UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 2001
------------------
Commission file number 000-23904
---------
SLADE'S FERRY BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3061936
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Slade's Ferry Avenue 02726
---------------------------------------- ----------
Somerset, Massachusetts (Zip Code)
(Address of principal executive offices)
(508)675-2121
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date:
Common stock ($.01 par value) 3,842,997.389 shares as of September 30, 2001.
----------------------------------------------------------------------------
PART I
ITEM 1
Financial Statements
--------------------
SLADE'S FERRY BANCORP
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2001 December 31, 2000
------------------ -----------------
(Unaudited)
ASSETS:
Cash and due from banks $ 14,219,444 $ 15,947,182
Money market mutual funds 88,142 113,527
Federal funds sold 23,500,000 12,000,000
----------------------------------
Cash and Cash Equivalents 37,807,586 28,060,709
Investment securities(1) 16,769,663 19,102,496
Securities available for sale(2) 76,516,471 67,993,096
Federal Home Loan Bank stock 1,013,400 1,013,400
Loans (net) 246,273,747 250,848,831
Premises and equipment 6,452,684 6,765,689
Accrued interest receivable 2,257,420 2,351,926
Goodwill 2,230,068 2,400,168
Cash surrender value of life insurance 7,602,044 6,830,918
Other assets 3,163,451 3,252,123
----------------------------------
TOTAL ASSETS $400,086,534 $388,619,356
==================================
LIABILITIES & STOCKHOLDERS' EQUITY:
Deposits $341,612,942 $337,000,901
Advances from Federal Home Loan Bank 17,040,487 12,725,908
Other borrowed funds 1,212,009 1,200,000
Other liabilities 1,921,470 1,965,174
----------------------------------
TOTAL LIABILITIES 361,786,908 352,891,983
----------------------------------
Preferred stockholders' equity in a
Subsidiary company 53,000 53,000
----------------------------------
STOCKHOLDERS' EQUITY:
Common stock 38,430 37,895
Paid in capital 26,413,689 25,885,220
Retained earnings 11,792,859 10,371,944
Accumulated other comprehensive gain (loss) 1,648 (620,686)
----------------------------------
TOTAL STOCKHOLDERS' EQUITY 38,246,626 35,674,373
----------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $400,086,534 $388,619,356
==================================
--------------------
Investment securities are to be held to maturity and have a fair
market value of $17,201,449 as of September 30, 2001 and $19,088,080
as of December 31, 2000.
Securities classified as Available for Sale are stated at fair value
with any unrealized gains or losses reflected as an adjustment in
Stockholders' Equity, net of tax.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
(UNAUDITED)
9 MONTHS ENDING SEPTEMBER 30,
2001 2000
---- ----
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $16,582,559 $16,540,347
Interest and dividends on investments 3,720,304 3,844,402
Other interest 704,011 342,774
---------------------------
Total interest and dividend income 21,006,874 20,727,523
---------------------------
INTEREST EXPENSE:
Interest on deposits 8,955,587 8,724,284
Interest on other borrowed funds 704,435 569,263
---------------------------
Total interest expense 9,660,022 9,293,547
---------------------------
Net interest and dividend income 11,346,852 11,433,976
PROVISION FOR LOAN LOSSES 562,500 1,050,000
---------------------------
Net interest and dividend income
after provision for loan losses 10,784,352 10,383,976
---------------------------
OTHER INCOME:
Service charges on deposit accounts 610,244 608,523
Security gains (net) 7,700 637
Other income 717,193 589,194
---------------------------
Total other income 1,335,137 1,198,354
---------------------------
OTHER EXPENSE:
Salaries and employee benefits 5,407,271 4,545,954
Occupancy expense 669,883 640,601
Equipment expense 428,153 420,158
Gain on sales of other real estate owned 0 (49,758)
Other expense 2,138,954 2,096,968
---------------------------
Total other expense 8,644,261 7,653,923
---------------------------
Income before income taxes 3,475,228 3,928,407
Income taxes 1,059,303 1,221,498
---------------------------
NET INCOME $ 2,415,925 $ 2,706,909
===========================
Basic earnings per share $ 0.63 $ 0.72
===========================
Diluted earnings per share $ 0.63 $ 0.72
===========================
Basic average shares outstanding 3,822,070 3,734,132
===========================
Diluted average shares outstanding 3,830,348 3,737,384
===========================
Dividends per share $ 0.25 $ 0.24
===========================
Comprehensive Income(1) $ 3,038,259 $ 2,833,187
===========================
--------------------
Calculated using the change in accumulated other comprehensive income
(loss) for the period and net income for the period.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
(UNAUDITED)
3 MONTHS ENDING SEPTEMBER 30,
2001 2000
---- ----
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $5,366,721 $5,753,721
Interest and dividends on investments 1,258,641 1,277,669
Other interest 229,923 63,346
-------------------------
Total interest and dividend income 6,855,285 7,094,736
-------------------------
INTEREST EXPENSE:
Interest on deposits 2,808,967 2,984,307
Interest on other borrowed funds 274,666 195,514
-------------------------
Total interest expense 3,083,633 3,179,821
-------------------------
Net interest and dividend income 3,771,652 3,914,915
PROVISION FOR LOAN LOSSES 187,500 0
-------------------------
Net interest an dividend income
after provision for loan losses 3,584,152 3,914,915
-------------------------
OTHER INCOME:
Service charges on deposit accounts 195,901 198,751
Security gains (net) 7,700 5,394
Other income 315,493 187,322
-------------------------
Total other income 519,094 391,467
-------------------------
OTHER EXPENSE:
Salaries and employee benefits 1,863,150 1,517,652
Occupancy expense 202,861 205,106
Equipment expense 138,120 142,237
Other expense 684,824 711,190
-------------------------
Total other expense 2,888,955 2,576,185
-------------------------
Income before income taxes 1,214,291 1,730,197
Income taxes 382,309 543,131
-------------------------
NET INCOME $ 831,982 $1,187,066
=========================
Basic earnings per share $ 0.22 $ 0.32
=========================
Diluted earnings per share $ 0.22 $ 0.32
=========================
Basic average shares outstanding 3,839,318 3,752,795
=========================
Diluted average shares outstanding 3,863,037 3,755,836
=========================
Dividends per share $ 0.09 $ 0.08
=========================
Comprehensive Income(1) $1,044,663 $1,506,188
=========================
--------------------
Calculated using the change in accumulated other comprehensive income
(loss) for the period and net income for the period.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------
(Unaudited)
2001 2000
---- ----
Reconciliation of net income to net cash
provided by operating activities:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,415,925 $ 2,706,909
Adjustments to reconcile net income to net
cash provided by operating activities:
Accretion, net of amortization of fair
market value adjustments (8,550) (8,550)
Amortization of goodwill 170,100 170,100
Depreciation and amortization 524,041 522,279
Security gains, net (7,700) (637)
Provision for loan losses 562,500 1,050,000
Decrease in taxes payable (450,953) (154,108)
(Increase) decrease in interest receivable 94,506 (550,302)
Increase (decrease) in interest payable (31,304) 13,584
Increase (decrease) in accrued expenses 112,273 (322,356)
Increase in prepaid expenses (97,894) (52,799)
Accretion, net of amortization of securities 2,776 (30,723)
Amortization of securities available for sale,
net of accretion 97,059 27,689
Loss (gain) on sale of other real estate owned 0 (49,758)
Gain on sale of fixed assets (105,000) 0
Change in unearned income (130,192) (78,032)
Increase in other assets (288,336) (272,314)
Increase in other liabilities 14,739 52,353
-----------------------------
Net cash provided by operating activities 2,873,990 3,023,335
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (47,234,138) (8,945,231)
Investment in life insurance policy (515,500) (4,918,838)
Maturities of securities available for sale 39,210,554 3,230,040
Proceeds from sales of securities available for sale 519,997 2,133,080
Proceeds from sales of other real estate owned 0 143,853
Proceeds from sales of fixed assets 200,000 0
Proceeds from maturities of investment securities 4,968,192 5,535,235
Purchases of investment securities (2,638,133) (5,317,668)
Net decrease (increase) in loans 4,105,873 (12,813,371)
Capital expenditures (306,036) (320,366)
Recoveries of previously charged-off loans 45,452 156,180
-----------------------------
Net cash used in investing activities (1,643,739) (21,117,086)
-----------------------------
5
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------
(Unaudited)
(Continued)
2001 2000
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 529,003 597,819
Net increase in demand deposits, NOW, money market
and savings accounts 3,210,785 9,166,219
Net increase (decrease) in time deposits 1,401,256 (3,080,502)
Net increase (decrease) in other borrowed funds 12,009 (40,918)
Dividends paid (951,006) (899,375)
Advances from Federal Home Loan Bank, net 4,314,579 4,903,146
---------------------------
Net cash provided by financing activities 8,516,626 10,646,389
---------------------------
Net increase (decrease) in cash and cash equivalents 9,746,877 (7,447,362)
Cash and cash equivalents at beginning of period 28,060,709 21,108,966
---------------------------
Cash and cash equivalents at end of period $37,807,586 $13,661,604
===========================
SUPPLEMENTAL DISCLOSURES:
Loans originating from sales of Other Real Estate Owned $ 0 $ 259,000
Interest paid $ 9,691,326 $ 9,279,963
Income taxes paid $ 1,510,256 $ 1,375,606
6
SLADE'S FERRY BANCORP AND SUBSIDIARY, NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2001
Note A - Basis of Presentation
------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and the
instructions to Form 10-Q and, accordingly, do not include all of the
information and footnotes required by generally accepted accounting
principles in the United States of America for complete financial
statements. In the opinion of the management of Slade's Ferry Bancorp
("the Company"), all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 2001 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2001.
The year-end condensed balance sheet was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America.
Note B - Accounting Policies
----------------------------
The accounting principles followed by Slade's Ferry Bancorp and subsidiary
and the methods of applying these principles which materially affect the
determination of financial position, results of operations, or changes in
financial position are consistent with those used at year end 2000.
The consolidated financial statements of Slade's Ferry Bancorp include its
wholly-owned subsidiary, Slade's Ferry Trust Company, and its subsidiaries,
Slade's Ferry Realty Trust, Slade's Ferry Securities Corporation, Slade's
Ferry Preferred Capital Corporation, and Slade's Ferry Loan Company. All
significant intercompany balances have been eliminated.
Note C - Impact of New Accounting Standard
------------------------------------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". Statement No. 133, as amended by SFAS
No. 138, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. The Statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company
adopted this statement as of January 1, 2001. In management's opinion, the
adoption of SFAS No. 133 did not have a material effect on the Company's
consolidated financial statements.
FASB has issued SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This Statement
replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Asset and Extinguishments of Liabilities," and rescinds SFAS Statement No.
127, "Deferral of the Effective Date of Certain Provisions of FASB
Statement No. 125". SFAS No. 140 provides accounting and reporting
standards for transfers and servicing of financial assets and
extinguishments of liabilities. This statement provides consistent
standards for distinguishing transfers of financial assets that are sale
from transfers that are secured borrowings. This statement is effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001; however, the disclosure
provisions are effective for fiscal years ending after December 15, 2000.
7
The adoption of this statement did not have a material impact on the
Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 141 improves the
consistency of the accounting and reporting for business combinations by
requiring that all business combinations be accounted for under a single
method - the purchase method. Use of the pooling-of-interests method is no
longer permitted. Statement No. 141 requires that the purchase method be
used for business combinations initiated after June 30, 2001. The adoption
of this Statement did not have a material impact on the consolidated
financial statements.
Statement of Financial Accounting Standards No. 142 requires that goodwill
no longer be amortized to earnings, but instead be reviewed for impairment.
The amortization of goodwill ceases upon adoption of the Statement, which
for the Company, will be January 1, 2002. Beginning on that date, the
Company's amortization of goodwill, which has been at the annual rate of
$226,800, will be discontinued. Instead, the company will be required to
evaluate goodwill for impairment under SFAS No. 142. Any such impairment
will be reflected in the Company's financial statements for 2001.
ITEM 2
Management's Discussion and Analysis
------------------------------------
Financial Condition
-------------------
Assets as of September 30, 2001 increased by $11.5 Million to $400.1
Million from $388.6 Million reported as of year end 2000. During the nine
months ending September 30, 2001, Net Loans decreased by $4.6 Million due
to refinancing, prepayments and a general slow down in loan demand due to
the uncertainty of the economic environment. Total Investments increased
by $6.2 Million and Federal Funds Sold increased substantially by $11.5
Million. The funding sources for the increase in Federal Funds Sold and
investments was provided by growth in deposits of $4.6 Million, borrowings
from the Federal Home Loan Bank of $4.3 Million and amortization and
prepayments derived from the loan and investment portfolios.
The investment portfolio represents the second largest component of the
Company's assets and consists of securities in the Available for Sale
category and securities in the Held to Maturity category. The designation
of which category the security is to be classified as is determined at the
time of the purchase of the investment instrument.
The Held to Maturity category consists predominately of securities of the
U.S. Treasury, U.S. Government corporations and agencies, and securities
issued by states of the United States and political subdivisions of states.
The Company has the positive intent and ability to hold these securities to
maturity. In managing the Held to Maturity portfolio, the Company seeks to
maximize its return and maintain consistency to meet short and long term
liquidity forecasts by purchasing securities with maturities laddered
within a short-term period of 1-3 years, a mid-term period of 3-5 years,
and some securities extending out to 10 years. The Company does not
purchase investments with off-balance sheet characteristics, such as swaps,
options, futures, and other hedging activities that are called derivatives.
The main objective of the investment policy is to provide adequate
liquidity to meet reasonable declines in deposits and any anticipated
increases in the loan portfolio, to provide safety of principal and
interest, to generate earnings adequate to provide a stable income and to
fit within the overall asset/liability management objectives of the
Company.
8
Investment Securities are securities that the Company will hold to maturity
and are carried at amortized cost on the balance sheet, and are summarized
as follows as of September 30, 2001:
Gross Gross
Net Carrying Unrecognized Unrecognized
(Dollars in Thousands) Amount Holding Gains Holding Losses Fair Value
Debt securities issued by the U. S.
Treasury and other U. S. Government
corporations and Agencies $ 4,249 $ 59 $ 0 $ 4,308
Debt securities issued by states of
the United States and political
subdivisions of the states 12,513 373 0 12,886
Mortgage-backed securities 6 0 0 6
Other debt securities 1 0 0 1
------------------------------------------------------------
$16,769 $432 $ 0 $17,201
============================================================
Securities in the Available for Sale category are securities that the
Company intends to hold for an indefinite period of time, but not
necessarily to maturity. These securities may be sold in response to
interest rate changes, liquidity needs or other factors. Any unrealized
gains or losses, net of taxes, are reflected in Stockholders' Equity as a
separate component.
Investments in Available for Sale securities are carried at fair value on
the balance sheet and are summarized as follows as of September 30, 2001:
Gains in Losses in
Accumulated Accumulated
Other Other
Amortized Comprehensive Comprehensive
(Dollars in Thousands) Cost Basis Income Income Fair Value
---------------------- ---------- ------------- ------------- ----------
Debt securities issued by the U. S.
Treasury and other U. S.
Government corporations and Agencies $33,505 $ 717 $ 10 $34,212
Corporate Bonds 2,746 87 0 2,833
Marketable Equities 4,619 178 1,371 3,426
Mortgage-backed securities 35,508 544 7 36,045
----------------------------------------------------------
$76,378 $1,526 $1,388 $76,516
==========================================================
Increase to Stockholders' Equity as of September 30, 2001:
(In Whole Dollars)
Unrealized Net Gain on Available for Sale Securities $138,865
Less tax effect 113,074
--------
Net Unrealized Gain on Available for Sale Securities $ 25,791
========
The Available For Sale category at September 30, 2001 had net unrealized
gains, net of taxes of $25,791, of which $800,206 are net unrealized gains
(net of tax) attributed to securities of U.S. Treasury, other U.S.
Government corporations and agencies, corporate bonds, and mortgage-backed
securities, and $774,415 are net unrealized losses (net of tax)
attributable to market equity securities.
9
Securities of the U.S. Treasury, U.S. Government corporations and agencies,
and mortgage-backed securities have little or no credit risk, other than
being sensitive to changes in interest rates; and if held to maturity,
these securities will mature at par. The Company amortizes premiums and
accretes discounts over the life of the security.
Marketable equity securities, however, have a greater risk as they are
subject to rapid market fluctuations. These securities are constantly
monitored and evaluated to determine their suitability for sale or
retention in the portfolio. Management minimizes its risk by limiting the
total amount invested into marketable equity securities to 6% of the total
investment portfolio. At September 30, 2001, the amount invested in
marketable equity securities was 5.0% of the total investment portfolio
distributed over various business sectors.
INFORMATION WITH RESPECT TO NONACCRUAL AND PAST DUE LOANS
AT SEPTEMBER 30, 2001 AND 2000 AND DECEMBER 31, 2000 AND 1999
At September 30, At December 31,
---------------------------------------------------------------------------------------------
(Dollars in Thousands) 2001 2000 2000 1999
---------------------------------------------------------------------------------------------
Nonaccrual Loans $1,086 $2,653 $2,415 $1,777
Loans 90 days or more past due and still
accruing 14 3,392 335 248
Real estate acquired by foreclosure
or substantively repossessed 0 0 0 353
Percentage of nonaccrual loans to total loans 0.43% 1.04% 0.94% 0.73%
Percentage of nonaccrual loans and real estate
acquired by foreclosure or substantively
repossessed to total assets 0.27% 0.71% 0.64% 0.74%
Percentage of allowance for loan
losses to nonaccrual loans 489.69% 176.50% 197.76% 211.92%
The $1.1 Million in nonaccrual loans consists of $0.9 Million of real
estate mortgages and $0.2 Million attributed to commercial loans. Of the
total nonaccrual loans outstanding, there are no loans restructured as of
September 30, 2001.
The Company's nonperforming assets which consist of nonaccrual loans, loans
90 days or more past due and still accruing, and real estate acquired by
foreclosure or substantively repossessed decreased by $1.7 Million to $1.1
Million at September 30, 2001 from $2.8 Million reported on December 31,
2000. Nonaccrual loans, which is the largest component of nonperforming
assets, decreased by $1.3 Million compared to year end 2000. The decrease
was a combination of loans totaling $1.6 Million that became nonaccrual
during the last nine months offset by $2.9 Million of payments on
previously classified nonaccrual loans. Loans past due 90 days or more but
still accruing decreased by $321,000 during this nine month period.
The percentage of nonaccrual loans to total loans increased from 0.94%
reported at year end 2000 to 0.43% at September 30, 2001.
10
INFORMATION WITH RESPECT TO NONACCRUAL LOANS
AT SEPTEMBER 30, 2001 AND 2000 AND DECEMBER 31, 2000 AND 1999
At September 30, At December 31,
-----------------------------------------------------------------------------------------
(Dollars in Thousands) 2001 2000 2000 1999
-----------------------------------------------------------------------------------------
Nonaccrual Loans $1,086 $2,653 $2,415 $1,777
Interest income that would have been recorded
under original terms 222 173 228 146
Interest income recorded during the period 26 12 22 37
The Company stops accruing interest on a loan once it becomes past due 90
days or more unless there is adequate collateral and the financial
condition of the borrower is sufficient. When a loan is placed on a
nonaccrual status, all previously accrued but unpaid interest is reversed
and charged against current income. Interest is thereafter recognized only
when payments are received and the loan becomes current.
Loans in the nonaccrual category will remain until the possibility of
collection no longer exists; the loan is paid off or becomes current. When
a loan is determined to be uncollectible, it is then charged off against
the Allowance for Loan Losses.
Statement of Financial Accounting Standards No. 114 "Accounting by
Creditors for Impairment of a Loan" applies to all loans except large
groups of smaller-balance homogeneous loans that are collectively evaluated
for impairment, loans measured at fair value or at a lower of cost or fair
value, leases, and debt securities as defined in Statement 115. Statement
114 requires that impaired loans be valued at the present value of expected
future cash flows discounted at the loan's effective interest rate or as a
practical expedient, at the loan's observable market value of the
collateral if the loan is collateral dependent. Smaller-balance
homogeneous loans are considered by the Company to include consumer
installment loans and credit card loans.
Included in the $1,085,974 in nonaccrual loans are $1,063,488 which the
Company has determined to be impaired, for which there is a related
allowance for credit losses of $125,187. Management is not aware of any
other loans that pose a potential credit risk or where the loans are
current but the borrowers are experiencing financial difficulty.
There were no other loans classified for regulatory purposes at September
30, 2001 that management reasonably expects will materially impact future
operating results, liquidity or capital resources.
11
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Nine Months Years Ended
Ended September 30, December 31,
------------------------------------------------------------------------------------
(Dollars in Thousands) 2001 2000 2000 1999
------------------------------------------------------------------------------------
Balance at January 1 $4,776 $3,766 $3,766 $3,569
------------------------------------------------------------------------------------
Charge-offs:
Commercial (44) (134) (194) (221)
Real estate - construction 0 (0) 0 (0)
Real estate - mortgage 0 (23) (23) (23)
Installment/consumer (22) (134) (138) (158)
------------------------------------------------------------------------------------
(66) (291) (355) (402)
------------------------------------------------------------------------------------
Recoveries:
Commercial 10 47 50 11
Real estate - construction 0 0 0 0
Real estate - mortgage 26 87 92 24
Installment/consumer 9 23 23 14
------------------------------------------------------------------------------------
45 157 165 49
------------------------------------------------------------------------------------
Net (Charge-offs) Recoveries (21) (134) (190) (353)
------------------------------------------------------------------------------------
Additions charged to operations 563 1,050 1,200 550
------------------------------------------------------------------------------------
Balance at end of period $5,318 $4,682 $4,776 $3,766
====================================================================================
Ratio of net (charge-offs) Recoveries
to average loans outstanding (0.008%) (0.054%) (0.08%) (0.15%)
The Allowance for Loan Losses at September 30, 2001 was $5,318,200,
compared to $4,776,360 at year end 2000. The Allowance for Loan Loses as a
percentage of outstanding loans was 2.13% at September 30, 2001 and 1.90%
at December 31, 2000.
The Bank provided $1,200,000 in December 31, 2000, $550,000 in December
31,1999, and $562,500 as of September 30, 2001 to the Allowance for Loan
Losses. Loans charged off were $355,000 in December 31, 2000, $402,000 in
December 31, 1999, and $66,000 as of September 30, 2001. Recoveries on
loans previously charged off were $165,000 in December 31, 2000, $49,000 in
December 31, 1999, and $45,000 as of September 30, 2001. Management
believes that the Allowance for Loan Losses of $5,318,200 is adequate to
absorb any losses that are estimated to occur, due to the Bank's strong
collateral position and the current asset quality.
The level of the Allowance for Loan Losses is evaluated by management and
encompasses several factors, which include but are not limited to, recent
trends in the nonperforming loans, the adequacy of the assets which
collateralize the nonperforming loans, current economic conditions in the
market area, and various other external and internal factors.
12
This table shows an allocation of the Allowance for Loan Losses as of the
end of each of the periods indicated.
September 30, 2001 December 31, 2000 December 31, 1999
--------------------------------------------------------------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
(Dollars in Thousands)
--------------------------------------------------------------------------------------
Domestic(5)
Commercial $1,757(1) 18.66% $1,466(1) 19.66% $1,356(1) 19.52%
Real estate - Construction 44 3.43 47 3.36 34 2.07
Real estate - mortgage 3,186(2) 73.28 2,970(2) 71.91 1,924(2) 74.48
Consumer(3) 331(4) 4.63 293(4) 5.07 452(4) 3.93
--------------------------------------------------------------------------------------
$5,318 100.00% $4,776 100.00% $3,766 100.00%
======================================================================================
--------------------
Includes amounts specifically reserved for impaired loans of $730,773
as of September 30, 2001, $286,248 as of December 31, 2000 and
$234,205 as of December 31, 1999 as required by Financial Accounting
Standard No. 114, Accounting for Impairment of Loans.
Includes amounts specifically reserved for impaired loans of $448,819
as of September 30, 2001, $132,911 as of December 31, 2000 and
$147,884 as of December 31, 1999 as required by Financial Accounting
Standard No. 114, Accounting for Impairment of Loans.
Includes consumer, obligations of states and political subdivisions
and other.
Includes amounts specifically reserved for impaired loans of $1,358
as of September 30, 2001, $10,398 as of December 31, 2000, and
$39,241 as of December 31, 1999, as required by Financial Accounting
Standard No. 114, Accounting for Impairment of Loans.
Includes commercial, financial, agricultural and nonprofit loans.
The loan portfolio's largest segment of loans is commercial real estate
loans, which represent 57% of gross loans. Residential real estate
represents 16% of gross loans. The Company requires a loan to value ratio
of 80% in both commercial and residential mortgages. These mortgages are
secured by real properties which have a readily ascertainable appraised
value.
Generally, commercial real estate loans have a higher degree of credit risk
than residential real estate loans because they depend primarily on the
success of the business. When granting these loans, the Company evaluates
the financial statements of the borrower(s), the location of the real
estate, the quality of management, and general economic and competitive
conditions. When granting a residential mortgage, the Company reviews the
borrower(s)' repayment history on past debts, and assesses the borrower(s)'
ability to meet existing obligations and payments on the proposed loans.
Commercial loans consist of loans predominantly collateralized by
inventory, furniture and fixtures, and accounts receivable. In assessing
the collateral for this type of loan, management applies a 40% liquidation
value to inventories, 25% to furniture, fixtures and equipment; and 60% to
accounts receivable. Commercial loans represent 18.70% of the loan
portfolio.
13
Consumer loans are generally unsecured credits and represent 4.6% of the
total loan portfolio. These loans have a higher degree of risk then
residential mortgage loans. The underlying collateral of a secured
consumer loan tends to depreciate in value. Consumer loans are typically
made based on the borrower's ability to repay the loan through continued
financial stability. The Company endeavors to minimize risk by reviewing
the borrower's repayment history on past debts, and assessing the
borrower's ability to meet existing obligations on the proposed loans.
The allocation of the Allowance for Loan Losses is based on management's
judgement of potential losses in the respective portfolios. While
management has allocated reserves to various portfolio segments, the
Allowance is general in nature and is available for the portfolio in its
entirety.
Results of Operations
---------------------
The Company's largest source of earnings is net interest and dividend
income, which is the difference between interest income earned on loans and
investments and interest expense paid on deposits and borrowed funds. Net
interest and dividend income for the nine months ending September 30, 2001
decreased by $87,124 to $11,346,852 when compared to $11,433,976 recorded
during the same period in 2000. Total interest and dividend income
increased by $279,351 offset by an increase in total interest expense of
$366,475. The national economic slowdown, further impacted by the tragedy
in New York on September 11, 2001, continues to prompt aggressive action by
the Federal Reserve Bank to reduce short-term interest rates in an attempt
to avoid a recession and stimulate growth in our economy. This easing
action has impacted our net interest margin as a result of loan and
investment repricing at lower interest rates due to refinancing and
prepayments.
The Provision for Loan Losses for the nine months ending September 30, 2001
decreased by $487,500 from $1,050,000 reported as of September 30, 2000 to
$562,500. As previously disclosed in our June 30, 2000 quarterly report,
management felt it prudent to change the methodology used in calculating
the adequate level of reserves to absorb any unanticipated losses inherent
in the Bank's loan portfolio. This action resulted in recording an
additional $750,000 provision for loan losses as of June 30, 2000.
Total Other Income increased by $136,783 for the first nine months of 2001
when compared to the same period in 2000. Service charges on deposit
accounts increased by $1,721. The Bank realized gains on sales of
securities of $7,700 during the first nine months of 2001 compared to $637
for the same period in 2000. In addition, the Bank sold a vacant parcel of
land at our Fairhaven branch location recognizing a gain of $105,000.
The line item Other Income increased by $127,999 when compared to the first
nine months of 2000. There was an increase of $88,733 in the cash
surrender value of life insurance policies associated with both the
Directors' and Executive life insurance programs. In addition, as noted
above, the Bank recognized a $105,000 gain on sale of a vacant parcel of
land. In 2000, the Bank recorded $59,000 in miscellaneous income as a
reverse of prior years expense accrual that did not materialize. There
were no such reversals during the first nine months of 2001.
The category Total Other Expense increased by $990,338 to $8,644,261 during
the first nine months ending September 30, 2001 compared to $7,653,923
reported for the same period in 2000. Salaries and employee benefits
increased by $861,317 due to general wage adjustments occurring at year end
2000 and staff additions in the lending, marketing, training, and new
customer investment areas of the Bank. Our medical insurance carrier also
increased premiums by approximately 20%. Occupancy and equipment expenses
combined increased by $37,277. The Bank had no gains on sales of real
estate acquired through foreclosure in 2001, compared to gains of $49,758
realized during the same period in the previous year.
14
The following table sets forth the components of the line item Other
Expense. This table reflects a decrease of $26,366, to $684,824 from
$711,190 for the three month period ending September 30, 2001 and an
increase of $41,986 to $2,138,954 from $2,096,968 for the nine month period
ending September 30, 2001 when compared to September 30, 2000.
Three Months Nine Months
----------------------------------------------------------------------------------------------------
(Dollars in Thousands) 2001 2000 Variance 2001 2000 Variance
----------------------------------------------------------------------------------------------------
Amortization of Goodwill $ 57 $ 57 $ 0 $ 170 $ 170 $ 0
Advertising & Public Relations 96 130 (34) 317 358 (41)
Stationery & Supplies 78 62 16 204 221 (17)
Communications 83 74 9 250 233 17
Professional Fees & Other Services 176 188 (12) 614 561 53
Other Real Estate Owned 0 0 0 0 38 (38)
Committee Fees 60 55 5 148 145 3
Other Miscellaneous Expenses 135 145 (10) 436 371 65
--------------------------------------------------------------------------------------------------
Other Expense $685 $711 $(26) $2,139 $2,097 $ 42
==================================================================================================
Advertising and Public Relations expense decreased by $41,513 for nine
months ending September 30, 2001 when compared to 2000. Stationery and
Supplies also decreased by $16,545. Communication expense increased by
$16,121 due to an increase in postage rate. Professional Fees and Other
Services increased by $52,805 during the nine month period ending September
30, 2001 when compared to the same period in 2000. This increase is due to
increases in the state assessment of $46,303, computer services of $22,901,
and outside fees of $21,857 which include general appraisals of properties
securing loans, offset by a decrease in Other Real Estate Owned expense of
$40,473. As of June 30, 2000, all OREO properties had been sold. Other
Miscellaneous Expenses increased by $65,000 primarily attributed to an
increase in the FDIC assessment.
Income before income taxes, totaled $3,475,228 at September 30, 2001, a
decrease of $453,179 when compared to $3,928,407 reported on September 30,
2000. Applicable taxes decreased by $162,195 to $1,059,303 when compared
to $1,221,498 reported in the prior year.
Net income of $2,415,925 reflects a decrease of 10.7% when compared to
earnings of $2,706,909 reported at September 30, 2000. Diluted earnings
per share were $0.63 for nine months ending September 30, 2001 compared to
$0.72 for the same period in 2000.
The results of operation for the third quarter in 2001 indicates that the
net interest and dividend income decreased by $143,263 to $3,771,652 from
$3,914,915 earned during the same period in the previous year. Total Other
Income increased by $127,627. The line item Other Income increased by
$128,171 due to the recognition of gain of $105,000 on sale of land in
Fairhaven, and income related to the debit card program introduced by the
Bank in late 2000.
The line item Other Expense decreased by $26,366. Salaries and benefits
increased by $345,498 related to staff additions, salary adjustments, and
general wage increases due to performance evaluations. Occupancy and
equipment expense combined decreased by $6,362.
15
Variances in Advertising and Public Relations of $34,709 were attributed to
direct residential flyer mailing advertising in the Greater New Bedford
market area during the third quarter of 2000. No mailing was done in 2001.
There was an increase of $16,524 in stationery and supplies expense.
Communications also increased slightly by $9,000. Professional fees
decreased by $12,080. Other Miscellaneous Expense decreased by $10,000.
Income before taxes for the third quarter in 2001 decreased by $515,906 to
$1,214,291 from $1,730,197 reported for the same period in the prior year.
Applicable taxes also decreased by $160,822 to $382,309 when compared to
$543,131 reported in the third quarter in 2000.
The net income for the three month period ending September 30, 2001 was
$831,982, or a decrease of 29.9%, when compared to $1,187,066 earned in the
third quarter in 2000. Diluted earnings per share were $0.22 compared to
$0.32 per share for the same period in 2000.
Liquidity
---------
The Company's principal sources of funds are customer deposits, loan
amortization, loan payoffs, and the maturities of investment securities.
Through these sources, funds are provided for customer withdrawals from
their deposit accounts, loan originations, draw-downs on loan commitments,
acquisition of investment securities and other normal business activities.
Investors' capital also provides a source of funding.
The largest source of funds is provided by depositors. The largest
component of the Company's deposit base is reflected in the Time Deposit
category. The Company does not participate in brokered deposits. Deposits
are obtained from consumers and commercial customers within the Bank's
community reinvestment area, consisting of Bristol County, Massachusetts
and several abutting towns in Rhode Island.
The Company also has the ability to borrow funds from correspondent banks,
the Federal Home Loan Bank, as well as the Federal Reserve Bank of Boston
by pledging various investment securities as collateral. During the third
quarter in 2000 and 2001, the Bank was not required to borrow short-term
funds to meet current liquidity needs. Tax payments made by our customers,
which are owed to the Federal Reserve Bank Treasury Tax and Loan account,
are classified as short-term borrowings. As of September 30, 2001, there
is also $17,040,487 in advances from the Federal Home Loan Bank
representing $12,040,487 to match fund long term, fixed rate loans
available to qualified borrowers; therefore reducing interest rate risk
exposure, and $5,000,000 in leverage borrowings.
Excess available funds are invested on a daily basis as Federal Funds Sold
and can be withdrawn daily. The Bank attempts through its cash management
strategies to maintain a level of Federal Funds Sold to further enhance its
liquidity.
Liquidity represents the ability of the Bank to meet its funding
requirements. In assessing the appropriate level of liquidity, the Bank
considers deposit levels, lending requirements, and investment maturities
in light of prevailing economic conditions. Through this assessment, the
Bank manages its liquidity level to optimize earnings and respond to
fluctuations in customer borrowing needs.
At September 30, 2001, the Bank's liquidity ratio stood at 35.5% as
compared to 32.0% at December 31, 2000. The liquidity ratio is determined
by dividing the Bank's short-term assets (cash and due from banks, interest
bearing deposits due from other banks, securities, and federal funds sold)
by the Bank's total deposits. Management believes the Bank's liquidity to
be adequate to meet the current and presently foreseeable needs of the
Bank.
16
The comparison of cash flows for nine months ending September 30, 2001 and
2000 shows a decrease in net cash provided by operating activities of $0.2
Million. There was a decrease in net interest and dividend income of $0.1
Million, offset by increases in cash paid to suppliers of $0.5 Million and
taxes paid of $0.2 Million.
Cash flows from investing activities show a net decrease in cash used in
investing activities of $19.5 Million when compared to 2000. Purchases of
securities increased by $35.6 Million, offset by a net increase in
maturities and sales of $33.8 Million for a net increase of $1.8 Million in
cash used in investing activities. A decrease in cash used in loan
activity of $16.9 Million, a decrease in life insurance policies purchased
of $4.4 Million, and an increase in proceeds from a sale of a fixed assets
of $0.2 Million were partially offset by a decrease in sales of other real
estate owned of $0.1 Million, and a decrease in capital expenditures of
$0.1 Million.
Cash flows provided by financing activities decreased by $2.1 Million when
compared to the first nine months of 2000. There was a net decrease in
cash provided by demand deposits, NOW, money market, and savings accounts
of $6.0 Million, a decrease in Federal Home Loan borrowings of $0.6
Million, offset by an increase in time deposits of $4.5 Million.
Capital
-------
As of September 30, 2001, the Company had total capital of $38,246,626.
This represents an increase of $2,572,253 from $35,674,373 reported on
December 31, 2000. The increase in capital was a combination of several
factors. Additions consisted of nine months earnings of $2,415,925,
transactions originating through the Dividend Reinvestment Program whereby
6,355.132 shares were issued for cash contributions of $61,986 and
47,139.290 shares were issued for $467,017 in lieu of cash dividend
payments. These additions were offset by dividends declared of $995,010.
Also affecting capital is the line item accumulated other comprehensive
income (loss) which reflects net unrealized gains or losses, net of taxes,
on securities classified as Available-for-Sale, and the minimum pension
liability adjustment. On December 31, 2000 the Available-for-Sale
portfolio had unrealized losses, net of taxes, of $596,543, and on
September 30, 2001, as a result of current market values, the portfolio
reflects unrealized gains, net of taxes, of $25,791 resulting in a positive
change to capital of $622,334. There was no change in the minimum pension
liability adjustment of $24,143, net of taxes, recorded December 31, 2000.
Under the requirements for Risk Based and Leverage Capital of the federal
banking agencies, a minimum level of capital will vary among banks based on
safety and soundness of operations. Risk Based Capital ratios are
calculated with reference to risk-weighted assets, which include both on
and off balance sheet exposure.
At September 30, 2001 the actual Risk Based Capital of the Bank was
$31,043,000 for Tier 1 Capital, exceeding the minimum requirements of
$10,705,400 by $20,337,600. Total Capital of $34,413,000 exceeded the
minimum requirements of $21,410,800 by $13,002,200, and Leverage Capital of
$31,043,000 exceeded the minimum requirements of $15,798,640 by
$15,244,360. In addition to the "minimum" capital requirements, "well
capitalized" standards have also been established by the Federal Banking
Regulators.
17
As shown by the table below which illustrates the capital ratios of the
Company and the Bank on September 30, 2001 and at December 31, 2000, the
Company and the Bank met the "well-capitalized" standards as of the dates
indicated.
Well September 30, 2001 December 31, 2000
Capitalized -----------------------------------------
Requirement Bancorp Bank Bancorp Bank
------------------------------------------------------------------------------------------------------
Total Capital (to Risk Weighted Assets) 10% 14.64% 12.86% 13.24% 11.76%
Tier I Capital (to Risk Weighted Assets) 6% 13.39% 11.60% 11.98% 10.50%
Leverage Capital (to Average Assets) 5% 9.03% 7.86% 8.74% 7.69%
Under the informal agreement entered into with the Massachusetts
Commissioner of Banks and the Federal Deposit Insurance Corporation,
effective December 1, 2000, the Bank is required to maintain a seven (7)
percent Tier 1 Leverage Capital ratio and a nine (9) percent Tier 1 Risk
Based Capital ratio. As of September 30, 2001, these ratios were 7.86% and
11.60% respectively.
ITEM 3
Quantitative and Qualitative Disclosure of Market Risk
------------------------------------------------------
Interest Rate Risk
------------------
Volatility in interest rates requires the Company to manage interest rate
risk that arises from the differences in the timing of repricing of assets
and liabilities. The Company considers interest rate risk, the exposure of
earnings to adverse movements in interest rates, to be a significant market
risk as it could potentially have an effect on the Company's financial
condition and results of operation.
The Company's Asset-Liability Management Committee, comprised of the Bank's
Executive Management team, has the responsibility of managing interest rate
risk, and monitoring and adjusting the difference between interest-
sensitive assets and interest-sensitive liabilities ("GAP" position) within
various time periods.
Management's objective is to reduce and control the volatility of its net
interest margin by managing the relationship of interest-earning assets and
interest-bearing liabilities. In order to manage this relationship, the
committee utilizes a GAP report prepared on a monthly basis. The GAP
report indicates the differences or gap between interest-earning assets and
interest-bearing liabilities in various maturity or repricing time periods.
This, in conjunction with certain assumptions, and other related factors,
such as anticipated changes in interest rates and projected cash flows from
loans, investments and deposits, provides management a means of evaluating
interest rate risk.
In addition to the GAP report, the Company also uses an analysis to measure
the exposure of net interest income to changes in interest rates over a
relatively short (i.e., 12 months) time frame. The analysis projects
future interest income and expenses from the Company's earning assets and
interest-bearing liabilities. Depending on the GAP position, the Company's
policy limit on interest rate risk specifies that if interest rates were to
change immediately up or down 200 basis points, estimated net interest
income for the next twelve months should not decline by more than ten
percent.
18
The following table reflects the Company's estimated exposure as a
percentage of estimated net interest income for the next twelve months,
assuming an immediate change in interest rates:
Estimated Exposure as a
Rate Change Percentage of Net Interest Income
(Basis Points) September 30, 2001
----------------------------------------------------------
+200 1.94%
-200 (7.08%)
The model used to monitor earnings-at-risk provides management a
measurement tool to assess the effect of changes in interest rates on the
Company's current and future earnings. The 10% limit established by the
Company provides an internal tolerance level to control interest rate risk
exposure.
19
PART II
OTHER INFORMATION
ITEM 6
Exhibits and Reports on Form 8-K
(a) Exhibits: See exhibit index
(b) Reports on Form 8-K: None
20
EXHIBIT INDEX
Exhibit No. Description Page
----------- ----------- ----
3.1 Articles of Incorporation of Slade's Ferry Bancorp as amended (1)
3.2 By-laws of Slade's Ferry Bancorp as amended (2)
10.1 Slade's Ferry (formerly Weetamoe) Bancorp 1996 Stock Option Plan (3)
(as amended)
10.2 Noncompetition Agreement between Slade's Ferry Trust Company and (4)
Edward S. Machado (A substantially identical contract exists with
Peter Paskowski)
10.3 Supplemental Executive Retirement Agreement between Slade's Ferry (5)
(formerly Weetamoe) Bancorp and Donald T. Corrigan
10.4 Supplemental Executive Retirement Agreement between Slade's Ferry (2)
(formerly Weetamoe) Bancorp and James D. Carey
10.5 Supplemental Executive Retirement Agreement between Slade's Ferry (2)
(formerly Weetamoe) Bancorp and Manuel J. Tavares
10.6 Swansea Mall Lease (4)
10.7 Form of Director Supplemental Retirement Program Director Agreement, (6)
Exhibit I thereto (Slade's Ferry Trust Company Director Supplemental
Retirement Program Plan) and Endorsement Method Split Dollar Plan
Agreement thereunder for Thomas B. Almy. (Similar forms of agreement
entered into between Slade's Ferry Trust Company and the other
directors)
10.8 Form of Directors' Paid-up Insurance Policy for Thomas B. Almy (part (7)
of the Director Supplemental Retirement Program). (Similar forms of
policy entered into by Company for other directors).
10.9 Form of Officers' Paid-up Endorsement Method Split Dollar Plan Agreement (8)
and Insurance Policies for Janice Partridge (Similar forms of policies
entered into by Company for its President and other Vice Presidents)
--------------------
Incorporated by reference to the Registrant's Registration Statement
on Form SB-2 filed with the Commission on April 14, 1997.
Incorporated by reference to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1996
Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended June 30, 1999.
Incorporated by reference to the Registrant's Registration Statement
on Form S-4 File No. 33-32131.
Incorporated by reference to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1994.
Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended March 31, 1999.
Incorporated by reference to the Registrant's Form 10-QSB for the
quarter ended June 30, 1998.
Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended June 30, 2000.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SLADE'S FERRY BANCORP
----------------------------------------
(Registrant)
11/15/2001 /s/ Kenneth R. Rezendes
-------------------- ----------------------------------------
(Date) (Signature) Kenneth R. Rezendes
President/CEO
11/15/2001 /s/ James D. Carey
-------------------- ----------------------------------------
(Date) (Signature) James D. Carey
Executive Vice President/Director
11/15/2001 /s/ Edward Bernardo Jr.
-------------------- ----------------------------------------
(Date) (Signature) Edward Bernardo Jr.
Vice President/Treasurer
Chief Financial Officer/Chief Accounting Officer