UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2007
-----------------
Commission file number 000-23904
-------------
SLADE'S FERRY BANCORP.
--------------------------------------------------------
(Exact name of registrant as specified in its character)
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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common stock ($0.01 par value) 4,001,353 outstanding
shares as of July 31, 2007.
----------------------------------------------------
1
TABLE OF CONTENTS
Part I
ITEM 1 - Financial Statements (Unaudited) 3
* Consolidated Balance Sheets - June 30, 2007 and
December 31, 2006
* Consolidated Statements of Income - Three Months Ended
June 30, 2007 and 2006
* Consolidated Statements of Income - Six Months Ended
June 30, 2007 and 2006
* Consolidated Statement of Changes in Stockholders' Equity -
Six Months Ended June 30, 2007
* Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2007 and 2006
* Notes to Consolidated Financial Statements
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk 31
ITEM 4 - Controls and Procedures 33
Part II
ITEM 1 - Legal Proceedings 34
ITEM 1A- Risk Factors 34
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds 34
ITEM 3 - Defaults Upon Senior Securities 35
ITEM 4 - Submission of Matters to a Vote of Security Holders 35
ITEM 5 - Other Information 35
ITEM 6 - Exhibits 35
2
ITEM 1
FINANCIAL STATEMENTS
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 2007 December 31, 2006
------------- -----------------
Assets (In thousands)
------
Cash and due from banks $ 12,569 $ 19,448
Interest-bearing deposits with other banks 1,648 1,007
Federal funds sold 25,585 1,900
-------- --------
Cash and cash equivalents 39,802 22,355
Interest-bearing certificates of deposit with other banks 100 100
Securities available for sale 102,227 105,603
Securities held to maturity (fair value approximates $21,060
as of June 30, 2007 and $24,219 as of December 31, 2006) 21,781 24,623
Federal Home Loan Bank stock, at cost 7,312 6,856
Loans, net of allowance for loan losses of $4,296 at June 30, 2007
and $4,385 at December 31, 2006 429,773 422,370
Premises and equipment, net 6,710 5,587
Goodwill 2,173 2,173
Accrued interest receivable 2,269 2,311
Bank-owned life insurance 12,537 12,317
Deferred tax asset, net 2,191 2,039
Other assets 1,445 1,426
-------- --------
$628,320 $607,760
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Noninterest-bearing $ 73,715 $ 79,101
Interest-bearing 351,933 344,905
-------- --------
Total deposits 425,648 424,006
Long-term borrowings 137,867 119,058
Subordinated debentures 10,310 10,310
Due to broker 985 -
Accrued expenses and other liabilities 2,747 3,141
-------- --------
Total liabilities 577,557 556,515
Stockholders' equity:
Common stock, par value $0.01 per share; authorized 10,000,000
shares; issued and outstanding 4,028,228 shares at June 30, 2007
and 4,102,242 shares at December 31, 2006 40 41
Additional paid-in capital 30,447 31,444
Retained earnings 22,018 21,111
Accumulated other comprehensive loss (630) (464)
Unearned compensation (1,112) (887)
-------- --------
Total stockholders' equity 50,763 51,245
-------- --------
$628,320 $607,760
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
3
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30,
2007 2006
---- ----
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $ 7,152 $ 6,685
Interest and dividends on securities:
Taxable 1,548 1,217
Tax-exempt 45 65
Interest on federal funds sold 179 53
Other interest 15 10
---------- ----------
Total interest and dividend income 8,939 8,030
---------- ----------
Interest expense:
Interest on deposits 2,702 2,256
Interest on Federal Home Loan Bank advances 1,650 1,209
Interest on subordinated debentures 214 170
---------- ----------
Total interest expense 4,566 3,635
---------- ----------
Net interest and dividend income 4,373 4,395
Provision for loan losses - -
---------- ----------
Net interest income, after provision for loan losses 4,373 4,395
---------- ----------
Noninterest income:
Service charges on deposit accounts 353 352
Gain (loss) on sales and calls of
available-for-sale securities, net 78 (172)
Increase in cash surrender value of life
insurance policies 114 106
Other income 271 260
---------- ----------
Total noninterest income 816 546
---------- ----------
Noninterest expense:
Salaries and employee benefits 2,016 2,287
Occupancy and equipment expense 506 490
Professional fees 317 388
Marketing expense 272 109
Data processing 276 118
Other expense 603 560
---------- ----------
Total noninterest expense 3,990 3,952
---------- ----------
Income before income taxes 1,199 989
Provision for income taxes 407 363
---------- ----------
Net income $ 792 $ 626
========== ==========
Earnings per share:
Basic $ 0.20 $ 0.15
========== ==========
Diluted $ 0.20 $ 0.15
========== ==========
Average common shares outstanding:
Basic 4,047,215 4,156,481
========== ==========
Diluted 4,050,359 4,170,610
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
4
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended June 30,
2007 2006
---- ----
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $ 14,074 $ 13,120
Interest and dividends on securities:
Taxable 3,130 2,550
Tax-exempt 95 134
Interest on federal funds sold 215 64
Other interest 25 18
---------- ----------
Total interest and dividend income 17,539 15,886
---------- ----------
Interest expense:
Interest on deposits 5,391 4,167
Interest on Federal Home Loan Bank advances 3,169 2,365
Interest on subordinated debentures 425 394
---------- ----------
Total interest expense 8,985 6,926
---------- ----------
Net interest and dividend income 8,554 8,960
Provision for loan losses - 39
---------- ----------
Net interest income, after provision for loan losses 8,554 8,921
---------- ----------
Noninterest income:
Service charges on deposit accounts 681 659
Gain (loss) on sales and calls of
available-for-sale securities, net 139 (169)
Increase in cash surrender value of life
insurance policies 220 213
Other income 502 546
---------- ----------
Total noninterest income 1,542 1,249
---------- ----------
Noninterest expense:
Salaries and employee benefits 4,013 4,398
Occupancy and equipment expense 998 983
Professional fees 592 800
Marketing expense 328 187
Data processing 573 199
Other expense 1,042 1,135
---------- ----------
Total noninterest expense 7,546 7,702
---------- ----------
Income before income taxes 2,550 2,468
Provision for income taxes 885 935
---------- ----------
Net income $ 1,665 $ 1,533
========== ==========
Earnings per share:
Basic $ 0.41 $ 0.37
========== ==========
Diluted $ 0.41 $ 0.37
========== ==========
Average common shares outstanding:
Basic 4,063,511 4,151,091
========== ==========
Diluted 4,067,344 4,168,271
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
5
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended June 30, 2007
(Unaudited)
Accumulated
Shares of Additional Other
Common Common Paid-in Retained Comprehensive Unearned
Stock Stock Capital Earnings Loss Compensation Total
-----------------------------------------------------------------------------------------
(In thousands, except per share data)
Balance at December 31, 2006 4,102,242 $41 $31,444 $21,111 $(464) $ (887) $51,245
Comprehensive income:
Net income - - - 1,665 - - 1,665
Other comprehensive loss - - - - (166) - (166)
-------
Comprehensive income 1,499
-------
Issuance of common stock 15,665 - 275 - - - 275
Stock options exercised 18,000 - 254 - - 254
Tax benefit of stock options
exercised - - 19 - - 19
Stock-based compensation - - 91 - - 91
Purchase of treasury stock (94,956) (1) (1,636) - - (1,637)
Purchase of stock for award plan (12,723) - - - - (225) (225)
Dividends declared ($.18 per share) - - - (758) - - (758)
-----------------------------------------------------------------------------------------
Balance at June 30, 2007 4,028,228 $40 $30,447 $22,018 $(630) $(1,112) $50,763
=========================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
6
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------
2007 2006
---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 1,665 $ 1,533
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization, net of accretion of securities 7 65
(Gain) loss on sales and calls of available-for-sale
securities, net (139) 169
Amoritization of net deferred loan fees (16) (10)
Provision for loan losses - 39
Deferred tax benefit (4) (409)
Depreciation and amortization 425 439
Gain on sale of assets (3) -
Increase in cash surrender value of life insurance (220) (213)
Stock-based compensation 91 136
Excess tax benefits from stock-based compensation (19) (82)
Net change in:
Other assets (19) 67
Accrued interest receivable 42 224
Other liabilities (461) (463)
--------- --------
Net cash provided by operating activities 1,349 1,495
--------- --------
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases (6,668) (6,440)
Sales 975 15,196
Maturities, calls and pay-downs 9,902 5,611
Activity in held-to-maturity securities:
Maturities, calls and pay-downs 2,795 2,046
Purchases of Federal Home Loan Bank stock (456) -
Loan originations, net of principal payments (7,298) (17,097)
Recoveries of loans previously charged off, net (22) -
Capital expenditures (1,568) (268)
Proceeds from sale of property and equipment 23 -
--------- --------
Net cash used in investing activities (2,317) (952)
--------- --------
The accompanying notes are an integral part of these consolidated financial statements.
7
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Six Months Ended June 30,
-------------------------
2007 2006
---- ----
(In thousands)
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits $ (5,386) $ 5
Net increase in interest-bearing deposits 7,028 14,217
Short-term advances from Federal Home Loan Bank 280,315 43,000
Long-term advances from Federal Home Loan Bank 25,000 -
Payments on Federal Home Loan Bank short-term advances (280,315) (40,000)
Payments on Federal Home Loan Bank long-term advances (6,191) (7,822)
Proceeds from issuance of common stock 275 302
Stock options exercised 254 305
Excess tax benefits from stock-based compensation 19 82
Purchase of treasury stock (1,601) (230)
Unearned compensation (225) (100)
Dividends paid on common stock (758) (749)
--------- --------
Net cash provided by financing activities 18,415 9,010
--------- --------
Net increase in cash and cash equivalents 17,447 9,471
Cash and cash equivalents at beginning of period 22,355 20,018
--------- --------
Cash and cash equivalents at end of period $ 39,802 $ 29,489
========= ========
Supplemental disclosures:
Interest paid $ 9,263 $ 7,105
Income taxes paid $ 947 $ 475
Non-cash disclosure:
Due to broker $ 985 $ 9,509
The accompanying notes are an integral part of these consolidated financial statements.
8
SLADE'S FERRY BANCORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2007
Note A - Basis of Presentation
------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United
States of America ("GAAP") for interim financial information and the
instructions to Form 10-Q and, accordingly, do not include all of the
information and footnotes required by GAAP 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 six months
ended June 30, 2007 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2007.
The year-end consolidated financial data was derived from audited financial
statements, but does not include all disclosures required by GAAP. This Form
10-Q should be read in conjunction with the Company's Annual Report filed on
Form 10-K for the year ended December 31, 2006.
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 for the year ended December
31, 2006, except for the adoption of Financial Accounting Standards
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN48),
effective January 1, 2007. See Note C.
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiary, Slade's Ferry Trust Company (the "Bank") and the
Bank's wholly-owned subsidiaries. All significant inter-company balances and
transactions have been eliminated in consolidation. The Company accounts for
its other wholly-owned subsidiary, Slade's Ferry Statutory Trust I, using the
equity method.
Note C - Recent Accounting Pronouncements
-----------------------------------------
The Company adopted FIN 48 effective January 1, 2007, which clarifies the
accounting for uncertainty in income taxes recognized in an entity's financial
statements in accordance with FASB Statement No. 109, "Accounting for Income
Taxes". FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosures and transitions. Management has evaluated FIN 48 and
determined that there is no impact on the Company's consolidated financial
statements.
9
Note D - Pension Plan
---------------------
The components of net periodic pension expense cost are as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2007 2006 2007 2006
---- ---- ---- ----
(In thousands)
Interest cost $ 12 $ 16 $ 23 $ 33
Service cost and expenses 6 - 13 -
Expected return on plan assets (19) (29) (39) (58)
Settlements - 133 38 133
Recognized net actuarial loss 4 8 8 15
---- ---- ---- ----
$ 3 $128 $ 43 $123
==== ==== ==== ====
The Company previously disclosed in its consolidated financial statements for
the year ended December 31, 2006 that it expects to make no contributions to
the plan in 2007.
Note E - 2004 Equity Incentive Plan
-----------------------------------
Stock options granted under the Slade's Ferry Bancorp. 2004 Equity Incentive
Plan (the "2004 Plan") may be either incentive stock options or non-qualified
stock options. The exercise price for incentive stock options granted to
employees shall not be less than 100 percent of the fair market value at grant
date. No stock option shall be exercisable more than 10 years after the date
the stock option is granted. The 2004 Plan also provides for the granting of
Unrestricted Stock Awards, Restricted Stock Awards, or Deferred Stock Awards.
At June 30, 2007, no stock awards had been granted.
A summary of options under the 2004 Plan as of June 30, 2007, and changes
during the six months then ended, (shares in thousands) is presented below:
Weighted
Average
Remaining
Contractual Aggregate
Weighted Average Term Intrinsic
Shares Exercise Price (in years) Value
------ ---------------- ----------- ---------
Outstanding at January 1, 2007 231 $18.18
Granted 10 16.59
Exercised (18) 14.15
Forfeited - -
Expired (19) 18.06
--- ------ --- -----
Outstanding at June 30, 2007 204 18.47 4.2 $ -
=== ====== === =====
Exercisable at June 30, 2007 189 $18.37 4.2 $ -
--- ------ --- -----
10
On July 17, 2007, the Compensation Committee of the Company's Board of
Directors (the "Committee") approved the granting of (1) 24,000 Incentive Stock
Options to purchase shares of Company common stock, of which 8,000 vest
immediately, 8,000 vest on May 31, 2008 and 8,000 vest on May 31, 2009, and (2)
32,000 Restricted Stock Awards, of which 6,500 vest on September 1, 2007, 6,500
vest on May 31, 2008, 12,500 vest on May 31, 2009 and 6,500 vest on May 31,
2010. On August 9, 2007, the Committee granted 29,000 Restricted Stock Awards,
of which 7,250 vest each August 31, 2008, 2009, 2010 and 2011.
Note F - Comprehensive Income
-----------------------------
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available-for-sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
The components of other comprehensive loss and related tax effects are as
follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2007 2006 2007 2006
---- ------- ----- -----
(In thousands)
Unrealized gains (losses) on securities available for sale $148 $(1,153) $(393) $(629)
Reclassification adjustment for losses (gains) realized
in income (78) 172 139 169
---- ------- ----- -----
Net unrealized gains (losses) 70 (981) (254) (460)
Tax effect (24) 360 88 174
---- ------- ----- -----
Net-of-tax amount $ 46 $ (621) $(166) $(286)
==== ======= ===== =====
The components of accumulated other comprehensive loss, included in
stockholders' equity, are as follows:
June 30, December 31,
2007 2006
------ ------
(In thousands)
Net unrealized losses on securities available
for sale $(675) $(380)
Tax effect 268 139
----- -----
Net-of-tax amount (407) (241)
----- -----
Unrecognized net actuarial loss pertaining
to defined benefit plan (377) (377)
Tax effect 154 154
----- -----
Net-of-tax amount (223) (223)
----- -----
$(630) $(464)
===== =====
11
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Slade's Ferry Bancorp., a Massachusetts corporation, is a bank holding company
headquartered in Somerset, Massachusetts with consolidated assets of $628.3
million, consolidated net loans and leases of $429.8 million, consolidated
deposits of $425.6 million and consolidated shareholders' equity of $50.8
million as of June 30, 2007. We conduct our business principally through our
wholly-owned subsidiary, Slade's Ferry Trust Company (referred to herein as the
"Bank"), a Massachusetts-chartered trust company. Our common stock is listed in
the NASDAQ Capital Market under the symbol "SFBC."
Forward-looking Statements
--------------------------
This Form 10-Q contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995, including statements
regarding the strength of the company's capital and asset quality. Such
statements may be identified by words such as "believes," "will," "expects,"
"project," "may," "could," "developments," "strategic," "launching,"
"opportunities," "anticipates," "estimates," "intends," "plans," "targets" and
similar expressions. These statements are based upon the current beliefs and
expectations of management and are subject to significant risks and
uncertainties. Actual results may differ materially from those set forth in the
forward-looking statements as a result of numerous factors.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations expressed in our
forward-looking statements:
(1) enactment of adverse government regulation;
(2) competitive pressures among depository and other financial
institutions may increase significantly and have an effect on
pricing, spending, third-party relationships and revenues;
(3) the strength of the United States economy in general and
specifically the strength of the New England economies may be
different than expected, resulting in, among other things, a
deterioration in overall credit quality and borrowers' ability to
service and repay loans, or a reduced demand for credit, including
the resultant effect on the our loan portfolio, levels of
charge-offs and non-performing loans and allowance for loan losses;
(4) changes in the interest rate environment may reduce interest
margins and adversely impact net interest income; and
(5) changes in assumptions used in making such forward-looking
statements.
Should one or more of these risks materialize or should underlying beliefs or
assumptions prove incorrect, actual results could differ materially from those
discussed.
All subsequent written and oral forward-looking statements attributable to
Slade's Ferry Bancorp. or any person acting on its behalf are expressly
qualified in their entirety by the cautionary statements set forth above.
Slade's Ferry Bancorp. does not intend or undertake any obligation to update
any forward-looking statement to reflect circumstances or events that occur
after the date the forward-looking statements are made.
As used throughout this report, the terms "we," "our," "us," or the "Company"
refer to Slade's Ferry Bancorp. and its consolidated subsidiary, unless context
otherwise requires.
12
Critical Accounting Policies
----------------------------
Our significant accounting policies are incorporated by reference to Note 1 to
our Consolidated Financial Statements filed within Form 10-K for the year ended
December 31, 2006. In preparing consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America,
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 reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses and other-than-temporary
impairment losses.
Allowance for loan losses. The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans
in light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
Other than temporary impairment. In estimating other-than-temporary-impairment
losses, management considers (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to
retain its investment in the issuer for a period of time sufficient to allow
for any anticipated recovery in fair value.
Comparison of Financial Condition at June 30, 2007 and December 31, 2006
------------------------------------------------------------------------
General
-------
Total assets increased from $607.8 million at December 31, 2006 to $628.3
million at June 30, 2007. Total net loans increased by $7.4 million, from
$422.4 million to $429.8 million. Deposits increased from $424.0 million at
December 31, 2006 to $425.6 million at June 30, 2007.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents increased by $17.4 million, from $22.4 million at
December 31, 2006 to $39.8 million at June 30, 2007. The increase is due to
increased federal funds sold, which management intends to be used to fund loan
growth and maturing certificates of deposit.
Investment Portfolio
--------------------
The main objectives of our investment portfolio are to achieve a competitive
rate of return over a reasonable time period and to provide liquidity.
Our total investment portfolio decreased from $137.1 million at December 31,
2006 to $131.3 million at June 30, 2007, a decrease of $5.8 million, or 4.2%.
The decrease is the result of the maturity, calls and paydowns of certain state
and municipal obligations and mortgage-backed securities. Those funds were used
to provide liquidity for current loan growth. The current investment strategy
is to reduce the investment portfolio through normal paydowns and maturities
and reinvest these funds into higher yielding loans. Our investment policy
13
also permits investments in mortgage-backed securities, usually having a longer
weighted average life. Our investment policy, however, limits the duration of
the aggregate investment portfolio to 5 years. At June 30, 2007, the portfolio
duration was 3.5 years. We do not purchase investments with imbedded derivative
characteristics, or free-standing derivative instruments such as swaps,
options, or futures.
Securities Held to Maturity
The held-to-maturity portfolio consists of mortgage-backed securities and
securities issued by states and municipalities. Held-to-maturity securities
decreased from $24.6 million at December 31, 2006 to $21.8 million at June 30,
2007. Management has designated the mortgage-backed securities to secure
advances from the FHLB. We have the positive intent and ability to hold these
securities to maturity.
The following table shows the amortized cost basis and fair value of securities
held to maturity at June 30, 2007 and December 31, 2006.
June 30, 2007 December 31, 2006
-------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------- -------------------
(In thousands)
State and municipal obligations $ 4,229 $ 4,266 $ 5,001 $ 5,069
Mortgage-backed securities 17,552 16,794 19,622 19,150
------- ------- ------- -------
Total securities held to maturity $21,781 $21,060 $24,623 $24,219
======= ======= ======= =======
Securities Available for Sale
Securities not designated as held-to-maturity are designated as available for
sale. Although we do not anticipate the sale of these securities, the
designation as available for sale allows us the flexibility to alter our
investment strategies and sell these securities when conditions warrant.
Additionally, marketable equity securities that have no maturity date must be
designated as available-for-sale. These securities are carried at fair value.
The available-for-sale securities portfolio includes obligations and
mortgage-backed securities of government-sponsored enterprises, corporate debt
and equity securities.
14
The following table shows the amortized cost basis and fair value of securities
available for sale at June 30, 2007 and December 31, 2006.
June 30, 2007 December 31, 2006
-------------------- -------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------------- -------------------
(In thousands)
Debt Securities:
Government-sponsored enterprises $ 29,474 $ 29,136 $ 34,462 $ 33,957
Corporate 9,174 9,079 9,221 9,080
Mortgage-backed 59,730 59,247 57,946 57,980
-------- -------- -------- --------
Total debt securities 98,378 97,462 101,629 101,017
Marketable equity securities 3,309 3,587 3,139 3,389
Mutual funds 1,215 1,178 1,215 1,197
-------- -------- -------- --------
Total securities available for sale $102,902 $102,227 $105,983 $105,603
======== ======== ======== ========
Loans
-----
Our loan portfolio consists primarily of residential, multi-family and
commercial real estate, construction and land development, commercial, and
consumer loans and home equity lines of credit originated primarily in our
market area. There are no foreign loans outstanding. Interest rates charged on
loans are affected principally by the demand for such loans, the supply of
money available for lending purposes and the rates offered by our competitors.
Total net loans were 68.4% of total assets at June 30, 2007, as compared to
69.5% of total assets at December 31, 2006.
Multi-Family and Commercial Real Estate Lending
We originate multi-family and commercial real estate loans that are generally
secured by five or more unit apartment buildings and properties used for
business purposes such as small office buildings, restaurants or retail
facilities. These loans generally involve larger principal amounts and a
greater degree of risk than one-to-four family residential mortgage loans.
Because payments on loans secured by multi-family and commercial real estate
properties are often dependent on successful operation or management of the
properties, repayment of such loans may be subject to adverse conditions in the
real estate market or the economy. We seek to minimize these risks through our
underwriting standards.
Multi-family and commercial real estate loans totaled $208.3 million and
comprised 48.0% of total gross loans at June 30, 2007. At December 31, 2006,
the multi-family and commercial real estate loan portfolio totaled $209.2
million, or 49.0% of total gross loans.
Residential Lending
We currently offer fixed-rate, one-to-four family mortgage loans with terms
from 10 to 30 years and a number of adjustable-rate mortgage loans with terms
of up to 30 years and interest rates which adjust every one or three years from
the outset of the loan.
We generally underwrite our residential real estate loans to comply with
secondary market standards established by the Federal National Mortgage
Association. Although loans are underwritten to standards that make them
readily salable, we have not chosen to sell these loans, rather to maintain
them in portfolio, consistent with our income and interest rate risk management
targets.
15
Residential real estate loans totaled $133.0 million and comprised of 30.6% of
total gross loans at June 30, 2007. At December 31, 2006, residential real
estate loans totaled $132.4 million, or 31.0% of total gross loans.
Commercial Loans
The commercial loan portfolio consists of loans and lines predominantly
collateralized by inventory, furniture and fixtures, and accounts receivable.
In assessing the collateral for this type of loan, we apply a 50% liquidation
value to inventories; 25% to furniture, fixtures and equipment; and 70% to
accounts receivable less than 90 days of invoice date.
Commercial loans totaled $48.2 million and comprised 11.1% of total gross loans
at June 30, 2007. At December 31, 2006, the commercial loan portfolio totaled
$47.7 million, or 11.2% of total gross loans.
Construction Lending
Fixed-rate construction loans are originated for the development of one-to-four
family residential properties. Although we do not generally make loans secured
by raw land, our policies permit the origination of such loans. Construction
loan proceeds are disbursed periodically in increments as construction
progresses and as inspections by an independent construction specialist
warrant.
In addition, the Company has commercial construction loans that consist
primarily of owner occupied commercial real estate, new and rehabilitation
multi-family residential, assisted living and nursing home facilities.
Construction loans totaled $27.9 million and comprised 6.4% of total gross
loans at June 30, 2007. At December 31, 2006, the construction loan portfolio
totaled $21.0 million or 4.9% of total gross loans. The increase is due to
several new loans and an advance in the commercial construction category. As of
December 31, 2006, residential construction loans were $3.9 million, while
commercial construction loans were $17.1 million. As of June 30, 2007,
residential construction loans were $3.2 million, while commercial construction
loans were $24.7 million.
Home Equity Lines of Credit
Home equity lines of credit are secured by second mortgages on owner-occupied,
one-to-four family residences located in our primary market area. Our home
equity lines of credit generally have interest rates, indexed to the Wall
Street Journal Prime Rate, that adjust on a monthly basis.
Home equity lines of credit totaled $14.2 million and comprised 3.3% of total
gross loans at June 30, 2007. At December 31, 2006, the home equity line of
credit portfolio totaled $13.9 million, or 3.3% of total gross loans.
Consumer Lending
Consumer loans secured by rapidly depreciable assets such as recreational
vehicles and automobiles entail greater risks than one-to-four family,
residential mortgage loans. Consumer loans are typically made based on the
borrower's ability to repay the loan through continued financial stability. We
endeavor 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 loan. Consumer loans are both secured and unsecured borrowings.
Consumer loans totaled $2.7 million at June 30, 2007 and $2.8 million at
December 31, 2006 or 0.6% of total gross loans at both dates.
16
The following table summarizes our loan portfolio by category at June 30, 2007
and December 31, 2006.
Percentage
June 30, 2007 December 31, 2006 Increase/(Decrease)
------------- ----------------- -------------------
(Dollars in thousands)
Real estate mortgage loans:
Multi-Family and Commercial $208,278 $209,172 -0.43%
Residential 132,955 132,381 0.43%
Construction 27,894 20,988 32.90%
Home equity lines of credit 14,186 13,917 1.93%
Commercial 48,222 47,736 1.02%
Consumer 2,723 2,766 -1.55%
-------- -------- ------
Total loans 434,258 426,960 1.71%
Less: Allowance for loan losses (4,296) (4,385) -2.03%
Net deferred loan fees (189) (205) -7.80%
-------- -------- ------
Loans, net $429,773 $422,370 1.75%
======== ======== ======
The increases in the loan portfolio are the result of increased demand for
construction loans.
The following table presents information with respect to non-performing loans
as of the dates indicated.
June 30, 2007 December 31, 2006
------------- -----------------
(Dollars in thousands)
Non-accrual loans $1,699 $600
Loans 90 days or more past due and still accruing 1 -
------ ----
Total non-performing loans $1,700 $600
====== ====
Percentage of non-accrual loans to total gross loans 0.39% 0.14%
Percentage of allowance for loan losses to non-accrual loans 252.7% 730.8%
The $1.7 million in non-accrual loans as of June 30, 2007 consists of $1.1
million of commercial real estate loans, $463,000 of residential real estate
loans, and $157,000 of consumer loans. The increase in non-accrual loans is due
primarily to one commercial loan with an outstanding balance of $1,000,000,
which management reviewed and determined not to be impaired as of June 30,
2007. There were no restructured loans included in non-accrual loans at June
30, 2007.
It is our policy to manage our loan portfolio in order to recognize problem
loans at an early stage and thereby minimize loan losses. Loans are considered
delinquent when any payment of principal or interest is one month or more past
due. We generally commence collection procedures when accounts are 15 days past
due. Generally, when a loan becomes past due 90 days or more, management
discontinues the accrual of interest and reverses previously accrued interest,
unless the credit is well-secured and in the process of collection. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured. When a loan is determined to be uncollectible, it is charged to the
allowance for loan losses or, if applicable, any real estate that is securing
the loan is acquired through foreclosure, and recorded as other real estate
owned at the lower of cost or net realizable value.
17
Management defines non-performing loans to include non-accrual loans, loans
past due 90 days or more and still accruing, and restructured loans not
performing in accordance with amended terms.
At June 30, 2007, there were $444,000 of loans which we have determined to be
impaired, with no related allowance for loan losses. These loans are 90 days
past due, and were, therefore, not accruing at June 30, 2007. These loans were
individually evaluated for impairment. No specific allowance for loan losses
was allocated to these loans based on the impairment analysis.
Analysis of Allowance for Loan Losses
The table below illustrates the changes in the allowance for loan losses for
the periods indicated.
Six Months Ended June 30,
-------------------------
2007 2006
------ ------
(Dollars in thousands)
Balance at beginning of period $4,385 $4,333
Charge-offs:
Real estate mortgage loans:
Multi-family and commercial - -
Residential (25) -
Home equity lines of credit - -
Commercial - -
Consumer - (6)
------ ------
(25) (6)
------ ------
Recoveries:
Real estate mortgage loans:
Multi-family and commercial 3 -
Residential - -
Home equity lines of credit - -
Commercial - -
Consumer - -
------ ------
3 -
------ ------
Net loan charge-offs (22) (6)
Provision for loan losses - 39
Transfer of off-balance sheet credit exposures
to other liabilities (67) -
------ ------
Balance at end of period $4,296 $4,366
====== ======
Allowance for loan losses as a percent of loans 0.99% 1.02%
====== ======
Ratio of net loan charge-offs to average
loans outstanding (0.01)% 0.00%
====== ======
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans
in light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as impaired. For such
loans, an allowance is established when the discounted cash flows (or collateral
value or observable market price) of the impaired loan is lower than the
carrying value of
18
that loan. The general component covers non-classified loans and is based on
historical loss experience adjusted for qualitative factors. An unallocated
component is maintained to cover uncertainties that could affect management's
estimate of probable losses. The unallocated component of the allowance
reflects the margin of imprecision inherent in the underlying assumptions used
in the methodologies for estimating specific and general losses in the
portfolio.
The Company maintains a reserve for potential credit risk related to off
balance sheet lines of credit. The Company monitors changes to outstanding
lines and adjusts the reserve when appropriate. Prior to December 31, 2006, the
reserve was included as a component of the allowance. Effective January 1,
2007, the amount is included as "Other Liabilities" in accordance with
generally accepted accounting principles and Financial Institution Letter (FIL)
105-2006, which was issued in December 2006. No reserve adjustment was recorded
for the quarter ending June 30, 2007.
As the composition of the loan portfolio changes and diversifies, a different
allowance level may be required. After thorough review and analysis of the
adequacy of the loan loss allowance, management determined no provision for
losses was required for the three months ended June 30, 2007, unchanged from
the three months ended June 30, 2006. The provision for the six months ended
June 30, 2006 was $39,000, with no provision recorded for the six months ended
June 30, 2007. In 2007, a review of the allowance for loan losses resulted in a
reallocation of the allowance based on qualitative factor analysis, the
introduction of commercial loan risk ratings in the analysis, and the transfer
of the off-balance-sheet component of the allowance to other liabilities. The
allowance for loan losses as a percentage of total loans outstanding declined
from 1.03% at December 31, 2006 to .99% at June 30, 2007. This decrease can be
attributed to an overall improvement in the credit quality of existing loans
which results in a decrease in the degree of credit risk embedded in the loan
portfolio.
This table below shows an allocation of the allowance for loan losses at the
dates indicated.
June 30, 2007 December 31, 2006
----------------------- ------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ------------- ------ -------------
(Dollars in thousands)
Commercial $ 716 11.1% $ 718 11.2%
Real estate construction 278 6.4% 260 4.9%
Real estate mortgage 3,133 81.9% 3,181 83.3%
Consumer 169 0.6% 226 0.6%
------ ----- ------ -----
$4,296 100.0% $4,385 100.0%
====== ===== ====== =====
19
Deposits
--------
We solicit deposits from our primary market area using rates and services
designed to appeal to customers across a broad spectrum of ages and income
levels. We compete for deposit customers with community banks and credit
unions, as well as local branches of regional and national banks. Our total
deposits increased from $424.0 million at December 31, 2006 to $425.6 million
at June 30, 2007, an increase of $1.6 million. The Company obtained brokered
certificates of deposit during the quarter to offset a decline in our lower
cost deposit products. Customers have shown a preference for higher rate money
market products compared to lower rate savings and certificates of deposits. As
a result, outstanding brokered certificates of deposit totaled $23.3 million as
of June 30, 2007.
The following table presents deposits by category at June 30, 2007 and December
31, 2006.
Percentage
June 30, 2007 December 31, 2006 Increase/(Decrease)
------------- ----------------- -------------------
(Dollars in thousands)
Demand deposits $ 73,715 $ 79,101 -6.81%
NOW 53,547 55,071 -2.77%
Regular and other savings 69,340 77,189 -10.17%
Money market deposits 38,478 24,021 60.18%
-------- -------- ------
Total non-certificate accounts 235,080 235,382 -0.13%
-------- -------- ------
Term certificates of $100,000 or greater 63,271 66,894 -5.42%
Term certificates less than $100,000 103,980 121,730 -14.58%
Brokered term certificates 23,317 - -
-------- -------- ------
Total certificate accounts 190,568 188,624 1.03%
-------- -------- ------
Total deposits $425,648 $424,006 0.39%
======== ======== ======
Long Term Borrowings
--------------------
Long-term borrowings consist of advances from the Federal Home Loan Bank which
totaled $137.9 million at June 30, 2007, as compared to $119.1 million at
December 31, 2006, an increase of $18.8 million or 15.8%. Management's strategy
is to utilize advances from the Federal Home Loan Bank and brokered certificates
of deposit, in conjunction with investment portfolio maturities and repayments,
to fund loan growth and deposit runoff.
20
Comparison of Results of Operations for the Three Months Ended June 30, 2007
----------------------------------------------------------------------------
and 2006
--------
General
-------
Net income increased from $626,000, or $0.15 per share on a diluted basis, for
the three months ended June 30, 2006 to $792,000, or $0.20 per share on a
diluted basis, for the three months ended June 30, 2007, an increase of 26.5%.
Net interest and dividend income decreased by $22,000, or 1%, to $4.4 million
when comparing the three months ended June 30, 2006 and 2007. No provision for
loan losses was recorded for the three months ended June 30, 2007 or 2006.
Non-interest income increased by $270,000 or 49.5% from $546,000 to $816,000
for the three months ended June 30, 2006 and 2007, respectively. Non-interest
expense increased by $38,000, or 1%, to $4.0 million for the three months ended
June 30, 2007.
Interest Income
---------------
Our operating performance is dependent on net interest and dividend income, the
difference between interest and dividend income we earn on loans and
investments and interest expense we pay on deposits and borrowed funds. The
level of net interest income and dividend income is significantly impacted by
factors such as economic conditions, interest rates, asset/liability
management, and strategic planning.
Interest and dividend income increased by $909,000 or 11.3%, from $8.0 million
for the three months ended June 30, 2006 to $8.9 million for the three months
ended June 30, 2007. This increase is principally attributed to growth in the
loan portfolio, as the average balance of loans increased by $12.9 million or
3.1%, as well as a higher yield on the loan portfolio which increased from
6.34% for the three months ended June 30, 2006 to 6.58% for the three months
ended June 30, 2007. Also, interest and dividends on investments increased by
$437,000 for the three months ended June 30, 2007 compared to the three months
ended June 30, 2006, respectively. The increase in interest and dividends on
investments and Federal Funds sold reflected a higher yield on the components
of the investment portfolio combined with an increase in the average balance of
the portfolio for the three months ended June 30, 2007 compared to the same
period in 2006. The Company also received a FHLB dividend of $115,000 in the
second quarter of 2007, while no dividend was received in the second quarter of
2006.
Interest Expense
----------------
Total interest expense increased by $931,000 or 25.6%, from $3.6 million for
the three months ended June 30, 2006 to $4.6 million for the three months ended
June 30, 2007. The increase is primarily due to the migration of deposits to
higher cost certificates of deposit when comparing average balances at June 30,
2006 and 2007, combined with management's strategy to utilize FHLB advances and
brokered certificates of deposit to supplement deposit runoff experienced in
2007. Market interest rates and our own deposit rates have also increased.
Interest on deposits increased by $446,000 or 19.8% when comparing the three
months ended June 30, 2007 and 2006. As a result of the rate increases, the
weighted average cost of deposits increased from 2.65% for the three months
ended June 30, 2006 to 3.16% for the three months ended June 30, 2007.
Net Interest Margin
-------------------
As a result of the current interest rate environment and our rate increases on
deposit accounts, the net interest margin has compressed 19 basis points from
3.22% for the three months ended June 30, 2006 to 3.03% for the three months
ended June 30, 2007. The compression in net interest margin was mostly due to
balance sheet growth in an environment with an inverted yield curve and the
corresponding compressed margins on loans and investments, combined with
intense competition for deposits and increased wholesale funding costs.
21
The following table sets forth our average assets, liabilities, and stockholders' equity, interest earned and interest paid,
average rates earned and paid, net interest spread and the net interest margin for the three months ended June 30, 2007, and
2006. Average balances reported are daily averages.
Three Months Ended June 30,
-----------------------------------------------------------------------------------
2007 2006
--------------------------------------- ---------------------------------------
Average Interest Average Average Interest Average
Balance Income/Expense Rate Balance Income/Expense Rate
--------------------------------------- ---------------------------------------
Assets: (Dollars in thousands)
-------
Interest earning assets (1)
Loans:
Commercial $ 51,517 $ 1,095 8.53% $ 46,111 $ 885 7.70%
Commercial real estate 231,534 3,866 6.70% 228,558 3,710 6.51%
Residential real estate 150,110 2,150 5.74% 145,725 2,051 5.65%
Consumer 2,741 41 6.00% 2,565 39 6.10%
----------------------- -----------------------
Total loans 435,902 7,152 6.58% 422,959 6,685 6.34%
Federal funds sold 13,259 179 5.40% 4,387 53 4.85%
Taxable debt securities 115,220 1,399 4.87% 108,068 1,182 4.39%
Tax-exempt debt securities (2) 4,230 71 6.71% 6,099 102 6.68%
Marketable equity securities 4,589 35 3.06% 4,344 35 3.23%
FHLB stock 7,254 115 6.36% 6,304 - 0.00%
Other investments 650 15 9.23% 650 10 6.17%
----------------------- -----------------------
Total interest earning assets 581,104 8,966 6.19% 552,811 8,067 5.85%
------- -------
Allowance for loan losses (4,306) (4,373)
Deferred loan fees (189) (310)
Cash and due from banks 15,663 13,932
Other assets 25,046 26,432
-------- --------
$617,318 $588,492
======== ========
Liabilities and Stockholders'Equity:
------------------------------------
Interest bearing liabilities
Savings accounts $ 70,725 $ 233 1.32% $ 82,199 $ 272 1.33%
NOW accounts 53,597 180 1.35% 57,648 188 1.31%
Money market accounts 31,195 226 2.91% 25,709 149 2.32%
Time deposits 186,721 2,063 4.43% 175,539 1,647 3.76%
FHLB advances 137,887 1,650 4.80% 110,802 1,209 4.38%
Subordinated debt 10,310 214 8.29% 10,310 170 6.61%
----------------------- -----------------------
Total interest bearing liabilities 490,435 4,566 3.73% 462,207 3,635 3.15%
------- -------
Demand deposits 74,108 73,494
Other liabilities 2,353 707
-------- --------
Total liabilities 566,896 536,408
Total stockholders' equity 50,422 52,084
-------- --------
$617,318 $588,492
======== ========
Net interest income $ 4,400 $ 4,432
======= =======
Net interest spread 2.45% 2.70%
==== ====
Net interest margin 3.03% 3.22%
==== ====
(1) Average balance includes non-accruing loans. The effect of including such loans, although not material, is to reduce the
average rate earned on the Company's loans.
(2) On a fully taxable basis based on a tax rate of 35.0% for 2007 and 2006. Interest income on investments and net interest
income includes a fully taxable equivalent adjustment of $25,000 in 2007 and $37,000 in 2006.
22
The following table presents the changes in components of net interest income
for the three months ended June 30, 2007 and 2006, which are the result of
changes in interest rates and the changes that the result of changes in volume
of the underlying asset or liability. Changes that are attributable to the
changes in both rate and volume have been allocated equally to rate and volume.
Three Months Ended June 30,
2007 vs. 2006 Increase (Decrease)
---------------------------------
Total Due to Due to
Change Volume Rate
---------------------------------
(In thousands)
Commercial loans $ 210 $ 109 $ 101
Commercial real estate 156 49 107
Residential real estate 99 62 37
Consumer loans 2 3 (1)
Federal funds sold 126 114 12
Taxable debt securities 217 83 134
Tax-exempt debt securities (31) (31) -
Marketable equity securities - 2 (2)
FHLB Stock 115 8 107
Other investments 5 - 5
-----------------------------
Total interest income 899 399 500
-----------------------------
Savings accounts (39) (38) (1)
NOW accounts (8) (13) 5
Money market accounts 77 36 41
Time deposits 416 114 302
FHLB advances 441 310 131
Subordinated debt 44 - 44
-----------------------------
Total interest expense 931 409 522
-----------------------------
Net interest income $ (32) $ (10) $ (22)
=============================
Provision for Loan Losses
-------------------------
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans
in light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available. In
2007, a review of the allowance for loan losses resulted in a reallocation of
the allowance based on qualitative factor analysis, the introduction of
commercial loan risk ratings in the analysis, and the transfer of the off-
balance-sheet component of the allowance to other liabilities. Management
concluded that no provision for loan losses was required for the three months
ended June 30, 2007. No provision for loan losses was recorded for the three
months ended June 30, 2006.
23
Non-Interest Income
-------------------
Non-interest income increased from $546,000 for the three months ended June 30,
2006 to $816,000 for the three months ended June 30, 2007, an increase of
$270,000 or 49.5%. The gain on the sale of available-for-sale securities
changed from a loss of $172,000 for the three months ended June 30, 2006 to a
gain of $78,000 for the three months ended June 30, 2007, an increase of
$250,000. In 2007, after reviewing the investment market and the investment
portfolio, management determined that the sale of certain securities to realize
market appreciation was appropriate. In June 2006, the Company restructured the
investment portfolio by selling $14.5 million of low-yielding obligations of
government sponsored enterprises, resulting in realized losses of $176,000.
Other income increased from $260,000 for the three months ended June 30, 2006
to $271,000 for the three months ended June 30, 2007, an increase of 3.8%, due
to growth in ATM and debit card income.
Non-Interest Expense
--------------------
Non-interest expense increased by $38,000 to $4.0 million for the three months
ended June 30, 2007 compared to the three months ended June 30, 2006, an
increase of 1%. Salaries and employee benefits decreased by $271,000 or 11.8%,
from $2.3 million for the three months ended June 30, 2006 to $2.0 million for
the three months ended June 30, 2007. The decrease in salaries and benefits was
primarily attributable to staff reductions and a reduction in pension expense
on a comparable three month basis. Staff reductions resulted primarily from
outsourcing the Company's core item processing, back office proof operations
and internal audit in 2006. Pension expense decreased due to $133,000 of
expense for settlement accounting recognized on the Bank's defined benefit
pension plan in 2006. See Note E to the consolidated financial statements
included herein for stock-based compensation awards that will increase
compensation expense in periods subsequent to June 30, 2007. Also see Part II,
Item 5-Other Information, for new defined contribution supplemental executive
retirement plans that will increase benefits expense in periods subsequent to
June 30, 2007. Professional fees decreased $71,000 as a result of the
non-recurrence of various accounting and regulatory matters that occurred
during the three months ended June 30, 2006. Marketing expense increased
$163,000 to $272,000 for the three months ended June 30, 2007 from $109,000 for
the three months ended June 30, 2006. This increase is attributable to expenses
related to the Bank's rebranding initiative and the launch of a new deposit
product during the quarter ended June 30, 2007. Data processing expenses
increased $158,000 from $118,000 for the three months ended June 30, 2006 to
$276,000 for the three months ended June 30, 2007. The increase was primarily
due to expenses associated with outsourced core processing, item processing and
statement rendering functions that were done in-house during the same period of
2006. Other expenses increased $43,000 or 7.7% from $560,000 for the three
months ended June 30, 2006 to $603,000 for the three months ended June 30,
2007, due to.general cost increases for these items.
Provision for Income Taxes
--------------------------
Income before income taxes was $989,000 for the three months ended June 30,
2006 as compared to $1.2 million for the three months ended June 30, 2007. The
provision for income taxes totaled $407,000 and $363,000 for the quarters ended
June 30, 2007 and 2006, respectively, representing effective tax rates of 34.0%
and 36.7%, respectively. The lower effective tax rate is due primarily to an
increase in investment income at the Company's securities corporations, which
receive favorable state tax rates.
24
Comparison of Results of Operations for the Six Months Ended June 30, 2007
--------------------------------------------------------------------------
and 2006
--------
General
-------
Net income increased from $1.5 million, or $0.37 per share on a diluted basis,
for the six months ended June 30, 2006 to $1.7 million, or $0.41 per share on a
diluted basis, for the six months ended June 30, 2007, an increase of 8.6%. Net
interest and dividend income decreased by $406,000, or 4.5%, to $8.6 million
when comparing the six months ended June 30, 2006 and 2007. No provision for
loan losses was recorded for the six months ended June 30, 2007 while $39,000
was recorded for the same six month period in 2006. Non-interest income
increased by $293,000 or 23.5% from $1.2 million to $1.5 million for the six
months ended June 30, 2006 and 2007, respectively. Non-interest expense
decreased by $156,000, or 2.0%, to $7.55 million for the six months ended June
30, 2007, from $7.7 million for the six months ended June 30, 2006.
Interest Income
---------------
Our operating performance is dependent on net interest and dividend income, the
difference between interest and dividend income we earn on loans and
investments and interest expense we pay on deposits and borrowed funds. The
level of net interest income and dividend income is significantly impacted by
factors such as economic conditions, interest rates, asset/liability
management, and strategic planning.
Interest and dividend income increased by $1.7 million or 10.4%, from $15.9
million for the six months ended June 30, 2006 to $17.5 million for the six
months ended June 30, 2007. This increase is principally attributed to both
growth in the loan portfolio, as the average balance of loans increased by
$13.5 million or 3.2%, as well as a higher yield on the loan portfolio which
increased from 6.30% for the six months ended June 30, 2006 to 6.55% for the
six months ended June 30, 2007. These increases were related principally to
commercial and total real estate loans reflecting current market conditions.
Also, interest and dividends on investments and Federal Funds sold increased by
$692,000 for the six months ended June 30, 2007 compared to the six months
ended June 30, 2006. The increase in interest and dividends on investments
reflected a higher yield on the components of the investment portfolio combined
with an increase in the average balance of the portfolio for the six months
ended June 30, 2007 compared to the same period in 2006. In addition, dividends
received from the FHLB increased by $149,000 for the six months ended June 30,
2007 compared to the same period in 2006.
Interest Expense
----------------
Total interest expense increased by $2.1 million or 29.7%, from $6.9 million
for the six months ended June 30, 2006 to $9.0 million for the six months ended
June 30, 2007. The increase is due to both increased deposit and borrowing
levels and higher interest rates. Management's strategy is to utilize FHLB
advances and brokered certificates of deposit to supplement deposit runoff
experienced in 2007. Market interest rates and our own deposit rates have also
increased. Interest on deposits increased by $1.2 million or 29.4% when
comparing the six months ended June 30, 2007 and 2006. As a result of the rate
increases, the weighted average cost of deposits increased from 2.29% for the
six months ended June 30, 2006 to 3.15% for the six months ended June 30, 2007.
Net Interest Margin
-------------------
As a result of the current interest rate environment and our rate increases on
deposit accounts, the net interest margin has compressed 30 basis points from
3.31% for the six months ended June 30, 2006 to 3.0% at June 30, 2007. The
compression in net interest margin was mostly due to balance sheet growth in an
environment with an inverted yield curve and the corresponding compressed
margins on loans and investments, combined with intense competition for
deposits and increased wholesale funding costs.
25
The following table sets forth our average assets, liabilities, and stockholders' equity, interest earned and interest paid,
average rates earned and paid, net interest spread and the net interest margin for the six months ended June 30, 2007, and
2006. Average balances reported are daily averages.
Six Months Ended June 30,
-----------------------------------------------------------------------------------
2007 2006
--------------------------------------- ---------------------------------------
Average Interest Average Average Interest Average
Balance Income/Expense Rate Balance Income/Expense Rate
--------------------------------------- ---------------------------------------
Assets: (Dollars in thousands)
-------
Interest earning assets (1)
Loans:
Commercial $ 52,326 $ 2,135 8.23% $ 44,416 $ 1,658 7.53%
Commercial real estate 228,512 7,572 6.68% 228,745 7,319 6.45%
Residential real estate 149,954 4,285 5.76% 144,352 4,066 5.68%
Consumer 2,737 82 6.04% 2,557 77 6.07%
------------------------------------- -------------------------------------
Total loans 433,529 14,074 6.55% 420,070 13,120 6.30%
Federal funds sold 8,066 215 5.38% 2,738 64 4.71%
Taxable debt securities 117,065 2,829 4.87% 109,752 2,394 4.40%
Tax-exempt debt securities (2) 4,401 146 6.70% 6,260 208 6.69%
Marketable equity securities 5,381 70 2.62% 4,355 74 3.43%
FHLB stock 7,074 231 6.59% 6,304 82 2.62%
Other investments 650 25 7.76% 650 18 5.58%
------------------------------------- -------------------------------------
Total interest earning assets 576,166 17,590 6.16% 550,129 15,960 5.85%
------- -------
Allowance for loan losses (4,345) (4,358)
Deferred loan fees (202) (330)
Cash and due from banks 15,475 12,951
Other assets 23,903 26,229
-------- --------
$610,997 $584,621
======== ========
Liabilities and Stockholders' Equity:
-------------------------------------
Interest bearing liabilities
Savings accounts $ 72,742 $ 497 1.38% $ 83,637 $ 529 1.28%
NOW accounts 53,800 359 1.35% 56,715 361 1.28%
Money market accounts 27,892 373 2.70% 26,898 258 1.93%
Time deposits 187,439 4,162 4.48% 169,791 3,019 3.59%
FHLB advances 133,142 3,169 4.80% 110,998 2,365 4.30%
Subordinated debt 10,310 425 8.31% 10,310 394 7.71%
------------------------------------------ -------------------------------------
Total interest bearing liabilities 485,325 8,985 3.73% 458,349 6,926 3.05%
------- -------
Demand deposits 73,651 73,868
Other liabilities 1,939 842
-------- --------
Total liabilities 560,915 533,059
Total stockholders' equity 50,082 51,562
-------- --------
$610,997 $584,621
======== ========
Net interest income $ 8,605 $ 9,034
======= =======
Net interest spread 2.43% 2.80%
==== ====
Net interest margin 3.01% 3.31%
==== ====
(1) Average balance includes non-accruing loans. The effect of including such loans, although not material, is to reduce the
average rate earned on the Company's loans.
(2) On a fully taxable basis based on a tax rate of 35.0% for 2007 and 2006. Interest income on investments and net interest
income includes a fully taxable equivalent adjustment of $51,000 in 2007 and $74,000 in 2006.
26
The following table presents the changes in components of net interest income
for the six months ended June 30, 2007 and 2006, which are the result of
changes in interest rates and the changes that the result of changes in volume
of the underlying asset or liability. Changes that are attributable to the
changes in both rate and volume have been allocated equally to rate and volume.
Six Months Ended June 30,
2007 vs. 2006 Increase (Decrease)
---------------------------------
Total Due to Due to
Change Volume Rate
---------------------------------
(In thousands)
Commercial loans $ 477 $ 309 $ 168
Commercial real estate 253 (9) 262
Residential real estate 219 159 60
Consumer loans 5 5 -
Federal funds sold 151 133 18
Taxable debt securities 435 168 267
Tax-exempt debt securities (62) (62) -
Marketable equity securities (4) 15 (19)
FHLB Stock 149 18 131
Other investments 7 - 7
------------------------------
Total interest income 1,630 736 894
------------------------------
Savings accounts (32) (71) 39
NOW accounts (2) (19) 17
Money market accounts 115 11 104
Time deposits 1,143 355 788
FHLB advances 804 501 303
Subordinated debt 31 - 31
------------------------------
Total interest expense 2,059 777 1,282
------------------------------
Net interest income $ (429) $ (41) $ (388)
==============================
Provision for Loan Losses
-------------------------
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans
in light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available. In
2007, a review of the allowance for loan losses resulted in a reallocation of
the allowance based on qualitative factor analysis, the introduction of
commercial loan risk ratings in the analysis, and the transfer of the off-
balance-sheet component of the allowance to other liabilities. Management
concluded that no provision for loan losses was required for the six months
ended June 30, 2007. A provision for loan losses of $39,000 was recorded for
the six months ended June 30, 2006.
Non-Interest Income
-------------------
Non-interest income increased from $1.3 million for the six months ended June
30, 2006 to $1.5 million for the six months ended June 30, 2007, an increase of
$293,000 or 23.5%. The increase was mainly due to the gain on the sale of
available-for-sale securities which changed from a loss of $169,000 for the six
months
27
ended June 30, 2006 to a gain of $139,000 for the six months ended June 30,
2007, an increase of $308,000. In 2007, after reviewing the investment market
and the investment portfolio, management determined that the sale of certain
securities to realize market appreciation was appropriate. In 2006, the Company
restructured the investment portfolio by selling $14.5 million of low-yielding
obligations of government sponsored enterprises, resulting in realized losses
of $176,000. Additionally, service charges on deposit accounts increased by
$22,000 from $659,000 for the six months ended June 30, 2006 to $681,000 for
the six months ended June 30, 2007. Other income decreased $44,000, or 8.1%,
from $546,000 for the six months ended June 30, 2006 to $502,000 for the six
months ended June 30, 2007. This was the result of decreased volumes of sales
of non-deposit investment products combined with a changed sales environment.
The Company formerly recorded gross income on sales whereas in 2007 the
function has been outsourced, and the Company now records income net of
commissions and other expenses.
Non-Interest Expense
--------------------
Non-interest expense decreased from $7.7 million for the six months ended June
30, 2006 to $7.5 million for the six months ended June 30, 2007, a decrease of
$156,000 or 2.0%. Salaries and employee benefits decreased by $385,000 or 8.8%,
from $4.4 million for the six months ended June 30, 2006 to $4.0 million for
the six months ended June 30, 2007. The decrease in salaries and benefits was
primarily attributable staff reductions and a reduction in pension expense on a
comparable six month basis. Staff reductions resulted primarily from
outsourcing the Company's core item processing, back office proof operations
and internal audit in 2006. Pension expense decreased due to $133,000 of
expense for settlement accounting recognized on the Bank's defined benefit
pension plan in 2006. See Note E to the consolidated financial statements
included herein for stock-based compensation awards that will increase
compensation expense in periods subsequent to June 30, 2007. Also see Part II,
Item 5-Other Information, for new defined contribution supplemental executive
retirement plans that will increase benefits expense in periods subsequent to
June 30, 2007. Professional fees decreased $208,000 as a result of the
non-recurrence of various accounting and regulatory matters that occurred
during the six months ended June 30, 2006. Marketing expense increased $141,000
to $328,000 for the six months ended June 30, 2007 from $187,000 for the six
months ended June 30, 2006. This increase is attributable to expenses related
to the Bank's rebranding initiative and the launch of a new deposit product
during the period ended June 30, 2007. Data processing expenses increased
$374,000 from $199,000 for the six months ended June 30, 2006 to $573,000 for
the six months ended June 30, 2007. The increase was primarily due to expenses
associated with outsourced core processing, item processing and statement
rendering functions that were done in-house during the same period of 2006.
Other expenses decreased $93,000 or 8.2% from $ 1.1 million for the six months
ended June 30, 2006 to $1 million for the six months ended June 30, 2007, due
primarily to reduced Board committee meeting expense.
Provision for Income Taxes
--------------------------
Income before income taxes was $2.6 million for the six months ended June 30,
2007 as compared to $2.5 million for the six months ended June 30, 2006. The
provision for income taxes totaled $885,000 and $935,000 for the six months
ended June 30, 2007 and 2006, respectively, representing effective tax rates of
34.7% and 37.9%, respectively. The lower effective tax rate is primarily due to
an increase in interest income at the Company's securities corporations, which
receive favorable tax rates.
28
Capital
-------
At June 30, 2007, our total stockholders' equity was $50.8 million, a decrease
of $482,000 from $51.2 million at December 31, 2006. Additions consisted
primarily of net income of $1.7 million for the six months ended June 30, 2007.
There were 15,665 shares of common stock issued at a value of $275,000,
pursuant to regular reinvestment and optional cash contributions under our
Dividend Reinvestment Program. Stock options exercised, resulted in the
issuance of 18,000 shares at a value of $254,000, including a tax benefit of
$19,000, and stock compensation expense of $91,000. Other comprehensive losses
were $166,000, relating to market declines in the Company's securities
available for sale. Reductions in capital related to dividends declared of
$758,000, the repurchase of 94,956 shares of common stock under our stock
repurchase program at a cost of $1.6 million, and the purchase of 12,723 shares
of stock at a cost of $225,000 to be used to grant potential stock awards.
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.
In addition to meeting the required levels, the Company's and the Bank's
capital ratios meet the criteria of the well-capitalized category established
by the federal banking agencies as of June 30, 2007 and at December 31, 2006.
The Tier I Capital leverage ratio and Tier I Capital to risk weighted assets
ratio for the Company are 9.65% and 13.01%, respectively, at June 30, 2007. The
Company's Tier I Capital leverage ratio and Tier I Capital to risk weighted
assets ratio at December 31, 2006 were 9.90% and 14.18%, respectively. The Tier
I Capital leverage ratio and Tier I Capital to risk weighted assets ratio for
the Bank are 8.01% and 10.75%, respectively, at June 30, 2007. The Bank's Tier
I Capital leverage ratio and Tier I Capital to risk weighted assets ratio at
December 31, 2006 were 8.78% and 12.60%, respectively.
Off-Balance Sheet Arrangements
------------------------------
We do not have any off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, revenues
or expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors.
Liquidity
---------
Our principal sources of funds are customer deposits, amortization and payoff
of existing loan principal, and sales, amortization or maturities of various
investment securities. The Bank is a voluntary member of the FHLB and as such,
may take advantage of the FHLB's borrowing programs to enhance liquidity and
leverage its favorable capital position. The Bank also may draw on lines of
credit at the FHLB or the Federal Reserve Board, and enter into repurchase or
reverse repurchase agreements with authorized brokers. These various sources of
liquidity are used to fund withdrawals, new loans, and investments.
Management seeks to promote deposit growth while controlling cost of funds.
Sales-oriented programs to attract new depositors and the cross-selling of
various products to its existing customer base are currently in place.
Management reviews, on an ongoing basis, possible new products, with particular
attention to products and services, which will aid in retaining our base of
lower-costing deposits.
Our investment securities portfolio provides us with liquidity. Our policy of
purchasing shorter-term debt securities reduces market risk in the bond
portfolio while providing significant cash flow. For the six months ended June
30, 2007, cash flow from maturities, calls and pay-downs of securities was
$12.7 million, proceeds from sales of securities totaled $1 million, compared
to maturities, calls and pay-downs of securities of $7.7 million, and proceeds
from sales of securities of $15.1 million for the six months ended June 30,
2006.
29
Purchases of securities totaled $6.7 million and $6.4 million for the six
months ended June 30, 2007 and June 30, 2006, respectively.
Amortization and pay-offs of the loan portfolio also provides us with
significant liquidity. Traditionally, amortization and pay-offs are reinvested
into loans. Excess liquidity is invested in federal funds sold and overnight
investments at the FHLB.
We have also used borrowed funds as a source of liquidity. At June 30, 2007,
the Bank's outstanding borrowings from the FHLB were $137.9 million. The Bank
has the capacity to borrow an additional $4.0 million from the FHLB as of June
30, 2007. The Bank has the ability to increase this capacity with additional
asset pledges. The Bank has obtained brokered certificates of deposits as an
additional funding source during the quarter ending June 30, 2007, with an
outstanding balance of $23.3 million at quarter end. These deposits mature over
the next three months. While management will evaluate future brokered
certificates of deposit, the bank expects that FHLB borrowings will remain the
primary source of additional liquidity.
Loan originations for the six months ended June 30, 2007 totaled $54.0 million.
Commitments to originate loans at June 30, 2007 were $26.5 million, excluding
unadvanced construction funds totaling $12.9 million, unadvanced commercial
lines of credit totaling $24.3 million and unadvanced home equity lines
totaling $15.8 million. Management believes that adequate liquidity is
available to fund loan commitments utilizing deposits, loan amortization,
maturities of securities, or borrowings.
The increase in liquidity is due to the utilization of advances from the FHLB
in conjunction with the investment portfolio maturities, calls and paydowns of
certain state and municipal obligations and mortgage-backed securities that
were used to provide liquidity for the current loan growth and deposit runoff.
30
ITEM 3
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We consider interest rate risk to be a significant market risk as it could
potentially have an effect on our financial condition and results of operation.
The definition of interest rate risk is the exposure of our earnings to adverse
movements in interest rates, arising from the differences in the timing of the
repricing of assets and liabilities; the differences in the various pricing
indices inherent in our assets and liabilities; and the effects of overt and
embedded options in our assets and liabilities. Our Asset/Liability Committee,
comprised of executive management, is responsible for managing and monitoring
interest rate risk, and reviewing with the Board of Directors, at least
quarterly, the interest rate risk positions, the impact changes in interest
rates would have on net interest income, and the maintenance of interest rate
risk exposure within approved guidelines.
The potentially volatile nature of market interest rates requires us to manage
interest rate risk on an active and dynamic basis. Our objective is to reduce
and control the volatility of net interest income to within tolerance levels
established by the Board of Directors, by managing the relationship of
interest-earning assets and interest-bearing liabilities. In order to manage
this relationship, the Asset/Liability Committee utilizes an income simulation
model to measure the net interest income at risk under differing interest rate
scenarios. Additionally, the Committee uses an Economic Value of Equity ("EVE")
analysis to measure the effects of changing interest rates on the market values
of rate-sensitive assets and liabilities, taken as a whole. The Board of
Directors and management believe that static measures of timing differences,
such as "gap analysis", do not accurately assess the levels of interest rate
risk inherent in our balance sheet. Gap analysis does not reflect the effects
of overt and embedded options on net interest income, given a shift in interest
rates; nor does it take into account basis risk, the risk arising from using
various different indices on which to base pricing decisions.
The income simulation model currently utilizes a 200 basis point increase in
interest rates and a 200 basis point decrease in rates. The interest rate
movements used assume an instant and parallel change in interest rates and no
implementation of any strategic plans are made in response to the change in
rates. Prepayment speeds for loans are based on median dealer forecasts for
each interest rate scenario.
The Board of Directors has established a risk limit of a 5.00% change in net
interest income for each 100 basis point shift in market interest rates. The
limit established by the Board provides an internal tolerance level to control
interest rate risk. We were slightly outside our policy-mandated risk limit for
net interest income at risk due to a management decision, with the Board of
Directors concurrence, not to extend long-term funding in light of what we
believe to be temporarily overpriced short and long term funding costs.
The following table reflects our estimated exposure as a percentage of net
interest income and the change in basis points for the next twelve months,
assuming an immediate change in interest rates set forth below:
Rate Change Estimated Exposure as a Percentage Change
(Basis Points) of Net Interest Income (Basis Points)
------------------------------------------------------------------------
+200 -10.79% (19)
-200 5.60% 10
31
Additionally we use the model to estimate the effects of changes in interest
rates on our EVE. EVE represents our theoretical market value, given the rate
shocks applied in the model. The Board of Directors has established a risk
limit for EVE which provides that the EVE will not fall below 6.00%, the FDIC's
minimum capital level to be classified as "well capitalized". We are within our
risk limit for EVE.
The following table presents the changes in EVE given rate shocks.
Rate Change Economic Value Change from
(Basis Points) of Equity Flat Rates
-------------------------------------------------
Flat 13.38% N/A
+200 12.03% -1.35%
-200 13.83% 0.44%
32
ITEM 4
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of the
end of the period covered by this report, the Company carried out an evaluation
under the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer of
the effectiveness of the Company's disclosure controls and procedures. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
as of June 30, 2007 to ensure that information required to be disclosed by the
Company in the reports it files or submits under the Exchange Act is (i)
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commission's rules and forms and (ii)
accumulated and communicated to the Company's management, including its
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding disclosure. In connection with the rules
regarding disclosure and control procedures, we intend to continue to review
and document our disclosure controls and procedures, including our internal
controls and procedures for financial reporting, and may from time to time make
changes aimed at enhancing their effectiveness and to ensure that our systems
evolve with our business.
(b) Changes in Internal Controls over Financial Reporting
There has been no change in the Company's internal controls over financial
reporting identified in connection with the Company's evaluation of its
disclosure controls and procedures that occurred during the Company's last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect the Company's internal control over financial reporting.
33
PART II
OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings that would have a material
impact on our consolidated financial condition and results of operations.
ITEM 1A
RISK FACTORS
There have been no material changes to the risk factors that are included in
our Annual Report on Form 10-K for the year ended December 31, 2006 that could
affect our business, results of operations or financial condition.
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
This table provides certain information with respect to our purchase of our
common stock during the quarter ended June 30, 2007.
---------------------------------------------------------------------------------------------------------------------------
(c) Total Number of (d) Maximum Number (or
(a) Total Shares Purchased as Approximate Dollar Value) of
Number of (b) Average Part of Publicly Shares that may yet be
Shares Price Paid Announced Plans or Purchased under the Plans or
Period Purchased per Share Programs (1) Programs (1)
---------------------------------------------------------------------------------------------------------------------------
April 1, 2007 through April 30, 2007 1,965 $17.22 1,965 114,623
---------------------------------------------------------------------------------------------------------------------------
May 1, 2007 through May 31, 2007 9,137 $16.71 9,137 105,486
---------------------------------------------------------------------------------------------------------------------------
June 1, 2007 through June 30, 2007 21,849 $16.21 21,849 83,637
---------------------------------------------------------------------------------------------------------------------------
Total 32,951 $16.41 32,951 83,637
---------------------------------------------------------------------------------------------------------------------------
(1) On July 18, 2006, the Company announced that its Board of Directors approved a repurchase program pursuant to which
the Company may repurchase up to 208,036 shares of its common stock.
34
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's Shareholders was held on May 16, 2007 with
the following matter being voted upon and with the indicated results:
Election of Directors for terms expiring in 2010
Votes
-----------------------
Nominee For Withheld
------------------------------- --------- --------
Paul C. Downey 2,797,848 299,837
Mary Lynn D. Lenz 2,774,543 323,142
Majed Mouded, MD 2,978,888 118,797
William J. Piccerelli, CPA, CVA 2,798,146 299,539
David F. Westgate 2,989,996 107,689
ITEM 5
OTHER INFORMATION
On August 9, 2007, the Company entered into letter agreements (the "Agreements")
with Mary Lynn D. Lenz, President and Chief Executive Officer and Deborah A.
McLaughlin, Executive Vice President and Chief Financial Officer/Chief
Operations Officer (the "Executive Officers") that set forth the compensation
programs to be implemented for the remainder of 2007 for the Executive Officers.
Pursuant to the Agreements, the Company and the Executive Officers will enter
into new defined contribution supplemental executive retirement plans (the "New
SERPs") which will be credited with (1) one-time "catch-up" contributions in
2007 in the amount of $250,000 for Ms. Lenz and $50,000 for Ms. McLaughlin; and
(2) annual contributions at year-end for 2007 and each year thereafter in an
amount equal to 20% of the Executive Officers' base salary for the relevant
year. Such amounts will be fully vested at all times and will be placed in
rabbi trusts for the benefit of the Executive Officers. The "catch-up"
contributions will be charged to compensation expense upon the execution of the
New SERPs, and the anticipated annual contributions will be recognized as
compensation expense on a straight-line basis during each relevant year. In the
third quarter, the Company will record the "catch-up" contributions and nine
months of expense for 2007. In the event of a change of control of the Company,
each Executive Officer will receive an additional contribution of 60% of the
Executive Officer's then current base salary, in addition to amounts already
accrued under the New SERPs.
ITEM 6
EXHIBITS
Exhibits: See exhibit index.
35
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)
August 14, 2007 /s/ Mary Lynn D. Lenz
----------------------- -----------------------------------
(Date) Mary Lynn D. Lenz
President
Chief Executive Officer
(Principal Executive Officer)
August 14, 2007 /s/ Deborah A. McLaughlin
----------------------- -----------------------------------
(Date) Deborah A. McLaughlin
Executive Vice President
Chief Financial Officer &
Chief Operations Officer
(Principal Financial and Accounting
Officer)
36
EXHIBIT INDEX
Exhibit No. Description Item
----------- ----------- ----
3.1 Amended and Restated Articles of Incorporation of Slade's Ferry Bancorp. (1)
3.2 Amended and Restated Bylaws of Slade's Ferry Bancorp. (2)
3.3 Articles of Amendment to the Amended and Restated Articles of Incorporation (3)
of Slade's Ferry Bancorp
10.1 Slade's Ferry Bancorp. 1996 Stock Option Plan, as amended (4)
10.2 Amended and Restated Supplemental Executive Retirement Agreement between
Slade's Ferry Bancorp. and Manuel J. Tavares (5)
10.3 Supplemental Executive Retirement Agreement between Slade's Ferry Bancorp. (6)
and Mary Lynn D. Lenz
10.4 Employment Agreement between Slade's Ferry Bancorp. and Mary Lynn D. Lenz (7)
10.5 Employment Agreement between Slade's Ferry Bancorp. and Deborah A. McLaughlin (8)
10.6 Employment Agreement between Slade's Ferry Bancorp. and Manuel J. Tavares (9)
10.7 Form Change of Control Agreement (10)
10.8 Severance Pay Plan (11)
10.9 Slade's Ferry Bancorp. 2004 Equity Incentive Plan (12)
10.10 Form of Amendment to Directors' Supplemental Retirement Program for
Non-Employee Directors (13)
11.1 Statement Regarding Computation of Per Share Earnings
31.1 Rule 13a-14(a)/15d-14(a) Certification of the CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of the CFO
32.1 Section 1350 Certification of the CEO
32.2 Section 1350 Certification of the CFO
--------------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form SB-2 filed with the
Commission on April 14, 1997.
(2) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on June 26, 2006.
(3) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on December 21,
2004.
(4) Incorporated by reference to the Registrant's Form 10-Q/A for the quarter ended June
30, 1999.
(5) Incorporated by reference to the Registrant's Form 8K filed with the Commission on July 18, 2007.
(6) Incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-Q/A for the quarter ended
March 31, 2003.
(7) Incorporated by reference to Exhibit 10.11 to the Registrant's Form 10-Q/A for the quarter ended
June 30, 2004.
(8) Incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-Q/A for the quarter ended
September 30, 2004.
(9) Incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-Q/A for the quarter ended
September 30, 2004.
(10) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on January 13,
2005.
(11) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on January 14,
2005.
(12) Incorporated by reference to Appendix C to the Registrant's Proxy Statement filed on April 9, 2004
(13) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on December 22,
2006.
37