction loans
may involve additional risks, because the uncertainties inherent in estimating
construction costs, delays arising from labor problems, material shortages, and
other unpredictable contingencies, which make it relatively difficult to
evaluate accurately the total loan funds required to complete a project, and
related loan-to-value ratios. Because of these factors, the analysis of
prospective construction loan projects requires an expertise that is different
in significant respects from the expertise required for residential mortgage
lending. Consumer loans and particularly unsecured personal loans may involve
additional risks, and it may be expensive and time consuming to recover the
money lent in the event of a default. While the Bank has attempted to limit the
risk of loss on its commercial real estate, construction and consumer loans,
and has established provisions for loan losses, a reversal in the current
positive trend in the New England real estate market could negatively affect
the Bank's commercial real estate, construction and consumer loan portfolios,
which would further negatively affect the Bank's results of operations. In
addition, the status of the Bank's problem assets could be impacted by a
reversal in the continuing improvement in the New England real estate market
and the Bank's market area.
The following table indicates the amounts of construction and commercial
loans which are due after one year from December 31, 1997 that earn interest at
fixed rates and adjustable rates.
<TABLE>
<CAPTION>
Total Due After One Year
------------------------------------
Fixed Adjustable
Rate Rate Total
--------- ----------- ----------
(in thousands)
<S> <C> <C> <C>
Construction ......... $ -- $18,251 $18,251
Commercial ........... 1,986 -- 1,986
------ ------- -------
Total .............. $1,986 $18,251 $20,237
====== ======= =======
</TABLE>
G-43
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
Loans by Interest Rate and Maturity. The following table shows as of
December 31, 1997 information concerning the Bank's fixed and adjustable rate
permanent mortgage loans by interest rate range and by maturity date for fixed
rate mortgages and interest rate adjustment date for variable rate mortgages.
<TABLE>
<CAPTION>
Fixed Rate Mortgages Mortgages Subject to Interest Rate Adjustment
-------------------------------------------------- -------------------------------------------------------
4.01- 8.01- 10.01- 12.01% 4.01- 8.01- 10.01- 12.01%
8.00% 10.00% 12.00% and over Total 8.00% 10.00% 12.00% and over Total
---------- -------- -------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0-1 ................ $ 205 $ 147 $ -- $-- $ 352 $ 54,773 $ 82,206 $22,575 $ 76 $159,630
1-2 ................ 37 80 20 5 142 36,410 15,190 534 65 52,199
2-5 ................ 1,712 442 66 11 2,231 100,363 14,811 744 -- 115,918
5-10 ............... 6,732 315 182 75 7,304 -- 23 -- -- 23
10 or more ......... 4,336 990 -- -- 5,326 -- -- -- -- --
------- ------ ---- --- ------- -------- -------- ------- ---- --------
Total ............. $13,022 $1,974 $268 $91 $15,355 $191,546 $112,230 $23,853 $141 $327,770
======= ====== ==== === ======= ======== ======== ======= ==== ========
</TABLE>
Origination Fees and Other Fees. The Bank offers real estate loans with
and without origination fees. During 1997, customer preference tended towards
the "no point," higher rate loans, both adjustable and fixed. The Bank does
charge the customer for expenses incurred during the loan application process
to cover such items as real estate appraisal, credit report, etc. The Bank
retains late charges on all real estate loans that are more than fifteen days
late. For information regarding the manner in which fees are taken into income,
see Note 1 of Notes to Consolidated Financial Statements contained in the
Company's 1997 Annual Report to Stockholders (the "Annual Report"), which is
Exhibit 13 to this report.
Loan Solicitation and Approval Procedures. Loan originations are developed
by the Bank's officers, managers, assistant branch managers, customer service
representatives, and loan originators from a number of sources, including
referrals from realtors, builders, attorneys and customers. Consumer loans are
solicited from existing depositors and loan customers. Various advertising
forums are also used to promote the Bank's lending programs.
Applications for all types of loans are taken at all of the Bank's offices
and mortgage loan applications are forwarded to the Bank's loan department for
processing. The Bank's loan underwriting procedures include the use of detailed
credit applications, property appraisals and verifications of an applicant's
credit history, employment situations and banking relationships. Loans up to
and including $500,000 may be approved by the Bank's senior loan officer, while
those over $500,000 must be approved by the Bank's Security Committee before
they close. All mortgage loans are approved or ratified by the Security
Committee and/or the full Board of Directors. All residential loans and
commercial mortgages over $100,000 are appraised by independent state certified
appraisers selected by the Bank. Title insurance and fire and casualty
insurance are required on all security properties.
Mortgage applicants are promptly notified of the decision concerning their
application by a commitment letter setting forth the terms and conditions of
the decision. If approved, these commitments include the amount of the loan,
interest rate, amortization term, brief description of the real estate
mortgaged to the Bank, the required amount of fire and casualty insurance to be
maintained to protect the Bank's interest and other special conditions as
warranted.
Loan Originations, Purchases and Sales. The Bank uses the underwriting
standards and standard documents of the Federal Home Loan Mortgage Corporation
and Federal National Mortgage Association. The Bank continues to sell fixed
rate residential loans in the secondary market. The Bank has also become more
active in the Massachusetts Housing Finance Agency ("MHFA") program, and
generated five loans totaling $326,175 under their below market fixed rate
residential loan programs. Also, in 1997, the Bank began offering the low
interest rate MHFA Septic loans and closed two loans totaling $10,000 as of
December 31, 1997.
G-44
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
Set forth below is a table showing the Bank's mortgage loan origination,
purchase and sales activity for the periods indicated, together with
information on repayment of principal on mortgage loans in the Bank's
portfolio. Mortgage loans purchased were whole loans originated by other New
England-based financial institutions.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance (a) ....................... $ 292,757 $ 242,369 $ 221,536 $ 182,609 $ 151,892
Loan originations and purchases:
Fixed rate ................................. 20,845 19,127 12,682 21,244 60,921
Adjustable rate ............................ 67,895 62,258 36,416 35,026 36,087
Construction ............................... 34,431 35,982 27,028 23,491 11,683
--------- --------- --------- --------- ---------
Total mortgage loan originations .......... 123,171 117,367 76,126 79,761 108,691
Loans purchased ............................ 18,342 23,758 8,612 14,590 12,674
--------- --------- --------- --------- ---------
Total loan originations and purchases ..... 141,513 141,125 84,738 94,351 121,365
--------- --------- --------- --------- ---------
Loan principal reduction .................... (74,023) (70,396) (49,708) (35,160) (46,739)
Loans sold .................................. (17,610) (20,999) (14,363) (20,142) (43,913)
Change in deferred net loan origination
fees ........................................ 488 487 98 117 4
Change in unearned discount ................. -- 171 68 (239) --
--------- --------- --------- --------- ---------
Ending balance (a) .......................... $ 343,125 $ 292,757 $ 242,369 $ 221,536 $ 182,609
========= ========= ========= ========= =========
</TABLE>
(a) Beginning balance and ending balance are net of undisbursed proceeds
of loans in process, deferred net loan origination fees and unearned discounts.
The following table sets forth at December 31, 1997 all mortgage loans by
categories of weighted average annual yield.
<TABLE>
<CAPTION>
Percent Weighted Average
Amount of Total Annual Yield
---------- ---------- -----------------
(In thousands)
<S> <C> <C> <C>
12.01% and over ................ $ 232 0.07% 12.71%
11.01% to 12% .................. 917 0.27 11.51
10.01% to 11% .................. 23,352 6.81 10.50
9.01% to 10% ................... 46,267 13.48 9.59
8.01% to 9% .................... 67,957 19.81 8.54
4.01% to 8% .................... 204,400 59.56 7.02
-------- ------ -----
Total mortgage loans ......... $343,125 100.00% 7.92%
======== ====== =====
</TABLE>
Non-performing Assets and Asset Classification. Once a loan payment is 15
days past due, the Bank notifies the borrower of the delinquency. Repeated
contacts are made if the loan remains in a delinquent status for 30 days or
more. While generally the Bank is able to work out satisfactory repayment with
a delinquent borrower, the Bank will undertake foreclosure proceedings if the
delinquency is not otherwise resolved when payments are 90 days past due.
Property acquired by the Bank as a result of foreclosure or by deed in lieu of
foreclosure is classified as "other real estate owned" until such time as it is
sold or otherwise disposed. When such property is acquired it is recorded at
the lower of unpaid principal balance of the related loan or its fair value,
less costs to dispose. Beginning for the year ended December 31, 1993, the Bank
has classified its non-performing assets in accordance with FDIC classification
regulations, so that all loans secured by residential real estate are
considered residential loans, regardless of whether they are owner-occupied or
are investment properties. During the year ended December 31, 1997, the Bank
foreclosed on eleven loans totaling $1,245,000 of which nine were residential
mortgage loans totaling $728,000 and two were commercial real estate loans
totaling $517,000. The Bank charged off $397,000 on various other loans during
fiscal 1997.
G-45
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
The following table sets forth information with respect to the Bank's
non-performing assets at the dates indicated. At December 31, 1997, the Bank
had one restructured loan within the meaning of the Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 15 which are described below.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual basis which
are contractually past due 90 days or more:
Mortgage loans:
Residential ........................................... $ 2,755 $ 2,320 $ 2,948 $ 966 $ 1,614
Commercial real estate ................................ 456 1,118 1,225 401 228
Construction and land ................................. 72 83 65 227 264
------- ------- ------- ------- -------
Total ................................................ 3,283 3,521 4,238 1,594 2,106
------- ------- ------- ------- -------
Other:
Home equity ........................................... 82 195 133 250 219
Consumer .............................................. 42 90 138 20 6
Commercial ............................................ 174 280 162 199 --
------- ------- ------- ------- -------
Total ................................................ 298 565 433 469 225
------- ------- ------- ------- -------
Total non-accrual loans ............................... $ 3,581 $ 4,086 $ 4,671 $ 2,063 $ 2,331
======= ======= ======= ======= =======
Restructured loans:
Mortgage loans:
Residential ........................................... $ -- $ 151 $ 504 $ 1,078 $ 551
Commercial real estate ................................ 105 107 558 423 1,174
Construction and land ................................. -- -- -- 30 --
------- ------- ------- ------- -------
Total ................................................ 105 258 1,062 1,531 1,725
------- ------- ------- ------- -------
Other:
Home equity ........................................... -- -- -- -- 37
Commercial ............................................ -- -- -- -- 303
------- ------- ------- ------- -------
Total ................................................ -- -- -- -- 340
------- ------- ------- ------- -------
Total restructured loans .............................. $ 105 $ 258 $ 1,062 $ 1,531 $ 2,065
======= ======= ======= ======= =======
Total of non-accrual loans and restructured loans ......... $ 3,686 $ 4,344 $ 5,733 $ 3,594 $ 4,396
======= ======= ======= ======= =======
Percentage of total loans ................................. 1.01% 1.37% 2.12% 1.43% 2.12%
======= ======= ======= ======= =======
Real estate acquired by foreclosure or substantively
repossessed .............................................. $ 596 $ 465 $ 367 $ 969 $ 2,867
======= ======= ======= ======= =======
</TABLE>
At December 31, 1997, the Bank had 46 loans, totaling $3.6 million which
were non-accruing. Non-accruing loans at December 31, 1997 included in the
above total were: (i) 27 loans on residential properties, including two land
loans, totaling $2.8 million with balances outstanding ranging from $2,000 to
$712,000; (ii) eight loans on commercial real estate properties, totaling
$600,000, with balances outstanding ranging from $30,000 to $111,000; (iii)
three home equity loans with combined balances outstanding of $82,000 and (iv)
$121,000 in various other loans. Reserves of $4.1 million have been established
by the Bank at December 31, 1997 to cover any losses that may be incurred on
loans.
Restructured loans at December 31, 1997 amounted to $105,000. Additional
interest income of approximately $2,000 would have been recorded on these
restructured loans during the year ended December 31, 1997 if they had been
performing in accordance with their original terms. Interest income actually
recorded on these loans for the year amounted to approximately $9,000.
Typically, restructured loans are restructured to provide either a reduction of
the interest on the loan principal or an extension of the loan maturity.
G-46
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
Real estate acquired by foreclosure at December 31, 1997 totaled $596,000,
representing the lower of the carrying value of the loan or the fair value less
costs to dispose of properties. These properties had secured six loans which
were foreclosed upon by the Bank. The largest of these foreclosed properties,
carried at $167,000 at December 31, 1997, is comprised of one residential loan.
For further information regarding the Bank's non-performing assets, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 4 of Notes to Consolidated Financial Statements contained
in the Annual Report.
Allowance for Loan Losses
The Bank maintains an allowance for losses on loans. The annual provision
for loan losses is determined by management on the basis of many factors
including the risk characteristics of the portfolio, current economic
conditions and trends in loan delinquencies and charge-offs. The provision for
loan losses charged to earnings totaled $750,000 and $265,000 for the years
ended December 31, 1997 and 1996, respectively. The Bank 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. The allowance for
loan losses was $4.1 million at December 31, 1997. The allowance for loan
losses is reviewed by management on a continual basis and although management
currently believes this allowance to be adequate, there can be no assurance
that this allowance will be sufficient to cover future losses.
The following table presents activity in the allowance for loan losses
during the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ------------ ------------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at the beginning of year ......... $3,741 $3,674 $3,255 $2,983 $2,979
------ ------ ------ ------ ------
Provision for loan losses ................ 750 265 597 340 478
------ ------ ------ ------ ------
Loans charged-off:
Mortgage loans:
Residential .............................. (59) (50) (223) (2) (250)
Commercial real estate ................... (24) (92) (36) (89) (121)
Construction and land .................... -- -- -- (51) (100)
Other loans:
Home equity .............................. -- -- (21) (23) --
Consumer ................................. (151) (101) (73) (19) (16)
Commercial ............................... (246) (22) (8) -- (60)
------ ------ -------- ------- ------
Total charge-offs ....................... (480) (265) (361) (184) (547)
------ ------ ------- ------- ------
Recoveries on previously charged-
off loans:
Mortgage loans ........................... 60 46 152 106 49
Other loans .............................. 29 21 31 10 24
------ ------ ------- ------- ------
Total recoveries ........................ 89 67 183 116 73
------ ------ ------- ------- ------
Net charge-offs .......................... (391) (198) (178) (68) (474)
------ ------ ------- ------- ------
Balance at the end of year ............... $4,100 $3,741 $3,674 $3,255 $2,983
====== ====== ======= ======= ======
Ratio of net charge-offs to average
loans outstanding ........................ 0.11% 0.07% 0.07% 0.03% 0.25%
====== ====== ======= ======= ======
</TABLE>
G-47
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
The following table sets forth the breakdown of the allowance for loan
losses by loan category for the periods indicated. The allocation of the
allowance to each category is not necessarily indicative of future losses and
does not restrict the use of the allowances to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Residential ................................ $1,613 $1,313 $1,396 $1,279 $1,302
Commercial real estate ..................... 1,655 1,683 1,513 1,148 985
Construction and land ...................... 378 284 267 320 311
Other:
Home equity ............................... 81 90 90 130 188
Consumer .................................. 137 146 178 273 128
Commercial ................................ 236 225 230 105 69
------ ------ ------ ------ ------
Total allowance for loan losses ......... $4,100 $3,741 $3,674 $3,255 $2,983
====== ====== ====== ====== ======
</TABLE>
Investment Activities
The Bank's management believes it prudent to maintain an investment
portfolio that provides not only a source of income but also a source of
liquidity to meet lending demands and fluctuations in deposit flows. The
relative mix of investment securities and loans in the Bank's portfolio is
dependent upon the comparative attractiveness of yields available to the Bank
on adjustable rate loans that it makes as compared to yields on short-term
investment securities. At December 31, 1997, the Bank's portfolio of short-term
investments, equity securities, mortgage-backed securities and collateralized
mortgage obligations totaled $110.7 million, which represented 21.3% of total
assets. Sales of equity securities during the year ended December 31, 1997
resulted in a net gain of $55,000. There were no sales of equity securities for
the year ended December 31, 1996. The fair value of the Bank's equity
securities portfolio as of December 31, 1997 totaled $6,000. For more
information, see Note 3 of Notes to Consolidated Financial Statements in the
Annual Report.
The Bank's portfolio of investment securities consists of securities
offering reasonably short maturities or adjustable interest rates, primarily
United States Treasury notes and Government agency obligations, mortgage-backed
securities, collateralized mortgage obligations, investment grade corporate
bonds, money market instruments and municipal tax anticipation notes. The
average life of the Bank's fixed-income investment portfolio was less than
three years at December 31, 1997, with final maturities greater than ten years.
The Bank's investment portfolio is presently managed by the Bank's Chief
Financial Officer.
G-48
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
The following table sets forth a summary of the held to maturity and
available for sale, amortized cost and fair value of the Bank's investment
securities at the dates specified.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------------------------- ----------------------
Held to Maturity Available for Sale Held to Maturity
---------------------- --------------------- ----------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- ---------- ----------- --------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government obligations:
Maturing within 1 year .......... $ 9,992 $10,004 $ -- $ -- $12,015 $12,035
Maturing after 1 year but within
5 years ........................ 5,488 5,506 -- -- 10,462 10,492
------- ------- ------- ------- ------- -------
15,480 15,510 -- -- 22,477 22,527
------- ------- ------- ------- ------- -------
Collaterized 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 one year ........ -- -- 98 98 -- --
Maturing after 1 year but within
5 years ........................ -- -- -- -- -- --
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
------- ------- ------- ------- ------- -------
33,888 34,010 10,861 10,989 12,391 12,392
------- ------- ------- ------- ------- -------
Other bonds and obligations:
Maturing within one year ........ -- -- -- -- -- --
Maturing after 1 year but within
5 years ........................ -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Marketable equity securities
Mortgage-backed mutual funds .... -- -- -- -- -- --
Common and preferred stocks ..... -- -- 2 6 -- --
------- ------- ------- ------- ------- -------
Totals ........................ $99,577 $99,775 $10,863 $10,995 $99,648 $99,128
======= ======= ======= ======= ======= =======
<CAPTION>
December 31, 1996 December 31, 1995
--------------------- -------------------------------------------
Available for Sale Held to Maturity Available for Sale
--------------------- --------------------- ---------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
----------- --------- ----------- --------- ----------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government obligations:
Maturing within 1 year .......... $ 2,000 $ 1,994 $ 2,522 $ 2,534 $ 8,758 $ 8,828
Maturing after 1 year but within
5 years ........................ -- -- 12,072 12,172 4,007 4,005
------- ------- ------- ------- ------- -------
2,000 1,994 14,594 14,706 12,765 12,833
------- ------- ------- ------- ------- -------
Collaterized mortgage obligations
(CMOs):
Maturing within 1 year .......... -- -- -- -- -- --
Maturing after 1 year but within
5 years ........................ -- -- 7,547 7,609 -- --
Maturing after 5 years but within
10 years ....................... -- -- 6,022 6,001 -- --
Maturing after 10 years ......... -- -- 57,385 57,077 -- --
------- ------- ------- ------- ------- -------
-- -- 70,954 70,687 -- --
------- ------- ------- ------- ------- -------
Mortgage-backed securities:
Maturing within one year ........ -- -- -- -- -- --
Maturing after 1 year but within
5 years ........................ 147 147 -- -- 152 152
Maturing after 5 years but within
10 years ....................... -- -- -- -- -- --
Maturing after 10 years ......... 8,271 8,343 1,358 1,390 10,031 10,062
------- ------- ------- ------- ------- -------
8,418 8,490 1,358 1,390 10,183 10,214
------- ------- ------- ------- ------- -------
Other bonds and obligations:
Maturing within one year ........ -- -- 709 707 -- --
------- ------- ------- -------
Maturing after 1 year but within
5 years ........................ -- -- 1,853 1,898 -- --
------- ------- ------- ------- ------- -------
2,562 2,605 -- --
------- ------- ------- -------
Marketable equity securities
Mortgage-backed mutual funds .... 2,520 2,510 -- -- 2,375 2,369
Common and preferred stocks ..... 324 318 -- -- 370 354
------- ------- ------- ------- ------- -------
Totals ........................ $13,262 $13,312 $89,468 $89,388 $25,693 $25,770
======= ======= ======= ======= ======= =======
</TABLE>
G-49
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS
General. Checking, savings and investment deposits have traditionally been
an important source of the Bank's funds for use in lending and for other
general business purposes. In addition to deposits, the Bank derives funds from
loan repayments, selling loans, and from other operations. The availability of
funds is influenced by general interest rates and other market conditions.
Scheduled loan repayments are a relatively stable source of funds while deposit
inflows and outflows vary widely and are influenced by prevailing interest
rates and money market conditions. Borrowings may be used on a short-term basis
to compensate for reductions in deposits or deposit inflows at less than
projected levels and may be used on a longer term basis to support expanded
lending activities, or to take advantage of favorable investment opportunities.
Deposits. Consumer deposits are attracted principally from within the
Bank's market area through the offering of a broad selection of deposit
instruments including demand deposit accounts, NOW accounts, money market
deposit accounts, regular savings accounts, term deposit accounts and
retirement savings plans. The Bank does not actively solicit or advertise for
deposits outside of its market area. The Bank accepts deposits primarily
through its branch office network and through the "X-Press 24" automated teller
machine network, of which it is a member. The Bank also actively solicits
deposits from area businesses as part of its Business Services offerings and
seeks to attract deposits from local municipalities.
The Bank has adopted a policy of controlled deposit growth, by pricing its
savings products based on the Bank's need for additional funds and rates being
paid by other area financial institutions.
The Bank offers its customers a variety of pricing options which enable
them to select the combination of banking services which best meets their
needs, in the most cost effective manner.
In August 1994, the Bank introduced a new relationship banking product
called "Advantage CD." With this deposit offering, customers have the
opportunity to earn bonus interest each month, based upon their total deposit
and loan account balances with the Bank. As of December 31, 1997, over $78.1
million had been deposited into the 18 and 30 month Advantage CD's. In January
1996, the Bank reintroduced its club program, as the Presidents Club, producing
a package of benefits for customers with combined balances of $10,000 or more.
During 1997, Presidents Club household deposits with the Bank grew by $31.3
million to $179.3 million at December 31, 1997. In August 1997, a high rate,
high minimum balance money market account was introduced, resulting in deposits
of $19.8 million by year end 1997.
For further information regarding the Bank's deposits see Note 8 of Notes
to Consolidated Financial Statements in the Annual Report.
Borrowings. Savings deposits and loan repayments, as well as principal
payments and maturing investments, are the primary source of funds of the
Bank's lending and investment activities and for its general business purposes.
Advances from the Federal Home Loan Bank ("FHLB") of Boston and other
borrowings in the form of securities sold under agreements to repurchase, are
alternative sources of funds. The Bank increased its advances from the FHLB of
Boston to finance loan originations, loan purchases and purchases of investment
securities. Advances from the FHLB of Boston were $45.6 million at December 31,
1997 compared to $32.1 million at December 31, 1996. Additional sources of
available funds include the Co-operative Central Bank Reserve Fund and the
Federal Reserve System.
G-50
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
Advances from the Federal Home Loan Bank of Boston are summarized as
follows:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------
Maturing in
Interest Rate Year Ending 1997 1996 1995
- ----------------------------------------------------- ------------- ------------ ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
4.19%-5.61% ......................................... 1996 $ -- $ -- $ 6,407
4.53%-5.78% ......................................... 1997 -- 26,026 694
5.60%-6.47% ......................................... 1998 34,000 5,000 --
5.71%-6.83% ......................................... 1999 11,000 1,000 1,000
8.32% ............................................... 2015 47 47 47
6.67% ............................................... 2017 54 -- --
5.66% ............................................... 2018 500 -- --
-------- -------- -------
$ 45,601 $ 32,073 $ 8,148
======== ======== =======
Weighted average rate (cost of borrowings) .......... 5.82% 5.70% 5.21%
======== ======== =======
Maximum amount outstanding at any month end ......... $ 71,515 $ 32,073 $15,354
======== ======== =======
</TABLE>
For further information regarding the Bank's borrowings see Note 9 of
Notes to Consolidated Financial Statements included in the Company's Annual
Report to Stockholders.
Subsidiary Activities
The Sextant Corporation (the "Corporation") is a wholly-owned subsidiary
of the Bank, originally formed to purchase equipment and lease the equipment to
the Bank to take advantage of favorable tax treatment previously but no longer
allowed to such transactions. In fiscal 1989, the Corporation constructed four
office condominium buildings which contain a total of sixteen thousand square
feet of office space (16 units). At December 31, 1997, eight units had been
sold, and two units have been leased. The Bank occupies the remaining units.
The Corporation also owns seven condominium units in Cedarville, Massachusetts.
These units have been written down to their appraised value and are actively
being marketed. The sales price for the units has been reduced as of March 1,
1997 to help facilitate a sale. No further losses are anticipated; the current
book value as of December 31, 1997 is $233,000.
The Company in its application to the Federal Reserve Bank of Boston
("FRB") to become a bank holding company committed to divest or convert to bank
premises the properties that are currently held by the Sextant Corporation
including the properties discussed above, pursuant to [sec]225.22(f) of
Regulation Y. Section 225.22(f) of Regulation Y, which stipulates that a
company that becomes a bank holding company may, for a period of two years,
engage in nonbanking activities and control voting securities or assets of a
nonbank subsidiary, if the bank holding company engaged in such activities or
controlled such voting securities or assets on the date it became a bank
holding company. The FRB may grant requests for up to three one-year extensions
of the two-year period.
The Corporation is also a 49% partner in the Glasstown Group Partnership.
In July 1996, the Partnership sold approximately 12 acres of land on Old Kings
Highway adjacent to a major retail complex in Sandwich, Massachusetts. The
Corporation received $113,000 in cash and a note receivable for $174,000.
Principal and interest is payable in quarterly payments over a five year
period. The Corporation sustained no loss as a result of the transaction. At
December 31, 1997, the Corporation's portion of the note receivable was
$135,000.
In March 1992, the Bank established Redeil Corporation ("Redeil"), a
Massachusetts Corporation which was established in order to allow the Bank to
transfer certain real estate owned by foreclosure to Redeil. The Bank
transferred $903,000 in real estate owned by foreclosure to Redeil in March
1992, and made an additional investment in Redeil of $20,000 in June 1992. At
July 31, 1995, the Bank dissolved Redeil and transferred its investment of
$791,000, including a real estate owned by foreclosure balance of $135,000,
back to the Bank.
In February 1993, the Bank established Sandwich Securities Corporation
("SSC"), a Massachusetts corporation for the purpose of engaging exclusively in
buying, selling and holding, on its own behalf, securities that may be held
directly by the Bank. SSC qualifies under Massachusetts General Laws, Chapter
63 Section 38B, as a Massachusetts security corporation. At December 31, 1997,
SSC held $39.6 million in U.S. Treasury notes and Government agency obligations
and mortgage-backed securities. In March 1995, the Bank established Sextant
G-51
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
Securities Corporation ("SEXT"), a second Massachusetts security corporation,
for the purpose of engaging exclusively in buying, selling and holding, on its
own behalf, securities that may be held directly by the Bank. At December 31,
1997, SEXT held $30.3 million in securities.
In February 1997, the Bank filed for and received permission from the
Massachusetts Commissioner of Banks to increase the amount of securities to be
held by SSC from the original amount of $15 million to an amount not to exceed
$45 million.
Yields Earned and Rates Paid
The Bank'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 rate
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.
At December 31, 1997, approximately 6.4% of the Bank's total loans
outstanding consisted of fixed-rate loans with maturities of up to 30 years.
Although actions taken by management have largely reduced the Bank's reliance
on long-term fixed-rate assets in favor of short-term repriceable assets, when
interest rates rise, the Bank's yield on its loan portfolio still increases at
a slower pace as the Bank's deposit base has a shorter term than its loan
portfolio and is more sensitive to rapidly increasing or decreasing rates.
Competition
The Bank's competition for deposits has historically come from other
co-operative banks, savings banks, savings and loan associations, trust
companies, commercial banks and credit unions located in Massachusetts
generally, and on Cape Cod specifically, some of which have greater financial
resources than the Bank. Based upon FDIC data for branch deposits as of June
30, 1997, the Bank ranked fourth in total deposits in its principle market of
Barnstable County (Cape Cod), when compared to other deposit gathering
institutions. The Bank has also experienced significant additional competition
for investors' funds from short term money market funds, mutual funds,
annuities and other corporate and government securities yielding interest rates
which have been higher than those being paid by the Bank on savings deposits or
containing other favorable features. The Bank anticipates that it will face
continuing competition from other financial intermediaries for deposits.
The Bank competes for deposits principally by offering depositors a wide
variety of checking, savings and investment programs, convenient branch
locations, 24-hour automated teller machine access, preauthorized payment and
withdrawal systems, tax-deferred retirement programs, and other miscellaneous
services. The Bank does not rely upon any individual, group or entity for a
material portion of its deposits.
The Bank's competition for real estate loans comes principally from
mortgage banking companies, co-operative banks and savings banks, savings and
loan associations, commercial banks, insurance companies and other
institutional lenders. The Bank competes for loan originations primarily
through the interest rates and loan fees it charges and the efficiency and
quality of services it provides borrowers, real estate brokers and builders.
For 1997, Banker and Tradesman listed the Bank as being the third largest
originator of residential mortgages on Cape Cod (Barnstable County),
Massachusetts, by dollar amount. The competition for loans encountered by the
Bank, as well as the types of institutions with which the Bank competes, varies
from time to time depending upon certain factors including the general
availability of lendable funds and credit, general and local economic
conditions, current interest rate levels, volatility in the mortgage markets
and other factors which are not readily predictable.
In addition to competing with other banks and financial services
organizations based in Massachusetts, the Bank has and is expected to face
competition from major commercial banks headquartered outside of Massachusetts
as a result of regional interstate banking laws which currently permit banks
located in New England to enter the Bank's market area and compete with it for
deposits and loan originations. The Bank also faces increased
G-52
<PAGE>
Sandwich Bancorp -- Excerpts from Annual Report on Form 10-K for the Year Ended
December 31, 1997
competition as a result of the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 which, as of September 29, 1995, allowed the Federal
Reserve Board to approve a bank holding company's application to acquire
control of, or substantially all of the assets of, a Massachusetts bank without
regard to Massachusetts law.
Bank regulation is undergoing significant change with an increased number
of bank mergers and acquisitions, changes in the products and services banks
can offer, and involvement in non-banking activities by bank holding companies.
There are a number of pending legislative and regulatory proposals that may
further alter the structure, regulation, and competitive relationships of
financial institutions.
The Bank is headquartered in Sandwich, Massachusetts and operates a
network of eleven full service offices and one loan production office. The
Bank's eleven full service office facilities are located in Sandwich, South
Sandwich, Buzzards Bay (Bourne), Pocasset (Bourne), Wareham, Cedarville
(Plymouth), Falmouth, Hyannis, Chatham, Orleans and South Yarmouth,
Massachusetts. The Bank's main office is located at 100 Old Kings Highway,
Sandwich, Massachusetts. In addition, the Bank maintains a loan production
office located in Plymouth, Massachusetts. Nine of the offices are located on
Cape Cod in Barnstable County, while the Wareham and Cedarville offices are
located in Plymouth County. The Bank's primary market area within which the
majority of the properties securing loans originated by the Bank are located,
encompasses the southern portion of Plymouth County and all of Cape Cod
(Barnstable County), Massachusetts.
Employees
As of December 31, 1997, the Company and subsidiaries had 128 full-time
and 39 part-time employees. The employees are not represented by any collective
bargaining agreement. Management considers its relations with its employees to
be good.
Executive Officers Who Are Not Directors
The executive officers of the Bank are as follows:
<TABLE>
<CAPTION>
Age at
December 31,
Name 1997 Principal Position
- -------------------------- ------------- -------------------------------------------------------------
<S> <C> <C>
Dana S. Briggs ........... 46 Senior Vice President
George L. Larson ......... 54 Senior Vice President, Chief Financial Officer and Treasurer
David A. Parsons ......... 54 Senior Vice President
</TABLE>
The following is a description of the principal occupation and employment
of the executive officers of the Company during at least the past five years:
Dana S. Briggs joined the Bank in 1983 as Assistant Vice President and
Main Office Manager and in 1984 became the Bank's Vice President of
Administration. Presently as Senior Vice President and Senior Retail/
Operations Officer, he is in charge of the Bank's branches, operations and
marketing. From 1973 to 1983, Mr. Briggs was employed by Bass River Savings
Bank and Barnstable County National Bank.
George L. Larson started with the Bank in November 1986 as Senior Vice
President and Chief Financial Officer and is responsible for the Financial
Division of the Bank. Mr. Larson came to the Bank with 15 years of bank
accounting and finance experience. From 1978 to 1986, Mr. Larson was employed
by Jefferson Federal Savings and Loan Association in Meriden, CT, as Senior
Vice President and Treasurer, in which capacities he was in charge of the
Jefferson Federal's accounting and data processing operations and managed the
Association's investment portfolio.
David A. Parsons joined the Bank in December, 1990 as Senior Vice
President, Senior Loan Officer and is responsible for the Bank's Lending
Division. He was employed from 1969-1989 by Shawmut Bank. His career has
covered consumer lending and collection, commercial loan collection and
workouts and equipment financing & leasing. In 1989, Mr. Parsons was employed
as an Executive Vice President/Senior Credit Officer at Home National Bank in
Milford, Massachusetts. Upon Home National's closing, Mr. Parsons was employed
by the FDIC until August 1990. From August 1990 until being hired full-time by
the Bank in December 1990, Mr. Parsons was employed as a consultant to the
Bank.
G-53
<PAGE>
Sandwich Bancorp -- Excerpts from Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1998
SANDWICH BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks .......................................... $ 15,771 $ 9,949
Federal funds sold ............................................... 8,001 6,018
-------- --------
Total cash and cash equivalents .............................. 23,772 15,967
-------- --------
Other short-term investments ..................................... 2,149 101
Investment securities:
Available for sale .............................................. 58,180 10,995
Held to maturity ................................................ 64,792 99,577
-------- --------
Total investment securities .................................. 122,972 110,572
-------- --------
Loans:
Mortgage loans .................................................. 336,646 346,062
Other loans ..................................................... 23,971 24,680
-------- --------
Total loans .................................................. 360,617 370,742
Less allowance for loan losses .................................. 4,167 4,100
-------- --------
Net loans .................................................... 356,450 366,642
-------- --------
Stock in Federal Home Loan Bank of Boston, at cost ............... 3,749 3,749
Accrued interest receivable ...................................... 2,748 2,836
The Co-operative Central Bank Reserve Fund ....................... 965 965
Real estate held for sale ........................................ 442 457
Real estate acquired by foreclosure .............................. 271 596
Office properties and equipment .................................. 4,510 4,641
Leased property under capital lease .............................. 1,721 1,738
Core deposit and other intangibles ............................... 1,237 1,459
Income taxes receivable, net ..................................... 350 103
Deferred income tax asset, net ................................... 2,929 2,948
Prepaid expenses and other assets ................................ 6,748 5,923
-------- --------
Total assets ................................................. $531,013 $518,697
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits ......................................................... $444,750 $423,014
Borrowed funds ................................................... 33,601 45,601
Capital lease obligation ......................................... 1,721 1,738
Escrow deposits of borrowers ..................................... 1,382 1,604
Accrued expenses and other liabilities ........................... 5,003 4,726
-------- --------
Total liabilities ............................................ 486,457 476,683
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, par value $1.00 per share;
authorized 5,000,000 shares; none issued or outstanding ......... -- --
Common stock, par value $1.00 per share;
authorized 15,000,000 shares; 2,043,475 and 1,942,159 issued
and outstanding, respectively ................................... 2,043 1,942
Additional paid-in capital ....................................... 21,540 20,139
Retained earnings ................................................ 20,811 19,848
Accumulated other comprehensive income ........................... 162 85
-------- --------
Total stockholders' equity ................................... 44,556 42,014
-------- --------
Total liabilities and stockholders' equity ................... $531,013 $518,697
======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
G-54
<PAGE>
Sandwich Bancorp -- Excerpts from Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1998
SANDWICH BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Interest on loans .......................................... $ 7,168 $ 6,986 $ 14,512 $ 13,493
Interest on dividends on investment securities
available for sale ........................................ 440 134 649 301
Interest on investment securities held to maturity ......... 1,230 1,758 2,744 3,377
Interest on short-term investments ......................... 271 80 388 112
------- ------- -------- --------
Total interest and dividend income ..................... 9,109 8,958 18,293 17,283
------- ------- -------- --------
INTEREST EXPENSE
Deposits ................................................... 4,185 3,714 8,215 7,295
Borrowed funds ............................................. 624 870 1,357 1,412
------- ------- -------- --------
Total interest expense ................................. 4,809 4,584 9,572 8,707
------- ------- -------- --------
Net interest and dividend income ....................... 4,300 4,374 8,721 8,576
Provision for loan losses ..................................... -- 132 57 241
------- ------- -------- --------
Net interest and dividend income after
provision for loan losses ............................ 4,300 4,242 8,664 8,335
------- ------- -------- --------
NON-INTEREST INCOME
Service charges ............................................ 411 432 813 838
Mortgage loan servicing fees ............................... 71 58 138 122
Gain on sale of loans, net ................................. 146 27 304 67
Other ...................................................... 139 103 119 210
------- ------- -------- --------
Total non-interest income .............................. 767 620 1,374 1,237
------- ------- -------- --------
Income before non-interest expense and
income taxes ......................................... 5,067 4,862 10,038 9,572
------- ------- -------- --------
NON-INTEREST EXPENSE
Salaries and employee benefits ............................. 1,646 1,552 3,243 3,080
Occupancy and equipment .................................... 359 378 721 750
FDIC deposit insurance ..................................... 27 18 46 36
Advertising ................................................ 103 101 221 202
Data processing service fees ............................... 184 160 345 316
Foreclosed property expense ................................ 12 19 28 35
Amortization of core deposit intangible .................... 110 130 223 261
Other ...................................................... 818 688 1,465 1,371
------- ------- -------- --------
Total non-interest expense ............................. 3,259 3,046 6,292 6,051
------- ------- -------- --------
Income before income tax expense ....................... 1,808 1,816 3,746 3,521
Income tax expense ............................................ 646 669 1,404 1,327
------- ------- -------- --------
Net income ............................................. $ 1,162 $ 1,147 $ 2,342 $ 2,194
======= ======= ======== ========
Basic earnings per share ...................................... $ 0.59 $ 0.60 $ 1.19 $ 1.15
======= ======= ======== ========
Diluted earnings per share .................................... $ 0.56 $ 0.58 $ 1.14 $ 1.10
======= ======= ======== ========
Average basic shares outstanding .............................. 1,979 1,912 1,962 1,908
Dilutive effect of outstanding stock options .................. 79 78 89 81
------- ------- -------- --------
Average diluted shares outstanding ............................ 2,058 1,990 2,051 1,989
======= ======= ======== ========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
G-55
<PAGE>
Sandwich Bancorp -- Excerpts from Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1998
SANDWICH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Additional Accumulated other
Common paid-in Retained comprehensive
Stock capital earnings income Total
-------- ------------ ----------- ------------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ............................. $1,902 $19,323 $ 17,381 $ 27 $ 38,633
Net income for six months ............................. -- -- 2,194 -- 2,194
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment ........................ 76 76
--------
Comprehensive income .................................. 2,270
Dividends declared ($0.60 per share) .................. -- -- (1,145) -- (1,145)
Stock options exercised ............................... 13 123 -- -- 136
------ ------- -------- ----- --------
Balance at June 30, 1997 ................................. $1,915 $19,446 $ 18,430 $ 103 $ 39,894
====== ======= ======== ===== ========
Balance at December 31, 1997 ............................. $1,942 $20,139 $ 19,848 $ 85 $ 42,014
Comprehensive income:
Net income for six months ............................. -- -- 2,342 -- 2,342
Other comprehensive income, net of tax
Unrealized gains on securities, net of
reclassification adjustment ........................ 77 77
--------
Comprehensive income .................................. 2,419
Dividends declared ($0.70 per share) .................. -- -- (1,379) -- (1,379)
Stock options exercised ............................... 101 1,401 -- -- 1,502
------ ------- -------- ----- --------
Balance at June 30, 1998 ................................. $2,043 $21,540 $ 20,811 $ 162 $ 44,556
====== ======= ======== ===== ========
DISCLOSURE OF RECLASSIFICATION
AMOUNT:
Unrealized holding gains arising during period ........... $ 77
Less: reclassification adjustment for gains included in
net income .............................................. --
-----
Net unrealized gains on securities ....................... $ 77
=====
</TABLE>
See accompanying notes to consolidated financial statements.
G-56
<PAGE>
Sandwich Bancorp -- Excerpts from Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1998
SANDWICH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1998 1997
------------ -----------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .............................................................. $ 2,342 $ 2,194
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses ............................................. 57 241
Provision for loss and writedowns of real estate acquired by
foreclosure .......................................................... 13 20
Depreciation and amortization ......................................... 498 322
(Increase) decrease in:
Accrued interest receivable .......................................... 88 (345)
Deferred income tax asset, net ....................................... (27) (39)
Other assets ......................................................... (825) 408
Income taxes receivable .............................................. (247) (146)
Core deposit intangible .............................................. 222 260
Increase (decrease) in:
Escrow deposits of borrowers ......................................... (222) 63
Income tax payable ................................................... -- (282)
Accrued expenses and other liabilities ............................... 277 (709)
Gain on sales of loans, net ........................................... (304) (67)
Principal balance of loans originated for sale ........................ (39,028) (8,209)
Principal balance of loans sold ....................................... 39,232 8,430
Loss on sales of investment securities, net ........................... -- 6
Gain on sales of real estate acquired by foreclosure .................. (25) (20)
--------- ---------
Total adjustments ................................................. (291) (67)
--------- ---------
Net cash provided by operating activities ........................ 2,051 2,127
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of investment securities available for sale ................. (49,475) (13)
Purchases of investment securities held to maturity ................... -- (28,733)
Proceeds from sales of investment securities available for sale ....... -- 2,527
Proceeds from maturities and paydowns of investment securities
available for sale ................................................... 2,382 2,686
Proceeds from maturities and paydowns of investment securities
held to maturity ..................................................... 34,620 19,918
(Increase) decrease in:
Short-term investments ............................................... (2,048) (989)
Loans ................................................................ 10,105 (31,405)
Real estate acquired by foreclosure .................................. -- (20)
Real estate held for sale ............................................ 15 --
Stock in Federal Home Loan Bank of Boston ............................ -- (1,079)
Investments in real estate ........................................... -- 7
Proceeds from sale of real estate acquired by foreclosure ............. 467 742
Purchase of office properties and equipment ........................... (171) (209)
--------- ---------
Net cash used by investing activities ............................... (4,105) (36,568)
--------- ---------
</TABLE>
G-57
<PAGE>
Sandwich Bancorp -- Excerpts from Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1998
SANDWICH BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------
1998 1997
------------ -------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits ....................................... $ 21,736 $ 13,532
Advances from the Federal Home Loan Bank of Boston ............. 16,000 126,500
Repayment of Federal Home Loan Bank advances ................... (28,000) (103,026)
Cash dividends paid ............................................ (1,379) (1,145)
Stock options exercised ........................................ 1,502 136
--------- ----------
Net cash provided by financing activities ..................... 9,859 35,997
--------- ----------
Net increase in cash and federal funds sold .................... 7,805 1,556
Cash and federal funds sold, beginning of period ............... 15,967 11,718
--------- ----------
Cash and federal funds sold, end of period ..................... $ 23,772 $ 13,274
========= ==========
CASH PAID FOR
Interest on deposits ........................................... $ 8,221 $ 7,296
========= ==========
Interest on borrowed funds ..................................... $ 1,432 $ 1,338
========= ==========
Income taxes, net .............................................. $ 1,689 $ 1,791
========= ==========
OTHER NON-CASH ACTIVITIES
Deferred taxes on change in unrealized (gain) loss on securities
available for sale ............................................ $ (46) $ (18)
========= ==========
Additions to real estate acquired by foreclosure ............... $ 130 $ 524
========= ==========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
G-58
<PAGE>
Sandwich Bancorp -- Excerpts from Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1998
SANDWICH BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 and 1997
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements of Sandwich Bancorp, Inc.
(the "Company") and its wholly owned subsidiary, the Sandwich Co-operative Bank
(the "Bank") presented herein should be read in conjunction with the
consolidated financial statements of the Company as of and for the year ended
December 31, 1997. In the opinion of management, the interim financial
statements reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the three months and the six months ended
June 30, 1998 and 1997. Interim results are not necessarily indicative of
results to be expected for the entire year. Certain reclassifications have been
made to the December 31, 1997 and the June 30, 1997 balances to conform with
June 30, 1998 presentation. Management is required to make estimates and
assumptions that effect amounts reported in the financial statements. Actual
results could differ significantly from those estimates.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair market value. Under this statement, an entity that elects to apply
hedge accounting is required to establish at the inception of the hedge the
method it will use for assessing the effectiveness of the hedging derivative
and the measurement approach for determining the ineffective aspect of the
hedge. This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. This statement should not have an immaterial
effect on the Company's consolidated financial statements.
Recent Events
On February 2, 1998, the Company and the Bank entered into a definitive
agreement under which The 1855 Bancorp, the parent company of Compass Bank for
Savings of New Bedford, Massachusetts will acquire Sandwich Bancorp, Inc. Prior
to the Company's consideration and approval of its definitive agreement with
The 1855 Bancorp, the Company had contacted and received expressions of
interest from three other parties who had an interest in an acquisition of the
Company.
On February 24, 1998, the Company announced that its Board of Directors,
consistent with the exercise of its fiduciary duties, determined that it was
appropriate to request additional information and a clarification of the
renewed expressions of interest that it had recently received subsequent to
February 2 from the three other parties.
Following a comprehensive review of the other expressions of interests for
the Company, the Company and Compass Bank jointly announced on March 23, 1998,
that they had signed an amendment to their previously announced agreement of
February 2, 1998 by which Compass Bank would acquire Sandwich Bancorp, Inc.
Under the terms of the amended agreement, Compass Bank's parent company, The
1855 Bancorp will convert to a 100% publicly owned stock holding company and
thereafter issue stock having a value of $64.00 per share to Sandwich Bancorp
shareholders in a tax-free exchange of common stock. The value to be received
by Sandwich Bancorp shareholders is subject to adjustment pursuant to a formula
based on the value of the stock of The 1855 Bancorp near the transaction date.
Based on 1855 Bancorp's assumed initial public offering price of $10.00 per
share, each Sandwich Bancorp share will be exchanged for 1855 Bancorp stock
having a value of $64.00 per share so long as 1855 Bancorp stock trades at an
average price of between $10.00 and $13.50 per share during a designated
trading period following the initial public offering date. If this 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.
G-59
<PAGE>
Sandwich Bancorp -- Excerpts from Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1998
SANDWICH BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 1998 and 1997
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Sandwich Bancorp and The 1855 Bancorp also entered into a Stock Option
Agreement, granting to The 1855 Bancorp an option to acquire up to 19.9% of
Sandwich's common stock under certain circumstances. The transaction, which is
subject to all necessary regulatory and shareholder approvals, is expected to
close in the fourth quarter of 1998.
G-60
<PAGE>
Sandwich Bancorp -- Excerpts from Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1998
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
The following is a discussion of the major changes and trends in financial
condition as of June 30, 1998 as compared to December 31, 1997.
At June 30, 1998, the Company's total assets were $531,013,000 as compared
to $518,697,000 at December 31, 1997, an increase of $12,316,000 or 2.4%. The
increase is largely attributable to increases in cash and cash equivalents,
other short-term investments and investment securities available for sale,
partially offset by a decrease in investment securities held to maturity and in
loans. Total cash and cash equivalents at June 30, 1998 totaled $23,772,000
compared to $15,967,000 at December 31, 1997, an increase of $7,805,000. The
increase was the direct result of cash flow from loan repayments. The Company's
investment portfolio, including other short-term investments, investment
securities available for sale and investment securities held to maturity
increased $14,448,000 or 11.5% to $125,121,000 at June 30, 1998 compared to
$110,673,000 at December 31, 1997. Maturities on investment securities and cash
flow from mortgage-backed securities were reinvested into investment securities
available for sale.
The major components of investment securities at June 30, 1998 and
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- -------------
(In thousands)
<S> <C> <C>
Available-for-sale:
US Government obligations ................... $ 4,993 $ --
Mortgage-backed securities .................. 53,181 10,989
Common and preferred stocks ................. 6 6
-------- --------
58,180 10,995
-------- --------
Held-to-maturity:
US Government obligations ................... 9,989 15,480
Collateralized mortgage obligations ......... 37,235 50,209
Mortgage-backed securities .................. 17,568 33,888
-------- --------
64,792 99,577
-------- --------
Total ....................................... $122,972 $110,572
======== ========
</TABLE>
The New England and local real estate markets have been positively
impacted by a decline in market interest rates, occurring late in the fourth
quarter of 1997 and continuing through the first six months of 1998. The
decline has created a significant increase in loan refinances and thirty-year
fixed rate loan originations, which the Company sells in the secondary market.
As evidence of this, the Company's loan portfolio, net of allowance for loan
losses, decreased to $356,450,000 at June 30, 1998 compared to $366,642,000 at
December 31, 1997. In addition, property acquired by the Company as the result
of foreclosure or repossession decreased to $271,000 at June 30, 1998 from
$596,000 at December 31, 1997. Foreclosed properties are classified as "real
estate acquired by foreclosure," representing the lower of the carrying value
of the loan or the fair value of the property less costs to sell until such
time as they are sold or otherwise disposed. During the six months ended June
30, 1998, the Company acquired two properties through foreclosure or
repossession, of which one was a land loan totaling $30,000 and one, a
commercial mortgage loan totaling $100,000. During the same period, the Company
sold four foreclosed residential properties totaling $457,000, thereby
incurring a net gain of $25,000 and have accepted deposits totaling $10,000 on
pending sales of three additional properties.
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.
G-61
<PAGE>
Sandwich Bancorp -- Excerpts from Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1998
Deposits increased by $21,736,000 or 5.1% to $444,750,000 at June 30, 1998
compared to $423,014,000 at December 31, 1997. Substantially all of the
increase was realized in money market deposit accounts, passbook savings and
checking accounts. Borrowed funds decreased by $12,000,000 to $33,601,000 at
June 30, 1998 compared to $45,601,000 at December 31, 1997. Cash flow from loan
repayments and mortgage-backed securities were used to pay down maturing
advances from the Federal Home Loan Bank of Boston.
Total stockholders' equity increased $2,542,000 or 6.1% since December 31,
1997. Increases in stockholders' equity resulted from net income of $2,342,000,
stock options exercised of $1,502,000 and an increase in net unrealized gains
on investment securities available for sale of $77,000, partially offset by
cash dividends paid of $0.70 per share or $1,379,000. The Company is required
to maintain certain levels of capital (stockholders' equity) pursuant to FDIC
regulations. At June 30, 1998, the Company had a qualifying total capital to
risk-weighted assets ratio of 16.46%, of which 8.29% constituted Tier 1
leverage capital, substantially exceeding the FDIC qualifying total capital to
risk-weighted assets requirement of at least 8.00%, of which at least 4.00%
must be Tier 1 leverage capital.
As a result of the amendment to the Merger Agreement of February 2, 1998,
which was signed on March 23, 1998, the new terms, being a stock-for-stock
transaction, will allow the Company to record the transaction under the
pooling-of-interest method. Under the pooling-of-interest method, the Company
is allowed to defer all merger-related expenses (versus expensing as incurred).
During the first six months of 1998, the Company incurred approximately
$1,003,000 of merger-related expenses, which have been deferred and will be
recognized by the merged entity during the quarter when the merger is complete.
Results of Operations
Comparison of Three Months Ended June 30, 1998 and 1997
General
Operations for the three months ended June 30, 1998 resulted in net income
of $1,162,000 compared with $1,147,000 for the three months ended June 30,
1997. Non-interest income increased $147,000 or 23.7% to $767,000 for the three
months ended June 30, 1998 as compared to $620,000 for the three months ended
June 30, 1997. The principal reason for the increase was an increase in gains
on sale of fixed rate loans in the secondary market. No provision for loan
losses was recorded as a result of a decline in non-performing assets and total
loans. Non-interest expenses increased by $213,000 or 7.0% to $3,259,000 for
the three months ended June 30, 1998 as compared to $3,046,000 for the three
months ended June 30, 1997. The major areas of increase in non- interest
expense were in salaries and employee benefits, data processing service fees
and other non-interest expenses. Market interest rates have remained low over
the three month period, a continuance from the initial decline experienced late
in the fourth quarter of 1997. The Company's results of operations largely
depend upon its net interest margin which is the difference between the income
earned on loans and investments, and the interest expense paid on deposits and
borrowings divided by total interest earning average assets. The net interest
margin is affected by economic and market factors which influence interest rate
levels, loan demand and deposit flows. The net interest margin decreased to
3.46% for the three months ended June 30, 1998 from 3.70% for the three months
ended June 30, 1997. As a result of this decrease, net interest and dividend
income decreased $74,000 from $4,374,000 for the three months ended June 30,
1997 to $4,300,000 for the three months ended June 30, 1998.
Trends in the real estate market locally and in New England impact the
Company because of its real estate loan portfolio. If the local and New England
real estate markets should show signs of weakness, additional provisions for
loan losses and further write downs of properties acquired by foreclosure or
repossession may be necessary in the future. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Company's allowance for loan losses. Such agencies may require the Company
to recognize additions to the allowance based on information available at the
time of their review.
Interest and Dividend Income
Interest and dividend income increased by $151,000 to $9,109,000 for the
three months ended June 30, 1998 when compared to three months ended June 30,
1997. Interest on loans increased $182,000 or 2.6% as a result of an increase
in the average balance outstanding of $19,419,000, partially offset by a
decrease in the average rate
G-62
<PAGE>
Sandwich Bancorp -- Excerpts from Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1998
earned on the portfolio from 8.12% in the second quarter of 1997 to 7.88% for
the same period in 1998. Interest and dividends on total investments decreased
by $31,000 as a result of the decrease in the yield on the Company's investment
portfolio from 6.19% for the June 30, 1997 period, to 5.88% for June 30, 1998,
partially offset by an increase in the average balance outstanding of
$4,272,000.
Interest Expense
Total interest expense increased $225,000 to $4,809,000 for the three
months ended June 30, 1998, from $4,584,000 for the three months ended June 30,
1997. Interest expense on interest bearing deposits increased by $471,000 or
12.7%. The increase reflects an increase in the average balance outstanding of
$36,553,000 and an increase in interest rates over the three month period, from
4.19% in 1997 to 4.28% in 1998. Interest expense on borrowed funds decreased
$246,000 primarily due to a decrease in the average balance outstanding of
$17,039,000, along with a slight decrease in interest rates over the three
month period from 5.64% in 1997 to 5.61% in 1998. Cash flow from loan
repayments and mortgage-backed securities were used to pay down maturing
advances from the Federal Home Loan Bank of Boston. Interest rates on interest
bearing deposits and borrowed funds for the three months ended June 30, 1998
increased slightly to 4.41% from 4.40% when compared to the same period in
1997.
Provision for Loan Losses
No provision for loan losses was recorded for the three months ended June
30, 1998 as a result of a decline in non-performing assets, specific loan
charge-offs and total loans, compared to $132,000 charged to earnings for the
1997 period. At June 30, 1998, total non-performing assets were $2,962,000
representing 0.56% of total assets, compared to $3,958,000 or 0.79% of total
assets at June 30, 1997. Management's analysis of the loan portfolio considers
risk elements by loan category, and also the prevailing economic climate and
anticipated future uncertainties. Future adjustments to the allowance for loan
losses may be necessary if economic conditions differ substantially from
assumptions used in performing the analysis, or the levels of the Company's
non-performing assets increase significantly.
Non-accrual loans as of June 30, 1998 decreased $1,000,000 to $2,691,000
when compared to the June 30, 1997 balance of $3,691,000. Substantially all of
the decrease was attributed to a reduction in non-accrual residential mortgage
loans. There were no restructured loans at June 30, 1998 compared to $106,000
at June 30, 1997. Typically, restructured loans are modified to provide either
a reduction of the interest on the loan principal or an extension of the loan
maturity.
Non-performing assets and the percentage of such assets to total loans and
total assets are as follows:
<TABLE>
<CAPTION>
June 30, December 31, June 30,
(Dollars in thousands) 1998 1997 1997
- ------------------------------------------------ ---------- -------------- -----------
<S> <C> <C> <C>
Non-performing assets:
Non-accrual loans:
Mortgage loans .............................. $ 2,309 $ 3,283 $ 3,159
Other loans ................................. 382 298 532
------- ------- -------
Total non-accrual loans ................. 2,691 3,581 3,691
Real estate acquired by foreclosure ......... 271 596 267
------- ------- -------
Total non-performing assets ............. $ 2,962 $ 4,177 $ 3,958
======= ======= =======
Non-accrual loans as a percentage of:
Total loans receivable .................. 0.75% 0.97% 1.05%
======= ======= =======
Total assets ............................ 0.51% 0.69% 0.74%
======= ======= =======
Non-performing assets as a percentage of:
Total assets ............................ 0.56% 0.81% 0.79%
======= ======= =======
</TABLE>
Non-interest Income
Non-interest income increased $147,000 for the three months ended June 30,
1998 when compared to the same period in 1997. Substantially all of the
increase was due to an increase in gain on sale of fixed rate loans in the
secondary market. Gain on sale of loans, net as of three months ended June 30,
1998 totaled $146,000 compared to $27,000 as of three months ended June 30,
1997, an increase of $119,000. Other non-interest income as of three months
ended June 30, 1998 increased $36,000 to $139,000 when compared to $103,000 as
of three months ended June 30, 1997.
G-63
<PAGE>
Sandwich Bancorp -- Excerpts from Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1998
Non-interest Expense
Non-interest expense increased by $213,000 or 7.0% for the three months
ended June 30, 1998 compared to the three months ended June 30, 1997. Increases
in salaries and employee benefits, data processing service fees and other
non-interest expenses were incurred.
Income Tax Expense
The Company incurred income tax expense of $646,000 for the three months
ended June 30, 1998 and $669,000 in the comparable period of 1997. Both these
amounts differ from the expected tax expense of 34% of income before income
taxes. The major reasons for these variances relate to state income tax expense
(net of the federal tax benefit), tax exempt income and dividend received
deduction.
Comparison of Six Months Ended June 30, 1998 and 1997
General
Operations for the six months ended June 30, 1998 resulted in net income
of $2,342,000 compared with $2,194,000 for the six months ended June 30, 1997.
The principal reason for the increase was improvement in the net interest
income, resulting from growth in the residential loan portfolio. Substantial
increases in net gains realized on the sale of loans in the secondary market
were also realized for the six months ended June 30, 1998. The provision for
loan losses charged to earnings for the six months ended June 30, 1998 was
$57,000, compared to $241,000 charged to earnings for the 1997 period. Total
non- interest expense increased by $241,000 or 4.0% to $6,292,000 for the six
months ended June 30, 1998 when compared to six months ended June 30, 1997. The
Company's results of operations largely depend upon its net interest margin
which is the difference between the income earned on loans and investments, and
the interest expense paid on deposits and borrowings divided by total interest
earning average assets. The net interest margin is affected by economic and
market factors which influence interest rate levels, loan demand and deposit
flows. The net interest margin decreased to 3.51% for the six months ended June
30, 1998 from 3.74% for the six months ended June 30, 1997.
Interest and Dividend Income
Interest and dividend income increased by $1,010,000 or 5.8% to
$18,293,000 for the six months ended June 30, 1998 when compared to six months
ended June 30, 1997. Interest on loans increased $1,019,000 or 7.6% as a result
of an increase in the average balance outstanding of $32,209,000, partially
offset by a decrease in the average rate earned on the portfolio from 8.04% in
1997 to 7.89% in 1998. Interest and dividends on total investments decreased
slightly by $9,000 to $3,781,000 for the six months ended June 30, 1998 when
compared to six months ended June 30, 1997. The decrease was the result of a
decrease in the average rate earned on the portfolio from 6.19% in 1997 to
5.93% in 1998, partially offset by an increase in the average balance
outstanding of $5,121,000.
Interest Expense
Total interest expense increased $865,000 to $9,572,000 for the six months
ended June 30, 1998, from $8,707,000 for the six months ended June 30, 1997.
Interest expense on interest bearing deposits increased by $920,000 or 12.6%.
The rise reflects the increase in the average balance outstanding of
$35,468,000, that resulted substantially from an increase in deposit account
balances, along with market interest rates increasing over the same six month
period, from 4.17% in 1997 to 4.27% in 1998. Interest expense on borrowed funds
decreased $55,000 due to a decrease in the average balance outstanding of
$2,170,000, partially offset by a slight increase in the interest rate paid for
the six months ended June 30, 1998 of 5.70% compared to 5.68% for the same
period in 1997.
Provision for Loan Losses
The provision for loan losses charged to earnings for the six months ended
June 30, 1998 was $57,000 compared to $241,000 for the same period in 1997. The
Company decreased its provision for loan losses for the six months ended June
30, 1998 as a result of a decline in non-performing assets, specific loan
charge-offs and total loans.
G-64
<PAGE>
Sandwich Bancorp -- Excerpts from Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1998
Non-interest Income
Non-interest income was $1,374,000 for the six months ended June 30, 1998
compared to $1,237,000 for the same period in 1997. Gain on sale of fixed rate
loans in the secondary market was $304,000 for the six months ended June 30,
1998 compared to $67,000 for the same period in 1997, an increase of $237,000
due to the more favorable market interest rates in 1998. Other non-interest
income decreased $91,000 to $119,000 for the six months ended June 30, 1998,
from $210,000 for the six months ended June 30, 1997.
Non-interest Expense
Non-interest expense increased by $241,000 or 4.0% for the six months
ended June 30, 1998 compared to the six months ended June 30, 1997. Increases
in salaries and employee benefits, data processing service fees and other
non-interest expenses were incurred.
Income Tax Expense
The Company incurred income tax expense of $1,404,000 for the six months
ended June 30, 1998 compared with $1,327,000 in the 1997 period. Both these
amounts differ from the expected tax expense of 34% of income before income
taxes. The major reasons for these variances relate to state income tax expense
(net of the federal tax benefit), tax exempt income and dividend received
deduction.
Liquidity and Capital Resources
Substantially all of the Company's funds are generated through its
Company's subsidiary, the Sandwich Co-operative Bank. The Bank's primary
sources of liquidity are deposits, loan payments and payoffs, investment income
and maturities and principal payments of investments, mortgage-backed
securities and CMOs, advances from the Federal Home Loan Bank of Boston, and
other borrowings. As a member of the Co-operative Central Bank's Share
Insurance Fund, the Company also has a right to borrow from the Share Insurance
Fund for short-term cash needs by pledging certain assets, although it has
never exercised this right. The Company's liquidity management program is
designed to assure that sufficient funds are available to meet its daily needs.
The Company believes its capital resources, including deposits, scheduled
loan repayments, revenue generated from the sales of loans and investment
securities, unused borrowing capacity at the Federal Home Loan Bank of Boston,
and revenue from other sources will be adequate to meet its funding
commitments. At June 30, 1998 and December 31, 1997 the Company's and the
Bank's capital ratios were in excess of regulatory requirements.
Impact of the Year 2000 Issue
The Company remains on track with plans for Year 2000 compliance. In March
of 1998, the FDIC reviewed the Company's Year 2000 readiness plans and found
nothing unusual. They will continue to monitor the Company's process. The
Company continues to provide reports to the Board of Directors on a quarterly
basis. Recognizing the importance of customer awareness, additional
informational mailings are planned for the third quarter of 1998 for all
customers receiving monthly statements. A special follow-up mailing is also
planned for commercial loan customers during the third quarter of this year.
The Company relies on a third-party data processing vendor for critical
data warehousing and on-line transaction processing. Other, less critical,
systems are supported by purchased applications software. The Company is
continually evaluating mission-critical vendor plans and monitoring project
milestones. The Company plans to begin testing its key transaction processing
system in the third quarter of 1998 and to complete testing on most other
applications not later than December 31, 1998. There can be no guarantee that
the systems of other companies, or third party vendors on which the Company's
systems rely, will be remedied on a timely basis. Therefore, the Company may
possibly be negatively impacted to the extent other entities not affiliated
with the Company are unsuccessful in properly addressing their respective Year
2000 compliance responsibilities. Specific factors that may cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
During the first and second quarters of 1998, the Company replaced
specific hardware and software that had been identified as non-compliant in the
organization assessment. All replacements have been on schedule and within
G-65
<PAGE>
Sandwich Bancorp -- Excerpts from Quarterly Report on Form 10-Q for the Quarter
Ended June 30, 1998
budget. The remaining replacements are scheduled for the third quarter of 1998.
In addition, the Company added to the Information Systems Department staff in
the second quarter of 1998, according to plan. The Company will utilize
internal and, if necessary, external resources to upgrade, replace, and test
the software and systems for Year 2000 modifications.
Current projected timeframes call for completion of the proposed merger
with the 1855 Bancorp in the fourth quarter of 1998 and the subsequent data
system conversion in the first quarter of 1999. Y2K Team Leaders at both
Companies have agreed to pursue independent plans for Y2K compliance through
the date of the data system conversion. The Company foresees no significant
complications from the proposed merger and plans to complete the Year 2000
Project no later than March 31, 1999. Y2K Team Leaders from each Company are
working in concert to ensure smooth integration of plans after the conversion.
For further response, refer to the discussion under the sub-caption
"Impact of the Year 2000 Issue" of the caption "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Annual
Report, included as Part II, Item 7 of the Form 10-K, which is incorporated
herein by reference.
Quantitative and Qualitative Disclosures About Market Risk
The response is incorporated herein by reference from the discussion under
the sub-caption "Asset and Liability Management and Market Risk" of the caption
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" in the Annual Report, included as Part II, Item 7 of the Form 10-K,
which is incorporated herein by reference. In addition, there has been no
significant change in interest rates over the six month period ending June 30,
1998.
G-66
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
================================================================================
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the Offering made hereby and, if given or made,
such other information or representation must not be relied upon as having been
authorized by Seacoast Financial Services Corporation, Compass Bank for
Savings, Ryan Beck & Co., Inc., McConnell, Budd & Downes, Sandwich Bancorp,
Inc. or The Sandwich Co-operative Bank. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any of the securities
offered hereby to any person in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation in such jurisdiction. Neither the delivery
of this Prospectus nor any sale hereunder shall under any circumstances create
any implication that there has been no change in the affairs of Seacoast
Financial Services Corporation, Compass Bank for Savings, Sandwich Bancorp,
Inc. or The Sandwich Co-operative Bank since any of the dates as of which
information is furnished herein or since the date hereof.
----------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----------
<S> <C>
Summary of Prospectus ....................................... 5
Selected Consolidated Financial And Other Data of
Seacoast Financial ....................................... 13
Selected Consolidated Financial And Other Data of
Sandwich Bancorp ......................................... 16
Selected Unaudited Pro Forma Consolidated Financial
Data of Seacoast Financial ............................... 18
Recent Developments ......................................... 20
Forward-looking Statements .................................. 24
Risk Factors ................................................ 24
Pro Forma Data .............................................. 30
Regulatory Capital Compliance ............................... 43
Capitalization .............................................. 44
Use of Proceeds of Conversion ............................... 46
Seacoast Financial's Dividend Policy ........................ 47
Market for Seacoast Financial Common Stock .................. 47
Seacoast Financial and Subsidiary Consolidated
Statements of Income ..................................... 48
Management's Discussion and Analysis of Financial
Condition and Results of Operations of Seacoast
Financial ................................................ 49
Business of Seacoast Financial .............................. 63
Business of Compass ......................................... 64
Certain Effects of the Merger on Seacoast Financial ......... 91
The Conversion and the Merger ............................... 94
Federal and State Taxation of Seacoast Financial and
Compass .................................................. 113
Regulation of Seacoast Financial and Compass ................ 115
Management of Seacoast Financial and Compass ................ 122
Purchases by Management of Seacoast Financial and
Compass .................................................. 130
The Offerings ............................................... 131
Description of Capital Stock of Seacoast Financial .......... 138
Restrictions on Acquisition of Seacoast Financial and
Compass .................................................. 139
Transfer Agent and Registrar for Seacoast Financial
Common Stock ............................................. 143
Legal Opinions .............................................. 143
Experts ..................................................... 143
Additional Information ...................................... 143
Seacoast Financial Services Corporation and Subsidiary
Index to Consolidated Financial Statements ............... F-1
Sandwich Bancorp, Inc. and Subsidiaries Index to
Consolidated Financial Statements and Other
Information .............................................. G-1
</TABLE>
Until December 29, 1998, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may
be required to deliver this Prospectus when acting as underwriters and with
respect to their unsold allotments of subscriptions.
================================================================================
18,400,000 Shares
(Anticipated Maximum)
[LOGO] SEACOAST
Financial Services Corporation
COMMON STOCK
par value $0.01 per share
---------------------
P R O S P E C T U S
---------------------
Ryan, Beck & Co.
McConnell, Budd & Downes, Inc.
September 21, 1998
================================================================================
