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Slade's Ferry Bancorp is a one-bank holding company which owns and controls
100% of the assets of Slade's Ferry Trust Company and its subsidiaries. The
primary business of Bancorp is the ongoing business of the Trust Company, a
member of the Federal Deposit Insurance Corporation serving as a retail
bank.
The Bank provides multiple deposit products and a wide range of financial
services - including consumer installment loans, residential and commercial
mortgages, and other forms of commercial lending - and actively competes
with a variety of other financial institutions by offering competitive
rates.
Adhering to an established philosophy of providing professional, highly
personalized service throughout its marketplace, Slade's Ferry serves a
broad customer base from southeastern Massachusetts and nearby Rhode Island.
The Bank operates strategically located retail facilities and multiple ATMs
in the towns and cities of Fairhaven, Fall River, New Bedford, Seekonk,
Somerset and Swansea, MA.
Slade's Ferry Trust Company is an
Equal Opportunity/Affirmative Action Employer (M/F/D/V).
Corporate offices are located at 100 Slade's Ferry Avenue, Somerset, MA.
Dear Shareholders,
As the tragic events of September 11th impacted all of us in 2001, so
also did the actions of the Federal Open Market Committee impact all
financial institutions.
Eleven reductions in the prime rate and other related rates severely
reduced our net interest margin, as deposit and loan rates dropped to levels
last seen in the nineteen fifties.
The assets of the bank grew by $6,141,207 to $394,760,563 or an
increase of 1.58%, while net loans decreased from $250,848,831 to
$248,017,635, a reduction of 1.13%. As a result of the prime rate reductions
and the subsequent repricing of our assets, our net income earnings dropped
by $864,186 to $3,210,253 from $4,074,439 in 2000, a decrease of 21.2%.
As we begin 2002, our net interest spreads appear to be slowly
improving, and the prospects for an economic recovery are improving. We
anticipate little improvement in short term rates until the fourth quarter
of 2002, and further improvement in 2003.
The bank expanded its products and services in April with the addition
of the Investors Marketplace, staffed by Christina King and Jessica DeMarco.
Both are licensed to sell investment products such as stocks, bonds, mutual
funds, and annuities.
We also initiated our web site in the spring of 2002 and you can visit
us at www.sladesferry.com.
As I recently wrote to you, I have elected early retirement and will
be finalizing my career on the 29th of March. It has been a true privilege
and honor to serve as the President of your bank, and I want to express my
sincere appreciation for your support and well wishes.
-----------------------
James D. Carey
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
Commission file number 000-23904
---------
SLADE'S FERRY BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3061936
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Slade's Ferry Avenue
Somerset, Massachusetts 02726
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 675-2121
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
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
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this form 10-K. [ ]
The aggregate market value of the voting stock of Slade's Ferry Bancorp,
held by nonaffiliates of the registrant as of February 22, 2002 was
approximately $45,028,961. On that date, there were 3,883,643.200 shares of
Slade's Ferry Bancorp Common Stock, $.01 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Stockholders April 08, 2002
incorporated by reference into Part III.
PART I
ITEM 1
BUSINESS
Description of Business
Business of Slade's Ferry Bancorp
- ---------------------------------
Slade's Ferry Bancorp ("the Company") is a business corporation that
was organized under the laws of the Commonwealth of Massachusetts on June
13, 1989 as Weetamoe Bancorp. The name Weetamoe Bancorp was changed to
Slade's Ferry Bancorp effective January 1, 1997. The office of Slade's Ferry
Bancorp is located at the office of the Bank at 100 Slade's Ferry Avenue,
Somerset, Massachusetts, 02726, and its telephone number is the same as the
Bank's: (508)675-2121.
The Company was organized for the purpose of becoming the holding
company of the Bank. The Company's acquisition of the Bank was completed on
April 1, 1990. The Bank (Slade's Ferry Trust Company) is a wholly-owned
subsidiary of Slade's Ferry Bancorp.
Competition
- -----------
The primary business of Slade's Ferry Bancorp is the ongoing business
of the Bank. The competitive conditions to be faced by Slade's Ferry Bancorp
will be the same as those faced by the Bank. It is likely that, as a holding
company, it may compete with other holding companies engaged in bank-related
activities. Thus, the Company will face competition in undertaking to
acquire other banks, financial institutions or companies engaged in bank-
related activities, and in operating subsequent to any such acquisitions.
While the Company investigates opportunities to acquire other banks or
bank facilities when they occur and may in the future acquire other banks,
financial institutions, or bank facilities, it is not currently engaged in
any such acquisition.
Employees
- ---------
At present there are three employees of the Bank and the Company whose
compensation is paid by the Company. Although the Company has no current
plans to do so, if the Company should acquire other financial institutions
or pursue other lines of business, it may at such time hire additional
employees.
Business of Slade's Ferry Trust Company
- ---------------------------------------
On September 30, 1959, the Slade's Ferry Trust Company opened for
business as a state chartered trust company incorporated under the laws of
the Commonwealth of Massachusetts and as a member of the Federal Deposit
Insurance Corporation (FDIC). The founders were a group of individuals from
Somerset, Swansea, Fall River and Seekonk, Massachusetts who recognized the
need for a local bank committed to personalized services.
During the past three years, assets of the Bank increased by $36.6
Million. The Bank currently has twelve banking facilities extending east
from Seekonk, Massachusetts to Fairhaven, Massachusetts.
2
The Bank also provides limited banking services at the Somerset High School.
In addition, the Bank in 1999 received regulatory approval to establish a
loan production office in Rhode Island. The office is named the Slade's
Ferry Loan Company and is a subsidiary of Slade's Ferry Trust Company. The
purpose for the loan production office is to solicit commercial and consumer
borrowers in the Rhode Island area. The office is prohibited from accepting
deposits and payments.
In June 1999, the Bank implemented certain state tax planning
strategies by establishing a Real Estate Investment Trust (REIT) as a
subsidiary of Slade's Ferry Trust Company. The REIT, named the Slade's Ferry
Preferred Capital Corporation, provides the means for the Bank to invest
into the REIT certain designated, bank-owned real estate mortgage loans. The
income derived on these loans is taxed at a reduced state tax rate.
The Bank currently services numerous communities in Southeastern
Massachusetts and contiguous areas of Rhode Island through its twelve
facilities in Fall River, Somerset, Swansea, Seekonk, New Bedford and
Fairhaven, and its loan production office in Warwick, Rhode Island.
The Bank's major customer base consists of almost 31,500 personal
savings, checking and money market accounts, and 10,300 personal
certificates of deposit and individual retirement accounts. Its commercial
base consists of over 3,000 checking, money market, corporate, and
certificate of deposit accounts.
The Bank does not have any major target accounts, nor does it derive a
material portion of its deposits from any single depositor. It is a retail
bank that services the needs of the local communities, and its loans are not
concentrated within any single industry or group of related industries that
would have any possible adverse effect on the business of the Bank. The
Bank's business is not seasonal and its loan demand is well diversified. As
of December 31, 2001, commitments under standby letters of credit aggregate
approximately $638,371.
Services
- --------
The Bank engages actively in a broad range of banking activities,
including demand, savings, time deposits, related personal and commercial
checking account services, real estate mortgages, commercial and installment
lending, payroll services, money orders, travelers checks, Visa, MasterCard,
safe deposit rentals, automatic teller machines and cash management
services. The Bank offers a full range of commercial, installment, student,
and real estate loans. The service area of the Bank is approximately 300
square miles, including the southern geographic area of Bristol County,
Massachusetts and extends over to the towns of Tiverton, Warren, Bristol and
Barrington in the state of Rhode Island.
Competition
- -----------
The banking business in the market area served by the Bank is highly
competitive. The Bank actively competes with other banks, financial
institutions, and credit unions, including major banks and bank holding
companies which have numerous offices and affiliates operating over wide
geographic areas. The Bank competes for deposits, loans, and other business
with these institutions.
Many of the major commercial banks, or other affiliates in the service
areas of the Bank, offer services such as international banking, internet
banking, and trust services which are not offered directly by the Bank.
3
Supervision and Regulation
Holding Company Regulation
- --------------------------
Under the Federal Bank Holding Company Act ("BHCA"), the prior
approval of the Federal Reserve Board ("FRB") is required before a
corporation may acquire control of a bank. FRB approval must also be
obtained before a bank holding company acquires all or substantially all of
the assets of a bank, or merges or consolidates with another bank holding
company. In considering any applications for approval of an acquisition or
merger, the FRB is required to consider the financial and managerial
resources of the companies and banks concerned, and the convenience and
needs of the communities to be served.
As a registered bank holding company, the Company is required to file
with the FRB annual and periodic reports and such other additional
information as the Board may require. The Company and its subsidiaries are
also subject to continuing regulation, supervision and examinations by the
FRB.
A bank holding company, with certain exceptions, may not acquire more
than 5% of the voting shares of any company that is not a bank and may not
engage, directly or through subsidiaries, in any activity other than
banking, managing or controlling banks, or furnishing services to or
performing services for its subsidiaries, without prior approval of the FRB.
The FRB is authorized to approve the ownership by a bank holding company of
voting shares of any company whose activities the FRB determines to be so
closely related to banking or managing or controlling banks as to be a
proper incident thereof. Under the FRB's current regulations, and subject to
certain restrictions and limitations specified therein, bank holding
companies and their subsidiaries may be permitted by the FRB to engage in
such non-banking activities as: (1) making, acquiring, or servicing loans or
other extensions of credit such as would be made by a mortgage, finance,
credit card, or factoring company; (2) operating an industrial bank or
industrial loan company; (3) performing the functions of a trust company;
(4) acting as an investment or financial advisor; (5) leasing real or
personal property or acting as an agent or broker in leasing such property
or acting as an agent or broker in leasing property in certain situations;
(6) making investments to promote community welfare; (7) providing certain
data processing and transmission services; (8) acting as principal, agent,
or broker with respect to insurance directly related to extensions of credit
by the bank holding company or its subsidiaries, and engaging in certain
other insurance activities subject to specified conditions and limitations;
(9) providing courier services for checks and certain other instrument
exchanges among banks, and for audit and accounting media of a banking or
financial nature; (10) providing management consulting advice under
specified conditions to banks not affiliated with the bank holding company;
(11) issuing and selling retail money orders having a face value of not more
than $1,000 and travelers checks and selling U.S. Savings Bonds; (12)
performing appraisals of real and personal property; (13) arranging
commercial real estate equity financing under certain circumstances; (14)
providing securities brokerage services as agent for the accounts of
customers; (15) underwriting and dealing in certain government obligations
and money market instruments; (16) providing foreign exchange advisory and
transactional services; (17) acting as a futures commission merchant in spe
cified capacities or providing investment advice as a futures commission
merchant or commodity trading advisor with respect to certain financial
futures contracts and options; (18) providing consumer financial counseling
services; (19) providing tax planning and preparation services; (20)
providing check guaranty services to sub scribing merchants; (21)
operating a collection agency; and (22) operating a credit bureau. In
addition, a bank holding company may file an application for FRB approval to
engage, directly or through subsidiaries, in other nonbank activities that
the holding company reasonably believes are so closely related to banking as
to be a proper incident thereto.
4
In addition, pursuant to the Bank Export Services Act of 1982, a bank
holding company may invest up to 5% of its consolidated capital and surplus
in shares of an export trading company unless such investment is disapproved
by the FRB after notice as provided in that Act.
As a bank holding company, the Company will be required to give the
FRB prior written notice of any purchase or redemption of its outstanding
equity securities if the gross consideration for the purchase or redemption,
when combined with the net consideration paid for all such purchases or
redemptions during the preceding 12 months, is equal to 10% or more of
Bancorp's consolidated net worth. The FRB may disapprove such a purchase or
redemption if it determines that the proposal would violate any law,
regulation, FRB order, directive, or any condition imposed by, or written
agreement with, the FRB.
The status of the Company as a registered bank holding company under
the BHCA does not exempt it from certain federal and state laws and
regulations applicable to corporations generally, including, without
limitation, certain provisions of the federal securities laws.
Under Massachusetts law, Board of Bank Incorporation approval is
required before any company may become a bank holding company by directly or
indirectly owning, controlling or holding the power to vote 25% or more of
the voting stock of two or more banks. Further, such approval is required
prior to a bank holding company's (i) acquiring voting stock of another bank
institution if, as a result of the acquisition, such acquirer would,
directly or indirectly, own or control more than 5% of the voting stock of
such institution, or (ii) engaging in certain other transactions. The
Company is not considered a bank holding company under Massachusetts's law
since it does not control two or more banks. The activities of the Company,
how ever, will be limited under Massachusetts's law to activities
described above which would be permissible for a bank holding company
registered under the BHCA. In addition, the acquisition by the Company of
25% or more of the voting stock or the power to elect a majority of the
directors of another commercial bank, savings bank, cooperative bank, or
savings and loan association would subject the Company to regulation as a
bank holding company under applicable Massachusetts law and would require
the approval of the Massachusetts Board of Bank Incorporation.
Bank Regulation
- ---------------
As a Massachusetts-chartered, FDIC-insured trust company, the Bank is
subject to regulation and supervision by the Commissioner of Banks, the FDIC
and the FRB.
The Massachusetts statutes and regulations govern, among other things,
investment powers, deposit activities, borrowings, maintenance of surplus
and reserve accounts, distribution of earnings, and payment of dividends.
The Bank is also subject to state regulatory provisions covering such
matters as issuance of capital stock, branching, and mergers and
acquisitions.
Deposit accounts at the Bank are insured by the FDIC, generally up to
a maximum of $100,000 per insured depositor. As an insurer of deposits of
certain thrift institutions and commercial banks, the FDIC issues
regulations, conducts examinations, requires the filing of reports, and
generally supervises the operations of institutions to which it provides
deposit insurance. The approval of the FDIC is required prior to any merger
or consolidation with another financial institution, or the establishment or
relocation of an office facility. This supervision is intended primarily for
the protection of depositors.
As an FDIC-insured bank, the Bank is subject to certain FDIC
requirements designed to maintain the safety and soundness of individual
banks and the banking system. The FDIC periodically conducts
5
examinations of insured institutions and, based upon appraisals, may revalue
assets of an insured institution and require establishment of specific
reserves in amounts equal to the difference between such revaluation and the
book value of the assets. In addition, the FDIC has a regulation which
defines and sets minimum requirements for capital adequacy.
Bank regulators have implemented risk based capital guidelines that
require a bank to maintain certain minimum capital as a percent of such
bank's assets and certain off-balance sheet items adjusted for predefined
credit risk factors (risk adjusted assets). Under the requirements a minimum
level of capital will vary among banks on safety and soundness of operation.
At December 31, 2001 the minimum regulatory capital level of Risk Based
Capital was 4% for Tier 1 Capital, 8% for Total Capital and Leverage Capital
was 4%.
The Company, the Bank, the Slade's Ferry Realty Trust, the Slade's
Ferry Securities Corporation, the Slade's Ferry Preferred Capital
Corporation, and the Slade's Ferry Loan Company are "affiliates" within the
meaning of the Federal Reserve Act. Certain provisions of the Federal
Reserve Act, made applicable to the Bank by Section 18(j) of the Federal
Deposit Insurance Act and administered with respect to the Bank by the FDIC,
limit the amounts of and establish collateral requirements with respect to
the Bank's loans or extensions of credit to and investments in affiliates.
In addition, related provisions of the Federal Reserve Act and FRB
regulations also administered with respect to the Bank by the FDIC limit the
amounts of and establish required procedures and credit standards with
respect to loans and other extensions of credit to officers, directors and
principal stockholders of the Bank, of the Company, and of any subsidiaries
of the Company, and to related interests of such persons.
Recent Regulatory Examinations
- ------------------------------
During 2001, the Bank continued to operate under an informal agreement
(Memorandum of Understanding) with the Federal Deposit Insurance Corporation
and Massachusetts Commissioner of Banks. This agreement was originally
entered into in December 2000. Following completion of the most recent joint
examination in 2001, a revised Memorandum of Understanding was entered into
to be implemented during the first and second quarters of 2002.
Under the revised agreement, the Bank agreed to address and implement
certain plans, procedures, and policies. These include performing an
independent, thorough analysis and assessment of the Bank's management and
staffing needs, and formalizing a written management plan. In addition, the
Bank agrees to revise and implement loan and credit administration policies,
including a written classified and criticized asset reduction plan, a loan
risk and collection plan, and a revised loan policy providing for standards
applicable to construction lending and concentrations. Other policies and
procedures which are to be addressed and implemented relate to wire
transfers, Code of Ethics and Conflicts of Interest, and strategic planning.
During the life of the agreement, the Bank must maintain a seven (7)
percent Tier 1 Leverage Capital ratio.
Bank management and the Board of Directors have taken and are
continuing to take action to comply with the provisions required by the
informal agreement, and are committed to correcting and resolving all
issues.
6
Statistical Information
- -----------------------
The following supplementary information required under Guide 3
(Statistical Disclosure by Bank Holding Companies) should be read in
conjunction with the related financial statements and notes thereto, which
are a part of this report.
7
DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
The following table sets forth the Company's average assets,
liabilities, and stockholders' equity, interest income earned and interest
paid, average rates earned and paid, and the net interest margin for the
periods ending December 31, 2001, December 31, 2000, and December 31, 1999.
Averages are daily averages.
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Average Interest(1) Avg. Int. Average Interest(1) Avg. Int. Average Interest(1) Avg. Int.
(Dollars in Thousands) Balance Inc/Exp Rate Balance Inc/Exp Rate Balance Inc/Exp Rate
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Earning Assets (2)
Commercial Loans $ 47,036 $ 4,757 10.11% $ 48,445 $ 4,504 9.30% $ 47,386 $ 4,218 8.90%
Commercial Real Estate 153,395 12,989 8.47% 152,580 14,194 9.30% 136,648 12,876 9.42%
Residential Real Estate 38,819 2,868 7.39% 36,558 2,877 7.87% 37,523 2,778 7.40%
Consumer Loans 12,093 940 7.77% 11,216 911 8.12% 7,678 657 8.56%
- ---------------------------------------------------------------------------------------------------------------------------------
Total Loans 251,343 21,554 8.57% 248,799 22,486 9.04% 229,235 20,529 8.96%
Federal Funds Sold & FHLB
Overnight Deposits 23,136 819 3.54% 9,558 583 6.10% 5,563 259 4.66%
U.S. Treas/Govt Agencies 72,778 4,258 5.85% 68,606 4,421 6.44% 68,523 4,114 6.00%
States & Political
Subdivisions 12,498 777 6.22% 11,889 787 6.62% 11,505 748 6.50%
Mutual Funds 45 2 4.44% 55 3 5.45% 71 3 4.23%
Marketable Equity
Securities 4,116 91 2.21% 4,241 89 2.10% 3,470 78 2.25%
Other Investments 1,037 67 6.46% 1,066 79 7.41% 1,102 71 6.44%
- ---------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 364,953 27,568 7.55% 344,214 28,448 8.26% 319,469 25,802 8.08%
- ---------------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses (5,109) (4,202) (3,814)
Unearned Income (443) (552) (640)
Cash and Due From Banks 13,351 12,883 14,320
Other Assets 21,837 20,938 17,371
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets $394,589 $373,281 $346,706
=================================================================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY:
Savings $ 53,613 $ 878 1.64% $ 50,210 $ 1,006 2.00% $ 48,442 $ 1,022 2.11%
NOW's 37,834 700 1.85% 37,785 1,183 3.13% 38,404 994 2.59%
Money Market Accounts 9,415 120 1.27% 10,607 174 1.64% 12,188 215 1.76%
CD's > $100M 34,483 1,796 5.21% 31,689 1,537 4.85% 26,857 1,325 4.93%
Other Time Deposits 141,698 7,839 5.53% 138,637 8,019 5.78% 130,393 6,778 5.20%
FHLB Advances & Other
Borrowings 15,734 993 6.31% 12,402 780 6.29% 6,413 420 6.55%
- ---------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing
Liabilities 292,777 12,326 4.21% 281,330 12,699 4.51% 262,697 10,754 4.09%
- ---------------------------------------------------------------------------------------------------------------------------------
Demand Deposits 64,549 58,588 52,261
Other Liabilities 1,738 1,836 1,057
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities 359,064 341,754 316,015
- ---------------------------------------------------------------------------------------------------------------------------------
Common Stock 38 37 35
Paid-in Capital 26,264 25,109 22,646
Retained Earnings 9,516 7,648 8,492
Accumulated Other
Comprehensive Income (Loss) (293) (1,267) (482)
- ---------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 35,525 31,527 30,691
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities &
Stockholders' Equity $394,589 $373,281 $346,706
=================================================================================================================================
Net Interest Income $15,242 $15,749 $15,048
=================================================================================================================================
Net Interest Spread 3.34% 3.75% 3.99%
=================================================================================================================================
Net Yield on Earning Assets 4.18% 4.58% 4.71%
=================================================================================================================================
On a fully taxable equivalent basis based on tax rate of 31.40%. Interest income on investments and net
interest income includes a fully taxable equivalent adjustment of $244,000 in 2001, $262,000 in 2000, and
$249,000 in 1999.
Average balance includes non-accruing loans. The effect of including such loans is to reduce the average rate
earned on the Company's loans.
8
NET INTEREST INCOME - CHANGES DUE TO VOLUME AND RATE(1)
2001 vs. 2000 2000 vs. 1999
Increase Increase
(Decrease) (Decrease)
- -----------------------------------------------------------------------------------------------------
Total Due to Due to Total Due to Due to
(Dollars in Thousands) Change(2) Volume Rate Change(2) Volume Rate
- -----------------------------------------------------------------------------------------------------
Interest Income:
Federal Funds Sold & FHLB
Overnight Deposit $ 236 $ 655 $ (419) $ 324 $ 215 $ 109
US Treas/Govt Agencies (163) 257 (420) 307 5 302
States & Political Subdivisions (10) 39 (49) 39 25 14
Mutual Funds (1) 0 (1) 0 (1) 1
Marketable Securities 2 (3) 5 11 15 (4)
Other Investments (12) (2) (10) 8 (2) 10
Commercial Loans 253 (136) 389 286 96 190
Commercial Real Estate (1,205) 73 (1,278) 1,318 1,492 (174)
Residential Real Estate (9) 173 (182) 99 (74) 173
Consumer Loans 29 70 (41) 254 295 (41)
- -----------------------------------------------------------------------------------------------------
Total Interest Income (880) 1,126 (2,006) 2,646 2,066 580
- -----------------------------------------------------------------------------------------------------
Interest Expense:
Savings Accounts (128) 62 (190) (16) 36 (52)
NOW Accounts (483) 1 (484) 189 (18) 207
Money Market Accounts (54) (17) (37) (41) (27) (14)
CD's > 100 M 259 141 118 212 236 (24)
Other Time Deposits (180) 173 (353) 1,241 453 788
FHLB Advances & Other Borrowings 213 210 3 360 384 (24)
- -----------------------------------------------------------------------------------------------------
Total Interest Expense (373) 570 (943) 1,945 1,064 881
- -----------------------------------------------------------------------------------------------------
Net Interest Income $ (507) $ 556 $(1,063) $ 701 $1,002 $ (301)
=====================================================================================================
Changes in interest income and interest expense attributable to changes in both volume and rate have been
allocated equally to changes due to volume and changes due to rate.
The change in interest income on investments and net interest income includes interest on a fully taxable
equivalent basis based on a tax rate of 31.40%.
9
Interest Rate Risk
- ------------------
The Company considers interest rate risk to be a significant market
risk as it could potentially have an effect on the Company's financial
condition and results of operation. The definition of interest rate risk is
the exposure of the Company's earnings to adverse movements in interest
rates. Volatility in interest rates requires the Company to manage interest
rate risk, which arises from the differences in the timing of repricing of
assets and liabilities.
The Company's Asset-Liability Management Committee, comprised of the
Bank's Executive Management team, has the responsibility of managing
interest rate risk, and monitoring and evaluating the difference between
interest-sensitive assets and interest-sensitive liabilities within various
time periods.
The Company's objective is to reduce and control the volatility of its
net interest income by managing the relationship of interest-earning assets
and interest-bearing liabilities. In order to manage this relationship, the
Committee utilizes a monthly GAP report.
The GAP report provides a static analysis of repricing opportunities
of rate-sensitive assets and rate-sensitive liabilities. It is prepared by
categorizing these assets and liabilities into time periods based upon
either their contractual or anticipated maturity or repricing. The analysis
determines the net dollar amount of assets less liabilities that are
repricing in various time frames. This, in conjunction with certain
assumptions and other related factors, such as anticipated changes in
interest rates, projected cash flows from loans, investments and deposits,
provides a means of evaluating interest rate risk. Management also takes
into consideration that certain assets and liabilities react differently to
changes in interest rates.
The interest sensitivity gap is determined by subtracting the amount
of liabilities from the amount of assets that reprice in a particular time
period. When more liabilities than assets reprice or mature within a given
time frame, a liability sensitive position results (negative gap). A
negative gap position would tend to increase net interest income when
interest rates are falling, and decrease net interest income when rates are
rising. Conversely, an asset sensitive position (positive gap) results when
more assets than liabilities reprice within a given period. In this
scenario, net interest income would increase when interest rates rise and
decrease when rates fall.
At December 31, 2001, the following GAP report indicates the Company's
interest rate risk to have a reliance on short-term liabilities. This
position would have an adverse effect on earnings in a rising rate
environment and a positive effect on earnings in a decreasing rate
environment.
10
INTEREST RATE - SENSITIVITY GAPS
- --------------------------------
Repricing Period at December 31, 2001
- -------------------------------------
Within 1-2 2-3 3-5 Over 5
(Dollars in Thousands) 1 Year Years Years Years Years Total
- ---------------------------------------------------------------------------------------------------
Interest-Earning Assets:
Federal Funds Sold &
FHLB Overnight Deposit $ 14,700 $ 0 $ 0 $ 0 $ 0 $ 14,700
Investment Securities(1) 17,780 17,360 18,065 25,497 16,818 95,520
Loans 130,792 28,011 35,596 13,625 45,860 253,884
-----------------------------------------------------------------
Total Earning Assets $163,272 $ 45,371 $53,661 $39,122 $62,678 $364,104
-----------------------------------------------------------------
Interest Bearing Liabilities:
NOW Checking and Savings
Deposits $ 40,408 $ 11,631 $11,631 $31,015 $ 0 $ 94,685
Money Market Deposits 2,545 1,271 1,271 3,391 0 8,478
Term Deposits 143,172 20,555 4,860 0 0 168,587
FHLB Advances 1,000 0 1,000 0 14,983 16,983
Other Borrowings 465 0 0 0 0 465
-----------------------------------------------------------------
Total Interest-bearing
Liabilities $187,590 $ 33,457 $18,762 $34,406 $14,983 $289,198
-----------------------------------------------------------------
Net Interest Sensitivity Gap $(24,318) $ 11,914 $34,899 $ 4,716 $47,695 $ 74,906
Cumulative Gap $(24,318) $(12,404) $22,495 $27,211 $74,906
Cumulative Gap as a Percent of
Total Assets (6.16%) (3.14%) 5.70% 6.89% 18.97%
=================================================================
Excludes money market mutual funds which are carried in cash and cash
equivalents.
In addition to the GAP report, the Company also uses an analysis to
measure the exposure of net interest income to changes in interest rates
over a relatively short time period (i.e. 12 months). This analysis involves
projecting future interest income and expenses from the Company's earning
assets and interest-bearing liabilities. Depending on the GAP position, the
Company's policy limit on interest rate risk specifies that if interest
rates were to change immediately up or down 200 basis points, the effect on
estimated net interest income for the next 12 months that would be tolerated
would be not more than a ten percent (10%) decrease. The following table
reflects the Company's estimated exposure as a percentage of estimated net
interest income for the next 12 months, assuming an immediate change in
interest rates:
Rate Change Estimated Exposure as a
(Basis Points) Percentage of Net Interest Income Dollar Impact
- ---------------------------------------------------------------------------
+200 (0.72%) ($108,000)
-200 (5.51%) ($820,000)
The model used to monitor earnings-at-risk provides management a
measurement tool to assess the effect of changes in interest rates on the
Company's current and future earnings. The Company's 10% limit establishes
an internal tolerance level to control the Company's interest rate risk
exposure and is monitored on a quarterly basis.
11
II. INVESTMENT PORTFOLIO
The following table shows the book value of the major categories of
investment securities Held-to-Maturity for the years indicated:
At December 31,
- ----------------------------------------------------------------------
(Dollars in Thousands) 2001 2000 1999
- ----------------------------------------------------------------------
US Treasury Securities and
Obligations of US Government
Corporations and Agencies $ 2,750 $ 6,948 $ 7,975
Obligations of States and
Political Subdivisions of the States 13,528 12,094 11,439
Mortgage-backed securities 3 59 74
Other Debt Securities 1 1 1
- ----------------------------------------------------------------------
Total $16,282 $19,102 $19,489
======================================================================
In the following table, the carrying value of Held-to-Maturity securities
maturing within stated periods as of December 31, 2001, is shown with the
weighted average interest yield from securities falling within the range of
maturities:
US Treasury Obligations
& Government of States & Mortgage- Other
Corporations Political Backed Debt
(Dollars in Thousands) & Agencies Subdivisions(1) Securities(2) Securities Total
- ----------------------------------------------------------------------------------------------------
Due in 1 year or less:
Amount $ 2,500 $ 3,240 $ 0 $ 0 $ 5,740
Yield 6.32% 5.23% 0.00% 0.00% 5.70%
Due in 1 to 5 years:
Amount 0 7,235 3 1 7,239
Yield 0.00% 6.22% 7.83% 7.50% 6.22%
Due in 5 to 10 years:
Amount 250 1,960 0 0 2,210
Yield 7.00% 6.60% 0.00% 0.00% 6.65%
Due after 10 years:
Amount 0 1,093 0 0 1,093
Yield 0.00% 6.71% 0.00% 0.00% 6.71%
- ---------------------------------------------------------------------------------------------------
Amount $ 2,750 $13,528 $ 3 $ 1 $16,282
===================================================================================================
Yield 6.38% 6.08% 7.83% 7.50% 6.13%
===================================================================================================
Rates of tax exempt securities are shown assuming a 31.40% tax rate.
Mortgage-backed securities stated using average life.
12
The following table shows the amortized cost basis of the major
categories of Available-for-Sale securities for the years indicated:
At December 31,
- --------------------------------------------------------------
(Dollars in Thousands) 2001 2000 1999
- --------------------------------------------------------------
US Treasury Securities and
Obligations of US Government
Corporations and Agencies $34,240 $40,934 $41,801
Mortgage-backed Securities 36,129 22,089 16,939
Corporate Debt Securities 2,941 1,473 720
Marketable Equity Securities 6,015 4,582 3,808
- --------------------------------------------------------------
Total $79,325 $69,078 $63,268
==============================================================
In the following table, the amortized cost basis of Available-for-Sale
securities (other than equity securities) maturing within stated periods as
of December 31, 2001, is shown with the weighted average interest yield from
securities falling within the range of maturities:
US Treasury
& Government Mortgage- Corporate
Corporations Backed Debt
(Dollars in Thousands) & Agencies Securities(1) Securities Total
- ---------------------------------------------------------------------------------
Due in 1 year or less:
Amount $ 798 $ 635 $ 252 $ 1,685
Yield 6.53% 4.05% 5.51% 5.44%
Due in 1 to 5 years:
Amount 30,946 25,898 2,689 59,533
Yield 5.06% 5.89% 5.97% 5.46%
Due in 5 to 10 years:
Amount 2,496 7,773 0 10,269
Yield 6.18% 5.80% 0.00% 5.89%
Due after 10 years:
Amount 0 1,823 0 1,823
Yield 0.00% 5.86% 0.00% 5.86%
- --------------------------------------------------------------------------------
Amount $34,240 $36,129 $2,941 $73,310
================================================================================
Yield 5.17% 5.84% 5.93% 5.53%
================================================================================
Mortgage-backed securities stated using average life.
13
The following table shows the amortized cost basis and fair value of
the major categories of Held-to-Maturity securities as of December 31, 2001:
Gross Gross
Amortized Unrealized Unrealized
(Dollars in Thousands) Cost Basis Holding Gains Holding Losses Fair Value
- --------------------------------------------------------------------------------------------------
Debt securities issued by the U.S.
Treasury and other U.S. Government
corporations and agencies $ 2,750 $ 27 $ 0 $ 2,777
Debt securities issued by states of
the United States and political
subdivisions of the states 13,528 292 11 13,809
Mortgage-backed securities 3 0 0 3
Other debt securities 1 0 0 1
- ------------------------------------------------------------------------------------------------
Total $16,282 $319 $11 $16,590
================================================================================================
Investments in Available-for-Sale securities are carried at fair value
on the balance sheet and are summarized as follows as of December 31, 2001.
Gross Gross
Amortized Unrealized Unrealized
(Dollars in Thousands) Cost Basis Holding Gains Holding Losses Fair Value
- --------------------------------------------------------------------------------------------------
Debt securities issued by the U.S.
Treasury and other U.S. Government
corporations and agencies $34,240 $ 508 $ 83 $34,665
Marketable Equity 6,015 297 1,158 5,154
Mortgage-backed securities 36,129 332 94 36,367
Corporate debt securities 2,941 70 5 3,006
- ------------------------------------------------------------------------------------------------
Total $79,325 $1,207 $1,340 $79,192
================================================================================================
Decrease in Stockholder's Equity:
(In Whole Dollars)
Net unrealized loss on Available-for-Sale Securities $132,759
Less tax effect (11,816)
--------
$120,943
========
14
III. LOAN PORTFOLIO
The following table shows the Company's amount of loans by category at
the end of each of the last five years.
At December 31,
- --------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural $ 45,238 $ 49,331 $ 46,354 $ 43,777 $ 36,641
Real estate - construction and land development 7,600 8,601 5,014 3,773 6,678
Real estate - residential 60,936 55,871 52,330 51,220 55,477
Real estate - commercial 128,888 128,327 127,938 112,913 108,008
Consumer 10,643 12,872 9,393 6,477 6,747
Nonprofit 236 1,036 904 0 0
Obligations of states and political subdivisions 21 61 0 3 9
Other 322 54 116 67 176
- --------------------------------------------------------------------------------------------------------------
253,884 256,153 242,049 218,230 213,736
Allowance for Loan Losses (5,484) (4,776) (3,766) (3,569) (3,694)
Unamortized adjustment to fair value (0) (9) (20) (32) (42)
Unearned Income (382) (519) (594) (691) (690)
- --------------------------------------------------------------------------------------------------------------
Net Loans $248,018 $250,849 $237,669 $213,938 $209,310
==============================================================================================================
The following table shows the maturity distributions and interest rate
sensitivity of selected loan categories at December 31, 2001.
Within One One to Five After Five
(Dollars in Thousands) Year Years Years Total
- ---------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $39,494 $2,350 $3,394 $45,238
Real Estate - construction & land development 2,519 3,014 2,067 7,600
- ---------------------------------------------------------------------------------------------------
Total $42,013 $5,364 $5,461 $52,838
===================================================================================================
The following table shows the amounts, included in the table above,
which are due after one year and which have fixed interest rates and
adjustable rates:
Total Due After One Year
- -----------------------------------------------------------------------------------------
(Dollars in Thousands) Fixed Rate Adjustable Rate Total
Commercial, financial, and agricultural $5,090 $ 654 $ 5,744
Real Estate - construction & land development 1,675 3,406 5,081
- -----------------------------------------------------------------------------------------
Total $6,765 $4,060 $10,825
=========================================================================================
15
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
December 31,
- -----------------------------------------------------------------------------------------------------
(Dollars in Thousands) 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------
Nonaccrual loans $ 1,138 $ 2,415 $ 1,777 $ 3,331 $4,597
Loans 90 days or more past due
and still accruing 444 335 248 317 147
Real estate acquired by foreclosure
or substantively repossessed 0 0 353 1,026 159
- -----------------------------------------------------------------------------------------------------
Total nonperforming assets $ 1,582 $ 2,750 $ 2,378 $ 4,674 $4,903
- -----------------------------------------------------------------------------------------------------
Restructured debt performing in accordance with
amended terms, not included above $ 186 $ 53 $ 518 $ 867 $1,265
- -----------------------------------------------------------------------------------------------------
Percentage of nonaccrual loans to total loans 0.45% 0.94% 0.73% 1.53% 2.15%
Percentage of nonaccrual loans,
restructured loans and real estate
acquired by foreclosure
or substantively repossessed to
total assets 0.34% 0.64% 0.74% 1.54% 2.00%
Percentage of allowance for loan
losses to nonaccrual loans 481.90% 197.76% 211.92% 107.15% 80.36%
Nonaccrual loans include restructured loans of $137,000 at December
31, 2001; $153,000 at December 31, 2000; $0 at December 31, 1999; $0 at
December 31, 1998; and $263,000 at December 31, 1997.
Information with respect to nonaccrual and restructured loans for the
past five years ending December 31 is as follows:
December 31,
- -------------------------------------------------------------------------------------------------
(Dollars in Thousands) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------
Nonaccrual loans $1,138 $2,415 $1,777 $3,331 $4,597
Interest income that would have been
recorded under original terms $ 109 $ 228 $ 146 $ 318 $ 394
Interest income recorded during
the period $ 6 $ 22 $ 37 $ 37 $ 58
Nonperforming assets include nonaccrual loans, loans past due 90 days
or more and still accruing, restructured loans not performing in accordance
with amended terms, and other real estate acquired through foreclosure.
Nonperforming assets as a total decreased to $1.6 Million at year end 2001,
from $2.8 Million reported at year end 2000.
Nonaccrual loans is the largest component of nonperforming assets, and
at December 31, 2001, this category decreased by $1.3 Million from December
31, 2000. There are no loans greater than $0.3 Million in this category,
which is comprised of $0.8 Million of residential mortgages, $0.2 Million of
commercial real estate loans, and $0.1 Million of other types of loans.
Loans that became nonaccrual during the current year amounted to
$1,762,654. Offsetting this increase were receipts of loan payments of
$2,939,823 and loans of $99,885 that were deemed uncollectible and charged
off to the Allowance for Loan Losses. No loans on nonaccrual status were
transferred to accrual status.
16
The Company places a loan on nonaccrual status when, in the opinion of
management, the collectibility of the principal and interest becomes
doubtful. Generally, when a commercial loan, commercial real estate loan or
a residential real estate loan becomes past due 90 days or more, the Company
discontinues the accrual of interest and reverses previously accrued
interest. The loan remains in the nonaccrual status until the loan is
current and six consecutive months of payments are made, then it is
reclassified as an accruing loan. When it is determined that the
collectibility of the loan no longer exists, it is charged off to the
Allowance for Loan Losses or, if applicable, any real estate that is
collateralizing the loan is acquired through foreclosure, at which time it
is categorized as Other Real Estate Owned.
IV. SUMMARY OF LOAN LOSS EXPERIENCE
The table below illustrates the changes in the Allowance for Loan
Losses for the periods indicated.
(Dollars in Thousands) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------
Balance at January 1 $4,776 $3,766 $3,569 $3,694 $3,354
- ---------------------------------------------------------------------------------------
Charge-offs:
Commercial (73) (194) (221) (0) (40)
Real estate-construction (0) (0) (0) (0) (0)
Real estate-mortgage (0) (23) (23) (716) (147)
Installment/Consumer (28) (138) (158) (76) (68)
- ---------------------------------------------------------------------------------------
(101) (355) (402) (792) (255)
- ---------------------------------------------------------------------------------------
Recoveries:
Commercial 14 50 11 8 41
Real estate-construction 0 0 0 0 0
Real estate-mortgage 29 92 24 43 16
Installment/Consumer 16 23 14 16 38
- ---------------------------------------------------------------------------------------
59 165 49 67 95
- ---------------------------------------------------------------------------------------
Net Charge-offs (42) (190) (353) (725) (160)
- ---------------------------------------------------------------------------------------
Additions charged to operations 750 1,200 550 600 500
Allowance attributable to acquisition 0 0 0 0 0
- ---------------------------------------------------------------------------------------
Balance at December 31: 5,484 $4,776 $3,766 $3,569 $3,694
=======================================================================================
Allowance for Loan Losses as a
percent of year end loans 2.16% 1.86% 1.56% 1.64% 1.73%
Ratio of net charge-offs to
average loans outstanding (0.02%) (0.08%) (0.15%) (0.34%) (0.08%)
17
The Allowance for Loan Losses at year end December 31, 2001 was
$5,484,519 and $4,776,360, $3,765,872, $3,569,282, and $3,693,865 for years
ending 2000, 1999, 1998, and 1997 respectively. The Allowance for Loan
Losses as a percent of year end loans was 2.16% in 2001, 1.86% in 2000,
1.56% in 1999, 1.64% in 1998, and 1.73% in 1997.
The level of the Allowance for Loan Losses is evaluated by management
and encompasses several factors. These factors include but are not limited
to recent trends in the nonperforming loans, the adequacy of the assets
which collateralize the nonperforming loans, the level of nonaccrual loans,
current economic conditions in the market area and various other external
and internal factors. During 2000, management made the decision to change
the methodology and guidelines used in calculating the adequate level of
loan loss reserves. Increasing credit risk due to a higher commercial real
estate loan portfolio and a rising interest rate environment are responsible
for the review and change in the methodology and guidelines. Management's
assessment of the adequacy of the Allowance for Loan Losses is reviewed by
regulators, the Company's independent accountants, and outside loan review
consultants.
The Company's provision for loan losses, which is a deduction from
earnings, in 2001 was $750,000.. Prior years' provisions were $1,200,000,
$550,000, $600,000 and $500,000 for years ending 2000, 1999, 1998, and 1997
respectively. In 2001, the Company realized recoveries of previously
charged-off loans of $59,000. Recoveries recorded in previous years were
$165,000, $49,000, $67,000, and $95,000 in 2000, 1999, 1998, and 1997
respectively.
The amount provided to the Allowance for Loan Losses was deemed
appropriate by management after full consideration of the value of the
assets securing the nonaccrual loans.
The table below shows an allocation of the allowance for loan losses
as of the end of each of the last five years.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31, 2001 December 31, 2000 December 31, 1999 December 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Commercial(5) $1,629(1) 17.91% $1,466(1) 19.66% $1,356(1) 19.52% $1,249(1) 20.06% $ 984(1) 17.14%
Real estate
Construction 41 2.99% 47 3.36% 34 2.07% 27 1.73% 44 3.12%
Real estate
Mortgage 3,585(2) 74.77% 2,970(2) 71.91% 1,924(2) 74.48% 1,964(2) 75.21% 2,311(2) 76.50%
Consumer(3) 229(4) 4.33% 293(4) 5.07% 452(4) 3.93% 329(4) 3.00% 355(4) 3.24%
- ------------------------------------------------------------------------------------------------------------------------------
$5,484 100.00% $4,776 100.00% $3,766 100.00% $ 3,569 100.00% $3,694 100.00%
==============================================================================================================================
Includes amounts specifically reserved for impaired loans of $780,029
as of December 31, 2001, $281,248 as of December 31, 2000, $234,205 as
of December 31, 1999, $128,207 as of December 31, 1998 and $42,937 as
of December 31, 1997, as required by Financial Accounting Standard
No. 114, Accounting for Impairment of Loans.
Includes amounts specifically reserved for impaired loans of $413,663
as of December 31, 2001, $132,911 as of December 31, 2000, $147,884 as
of December 31, 1999, $187,554 as of December 31, 1998, and $566,220
as of December 31, 1997, as required by Financial Accounting Standard
No. 114, Accounting for Impairment of Loans.
18
Includes consumer, obligations of states and political subdivisions
and other.
Includes amounts specifically reserved for impaired loans of $1,632 as
of December 31, 2001, $10,398 as of December 31, 2000, $39,241 as of
December 31, 1999, $9,126 as of December 31, 1998 and $14,413 as of
December 31, 1997 as required by Financial Accounting Standard
No. 114, Accounting for Impairment of Loans.
Includes commercial, financial, agricultural and nonprofit.
The loan portfolio's largest segment of loans is commercial real
estate loans, which represent 51% of gross loans. Residential real estate
loans represent 24% of gross loans. The Company requires a loan to value
ratio of 80% in both commercial and residential mortgages. These mortgages
are secured by real properties which have a readily ascertainable value.
Generally, commercial real estate loans have a higher degree of credit
risk than residential real estate loans because they depend primarily on the
success of the business. When granting these loans, the Company evaluates
the financial statements of the borrower(s), the location of the real
estate, the quality of management, and general economic and competitive
conditions. When granting a residential mortgage, the Company reviews the
borrower(s) repayment history on past debts, and assesses the borrower(s)
ability to meet existing obligations and payments on the proposed loans.
Commercial loans consist of loans predominantly collateralized by
inventory, furniture and fixtures, and accounts receivable. In assessing the
collateral for this type of loan, management applies a 40% liquidation value
to inventories; 25% to furniture, fixtures and equipment; and 60% to
accounts receivable. Commercial loans represent 18% of the loan portfolio.
Consumer loans are generally unsecured borrowings and represent only
4% of the total loan portfolio. These loans have a higher degree of risk
than residential mortgage loans. The underlying collateral of a secured
consumer loan tends to depreciate in value. Consumer loans are typically
made based on the borrower's ability to repay the loan through continued
financial stability. The Company endeavors to minimize risk by reviewing the
borrower's repayment history on past debts, and assessing the borrower's
ability to meet existing obligations on the proposed loans.
Total losses in 2001 amounted to $101,000, when compared to losses of
$355,000 in 2000, $402,000 in 1999, $792,000 in 1998, and $255,000 in 1997.
The real estate-mortgage category incurred no losses in 2001 compared to
$23,000 in 2000, $23,000 in 1999, $716,000 in 1998, and $147,000 in 1997.
V. DEPOSITS
Deposits are obtained from individuals and from small and medium sized
businesses in the local market area. The Bank also attracts deposits from
municipalities and other government agencies. The Bank does not solicit or
accept brokered deposits.
19
The following table sets forth the average amount and the average rate
paid on deposits for the periods indicated.
2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(Dollars in Thousands) Balance Rate Balance Rate Balance Rate
- --------------------------------------------------------------------------------------------------------
Noninterest-bearing Demand Deposits $ 64,549 0.00% $ 58,588 0.00% $ 52,261 0.00%
Interest-bearing Demand Deposits 37,834 1.85 37,785 3.13 38,404 2.59
Savings Deposits 53,613 1.64 50,210 2.00 48,442 2.11
Money Market Deposits 9,415 1.27 10,607 1.64 12,188 1.76
Time Deposits $100,000 or More 34,483 5.21 31,689 4.85 26,857 4.93
Other Time Deposits 141,698 5.53 138,637 5.78 130,393 5.20
- --------------------------------------------------------------------------------------------------------
Totals $341,592 3.32% $327,516 3.64% $308,545 3.35%
========================================================================================================
As of December 31, 2001, time certificates of deposit in amounts of
$100,000 or more had the following maturities:
(Dollars in Thousands)
Three months or less $15,425
Over three months through six months 8,001
Over six months through twelve months 5,936
Twelve months and over 4,087
-------
$33,449
=======
VI. RETURNS ON EQUITY AND ASSETS
The following table shows consolidated operating and capital ratios of
the Company for each of the last three years:
Year Ended December 31,
--------------------------
2001 2000 1999
--------------------------
Return on Average Assets 0.81% 1.09% 1.11%
Return on Average Equity 9.04% 12.92% 12.56%
Dividend Payout Ratio 52.63% 36.84% 34.36%
Equity to Assets Ratio 9.00% 8.45% 8.85%
20
VII. SHORT TERM BORROWINGS
The following table shows the Company's short-term borrowings at the
end of each of the last three years, the maximum amount of borrowings and
the average amounts outstanding as well as weighted average interest rates
for the last three years.
(Dollars in Thousands) 2001 2000 1999
- ---------------------------------------------------------------------------
Balance at December 31 $ 465 $1,200 $1,248
Maximum Amount Outstanding at Any Month's End $1,237 $1,220 $4,000
Average Amount Outstanding During the Year $ 706 $ 723 $ 889
Weighted Average Interest Rate During the Year 4.03% 7.07% 5.93%
The Bank has the ability to borrow funds from correspondent banks and
the Federal Home Loan Bank, as well as the Federal Reserve Bank of Boston,
by pledging various investment securities as collateral. The Company did not
borrow during 2001 or 2000 to meet short-term liquidity needs. During 1999,
there were thirty-five various days when the Company borrowed to meet these
needs. Tax payments made by our customers, which are owed to the Federal
Reserve Bank Treasury Tax and Loan account, are classified as borrowed
funds. The Company had a note payable of $847,990 due to Fleet Bank which
was paid in full in November 1999. This note was assumed from Fairbank, Inc.
at the time of the acquisition. Because of the term of the note, including
applicable prepayment fees, management determined it advantageous for the
Bank not to pay off the note until its final maturity date of November 25,
1999. There is also $16,983,087 in borrowings from the Federal Home Loan
Bank as of December 31, 2001 which represent the match funding program that
is available to qualified borrowers. These borrowings totaled $12,725,908 at
year end 2000.
Accounting for Deferred Income Taxes
- ------------------------------------
The net deferred tax asset at year end 2001 was $2,202,139. The amount
of taxable income required to be generated to fully realize such net
deferred tax asset will be approximately $7.2 Million. The taxable income
earned by the Company in 2001 was $4,608,285.
21
ITEM 2
PROPERTIES
The main office of the Bank is located at 100 Slade's Ferry Avenue,
Somerset, Massachusetts at the junctions of U.S. Routes 6, 138, and 103. The
Bank has eleven additional branches located in Fairhaven, Fall River, New
Bedford, Seekonk, Somerset and Swansea, Massachusetts, and a Loan Production
Office in Warwick, Rhode Island. As of December 31, 2001, the following Bank
properties are owned through the Bank's subsidiary, the Slade's Ferry Realty
Trust:
Location Sq. Footage
- ------------------------------------------------------------------------------------
Main Office 100 Slade's Ferry Avenue Somerset, MA 42,000
North Somerset 2722 County Street Somerset, MA 3,025
Linden Street 244-253 Linden Street Fall River, MA 1,750
Brayton Avenue 855 Brayton Avenue Fall River, MA 3,325
North Swansea 2388 G.A.R. Highway Swansea, MA 2,960
Seekonk 1400 Fall River Avenue Seekonk, MA 2,300
Fairhaven 75 Huttleston Avenue Fairhaven, MA 13,000
South Main Street 1601 South Main Street Fall River, MA 6,604
Ashley Boulevard 833 Ashley Boulevard New Bedford, MA 2,655
Offices listed below are leased by the Bank with the indicated lease
expiration dates.
Swansea Mall
(expires 2003) Rt. 118 Swansea, MA 2,250
Brayton Avenue
Drive Up Complex 16 Stevens St. Fall River, MA 549
(expires 2005)
Walgreen's Drug Store 838 Pleasant St. New Bedford, MA 835
(expires 2004)
Loan Production Office 188 Airport Road Warwick, RI 600
(Expires 2002)
The main office building contains approximately 42,000 square feet of
usable space which the Bank occupies. The Bank also has a school banking
facility located in the Somerset High School, Grandview Avenue, Somerset,
Massachusetts that consists of 200 square feet which provides basic banking
services to students and school staff. The Seekonk office is an 8,800 square
foot building of which the Bank is utilizing 2,300 square feet and leasing
out the remainder.
22
ITEM 3
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2001, no matters were submitted to a vote
of stockholders of the Company.
23
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock is listed in the NASDAQ Small Cap Market
under the symbol SFBC. The following table sets forth the range of high and
low bids as reported for the NASDAQ Small Cap Market by quarters for the
two-year period ended December 31, 2001.
2001 2000
- ----------------------------------------------
High Low High Low
- ----------------------------------------------
1st Quarter 10.00 8.81 10.88 9.25
- ----------------------------------------------
2nd Quarter 11.90 9.00 10.63 9.25
- ----------------------------------------------
3rd Quarter 13.75 10.26 10.00 8.88
- ----------------------------------------------
4th Quarter 14.00 11.10 10.00 8.63
- ----------------------------------------------
Dividends - History and Policy
The Company, since its inception in 1990 and prior thereto the Bank,
has consistently paid dividends to stockholders since 1961. The Company paid
a quarterly cash dividend of $.08 per share in the first quarter of 2001,
and then increased the cash dividend to $.09 per share for the remaining
quarters. In addition, an extra cash dividend of $.09 per share was paid in
December 2001 for a total of $.44 per share paid in 2001. In February 2000,
the Company issued a 5% stock dividend on the Company's common stock,
resulting in a distribution of 176,793 shares. The Company also paid four
quarterly cash dividends of $.08 per share in 2000, and an extra cash
dividend of $.08 per share was paid in December 2000 for a total of $.40 per
share paid in 2000.
The declaration of cash dividends is dependent on a number of factors,
including regulatory limitations, and the Bank's operating results and
financial condition. The stockholders of the Company will be entitled to
dividends only when, and if, declared by the Company's Board of Directors
out of funds legally available. Under the Massachusetts Business Corporation
Law, a dividend may not be declared if the corporation is insolvent or if
the declaration of the dividend would render the corporation insolvent.
Chapter 172 Section 28 of the Massachusetts Statutes on Bank and
Banking provides that a bank's Board of Directors may, subject to the
restriction contained in the section, declare and pay dividends on capital
stock out of net profits from time to time and to such extent as they deem
advisable. However, under this provision, no cash dividend shall be paid
unless, following the payment of such dividend, the capital stock and
retained earnings account will be unimpaired.
24
ITEM 6
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the last
five years.
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except per Share Data) 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
EARNINGS DATA
Interest Income $ 27,324 $ 28,186 $ 25,553 $ 24,306 $ 23,150
Interest Expense 12,327 12,699 10,754 10,711 10,412
Net Interest Income 14,997 15,487 14,799 13,595 12,738
Provision for Loan Losses 750 1,200 550 600 500
Noninterest Income 1,769 1,857 2,086 1,568 1,562
Noninterest Expense 11,408 10,206 10,556 8,984 9,033
Income Before Income Taxes 4,608 5,938 5,779 5,579 4,767
Applicable Income Taxes 1,398 1,864 1,923 2,216 1,921
Net Income 3,210 4,074 3,856 3,363 2,846
PER SHARE DATA(1)
Net Income-Basic $ 0.84 $ 1.09 $ 1.060 $ 0.940 $ 0.850
Net Income-Diluted(2) $ 0.84 $ 1.09 $ 1.050 $ 0.940 $ 0.850
Cash Dividends $ 0.44 $ 0.40 $ 0.358 $ 0.265 $ 0.230
Book Value (at end of period) $ 9.94 $ 9.41 $ 8.567 $ 8.200 $ 7.746
Avg. Shs. Outstanding 3,830,575 3,743,138 3,650,275 3,572,329 3,344,100
Shares Outstanding Year End 3,869,924 3,789,503 3,520,409 3,446,413 3,236,713
BALANCE SHEET DATA
Assets $ 394,761 $ 388,619 $ 358,121 $ 340,355 $ 301,571
Loans 253,884 256,153 242,049 218,230 213,736
Unearned Discount 382 519 594 691 690
Allowance for Loan Losses 5,484 4,776 3,766 3,569 3,694
Loans, Net 248,018 250,849 237,669 213,938 209,310
Goodwill 2,173 2,400 2,627 2,854 3,081
Investments 96,401 88,109 81,806 79,978 58,668
Deposits 337,043 337,001 316,431 303,786 271,322
Stockholders' Equity 38,466 35,674 31,664 29,707 26,436
FINANCIAL RATIOS
Net Yield on Interest Earning
Assets(3) 4.18% 4.58% 4.71% 4.70% 4.66%
Net Interest Spread(3) 3.34 3.75 3.99 3.91 3.88
Net Income as a Percentage of
Average Assets 0.81 1.09 1.11 1.06 0.96
Average Equity 9.04 12.92 12.56 11.98 12.27
Dividend Payout Ratio 52.63 36.84 34.36 28.54 27.57
Average Equity to
Average Assets 9.00 8.45 8.85 8.86 7.79
Earnings per share are computed based on the average number of shares
of common stock outstanding during the year. On January 12, 1998, the
Company declared a 5% stock dividend mailed to stockholders on
February 11, 1998. On January 10, 2000, the Company declared a 5%
stock dividend mailed to stockholders on February 9, 2000. Per share
data has been restated to reflect the effect of the stock splits and
the stock dividends.
There were no stock options outstanding in years prior to 1997.
Calculated on a fully taxable equivalent basis.
25
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
The purpose of Management's Discussion and Analysis is to focus on
certain significant factors which have affected the Company's operating
results and financial condition, and to provide stockholders a more
comprehensive review of the figures contained in the financial data of this
report.
2001 Items of Significance
* In 2001, Slade's Ferry Bancorp recorded net income of $3,210,253 or
$0.84 per share on a diluted basis compared to $4,074,439 or $1.09 per
share on a diluted basis in 2000. This represents a decrease of
$864,186 or 21.21% in net income and $0.25 or 22.93% per share on a
diluted basis between 2001 and 2000.
* Return on average equity for 2001 was 9.04%, down by 3.88% when
compared to 12.92% reported in 2000. Return on average assets for 2001
was .81%, down by .28% when compared to 1.09% reported in 2000.
* The Company increased its cash dividend during the second quarter from
$.08 per share to $.09 per share, and paid an extra dividend in
December, 2001 to reflect total dividend payments of $.44 per share,
up by $.04 per share when compared to $.40 per share paid in 2000.
* Book value of the Company's common stock increased to $9.94 in 2001
from $9.41 reported in 2000 and $8.57 reported in 1999.
RESULTS OF OPERATIONS
Net interest income, which is the difference between interest and
dividend income earned on earning assets and interest expense paid on
interest-bearing liabilities, is the main contributor to net income.
Increases or decreases in interest rates affect the yields earned on loans
and investments and the cost of deposits and borrowings needed to fund these
earning assets. On a fully tax equivalent basis, our net interest income was
$15.2 Million in 2001, $15.7 Million in 2000 and $15.0 Million in 1999.
Although we saw growth of $20.8 Million in average earning assets from
$344.2 Million in 2000 to $365.0 in 2001, the historical 475 basis-point
reduction in interest rates during the year continued to compress our net
interest margins. As our national economy slipped into a recession during
the first quarter of 2001, the prompt aggressive action by the Federal
Reserve Bank to reduce short-term interest rates in an attempt to stimulate
growth in our economy impacted our net interest margin as a result of loan
and investment repricing at lower interest rates due to refinancing
opportunities and prepayments. Average earning assets produced a fully
taxable equivalent yield of 7.55% in 2001, compared to 8.26% in 2000, and
8.08% in 1999.
The loan portfolio, which generally produces higher interest yields
than our investment portfolio, represented only 63.70% of average assets in
2001, compared to 66.65% in 2000, and 66.12% in 1999.
Cost of funds decreased to 4.21% in 2001 compared to 4.51% in 2000 and
4.09% in 1999. During 2001, the average balances in interest-bearing
liabilities increased to $292.8 Million, compared to $281.3 Million in 2000
and $262.7 Million in 1999.
26
The net interest spread, representing the difference between the
weighted average yield earned on our assets and the weighted average cost of
interest-bearing liabilities decreased to 3.34% in 2001 from 3.75% in 2000
and 3.99% reported in 1999.
Net yield on earning assets, which represents net interest income as a
percentage of average earning assets decreased to 4.18% in 2001 from 4.58%
in 2000 and 4.71% in 1999. As our earning assets repriced to lower interest
rates at a faster pace than our interest-bearing liabilities, our earnings
were negatively impacted as a direct result of decreasing interest margins.
The Provision for Loan Losses is a charge against earnings and funds
the Allowance for Loan Losses. It is management's desire to maintain an
appropriate ratio of the Allowance for Possible Loan Losses to total
outstanding loans. The Bank's provision for 2001 was $750,000, a decrease of
$450,000 from $1,200,000 recorded in 2000. The 1999 provision was $550,000.
The increased provision in 2000 was attributed to management's decision to
change the methodology and guidelines used in calculating the adequate level
of loan loss reserves required to offset any possible unforeseeable loss
exposure within our loan portfolio. Increasing credit risk due to a higher
commercial real estate loan portfolio during 2000 is responsible for the
review and change in the methodology and guidelines.
Total Other Income for 2001 decreased by $86,903 or 4.6% to $1,769,532
from $1,856,435 recorded during 2000. Service charges on deposit accounts
decreased slightly in 2001 to $561,370 when compared to $564,444 in 2000 and
$618,303 in 1999. These decreases are primarily due to a lower amount of
service charges being realized on demand deposit accounts, as a result of
higher levels of compensating balances maintained in the business checking
account category.
During 2001, due to unfavorable stock market conditions as a result of
the state of the economy, only $14,934 was realized as gains on sales of
various marketable corporate equity securities, compared to $333,581 during
2000 and $666,898 in 1999.
Increase in cash surrender value of life insurance policies associated
with both the Directors' Life Insurance and Executive Officers' Life
Insurance increased by $68,168 from $282,855 reported as of year end 2000 to
$351,023 in 2001. This increase is due to an annual increase in the cash
surrender value of these policies. Purchase of policies in 2001 for newly
hired executives totaled $515,500, which generated additional earnings. The
purchase of $1.7 Million in Bank Owned Life Insurance for Directors
originated in 1998 and in 2000, approximately $5.0 Million was purchased for
Executives.
The line item Other Income represents income earned on safe deposit
box rentals, checkbook printing revenue, exchange and commission fees,
recoveries of previously recorded losses relating to check fraud, and
customer investment commission fees. In addition, the Bank sold a vacant
parcel of land at our Fairhaven branch location recognizing a gain of
$105,000 in 2001.
Total Other Expense increased by $1,202,505 to $11,408,387, when
compared to $10,205,882 recorded in 2000 and $10,556,569 in 1999. Salaries
and Employee Benefits, which is the largest component of this category,
increased by $1,054,320 to $7,124,377, up from $6,070,057 recorded in 2000.
In 1999, Salaries and Benefits were $5,780,176. These increased expenses
were due to general wage adjustments and staff additions in the lending,
marketing, training, and customer investment areas of the Bank. Also, our
medical insurance premiums increased by approximately 20%. Occupancy and
Equipment Expense combined totaled $1,426,855 in 2001, up by $36,500 when
compared to $1,390,355 reported in 2000 and $1,358,415 in 1999.
27
Costs associated with stationery and supplies were $241,186 in 2001, a
slight increase of $16,685 when compared to $224,501 in 2000. These same
costs were $255,665 in 1999.
Professional fees associated with legal, audit, collection and
repossession, and consultant expenses decreased by $20,399, from $385,079 in
2000 to $364,680 in 2001. These expenses in 1999 were $410,753.
Marketing Expenses attributed to advertising, business development,
and public relations decreased by $135,480, from $556,960 in 2000 to
$421,480 in 2001. Marketing Expense in 1999 was $428,534. There was an
increase in television advertising during 2000. As we continue to promote
and develop the Bank in our market areas, we attempt to control cost as much
as possible.
The assessment for F.D.I.C. deposit insurance increased by $96,621 in
2001, from $63,684 in 2000 to $160,305. In 1999, this cost was $34,226. This
increase is related to the issuance of the Memorandum of Understanding, an
informal agreement between the F.D.I.C. and the Bank.
Gains and Losses on Sales of Other Real Estate Owned is a result of
sales of real estate acquired through the foreclosure process. In 2001, the
Bank had no Other Real Estate Owned. The Bank realized a gain of $49,758 in
2000 on the sale of OREO, and a loss of $29,069 recognized in 1999.
Writedowns of Other Real Estate Owned occurs when bank owned property
is adjusted to the current appraised value if the fair market value is less
than the amount carried by the Bank. In 2001 and 2002, the Bank incurred no
writedown compared to a $57,024 writedown charge in 1999.
The following table sets forth the components of the line item Other
Expense.
2001 2000 1999
- -------------------------------------------------------------------------
Amortization of Goodwill $ 226,800 $ 226,800 $ 226,800
Communications 326,234 308,636 317,993
Other Real Estate Owned Expense 0 38,000 161,632
Committee Fees 190,900 189,350 183,900
Other Various Expense 925,570 802,218 1,312,382
- -------------------------------------------------------------------------
Other Expense Total $1,669,504 $1,565,004 $2,202,707
=========================================================================
Goodwill arising from the acquisition of Fairbank, Inc. has been
amortized on a straight-line basis over a period of fifteen years. The
amortization of goodwill ceases upon the adoption of Statement of Financial
Accounting Standards No. 142 effective January 1, 2002, which requires that
goodwill no longer be amortized, but instead be reviewed and tested for
impairment on an annual basis.
Communications Expense increased by $17,598 in 2001 due to an increase
in the postage rate. This expense was $308,636 and $317,993 respectively for
2000 and 1999.
Since the Bank had no Other Real Estate Owned during 2001, no expenses
relating to this property were incurred. OREO expenses for 2000 were $38,000
and $161,632 in 1999.
28
Other Various Expenses increased by $123,352 in 2001 from $802,218
reported in 2000 to $925,570. This expense in 1999 was $1,312,382. The 2001
increase is primarily attributed to an increase in ACH fees of $28,100, ATM
charges of $66,400, and computer service fees of $19,000. The amount
reported in 1999 includes a one-time charge of $277,643 to settle a court
judgment resulting from a civil suit.
Income before income taxes totaled $4,608,285 as of year-end 2001, a
decrease of $1,329,943 when compared to $5,938,228 reported as of December
31, 2000. Applicable taxes decreased by $465,757 to $1,398,032 when compared
to $1,863,789 reported in the prior year. The establishment in 1999 of
Slade's Ferry Preferred Capital Corporation (REIT) to utilize certain state
tax savings strategies continues to benefit the Bank.
The Company's net earnings were $3,210,253, $4,074,439, and $3,856,488
for 2001, 2000, and 1999 respectively. Diluted earnings per share were $.84
for twelve months ending December 31, 2001 compared to $1.09 for the same
period in 2000.
Unaudited Quarterly Financial Summary
(Dollars in Thousands) March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------
2001:
Revenues $7,618 $7,348 $7,377 $6,750
Operating Income 1,259 1,002 1,214 1,133
Net Income 869 715 832 794
Earnings per share
Diluted $ 0.22 $ 0.19 $ 0.22 $ 0.21
Basic $ 0.22 $ 0.19 $ 0.22 $ 0.21
2000:
Revenues $7,104 $7,301 $7,467 $8,170
Operating Income 1,486 712 1,730 2,010
Net Income 1,008 512 1,187 1,367
Earnings per share
Diluted $ 0.27 $ 0.14 $ 0.32 $ 0.36
Basic $ 0.27 $ 0.14 $ 0.32 $ 0.36
FINANCIAL CONDITION
Loans
Loan demand for residential real estate loans increased during 2001 as
new and existing homeowners took advantage of much lower interest rates. New
commercial loan commitments, the largest component of our loan portfolio,
decreased due to the recession, as borrowers focused on refinancing existing
debt to lower rates. As a result, total loans decreased slightly by 0.9%
from year end 2000 to 2001. The loan portfolio decreased by $2.3 Million to
$253.9 Million when compared to $256.2 Million reported at December 31,
2000. The largest segment of the loan portfolio is commercial real estate
loans representing 51% of total loans. These loans are collateralized by
various types of commercial properties, without any predominate type of
property nor concentration of credit in any one industry. The properties
consist of apartment complexes, medical centers, strip malls, factories with
multiple tenants, and retail office units located in the Bank's market area
extending throughout
29
Southeastern Massachusetts and nearby cities and towns in Rhode Island.
Commercial real estate loans generally have a higher degree of credit risk
than residential real estate loans because they are predominately dependant
on the success of the business. The Bank adheres to a credit criteria policy
that strives to maintain the quality of the loan portfolio. The process of
granting a commercial loan consists of an independent analysis of the
financial condition of the borrower and the business entity by the Bank's
credit analysis division. In turn, the borrowing request is further
evaluated by the Loan Committee and all loans in excess of $100,000 are
submitted to the Executive Committee of the Board of Directors for final
approval before the loan is granted. Periodically, during the life of the
loan, analysis of financial statements of the business is performed to
determine if there are any weaknesses or negative trends developing, and if
so, contact with the borrower is made to ascertain the cause and what
remedial action is planned.
Another component in the loan portfolio is residential real estate
which accounts for 24% of the loan portfolio and is comprised of mortgages
on one to four family properties. Credit is granted based on income to debt
ratio, a satisfactory credit report and the appraised value of the property.
The Bank also provides a program to encourage home ownership for first-time
homebuyers.
Other types of loans total 25% of the portfolio and are comprised of
commercial loans which are generally short-term loans to finance business
inventory, consumer credit installment loans, automobile financing and
credit card loans.
Investments
- -----------
The investment portfolio represents the second largest component of
the Company's assets and consists of securities in the Available-for-Sale
category and securities in the Held-to-Maturity category. The designation of
which category the security is to be classified as is determined at the time
of the purchase of the investment instrument. Securities in the Available-
for-Sale category are securities that the Company intends to hold for an
indefinite period of time, but not necessarily to maturity. These securities
may be sold in response to interest rate changes, liquidity needs or other
factors. Any unrecognized gains or losses, net of taxes, is reflected in
Stockholders Equity as a separate component.
The Available-for-Sale category at December 31, 2001 had net
unrecognized losses of $132,759 of which $727,847 in unrecognized gains, net
are attributed to securities of U.S. Treasury, other U.S. Government
corporations and agencies, mortgage-backed securities and corporate debt
securities, and $860,606 in unrecognized losses, net are attributable to
marketable equity securities.
Securities of U.S. Treasury, U.S. Government corporations and
agencies, and mortgage-backed securities have little or no credit risk,
other than being sensitive to changes in interest rates; and if held to
maturity, these securities will mature at par. The Company amortizes
premiums and accretes discounts over the life of the security.
Marketable equity securities, however, have a greater risk as they are
subject to rapid market fluctuations. These securities are constantly
monitored and evaluated to determine their suitability for sale or retention
in the portfolio. Management minimizes its risk by limiting the total amount
invested into marketable equity securities to 6.5% of the total investment
portfolio. At December 31, 2001, the amount invested in marketable equity
securities at amortized cost was 6.3% of the total investment portfolio
distributed over various business sectors.
The Held-to-Maturity category consists predominately of securities of
U.S. Treasury, U.S.
30
Government corporation and agencies, and securities issued by states of the
United States and political subdivisions of states. The Company has the
positive intent and ability to hold these securities to maturity. In
managing the Held-to-Maturity portfolio, the Company seeks to maximize its
return and maintain consistency to meet short and long term liquidity
forecasts by purchasing securities with maturities laddered within a short-
term period of 1-3 years, a mid-term period of 3-5 years, and some
securities extending out to 10 years. The Company does not purchase
investments with off-balance sheet characteristics, such as swaps, options,
futures, and other hedging activities that are called derivatives. The main
objective of the investment policy is to provide adequate liquidity to meet
reasonable declines in deposits and any anticipated increases in the loan
portfolio, to provide safety of principal and interest, to generate earnings
adequate to provide a stable income and to fit within the overall
asset/liability management objectives of the Company.
Deposits and Other Liabilities
Total deposits remained flat through most of 2001. Certificates of
deposit (term deposits) is the largest component of interest-bearing
deposits with maturities extending out to a maximum of three years. Total
interest-bearing deposits decreased by approximately $1.0 Million from
$272.7 Million to $271.7 Million. Due to the significant decrease in short-
term rates over the last twelve months, customers are attempting to find
better yielding alternative investments. Offsetting this decrease in
interest-bearing deposits was an increase of $1.0 Million in noninterest
bearing deposits.
The Bank is a member of the Federal Home Loan Bank (FHLB) and borrows
funds secured by residential mortgage loans and other assets. This borrowing
mechanism enables the Bank to match-fund loans to commercial borrowers who
meet certain credit and deposit requirements. At December 31, 2001, the Bank
had $17.0 Million of loans match-funded with FHLB compared to $12.7 Million
at year end 2000.
Asset/Liability Management and Interest Rate Risk
- -------------------------------------------------
The Company's Asset-Liability Management Committee, comprised of the
Bank's Executive Management team, monitors and evaluates the interest rate
sensitivity of the Company's assets and liabilities.
Management's objective is to reduce and control the volatility of its
net interest margin by managing the relationship of interest-earning assets
and interest-bearing liabilities. In order to manage this relationship, the
committee utilizes a GAP report prepared on a monthly basis which indicates
the differences or gap between interest-earning assets and interest-bearing
liabilities in various maturity or repricing time periods. This, in
conjunction with certain assumptions, and other related factors, such as
anticipated changes in interest rates and projected cash flows from loans,
investments and deposits, provides management a means of evaluating interest
rate risk.
Management also considers that certain assets and liabilities react
differently to changes in interest rates. Some assets may have rate caps or
prepayment fees attached to the instrument, and some liabilities have early
withdrawal penalties.
A positive gap results when more assets than liabilities are expected
to reprice within a certain time frame, and a negative gap reflects an
excess of liabilities repricing in that period. A positive gap would tend to
increase net interest income when rates are rising and decrease net interest
income when rates are falling. A negative gap position would tend to produce
the opposite effect. At December 31,
31
2001, for the period from 0 days to 2 years, the Company has a cumulative
negative gap position of $12.4 Million. This equates to a percentage of
total assets of a negative 3.14% which is within the specific target for
interest rate sensitivity established by the Company. The negative gap
occurs as a result of the amount of deposits that are subject to repricing
during this time period.
In addition to the GAP report, the Company also uses an analysis to
measure the exposure of net interest income to changes in interest rates
over a relatively short (i.e., 12 months) time frame. The analysis projects
future interest income and interest expense from the Company's interest-
earning assets and interest-bearing liabilities. Depending on the GAP
position, the Company's policy limit on interest rate risk specifies that if
interest rates were to change immediately up or down 200 basis points,
estimated net interest income for the next twelve months would not decline
by more than ten percent.
The following table reflects the Company's estimated exposure as a
percentage and the dollar impact of estimated net interest income for the
next twelve months, assuming an immediate change in interest rates:
Estimated Exposure as a Percentage
Rate Change of Net Interest Income
(Basis Points) December 31, 2001 Dollar Impact
- -----------------------------------------------------------------------------
+200 (0.72%) ($108,000)
-200 (5.51%) ($820,000)
The model used to monitor earnings-at-risk provides management a
measurement tool to assess the effect of changes in interest rates on the
Company's current and future earnings. The 10% limit established by the
Company provides an internal tolerance level to control interest rate risk
exposure.
Nonperforming Assets
- --------------------
The Company considers nonaccrual loans, loans past due 90 days or more
but still accruing, restructured loans not performing in accordance with
amended terms, and real estate acquired through foreclosure as nonperforming
assets. Nonperforming assets as a total decreased to $1.6 Million at year
end 2001, from $2.8 Million reported at year end 2000. At year end 1999,
nonperforming assets totaled $2.4 Million.
Nonaccrual loans is the largest component of nonperforming assets, and
at December 31, 2001, this category decreased to $1.1 Million from $2.4
Million reported at end of previous year.
The Company places a loan on nonaccrual status when, in the opinion of
management, the collectability of the principal and interest becomes
doubtful. Generally, when a commercial loan, commercial real estate loan or
a residential real estate loan becomes past due 90 days or more, the Company
discontinues the accrual of interest and reverses previously accrued
interest. The loan remains in the nonaccrual status until the loan is
current and six months of payments are made. Then it is reclassified as an
accruing loan.
If it is determined that collectibility of the loan no longer exists,
the loan is charged-off to the Allowance for Loan Losses, or if applicable,
any real estate collateralizing the loan is acquired through foreclosure and
categorized as Other Real Estate Owned.
32
Loans 90 days or more past due but still accruing increased to
$444,000 at year end 2001 from $335,000 reported at year end 2000.
Management continues to accrue on these loans due to the excess values of
collateral securing these loans compared to their outstanding balances.
There was no real estate acquired by foreclosure or substantively
repossessed at December 31, 2001 and at the end of the prior year.
The percentage of nonaccrual loans to total loans decreased from the
prior year due to the decrease of loans in the nonaccrual category and the
decline of the loan portfolio. In addition, the percentage of nonaccrual
loans, restructured loans and real estate acquired by foreclosure to total
assets decreased as result of increased asset levels. The $137,000 of
restructured loans represents one borrower where the original loan term was
amended and payments are current under the amended terms.
Statement of Financial Accounting Standards No. 114 "Accounting by
Creditors for Impairment of a Loan" applies to all loans except large groups
of smaller-balance homogeneous loans that are collectively evaluated for
impairment, loans measured at fair value or at a lower of cost or fair
value, leases, and debt securities as defined in Statement 115. Statement
114 requires that impaired loans be valued at the present value of expected
future cash flows discounted at the loan's effective interest rate or as a
practical expedient, at the loan's observable market value of the collateral
if the loan is collateral dependent. Smaller-balance homogeneous loans are
considered by the Company to include consumer installment loans and credit
card loans.
At December 31, 2001, there were $7,521,689 of loans which the Company
has determined to be impaired, of which $7,461,437 have a related allowance
for credit losses of $1,195,324. As of December 31, 2000, the recorded
investment in impaired loans was $3,178,869, with a related allowance for
credit losses of $424,557. The increase during 2001 was primarily due to the
addition to impairment of two loans totaling approximately $4,700,000, which
have related credit loss allowances. Management is not aware of any other
loans that pose a potential credit risk or where the loans are current but
the borrowers are experiencing financial difficulty.
33
Allowance for Loan Losses
- -------------------------
The table below illustrates the changes in the Allowance for Loan
Losses for the periods indicated.
(Dollars In Thousands) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------
Balance at January 1 $4,776 $3,766 $3,569 $3,694 $3,354
- ---------------------------------------------------------------------------------
Charge Offs:
Commercial (73) (194) (221) (0) (40)
Real estate construction (0) (0) (0) (0) (0)
Real estate mortgage (0) (23) (23) (716) (147)
Installment/Consumer (28) (138) (158) (76) (68)
- ---------------------------------------------------------------------------------
(101) (355) (402) (792) (255)
- ---------------------------------------------------------------------------------
Recoveries:
Commercial 14 50 11 8 41
Real estate construction 0 0 0 0 0
Real estate mortgage 29 92 24 43 16
Installment/Consumer 16 23 14 16 38
- ---------------------------------------------------------------------------------
59 165 49 67 95
- ---------------------------------------------------------------------------------
Net charge offs (42) (190) (353) (725) (160)
- ---------------------------------------------------------------------------------
Additions charged to
operations 750 1,200 550 600 500
Allowance attributable to
acquisition 0 0 0 0 0
- ---------------------------------------------------------------------------------
Balance at end of period $5,484 $4,776 $3,766 $3,569 $3,694
=================================================================================
Allowance for Loan Losses as a
percent of year end loans 2.16% 1.86% 1.56% 1.64% 1.73%
Ratio of net charge offs to
average loans outstanding (0.02%) (0.08%) (0.15%) (0.34%) (0.08%)
The Allowance for Loan Losses is available to absorb losses on loans
deemed by management as uncollectible. In assessing the adequacy of the
level of the allowance, management considers the status of nonaccrual loans
and specific borrower situations, the current and anticipated economic
climate of the area, including national credit trends and the historical
credit experiences within the region. Additions to the allowance are
provided by charges to earnings and recoveries on previously charged-off
loans. Deductions from the Allowance are transacted as a charge-off when a
loan is deemed uncollectible. The Allowance for Loan Losses as a percentage
of outstanding loans at December 31, 2001, was 2.16% compared to 1.86%
reported at year end 2000. The ratios at years ending 1999, 1998, and 1997
were 1.56%, 1.64% and 1.73% respectively. In 2001, the Company provided
$750,000 to the Allowance and recovered $58,821 from previously charged-off
loans.
Loans charged-off during 2001 totaled $100,662 resulting in net
charge-offs of $41,841. Net charge-offs for prior years were $189,512,
$353,410, $724,583, and $160,446 for 2000, 1999, 1998 and 1997 respectively.
In addition to management's assessment of the Allowance for Loan
Losses, the Allowance is also evaluated by regulatory agencies and
independent accountants as part of their examination and audit procedures.
34
Liquidity
- ---------
Liquidity represents the ability of the Bank to meet its funding
requirements. In assessing the appropriate level of liquidity, the Bank
considers deposit levels, lending requirements and investment maturities in
light of prevailing economic conditions. Through this assessment, the Bank
manages its liquidity level to optimize earnings and respond to fluctuations
in customer borrowing needs.
The Company's principle sources of funds are customer deposits, loan
amortization, loan payoffs, and the maturities of investment securities.
Through these sources, funds are provided for customer withdrawals from
deposit accounts, loan origination, draw-downs on loan commitments,
acquisitions of investment securities, and other normal business activities.
Investors' capital also provides a source of funding.
The largest source of funds is provided by depositors. The largest
component of the Company's deposit base is term certificates which extend
out to a maximum of three years. The Company does not participate in
brokered deposits. Deposits are obtained from consumers and commercial
customers within the Bank's community reinvestment area, being Bristol
County, Massachusetts and several abutting towns in Rhode Island.
The Company also has the ability to borrow funds for liquidity
purposes from correspondent banks, the Federal Home Loan Bank, as well as
the Federal Reserve Bank of Boston by pledging various investment securities
as collateral. Tax payments made by our customers which are owed to the
Federal Reserve Bank's Treasury Tax and Loan account are classified as Other
Borrowed Funds.
Excess available funds are invested on a daily basis into Federal
Funds Sold. An appropriate level of Federal Funds Sold is maintained to meet
loan commitments, anticipated loan growth and deposit forecasts. Funds
exceeding this level are then used to purchase investment securities that
are suitable in yields and maturities for the investment portfolio.
Liquidity in 2001 was primarily provided by the proceeds from the
maturities and sales of securities totaling $57.6 Million, a decrease in
loans of $2.2 Million, and advances, net of payments, from the Federal Home
Loan Bank of $4.3 Million. These were offset by purchases of securities of
$65.2 Million, and purchases of life insurance policies for Executive
Officers of $.5 Million. Other factors affecting liquidity included cash
provided by operating activities and financing activities as indicated in
the cash flow statements.
Capital
- -------
As of December 31, 2001, the Company had total capital of $38,466,131.
This represents an increase of $2,791,758 from $35,674,373 reported on
December 31, 2000. The increase in capital was a combination of several
factors. Additions consisted of twelve months earnings of $3,210,253 and
transactions originating through the Dividend Reinvestment Program whereby
7,279.818 shares were issued for cash contributions of $73,649 and
73,142.144 shares were issued for $803,933 in lieu of cash dividend
payments. These additions were offset by dividends paid of $1,689,574.
Also, affecting capital is the line item Accumulated other
comprehensive income (loss) which reflects net unrealized gains or losses,
net of taxes, on securities classified as Available-for-Sale and the minimum
pension liability adjustment. On December 31, 2000, the Available-for-Sale
portfolio had unrealized losses, net of taxes, of $596,543, and on December
31, 2001, as a result of current market
35
values, the portfolio reflects unrealized losses, net of taxes, of $120,943.
There was an increase in the minimum pension liability adjustment from
$24,143, net of taxes, recorded December 31, 2000 to $106,246 as of December
31, 2001.
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.
Under the revised informal agreement entered into with the
Massachusetts Commissioner of Banks and the Federal Deposit Insurance
Corporation, effective January 17, 2002, the Bank is required to maintain a
seven (7) percent Tier I Leverage Capital. As of December 31, 2001, this
ratio was 7.74%.
In addition to meeting the required levels, the Company and the Bank's
Capital ratios meet the criteria of the "well capitalized" category
established by the federal banking agencies as of December 31, 2001.
36
The following table illustrates the capital position of Slade's Ferry
Bancorp and Slade's Ferry Trust Company for years ending December 31, 2001
and 2000.
Slade's Ferry Bancorp 2001 2000
- --------------------------------------------------------------------------------------------
(Dollars in Thousands) Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------
Total Capital (to Risk Weighted Assets) $ 39,393 14.43% $ 36,994 13.24%
Minimum required 21,832 8.00 22,360 8.00
Excess 17,561 6.43 14,634 5.24
Tier I Capital (to Risk Weighted Assets) 35,956 13.18 33,484 11.98
Minimum required 10,916 4.00 11,180 4.00
Excess 25,040 9.18 22,304 7.98
Risk Adjusted Assets, net of goodwill,
nonqualifying intangibles, excess allowance
and excess deferred tax assets 272,900 279,499
Tier I Capital (Leverage Ratio) 35,956 8.98 33,484 8.74
Minimum required 16,025 4.00 15,323 4.00
Excess 19,931 4.98 18,161 4.74
Quarterly average total assets, net of goodwill,
nonqualifying intangibles and excess deferred
tax assets 400,625 383,112
Slade's Ferry Trust Company 2001 2000
- --------------------------------------------------------------------------------------------
(Dollars in Thousands) Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------
Total Capital (to Risk Weighted Assets) $ 34,046 12.55% $32,703 11.76%
Minimum required 21,697 8.00 22,253 8.00
Excess 12,349 4.55 10,450 3.76
Tier I Capital (to Risk Weighted Assets) 30,630 11.29 29,210 10.50
Minimum required 10,849 4.00 11,126 4.00
Excess 19,781 7.29 18,084 6.50
Risk Adjusted Assets, net of goodwill,
nonqualifying intangibles, excess allowance
and excess deferred tax assets 271,225 278,190
Tier I Capital (Leverage Ratio) 30,630 7.74 29,210 7.69
Minimum required(1) 15,834 4.00 15,186 4.00
Excess 14,796 3.74 14,024 3.69
Quarterly average total assets, net of goodwill,
nonqualifying intangibles and excess deferred
tax assets 395,850 379,844
The Bank is required to maintain a 7% Tier 1 Leverage Capital ratio
under the revised informal agreement with the Massachusetts
Commissioner of Banks and the Federal Deposit Insurance Corporation,
effective January 17, 2002.
37
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The most significant market risk factor affecting the financial
condition and operating results of Slade's Ferry Bancorp is interest rate
risk. Reference is hereby made to this Form 10-K, pages 10 and 11, under the
headings "Interest Rate Risk" and "Interest Sensitivity GAP Report" for a
discussion of market risk.
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements, together with the independent
auditors' report, appear beginning on page F-1 of the Annual Report on Form
10-K.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company had no disagreements with its independent accountants on
accounting and financial disclosure matters.
38
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is hereby made to the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders April 08, 2002. The information set
forth under the heading "Directors and Executive Officers" and under the
heading "Section 16(a) Beneficial Ownership Reporting Compliance" of such
Proxy Statement is incorporated herein by reference.
ITEM 11
EXECUTIVE COMPENSATION
Reference is hereby made to the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders April 08, 2002. The information set
forth under the heading "Executive Compensation Tables and Information" of
such Proxy Statement is incorporated herein by reference.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is hereby made to the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders April 08, 2002. The information set
forth under this heading of such Proxy Statement is incorporated herein by
reference.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is hereby made to the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders April 08, 2002. The information set
forth under this heading of such Proxy Statement is incorporated herein by
reference.
39
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets F-3
Consolidated Statements of Income F-4
Consolidated Statements of Changes in
Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
(2) Financial Statement Schedules
All financial statement schedules required by Item 14(a)(2)
have been omitted because they are inapplicable or because the
required information has been included in the Consolidated
Financial Statements or Notes thereto.
(3) Exhibits: see attached Exhibits Index Page X-1
(b) Reports on Form 8-K: A Form 8-K was filed on February 8, 2002
reporting the retirement and resignation from the Board of Directors
of both the Bank and the Company as of March 29, 2002 of James D.
Carey, the President and CEO of the Bank and Executive Vice President
of the Company.
40
INDEX TO FINANCIAL STATEMENTS
Slade's Ferry Bancorp and Subsidiaries Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 2001
and December 31, 2000 F-3
Consolidated Statements of Income for the years ended
December 31, 2001, December 31, 2000 and December 31, 1999 F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 2001,
December 31, 2000 and December 31, 1999 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, December 31, 2000 and December 31, 1999 F-7
Notes to Consolidated Financial Statements F-9
F-1
SHATSWELL, MACLEOD & COMPANY, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
83 PINE STREET
WEST PEABODY, MASSACHUSETTS 01960-3635
TELEPHONE (978) 535-0206
FACSIMILE (978) 535-9908
The Board of Directors
and Stockholders
Slade's Ferry Bancorp
Somerset, Massachusetts
INDEPENDENT AUDITORS' REPORT
----------------------------
We have audited the accompanying consolidated balance sheets of Slade's
Ferry Bancorp and Subsidiary as of December 31, 2001 and 2000 and the
related consolidated statements of income, changes in stockholders' equity
and cash flows for each of the years in the three-year period ended December
31, 2001. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Slade's Ferry Bancorp and Subsidiary as of December 31, 2001 and
2000, and the consolidated results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United
States of America.
/s/SHATSWELL, MacLEOD & COMPANY, P.C.
SHATSWELL, MacLEOD & COMPANY, P.C.
West Peabody, Massachusetts
January 11, 2002
F-2
SLADE'S FERRY BANCORP AND SUBSIDIARY
------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 2001 and 2000
--------------------------
2001 2000
-----------------------------
ASSETS
Cash and due from banks $ 13,730,752 $ 15,847,819
Interest bearing demand deposits with other banks 174,945 99,363
Money market mutual funds 86,613 113,527
Federal Home Loan Bank overnight deposit 6,000,000
Federal funds sold 8,700,000 12,000,000
-----------------------------
Cash and cash equivalents 28,692,310 28,060,709
Interest bearing time deposit with other bank 100,000
Investments in available-for-sale securities (at fair value) 79,105,537 67,993,096
Investments in held-to-maturity securities (fair values of $16,590,243
as of December 31, 2001 and $19,088,080 as of December 31, 2000) 16,281,712 19,102,496
Federal Home Loan Bank stock 1,013,400 1,013,400
Loans, net 248,017,635 250,848,831
Premises and equipment 6,455,837 6,765,689
Goodwill 2,173,368 2,400,168
Accrued interest receivable 1,953,989 2,351,926
Cash surrender value of life insurance 7,697,441 6,830,918
Other assets 3,269,334 3,252,123
-----------------------------
Total assets $394,760,563 $388,619,356
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 65,293,871 $ 64,273,911
Interest-bearing 271,749,471 272,726,990
-----------------------------
Total deposits 337,043,342 337,000,901
Federal Home Loan Bank advances 16,983,087 12,725,908
Other borrowed funds 465,216 1,200,000
Other liabilities 1,749,787 1,965,174
-----------------------------
Total liabilities 356,241,432 352,891,983
-----------------------------
Preferred stockholders' equity in a subsidiary company 53,000 53,000
-----------------------------
Stockholders' equity:
Common stock, par value $.01 per share; authorized 10,000,000 shares;
issued and outstanding 3,869,924.9 shares in 2001 and 3,789,503.5
shares in 2000 38,700 37,895
Paid-in capital 26,761,997 25,885,220
Retained earnings 11,892,623 10,371,944
Accumulated other comprehensive loss (227,189) (620,686)
-----------------------------
Total stockholders' equity 38,466,131 35,674,373
-----------------------------
Total liabilities and stockholders' equity $394,760,563 $388,619,356
=============================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
SLADE'S FERRY BANCORP AND SUBSIDIARY
------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Years Ended December 31, 2001, 2000 and 1999
--------------------------------------------
2001 2000 1999
-----------------------------------------
Interest and dividend income:
Interest and fees on loans $21,554,165 $22,486,187 $20,529,165
Interest and dividends on securities:
Taxable 4,410,499 4,588,612 4,265,369
Tax-exempt 533,287 524,652 499,384
Interest on federal funds sold 598,934 509,738 218,772
Other interest 226,785 77,157 40,211
-----------------------------------------
Total interest and dividend income 27,323,670 28,186,346 25,552,901
-----------------------------------------
Interest expense:
Interest on deposits 11,333,086 11,918,906 10,333,314
Interest on Federal Home Loan Bank advances 965,008 728,622 303,341
Interest on other borrowed funds 28,436 51,143 116,976
-----------------------------------------
Total interest expense 12,326,530 12,698,671 10,753,631
-----------------------------------------
Net interest and dividend income 14,997,140 15,487,675 14,799,270
Provision for loan losses 750,000 1,200,000 550,000
-----------------------------------------
Net interest and dividend income after
provision for loan losses 14,247,140 14,287,675 14,249,270
-----------------------------------------
Other income:
Service charges on deposit accounts 561,370 564,444 618,303
Overdraft service charges 257,586 250,454 269,508
Gain on sales of available-for-sale securities, net 14,934 333,581 666,898
Increae in cash surrender value of
life insurance policies 351,023 282,855 40,664
Other income 584,619 425,101 491,171
-----------------------------------------
Total other income 1,769,532 1,856,435 2,086,544
-----------------------------------------
Other expense:
Salaries and employee benefits 7,124,377 6,070,057 5,780,176
Occupancy expense 861,407 822,890 795,705
Equipment expense 565,448 567,465 562,710
Stationary and supplies 241,186 224,501 255,665
Professional fees 364,680 385,079 410,753
Marketing expense 421,480 556,960 428,534
FDIC deposit insurance premium 160,305 63,684 34,226
(Gain) loss on sales of other real estate owned, net (49,758) 29,069
Writedown of other real estate owned 57,024
Other expense 1,669,504 1,565,004 2,202,707
-----------------------------------------
Total other expense 11,408,387 10,205,882 10,556,569
-----------------------------------------
Income before income taxes 4,608,285 5,938,228 5,779,245
Income taxes 1,398,032 1,863,789 1,922,757
-----------------------------------------
Net income $ 3,210,253 $ 4,074,439 $ 3,856,488
=========================================
Earnings per common share $ .84 $ 1.09 $ 1.06
=========================================
Earnings per common share assuming dilution $ .84 $ 1.09 $ 1.05
=========================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
SLADE'S FERRY BANCORP AND SUBSIDIARY
------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Years Ended December 31, 2001, 2000 and 1999
--------------------------------------------
Accumulated
Other
Comprehensive
Common Paid-in Retained Income
Stock Capital Earnings (Loss) Total
------ ------- -------- ------------- -----
Balance, December 31, 1998 $34,464 $22,285,220 $ 7,103,642 $ 284,059 $29,707,385
Comprehensive income:
Net income 3,856,488
Other comprehensive loss (1,437,677)
Comprehensive income 2,418,811
Issuance of common stock from dividend
reinvestment plan 554 639,344 639,898
Stock issuance relating to optional
cash contribution plan 186 222,883 223,069
Dividends declared ($.36 per share) (1,324,917) (1,324,917)
---------------------------------------------------------------------
Balance, December 31, 1999 35,204 23,147,447 9,635,213 (1,153,618) 31,664,246
Comprehensive income:
Net income 4,074,439
Other comprehensive income 532,932
Comprehensive income 4,607,371
Issuance of common stock from dividend
reinvestment plan 749 739,805 740,554
Stock issuance relating to optional
cash contribution plan 157 151,124 151,281
Stock options exercised 17 14,009 14,026
Issuance of 5% common stock dividend 1,768 1,832,835 (1,836,628) (2,025)
Dividends declared ($.40 per share) (1,501,080) (1,501,080)
---------------------------------------------------------------------
Balance, December 31, 2000 37,895 25,885,220 10,371,944 (620,686) 35,674,373
Comprehensive income:
Net income 3,210,253
Other comprehensive income 393,497
Comprehensive income 3,603,750
Issuance of common stock from dividend
reinvestment plan 732 803,201 803,933
Stock issuance relating to optional
cash contribution plan 73 73,576 73,649
Dividends declared ($.44 per share) (1,689,574) (1,689,574)
---------------------------------------------------------------------
Balance, December 31, 2001 $38,700 $26,761,997 $11,892,623 $ (227,189) $38,466,131
=====================================================================
F-5
SLADE'S FERRY BANCORP AND SUBSIDIARY
------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Years Ended December 31, 2001, 2000 and 1999
--------------------------------------------
(continued)
Other comprehensive income and reclassification disclosure for the years ended
December 31:
2001 2000 1999
---------------------------------------
Unrealized gains (losses) on securities
Net unrealized gain (loss) on
available-for-sale securities $853,519 $1,279,547 $(1,827,534)
Reclassification adjustment for realized
gains in net income (14,934) (333,581) (666,898)
---------------------------------------
838,585 945,966 (2,494,432)
Income tax (expense) benefit (362,985) (391,915) 978,894
---------------------------------------
475,600 554,051 (1,515,538)
---------------------------------------
Minimum pension liability adjustment (138,992) (35,752) 141,705
Income tax (expense) benefit 56,889 14,633 (63,844)
---------------------------------------
(82,103) (21,119) 77,861
---------------------------------------
Other comprehensive income (loss), net of tax $393,497 $ 532,932 $(1,437,677)
=======================================
Accumulated other comprehensive loss consists of the following as of
December 31:
2001 2000 1999
---------------------------------------
Net unrealized losses on available-for-sale
securities, net of taxes $(120,943) $(596,543) $(1,150,594)
Minimum pension liability adjustment, net of taxes (106,246) (24,143) (3,024)
---------------------------------------
Accumulated other comprehensive loss $(227,189) $(620,686) $(1,153,618)
=======================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
SLADE'S FERRY BANCORP AND SUBSIDIARY
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 2001, 2000 and 1999
--------------------------------------------
2001 2000 1999
-------------------------------------------
Cash flows from operating activities:
Net income $ 3,210,253 $ 4,074,439 $ 3,856,488
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion, net of amortization of securities 152,995 2,929 (35,079)
Receipt of shares of stock from demutualized
insurance company (163,901)
Gain on sales of available-for-sale securities, net (14,934) (333,581) (666,898)
Change in unearned income (137,081) (75,141) (96,745)
Provision for loan losses 750,000 1,200,000 550,000
Depreciation and amortization 685,577 709,152 692,397
Gain on sale of property (107,109)
(Gain) loss on sales of other real estate owned, net (49,758) 29,069
Writedown of other real estate owned 57,024
Increase in cash surrender value of life
insurance policies (351,023) (282,855) (40,664)
Amortization of goodwill 226,800 226,800 226,800
Accretion, net of amortization of fair market value
adjustments (8,550) (11,400) (7,140)
(Increase) decrease in other assets 12,061 (2,114) (4,132)
(Increase) decrease in prepaid expenses (28,262) 52,580 (200,106)
Increase in income taxes receivable (120,379)
(Increase) decrease in interest receivable 397,937 (409,175) (344,469)
Increase (decrease) in other liabilities (4,085) 61,352 (3,482)
Increase (decrease) in accrued expenses (158,468) (379,813) 394,978
Increase (decrease) in interest payable (53,826) 76,045 5,697
Deferred tax (benefit) expense (196,033) (260,758) 11,331
Increase (decrease) in taxes payable (180,512) 680,208 (248,502)
Minority interest in subsidiary 53,000
-------------------------------------------
Net cash provided by operating activities 4,075,361 5,278,910 4,065,666
-------------------------------------------
Cash flows from investing activities:
Increase in interest bearing time deposits
with other banks (100,000)
Purchases of available-for-sale securities (61,088,695) (13,211,935) (22,923,708)
Proceeds from sales of available-for-sale securities 891,375 2,884,051 5,728,160
Proceeds from maturities of available-for-sale securities 49,790,967 4,880,762 12,335,599
Purchases of held-to-maturity securities (4,156,673) (5,317,668) (7,946,052)
Proceeds from maturities of held-to-maturity securities 6,971,893 5,737,924 9,463,368
Purchases of Federal Home Loan Bank stock (113,500)
Loan originations and principal collections, net 19,935,261 (9,609,846) (22,744,310)
Purchases of loans (17,767,255) (4,589,892) (1,357,963)
Recoveries of loans previously charged off 58,821 165,300 48,798
Capital expenditures (464,323) (405,533) (1,061,630)
Proceeds from sale of property 202,109
Proceeds from sales of other real estate owned 143,853 467,952
Investment in life insurance policies (515,500) (4,918,838) 24,956
-------------------------------------------
Net cash used in investing activities (6,242,020) (24,241,822) (28,078,330)
-------------------------------------------
F-7
SLADE'S FERRY BANCORP AND SUBSIDIARY
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 2001, 2000 and 1999
--------------------------------------------
(continued)
2001 2000 1999
-------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW and
savings accounts 7,818,060 13,929,857 (2,250,591)
Net increase (decrease) in time deposits (7,775,619) 6,639,857 14,893,663
Payment on notes payable (850,000)
Long-term advances from Federal Home Loan Bank 6,428,000 8,100,000
Payments on Federal Home Loan Bank long-term advances (2,170,821) (2,130,859)
Advances from Federal Home Loan Bank 2,381,000
Payments on Federal Home Loan Bank advances (99,687)
Net increase (decrease) in other borrowed funds (734,784) (48,461) 1,206,132
Proceeds from issuance of common stock 877,582 905,861 862,967
Fractional shares paid in cash (2,025)
Dividends paid (1,644,158) (1,479,575) (1,250,891)
-------------------------------------------
Net cash provided by financing activities 2,798,260 25,914,655 14,892,593
-------------------------------------------
Net increase (decrease) in cash and cash equivalents 631,601 6,951,743 (9,120,071)
Cash and cash equivalents at beginning of year 28,060,709 21,108,966 30,229,037
-------------------------------------------
Cash and cash equivalents at end of year $28,692,310 $28,060,709 $21,108,966
===========================================
Supplemental disclosures:
Loans transferred to other real estate owned $ $ $ 218,045
Loans originating from the sales of
other real estate owned 259,000 337,000
Interest paid 12,380,356 12,622,626 10,747,934
Income taxes paid 1,894,956 1,444,339 2,159,928
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
SLADE'S FERRY BANCORP AND SUBSIDIARY
------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 2001, 2000 and 1999
--------------------------------------------
NOTE 1 - NATURE OF OPERATIONS
- -----------------------------
Slade's Ferry Bancorp (Company) is a Massachusetts corporation that was
organized in 1990 to become the holding company of Slade's Ferry Trust
Company (Bank). The Company's primary activity is to act as the holding
company for the Bank. The Bank is a state chartered bank, which was
incorporated in 1959 and is headquartered in Somerset, Massachusetts. The
Bank operates its business from twelve banking offices located in
Massachusetts and a loan company in Rhode Island. The Bank is engaged
principally in the business of attracting deposits from the general public
and investing those deposits in residential and commercial real estate
loans, and in commercial, consumer and small business loans.
NOTE 2 - ACCOUNTING POLICIES
- ----------------------------
The accounting and reporting policies of the Company and its subsidiary
conform to accounting principles generally accepted in the United States of
America and predominant practices within the banking industry. The
consolidated financial statements were prepared using the accrual basis of
accounting. The significant accounting policies are summarized below to
assist the reader in better understanding the consolidated financial
statements and other data contained herein.
USE OF ESTIMATES:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from the estimates.
BASIS OF PRESENTATION:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, the Bank and the Bank's
wholly-owned subsidiaries, Slade's Ferry Realty Trust, Slade's Ferry
Securities Corporation, Slade's Ferry Loan Company and Slade's Ferry
Preferred Capital Corporation. Slade's Ferry Realty Trust was formed
to hold ownership of real estate, Slade's Ferry Securities Corporation
was formed to hold securities for tax benefits in Massachusetts,
Slade's Ferry Loan Company provides the opportunity to solicit
commercial and consumer borrowers in the Rhode Island area and Slade's
Ferry Preferred Capital Corporation, a real estate investment trust,
was formed to hold real estate mortgage loans, reducing applicable
state taxes. All significant intercompany accounts and transactions
have been eliminated in the consolidation.
CASH AND CASH EQUIVALENTS:
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, cash items, due from banks, money market mutual
funds, Federal Home Loan Bank overnight deposit and federal funds
sold.
Cash and due from banks as of December 31, 2001 includes $1,983,000
which is subject to withdrawals and usage restrictions to satisfy the
reserve requirements of the Federal Reserve Bank.
SECURITIES:
Investments in debt securities are adjusted for amortization of
premiums and accretion of discounts. Gains or losses on sales of
investment securities are computed on a specific identification basis.
F-9
The Company classifies debt and equity securities into one of three
categories: held-to-maturity, available-for-sale, or trading. This
security classification may be modified after acquisition only under
certain specified conditions. In general, securities may be classified
as held-to-maturity only if the Company has the positive intent and
ability to hold them to maturity. Trading securities are defined as
those bought and held principally for the purpose of selling them in
the near term. All other securities must be classified as available-
for-sale.
-- Held-to-maturity securities are measured at amortized cost in
the balance sheet. Unrealized holding gains and losses are not
included in earnings or in a separate component of capital. They
are merely disclosed in the notes to the consolidated financial
statements.
-- Available-for-sale securities are carried at fair value on the
consolidated balance sheet. Unrealized holding gains and losses
are not included in earnings, but are reported as a net amount
(less expected tax) in a separate component of capital until
realized.
-- Trading securities are carried at fair value on the consolidated
balance sheet. Unrealized holding gains and losses for trading
securities are included in earnings.
-- Declines in the fair value of held-to-maturity and available-
for-sale securities below their cost that are deemed to be other
than temporary are reflected in earnings as realized losses.
LOANS:
Loans receivable that management has the intent and ability to hold
until maturity or payoff are reported at their outstanding principal
balances reduced by amounts due to borrowers on unadvanced loans, by
any charge-offs, the allowance for loan losses and any deferred fees
or costs on originated loans, or unamortized premiums or discounts on
purchased loans.
Interest on loans is recognized on a simple interest basis.
Loan origination and commitment fees and certain direct origination
costs are deferred, and the net amount amortized as an adjustment of
the related loan's yield. The Company is amortizing these amounts over
the contractual life of the related loans.
Cash receipts of interest income on impaired loans is credited to
principal to the extent necessary to eliminate doubt as to the
collectibility of the net carrying amount of the loan. Some or all of
the cash receipts of interest income on impaired loans is recognized
as interest income if the remaining net carrying amount of the loan is
deemed to be fully collectible. When recognition of interest income on
an impaired loan on a cash basis is appropriate, the amount of income
that is recognized is limited to that which would have been accrued on
the net carrying amount of the loan at the contractual interest rate.
Any cash interest payments received in excess of the limit and not
applied to reduce the net carrying amount of the loan are recorded as
recoveries of charge-offs until the charge-offs are fully recovered.
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.
F-10
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status,
collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking
into consideration all of the circumstances surrounding the loan and
the borrower, including the length of the delay, the reasons for the
delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment
is measured on a loan by loan basis for commercial and construction
loans by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
disclosures.
PREMISES AND EQUIPMENT:
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Cost and related allowances for
depreciation and amortization of premises and equipment retired or
otherwise disposed of are removed from the respective accounts with
any gain or loss included in income or expense. Depreciation and
amortization are calculated principally on the straight-line method
over the estimated useful lives of the assets.
OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES:
Other real estate owned includes properties acquired through
foreclosure and properties classified as in-substance foreclosures in
accordance with Financial Accounting Standards Board Statement No. 15,
"Accounting by Debtors and Creditors for Troubled Debt Restructuring."
These properties are carried at the lower of cost or estimated fair
value less estimated cost to sell. Any writedown from cost to
estimated fair value required at the time of foreclosure or
classification as in-substance foreclosure is charged to the allowance
for loan losses. Expenses incurred in connection with maintaining
these assets, subsequent writedowns and gains or losses recognized
upon sale are included in other expense.
In accordance with Statement of Financial Accounting Standards No. 114
"Accounting by Creditors for Impairment of a Loan," the Company
classifies loans as in-substance repossessed or foreclosed if the
Company receives physical possession of the debtor's assets regardless
of whether formal foreclosure proceedings take place.
ADVERTISING:
The Company directly expenses costs associated with advertising as
they are incurred.
INCOME TAXES:
The Company recognizes income taxes under the asset and liability
method. Under this method, deferred tax assets and liabilities are
established for the temporary differences between the accounting basis
and the tax basis of the Company's assets and liabilities at enacted
tax rates expected to be in effect when the amounts related to such
temporary differences are realized or settled.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments," requires that the Company
disclose estimated fair value for its financial instruments. Fair
value methods and assumptions used by the Company in estimating its
fair value disclosures are as follows:
F-11
Cash and cash equivalents: The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate those assets'
fair values.
Securities (including mortgage-backed securities): Fair values for
securities are based on quoted market prices, where available. If
quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
Loans receivable: For variable-rate loans that reprice frequently and
with no significant change in credit risk, fair values are based on
carrying values. The fair values for other loans are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality.
Accrued interest receivable: The carrying amount of accrued interest
receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand deposits
(e.g., interest and non-interest checking, passbook savings, and money
market accounts) are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificates of deposit are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Federal Home Loan Bank Advances: Fair values for Federal Home Loan
Bank advances are estimated using a discounted cash flow technique
that applies interest rates currently being offered on advances to a
schedule of aggregated expected monthly maturities on Federal Home
Loan Bank advances.
Other borrowed funds: Fair values for other borrowed funds are
estimated using discounted cash flow analyses based on the Company's
current incremental borrowing rates for similar borrowings.
Off-balance sheet instruments: The fair value of commitments to
originate loans is estimated using the fees currently charged to enter
similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate loan commitments and the unadvanced portion of loans, fair
value also considers the difference between current levels of interest
rates and the committed rates. The fair value of letters of credit is
based on fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the obligation
with the counterparties at the reporting date.
EARNINGS PER SHARE:
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the
earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15.
STOCK BASED COMPENSATION:
Under SFAS No. 123 the Company has the option of accounting for stock-
based compensation using the intrinsic value approach in APB No. 25 or
the fair value method introduced in SFAS No. 123. The Company elected
to use the APB No. 25 method. Entities electing to follow the
provisions of APB No. 25 must make pro forma disclosure of net income
and earnings per share, as if the fair value method of accounting
defined in SFAS No. 123 had been applied. The Company has made the pro
forma disclosures required by SFAS No. 123.
F-12
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1998, the FASB issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, effective for fiscal
years beginning after June 15, 2000. This Statement establishes
accounting and reporting standards for derivative instruments and
hedging activities, including certain derivative instruments embedded
in other contracts, and requires that an entity recognize all
derivatives as assets or liabilities in the balance sheet and measure
them at fair value. If certain conditions are met, an entity may elect
to designate a derivative as follows: (a) a hedge of the exposure to
changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure to variable
cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of an unrecognized firm commitment, an available-
for-sale security, a foreign currency denominated forecasted
transaction, or a net investment in a foreign operation. The Statement
generally provides for matching the timing of the recognition of the
gain or loss on derivatives designated as hedging instruments with the
recognition of the changes in the fair value of the item being hedged.
Depending on the type of hedge, such recognition will be in either net
income or other comprehensive income. For a derivative not designated
as a hedging instrument, changes in fair value will be recognized in
net income in the period of change. The adoption of this Statement did
not have a material impact on the consolidated financial statements.
FASB has issued SFAS No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities". This
Statement replaces SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" and
rescinds SFAS Statement No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125". SFAS No. 140 provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. This statement
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. This statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after
March 31, 2001; however, the disclosure provisions are effective for
fiscal years ending after December 15, 2000. The adoption of this
Statement did not have a material impact on the Company's financial
position or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations".
This statement addresses financial accounting and reporting for
business combinations and supercedes APB Opinion No. 16, "Business
Combinations", and SFAS No. 38, "Accounting for Preacquisition
Contingencies of Purchased Enterprises". Under Opinion 16, business
combinations were accounted for using one of two methods, the pooling-
of-interests method or the purchase method. All business combinations
in the scope of SFAS No. 141 are to be accounted for using one method
- the purchase method. The provisions of SFAS No. 141 apply to all
business combinations initiated after June 30, 2001 and to all
business combinations accounted for using the purchase method for
which the date of acquisition is July 1, 2001, or later.
The adoption of SFAS No. 141 will have no immediate effect on the
Company's consolidated financial statements since it had no pending
business combinations as of December 31, 2001 or as of the date of the
issuance of these consolidated financial statements. If the Company
consummates business combinations in the future, any such combinations
that would have been accounted for by the pooling-of-interests method
under Opinion 16 will be accounted for under the purchase method and
the difference in accounting could have a substantial impact on the
Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". This statement addresses financial accounting and
reporting for required goodwill and other intangible assets and
supercedes APB Opinion No. 17, "Intangible Assets". The initial
recognition and measurement provisions of SFAS No. 142 apply to
intangible assets which are defined as assets (not including financial
assets) that lack physical substance. The term "intangible assets" is
used in SFAS No. 142 to refer to intangible assets other than
goodwill. The accounting for a recognized intangible asset is based on
its useful life. An intangible asset with a finite useful life is
amortized; an intangible asset with an indefinite useful life is not
amortized. An intangible asset that is subject to amortization shall
be reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of".
F-13
SFAS No. 142 provides that goodwill shall not be amortized. Goodwill
is defined as the excess of the cost of an acquired entity over the
net of the amounts assigned to assets acquired and liabilities
assumed. SFAS No. 142 further provides that goodwill shall be tested
for impairment at a level of reporting referred to as a reporting
unit. Impairment is the condition that exists when the carrying amount
of goodwill exceeds its implied fair value.
SFAS No. 142 is effective as follows:
All of the provisions of SFAS No. 142 shall be applied in fiscal
years beginning after December 15, 2001, to all goodwill and
intangible assets recognized in an entity's statement of
financial position at the beginning of that fiscal year,
regardless of when those previously recognized assets were
initially recognized.
The Company's assets as of December 31, 2001 include goodwill of
$2,173,368 recognized in the acquisition of Fairbank, Inc., in 1997.
This goodwill is being amortized at the rate of $226,800 per year.
Under SFAS No. 142 this amortization will be discontinued after
December 31, 2001 but will be subject to the impairment review
requirements of SFAS No. 142.
In the impairment review of goodwill, two terms, "reporting unit" and
"operating segment" are used. They are defined as follows:
A reporting unit is the level of reporting at which goodwill is tested
for impairment. A reporting unit is an operating segment or one level
below an operating segment.
An operating segment is a component of an enterprise:
a. That engages in business activities from which it may earn
revenues and incur expenses (including revenues and
expenses relating to transactions with other components of
the same enterprise),
b. Whose operating results are regularly reviewed by the
enterprise's chief operating decision maker to make
decisions about resources to be allocated to the segment
and assess its performance, and
c. For which discrete financial information is available.
In connection with Statement 142's transitional goodwill impairment
evaluation, the Statement will require the Company to perform an
assessment of whether there is an indication that goodwill is impaired
as of January 1, 2002. To accomplish this, the Company must identify
its reporting units and determine the carrying value of each reporting
unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units as of January
1, 2002. The Company will then have up to six months from January 1,
2002 to determine the fair value of each reporting unit and compare it
to the carrying amount of the reporting unit. To the extent the
carrying amount of a reporting unit exceeds the fair value of the
reporting unit, an indication exists that the reporting unit goodwill
may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must
compare the implied fair value of the reporting unit goodwill with the
carrying amount of the reporting unit goodwill, both of which would be
measured as of January 1, 2002. The implied fair value of goodwill is
determined by allocating the fair value of the reporting unit to all
of the assets (recognized and unrecognized) and liabilities of the
reporting unit in a manner similar to a purchase price allocation, in
accordance with Statement 141. The residual fair value after this
allocation is the implied fair value of the reporting unit goodwill.
This second step is required to be completed as soon as possible, but
no later than the end of 2002. Any transitional impairment loss will
be recognized as the cumulative effect of a change in accounting
principle in the Company's statement of income.
The Company is in the process of evaluating the impact of SFAS No. 142
on its future consolidated financial statements.
F-14
NOTE 3 - INVESTMENTS IN SECURITIES
- ----------------------------------
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities
and their approximate fair values are as follows as of December 31:
Gains In Losses In
Accumulated Accumulated
Amortized Other Other
Cost Comprehensive Comprehensive Fair
Basis Income Income Value
--------- ------------- ------------- -----
Available-for-sale securities:
December 31, 2001:
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies $34,240,332 $ 508,328 $ 83,094 $34,665,566
Mortgage-backed securities 36,128,956 332,183 94,103 36,367,036
Corporate debt securities 2,941,168 69,571 5,038 3,005,701
Marketable equity securities 6,014,453 297,247 1,157,853 5,153,847
------------------------------------------------------------
79,324,909 1,207,329 1,340,088 79,192,150
Money market mutual funds included in cash
and cash equivalents (86,613) (86,613)
------------------------------------------------------------
$79,238,296 $1,207,329 $1,340,088 $79,105,537
============================================================
December 31, 2000:
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies $40,934,467 $ 53,125 $ 558,570 $40,429,022
Mortgage-backed securities 22,089,178 135,490 179,741 22,044,927
Corporate debt securities 1,472,754 2,051 11,935 1,462,870
Marketable equity securities 4,581,568 468,674 880,438 4,169,804
------------------------------------------------------------
69,077,967 659,340 1,630,684 68,106,623
Money market mutual funds included in cash
and cash equivalents (113,527) (113,527)
------------------------------------------------------------
$68,964,440 $ 659,340 $1,630,684 $67,993,096
============================================================
Gross Gross
Net Unrecognized Unrecognized
Carrying Holding Holding Fair
Amount Gains Loss Value
-------- ------------ ------------ -----
Held-to-maturity securities:
December 31, 2001:
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies $ 2,749,710 $ 27,593 $ $ 2,777,303
Debt securities issued by states of the
United States and political subdivisions
of the states 13,528,291 292,100 11,264 13,809,127
Mortgage-backed securities 2,711 102 2,813
Other debt securities 1,000 1,000
----------------------------------------------------------
$16,281,712 $319,795 $11,264 $16,590,243
==========================================================
F-15
Gross Gross
Net Unrecognized Unrecognized
Carrying Holding Holding Fair
Amount Gains Loss Value
-------- ------------ ------------ -----
December 31, 2000:
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies $ 6,948,231 $26,941 $ 5,125 $ 6,970,047
Debt securities issued by states of the
United States and political subdivisions
of the states 12,094,549 41,349 77,687 12,058,211
Mortgage-backed securities 58,716 106 58,822
Other debt securities 1,000 1,000
----------------------------------------------------------
$19,102,496 $68,396 $82,812 $19,088,080
==========================================================
The scheduled maturities of securities (other than equity securities) were
as follows as of December 31, 2001:
Available-For-Sale Held-To-Maturity
------------------ ----------------
Fair Net Carrying
Value Amount
----- ------------
Due within one year $ 1,079,681 $ 5,739,461
Due after one year through five years 33,065,825 7,236,127
Due after five years through ten years 3,525,761 2,209,903
Due after ten years 1,093,510
Mortgage-backed securities 36,367,036 2,711
--------------------------------
$74,038,303 $16,281,712
====================================
During 2001, proceeds from sales of available-for-sale securities amounted
to $891,375. Gross realized gains and gross realized losses on those sales
amounted to $57,588 and $42,654, respectively. During 2000, proceeds from
sales of available-for-sale securities amounted to $2,884,051. Gross
realized gains and gross realized losses on those sales amounted to $428,447
and $94,866, respectively. During 1999, proceeds from sales of available-
for-sale securities amounted to $5,728,160. Gross realized gains and gross
realized losses on those sales amounted to $739,508 and $72,610,
respectively. The tax expense applicable to these net realized gains
amounted to $6,112, $136,534 and $272,962 for the years ended December 31,
2001, 2000 and 1999, respectively.
There were no securities of issuers whose aggregate carrying amount exceeded
10% of stockholders' equity as of December 31, 2001.
Total carrying amounts of $4,554,448 and $4,747,057 of debt securities were
pledged to secure treasury tax and loan, trust department and public funds
on deposit as of December 31, 2001 and 2000, respectively.
NOTE 4 - LOANS
- --------------
Loans consisted of the following as of December 31:
2001 2000
-----------------------------
Commercial, financial and agricultural $ 45,237,663 $ 49,330,628
Real estate - construction and land development 7,600,286 8,601,224
Real estate - residential 60,936,137 55,871,388
Real estate - commercial 128,887,954 128,327,133
Consumer 10,642,900 12,871,448
Nonprofit 236,388 1,036,350
Obligations of states and political subdivisions 21,400 61,200
Other 321,587 53,612
-----------------------------
253,884,315 256,152,983
Allowance for loan losses (5,484,519) (4,776,360)
Unearned income (382,161) (519,242)
Unamortized adjustment to fair value (8,550)
-----------------------------
Net loans, carrying amount $248,017,635 $250,848,831
=============================
F-16
Certain directors and executive officers of the Company and companies in
which they have significant ownership interest were customers of the Bank
during 2001. Total loans to such persons and their companies amounted to
$5,209,567 as of December 31, 2001. During the year ended December 31, 2001,
$6,598,220 of advances were made and repayments totaled $4,741,667.
Changes in the allowance for loan losses were as follows for the years ended
December 31:
2001 2000 1999
----------------------------------------
Balance at beginning of period $4,776,360 $3,765,872 $3,569,282
Loans charged off (100,662) (354,812) (402,208)
Provision for loan losses 750,000 1,200,000 550,000
Recoveries of loans previously charged off 58,821 165,300 48,798
----------------------------------------
Balance at end of period $5,484,519 $4,776,360 $3,765,872
========================================
Information about loans that meet the definition of an impaired loan in
Statement of Financial Accounting Standards No. 114 is as follows as of
December 31:
2001 2000
------------------------- -------------------------
Recorded Related Recorded Related
Investment Allowance Investment Allowance
In Impaired For Credit In Impaired For Credit
Loans Losses Loans Losses
------------------------- -------------------------
Loans for which there is a related allowance for credit losses $7,461,437 $1,195,324 $3,178,869 $424,557
Loans for which there is no related allowance for credit losses 60,252 0
------------------------------------------------------
Totals $7,521,689 $1,195,324 $3,178,869 $424,557
======================================================
Average recorded investment in impaired loans during
the year ended December 31 $6,134,847 $3,261,772
========== ==========
Related amount of interest income recognized during the
time, in the year ended December 31, that the loans
were impaired
Total recognized $ 562,278 $ 77,787
========== ==========
Amount recognized using a cash-basis method
of accounting $ 157,735 $ 0
========== ==========
NOTE 5 - PREMISES AND EQUIPMENT
- -------------------------------
The following is a summary of premises and equipment as of December 31:
2001 2000
--------------------------
Land $ 1,710,368 $ 1,805,368
Buildings 6,940,613 6,746,917
Furniture and equipment 4,449,637 4,179,010
Leasehold improvements 383,436 383,436
--------------------------
13,484,054 13,114,731
Accumulated depreciation and amortization (7,028,217) (6,349,042)
--------------------------
$ 6,455,837 $ 6,765,689
==========================
F-17
NOTE 6 - DEPOSITS
- -----------------
The aggregate amount of time deposit accounts in denominations of $100,000
or more as of December 31, 2001 and 2000 was $33,448,818 and $35,294,948,
respectively.
For time deposits as of December 31, 2001, the scheduled maturities for each
of the following three years ended December 31, are:
2002 $143,174,453
2003 20,553,261
2004 4,858,799
------------
Total $168,586,513
============
Deposits from related parties held by the Company as of December 31, 2001
and 2000 amounted to $2,773,437 and $3,387,274, respectively.
NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES
- ----------------------------------------
Advances consist of funds borrowed from the Federal Home Loan Bank (FHLB).
Maturities of advances from the FHLB for the five years ending after
December 31, 2001, and thereafter, are summarized as follows:
AMOUNT
------
2002 $ 1,230,744
2003 246,439
2004 1,259,063
2005 279,266
2006 298,638
Thereafter 13,668,937
-----------
$16,983,087
===========
Interest rates on FHLB advances ranged from 4.89 percent to 7.72 percent. At
December 31, 2001, the weighted average interest rate on FHLB advances was
6.47 percent.
As of December 31, 2001, a $3,000,000 advance from the FHLB maturing in 2015
is redeemable at par at the option of the FHLB on January 7, 2002 and each
calendar quarter thereafter.
Amortizing advances are being repaid in equal monthly payments and are being
amortized from the date of the advance to the maturity date on a direct
reduction basis.
Advances are secured by the Company's stock in that institution, its
residential real estate mortgage portfolio and the remaining U.S. government
and agency obligations not otherwise pledged.
NOTE 8 - OTHER BORROWED FUNDS
- -----------------------------
Other borrowed funds consist of treasury tax and loan deposits and generally
are repaid within one to 120 days from the transaction date.
F-18
NOTE 9 - INCOME TAXES
- ---------------------
The components of income tax expense are as follows for the years ended
December 31:
2001 2000 1999
----------------------------------------
Current:
Federal $1,513,874 $2,086,337 $1,917,807
State 80,191 38,210 57,463
1,594,065 2,124,547 1,975,270
Deferred:
Federal (162,866) (253,043) (37,739)
State (56,212) (87,440) (14,774)
Change in the valuation allowance 23,045 79,725
----------------------------------------
(196,033) (260,758) (52,513)
----------------------------------------
Total income tax expense $1,398,032 $1,863,789 $1,922,757
========================================
The reasons for the differences between the statutory federal income tax
rates and the effective tax rates are summarized as follows for the years
ended December 31:
2001 2000 1999
% of % of % of
Income Income Income
--------------------------
Federal income tax at statutory rate 34.0% 34.0% 34.0%
Increase (decrease) in tax resulting from:
Tax-exempt income (6.5) (4.6) (3.0)
Dividends received deduction (.4) (.3) (.3)
Unallowable expenses .7 .2 .8
Amortization of goodwill 1.7 1.3 1.3
State tax, net of federal tax benefit .3 (.6) .5
Change in valuation allowance .5 1.4
------------------------
Effective tax rates 30.3% 31.4% 33.3%
========================
The Company had gross deferred tax assets and gross deferred tax liabilities
as follows as of December 31:
2001 2000
-------------------------
Deferred tax assets:
Allowance for loan losses $2,111,553 $1,821,703
Deferred loan fees 155,543 185,300
Interest on non-performing loans 79,299 122,470
Accrued employee benefits 200,903 243,852
Minimum pension liability adjustment 73,618 16,729
Net unrealized holding loss on available-for-sale securities 11,816 374,801
Other adjustments 10,408 1,522
-------------------------
Gross deferred tax assets 2,643,140 2,766,377
Valuation allowance (102,770) (79,725)
-------------------------
2,540,370 2,686,652
-------------------------
Deferred tax liabilities:
Accelerated depreciation (197,939) (222,589)
Prepaid pensions (135,471) (147,647)
Discount accretion (2,504) (1,897)
Deferred gain on stock conversion (2,317) (2,317)
-------------------------
Gross deferred tax liabilities (338,231) (374,450)
-------------------------
Net deferred tax assets $2,202,139 $2,312,202
=========================
F-19
NOTE 10 - EMPLOYEE BENEFITS
- ---------------------------
The Company has a defined benefit pension plan (plan) that up to January 1,
1998 covered substantially all of its full time employees who met certain
eligibility requirements. On January 1, 1998 the Bank suspended the plan so
that employees no longer earn additional defined benefits for future
service. Employees were eligible under the plan upon attaining age 21 and
completing one year of service. The benefits paid are based on 1.5% of total
salary plus .5% of compensation in excess of integration level per year of
service. The integration level was the first $750 of monthly compensation.
The accrued benefit is based on years of service.
The following tables set forth information about the plan as of December 31
and the years then ended:
2001 2000
-------------------------
Change in projected benefit obligation:
Benefit obligation at beginning of year $1,199,450 $1,414,912
Interest cost 77,745 86,948
Actuarial loss 86,454 95,400
Expected distributions (237,663) (397,810)
-------------------------
Benefit obligation at end of year 1,125,986 1,199,450
-------------------------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 1,048,186 1,304,569
Actual return on plan assets (5,274) 141,427
Benefits paid (212,351) (397,810)
-------------------------
Fair value of plan assets at end of year 830,561 1,048,186
-------------------------
Funded status at end of year (295,425) (151,264)
Unrecognized net actuarial loss 510,841 401,597
Unrecognized prior service cost 21,189 8,013
Unamortized net obligation existing at date of adoption of SFAS No. 87 94,372 102,379
-------------------------
Net amount recognized $ 330,977 $ 360,725
=========================
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost $ 330,977 $ 360,725
Accrued benefit liability (295,425) (151,264)
Intangible asset 115,561 110,392
Accumulated other comprehensive loss 179,864 40,872
-------------------------
Net amount recognized $ 330,977 $ 360,725
=========================
The weighted-average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.0% for 2001 and 2000. The
weighted-average expected long-term rate of return on assets was 7.0% for
2001 and 2000.
Components of net periodic benefit cost:
2001 2000 1999
--------------------------------
Interest cost on benefit obligation $77,745 $86,948 $97,807
Expected return on assets (61,105) (75,177) (88,652)
Amortization of net transition obligation 8,007 8,007 8,007
Amortization of prior service cost (13,176) (13,176) (13,176)
Recognized actuarial loss 18,277 14,753 11,151
-------------------------------
Net periodic benefit cost $29,748 $21,355 $15,137
===============================
Securities of the Company included in plan assets as of December 31, 2001
and 2000 consist of 3,730 shares of Slade's Ferry Bancorp common stock.
F-20
The Company has a 401K plan for eligible employees who attain age 21 and
complete one year of service. The Company contributes a discretionary amount
to be allocated to eligible participants. Current contributions vest fully
after seven years of continuous service. The amount that may be deferred by
the employees is limited by the amount that will not cause the plan to
exceed IRS limitations. Contributions made by the Company charged to
employee benefit expense amounted to $17,500, $15,000 and $11,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
The Company adopted a profit-sharing plan, ("Plan") effective October 1,
1998. The Company contributes amounts to the plan at the Company's
discretion. Cost recognized by the Company for the profit-sharing plan
amounted to $300,000, $150,000 and $111,750 for the years ended December 31,
2001, 2000 and 1999, respectively.
NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES
- ------------------------------------------------
The Company is obligated under certain agreements issued during the normal
course of business which are not reflected in the accompanying consolidated
financial statements.
The Company is obligated under various lease agreements covering branch
offices and equipment. These agreements are considered to be operating
leases. The total minimum rental due in future periods under these
agreements is as follows as of December 31, 2001:
2002 $ 93,849
2003 77,035
2004 30,315
2005 20,000
--------
Total minimum lease payments $221,199
========
Certain leases contain provisions for escalation of minimum lease payments
contingent upon increases in real estate taxes and percentage increases in
the consumer price index. The total rental expense amounted to $126,256 for
2001, $123,316 for 2000 and $123,234 for 1999.
NOTE 12 - FINANCIAL INSTRUMENTS
- -------------------------------
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to originate loans, standby
letters of credit and unadvanced funds on loans. The instruments involve, to
varying degrees, elements of credit risk in excess of the amount recognized
in the balance sheets. The contract amounts of those instruments reflect the
extent of involvement the Company has in particular classes of financial
instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby
letters of credit is represented by the contractual amounts of those
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
Commitments to originate loans are agreements to lend to a customer provided
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Company evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the borrower.
Collateral held varies, but may include secured interests in mortgages,
accounts receivable, inventory, property, plant and equipment and income-
producing properties.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. Of the total standby
letters of credit outstanding as of December 31, 2001, $36,375 are secured
by deposits at the Bank.
F-21
The estimated fair values of the Company's financial instruments, all of
which are held or issued for purposes other than trading, are as follows as
of December 31:
2001 2000
---------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------------------------------