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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 2002
------------------
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)
(508)675-2121
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common stock ($.01 par value) 3,921,316.991 shares as of September 30, 2002.
- ----------------------------------------------------------------------------
PART I
ITEM 1
Financial Statements
- --------------------
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2002 December 31, 2001
---------------------------------------
(Unaudited)
ASSETS:
Cash, due from banks and interest-bearing
demand deposits with other banks $ 21,711,916 $ 13,905,697
Money market mutual funds 328,228 86,613
Federal Home Loan Bank overnight deposit 10,000,000 6,000,000
Federal funds sold 20,000,000 8,700,000
---------------------------------
Cash and Cash Equivalents 52,040,144 28,692,310
Interest-bearing time deposits with other banks 200,000 100,000
Investment securities(1) 14,478,796 16,281,712
Investment securities available for sale(2) 65,107,038 79,105,537
Federal Home Loan Bank stock 1,013,400 1,013,400
Loans, net 247,610,178 248,017,635
Premises and equipment 6,154,888 6,455,837
Goodwill 2,173,368 2,173,368
Accrued interest receivable 1,626,678 1,953,989
Cash surrender value of life insurance 9,003,355 7,697,441
Other assets 2,939,950 3,269,334
---------------------------------
TOTAL ASSETS $402,347,795 $394,760,563
=================================
LIABILITIES & STOCKHOLDERS' EQUITY:
Deposits $341,043,837 $337,043,342
Federal Home Loan Bank advances 19,255,895 16,983,087
Other borrowed funds 11,115 465,216
Other liabilities 1,928,693 1,749,787
---------------------------------
TOTAL LIABILITIES 362,239,540 356,241,432
---------------------------------
Preferred stockholders' equity in a
subsidiary company 51,500 53,000
---------------------------------
STOCKHOLDERS' EQUITY:
Common stock 39,214 38,700
Paid in capital 27,453,796 26,761,997
Retained earnings 12,928,175 11,892,623
Accumulated other comprehensive loss (364,430) (227,189)
---------------------------------
TOTAL STOCKHOLDERS' EQUITY 40,056,755 38,466,131
---------------------------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $402,347,795 $394,760,563
=================================
- --------------------
Investment securities are to be held to maturity and have a fair
market value of $15,075,727 as of September 30, 2002 and $16,590,243
as of December 31, 2001.
Securities classified as available for sale are stated at fair value
with any unrealized gains or losses reflected as an adjustment in
Stockholders' Equity.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
(UNAUDITED)
9 MONTHS ENDING SEPTEMBER 30,
2002 2001
--------------------------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $13,088,783 $16,582,559
Interest and dividends on investments 3,461,700 3,720,304
Other interest 258,593 704,011
--------------------------
Total interest and dividend income 16,809,076 21,006,874
--------------------------
INTEREST EXPENSE:
Interest on deposits 5,307,036 8,955,587
Interest on Federal Home Loan Bank and other borrowed funds 892,868 704,435
--------------------------
Total interest expense 6,199,904 9,660,022
--------------------------
Net interest and dividend income 10,609,172 11,346,852
Provision for loan losses 375,000 562,500
--------------------------
Net interest and dividend income
after provision for loan losses 10,234,172 10,784,352
--------------------------
OTHER INCOME:
Service charges on deposit accounts 415,297 414,096
Overdraft service charges 226,387 196,148
Gain (loss) on sales of available for sale securities, net 582,540 7,700
Cash surrender value of life insurance policies income 305,914 255,626
Other income 435,475 461,567
--------------------------
Total other income 1,965,613 1,335,137
--------------------------
OTHER EXPENSE:
Salaries and employee benefits 5,367,058 5,407,271
Occupancy expense 637,618 669,721
Equipment expense 369,307 428,314
Stationery and supplies 216,010 167,761
Professional fees 323,860 286,443
Marketing expense 269,416 316,771
Writedown on securities 1,085,158 0
Other expense 1,273,675 1,367,980
--------------------------
Total other expense 9,542,102 8,644,261
--------------------------
Income before income taxes 2,657,683 3,475,228
Income taxes 568,010 1,059,303
--------------------------
NET INCOME $ 2,089,673 $ 2,415,925
==========================
Basic earnings per share $ 0.54 $ 0.63
==========================
Diluted earnings per share $ 0.53 $ 0.63
==========================
Basic average shares outstanding 3,900,580 3,822,070
==========================
Diluted average shares outstanding 3,929,760 3,830,348
==========================
Dividends Per Share $ 0.27 $ 0.25
==========================
Comprehensive Income(1) $ 1,952,432 $ 3,038,259
==========================
- --------------------
Calculated using the change in accumulated other comprehensive income
(loss) for the period and net income for the period.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
(UNAUDITED)
3 MONTHS ENDING SEPTEMBER 30,
2002 2001
------------------------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $4,274,244 $5,366,721
Interest and dividends on investments 1,102,826 1,258,641
Other interest 107,836 229,923
------------------------
Total interest and dividend income 5,484,906 6,855,285
------------------------
INTEREST EXPENSE:
Interest on deposits 1,640,563 2,808,967
Interest on Federal Home Loan Bank and other borrowed funds 333,679 274,666
------------------------
Total interest expense 1,974,242 3,083,633
------------------------
Net interest and dividend income 3,510,664 3,771,652
Provision for loan losses 0 187,500
------------------------
Net interest and dividend income
after provision for loan losses 3,510,664 3,584,152
------------------------
OTHER INCOME:
Service charges on deposit accounts 133,668 131,777
Overdraft service charges 95,982 64,124
Gain (loss) on sales of available for sale securities, net 585,358 7,700
Cash surrender value of life insurance policies income 95,639 82,439
Other income 138,731 233,054
------------------------
Total other income 1,049,378 519,094
------------------------
OTHER EXPENSE:
Salaries and employee benefits 1,807,639 1,863,150
Occupancy expense 219,173 202,807
Equipment expense 118,594 136,863
Stationery and supplies 63,451 67,044
Professional fees 137,099 69,058
Marketing expense 78,757 95,608
Writedown on securities 138,263 0
Other expense 409,036 454,425
------------------------
Total other expense 2,972,012 2,888,955
------------------------
Income before income taxes 1,588,030 1,214,291
Income taxes 337,033 382,309
------------------------
NET INCOME $1,250,997 $ 831,982
========================
Basic earnings per share $ 0.32 $ 0.22
========================
Diluted earnings per share $ 0.32 $ 0.22
========================
Basic average shares outstanding 3,917,902 3,839,318
========================
Diluted average shares outstanding 3,944,581 3,863,037
========================
Dividends per share $ 0.09 $ 0.09
========================
Comprehensive Income(1) $ 978,350 $1,044,663
========================
- --------------------
Calculated using the change in accumulated other comprehensive income
(loss) for the period and net income for the period.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------
(Unaudited)
2002 2001
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,089,673 $ 2,415,925
Adjustments to reconcile net income to
net cash provided by operating activities:
Accretion, net of amortization of securities 120,436 99,835
Gain on sales of available-for-sale securities, net (582,540) (7,700)
Change in unearned income (42,540) (130,192)
Provision for loan losses 375,000 562,500
Depreciation and amortization 476,321 524,041
Gain on sale of fixed assets 0 (105,000)
Increase in cash surrender value of life insurance policies (305,914) 0
Amortization of goodwill 0 170,100
Accretion, net of amortization of fair market
value adjustments 0 (8,550)
Writedown on securities 1,085,158 0
Increase in other assets (35,621) (288,336)
(Increase) decrease in prepaid expenses 57,030 (97,894)
Decrease in interest receivable 327,311 94,506
Increase in other liabilities 94,596 14,739
Increase in accrued expenses 94,558 112,273
Decrease in interest payable (15,884) (31,304)
Increase in taxes receivable (232,946) (450,953)
Decrease in minority interest in subsidiary (1,500) 0
---------------------------
Net cash provided by operating activities $ 3,503,138 $ 2,873,990
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of interest-bearing time deposit with other bank (100,000) 0
Purchases of available-for-sale securities (22,166,456) (47,234,138)
Proceeds from maturities of available-for-sale securities 22,124,542 39,210,554
Proceeds from sales of available-for-sale securities 13,824,668 519,997
Purchases of held-to-maturity securities (2,786,923) (2,638,133)
Proceeds from maturities of held-to-maturity securities 4,581,409 4,968,192
Net decrease in loans 47,671 4,105,873
Recoveries of loans previously charged off 27,326 45,452
Capital expenditures (181,171) (306,036)
Proceeds from sale of asset 10,600 200,000
Investment in life insurance policies (1,000,000) (515,500)
---------------------------
Net cash provided by (used in) investing activities $14,381,666 $(1,643,739)
---------------------------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------
(Unaudited)
(Continued)
2002 2001
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW, money market
and savings accounts $16,549,104 $ 3,210,785
Net increase (decrease) in time deposits (12,548,609) 1,401,256
Advances on Federal Home Loan Bank borrowings,
net of payments 2,272,808 4,314,579
Net increase (decrease) in other borrowed funds (454,101) 12,009
Proceeds from issuance of common stock 692,313 529,003
Dividends paid (1,048,485) (951,006)
---------------------------
Net cash provided by financing activities $ 5,463,030 8,516,626
---------------------------
Net increase in cash and cash equivalents 23,347,834 9,746,877
Cash and cash equivalents at beginning of year 28,692,310 28,060,709
---------------------------
Cash and cash equivalents at end of year $52,040,144 $37,807,586
===========================
SUPPLEMENTAL DISCLOSURES;
Interest paid $ 6,215,788 $ 9,691,326
Income taxes paid $ 800,956 $ 1,510,256
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
SLADE'S FERRY BANCORP AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2002
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America (GAAP) for interim financial information and
the instructions to Form 10-Q and, accordingly, do not include all of the
information and footnotes required by GAAP for complete financial
statements. In the opinion of the management of Slade's Ferry Bancorp (the
"Company"), all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine months ended September 30, 2002 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2002.
The year-end condensed consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required
by GAAP.
Note B - Accounting Policies
- ----------------------------
The accounting principles followed by Slade's Ferry Bancorp and subsidiary
and the methods of applying these principles which materially affect the
determination of financial position, results of operations, or changes in
financial position are consistent with those used at year end 2001.
The consolidated financial statements of Slade's Ferry Bancorp include its
wholly-owned subsidiary, Slade's Ferry Trust Company, and its subsidiaries,
Slade's Ferry Realty Trust, Slade's Ferry Securities Corporation, Slade's
Ferry Preferred Capital Corporation, and Slade's Ferry Loan Company. All
significant intercompany balances have been eliminated.
Note C - Impact of New Accounting Standards
- -------------------------------------------
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
operation.
Statement of Financial Accounting Standards No. 141, "Business
Combinations", improves the consistency of the accounting and reporting for
business combinations by requiring that all business combinations be
accounted for under a single method - the purchase method. Use of the
pooling-of-interests method is no longer permitted. Statement No. 141
requires that the purchase method be used for business combinations
initiated after June 30, 2001. The adoption of 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
accompanying consolidated financial statements.
7
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which is effective for fiscal years beginning after
December 15, 2001. Under prior accounting standards, goodwill resulting from
a business combination was amortized on a straight-line basis over 15 years.
As a result of SFAS No. 142, goodwill is generally no longer amortized as an
expense after 2001, but instead will be reviewed and tested for impairment
using a fair value methodology and assessment. Goodwill will be tested at
least annually for impairment. Management does not anticipate an impairment
adjustment to the goodwill reflected in the accompanying condensed
consolidated balance sheet. In accordance with SFAS No. 142, the Company, as
of January 1, 2002, ceased the amortization of the goodwill balance of $2.2
Million.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain
Financial Institutions" an Amendment of SFAS Nos. 72 and 144 and FASB
Interpretation No. 9, SFAS No. 72 "Accounting for Certain Acquisitions of
Banking or Thrift Institutions" and FASB Interpretation No. 9 "Applying APB
Opinions No. 16 and 17, "When a Savings and Loan Association or a Similar
Institution is Acquired in a Business Combination Accounted for by the
Purchase Method" provided interpretive guidance on the application of the
purchase method to acquisitions of financial institutions. Except for
transactions between two or more mutual enterprises, FASB Statement No. 147
removes acquisitions of financial institutions from the scope of both
Statement 72 and Interpretation 9 and requires that those transactions be
accounted for in accordance with FASB Statements No. 141 "Business
Combinations" and No. 142 "Goodwill and Other Intangible Assets". Thus, the
requirement in paragraph 5 of Statement 72 to recognize (and subsequently
amortize) any excess of the fair value of liabilities assumed over the fair
value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset no longer applies to acquisitions within the
scope of FASB Statement No. 147. In addition, FASB Statement No. 147 amends
FASB Statement No. 144 "Accounting for the Impairment or Disposal of Long-
Lived Assets" to include in its scope long-term customer-relationship
intangible assets of financial institutions such as depositor- and borrower-
relationship intangible assets and credit cardholder intangible assets.
Consequently, those intangible assets are subject to the same undiscounted
cash flow recoverability test and impairment loss recognition and
measurement provisions that FASB Statement No. 144 requires for other long-
lived assets that are held and used.
Paragraph 5 of FASB Statement No. 147, which relates to the application of
the purchase method of accounting, is effective for acquisitions for which
the date of acquisition is on or after October 1, 2002. The provisions in
paragraph 6 related to accounting for the impairment or disposal of certain
long-term customer-relationship intangible assets are effective on October
1, 2002. Transition provisions for previously recognized unidentifiable
intangible assets are effective on October 1, 2002. Transition provisions
for previously recognized unidentifiable intangible assets in paragraphs 8-
14 are effective on October 1, 2002, with earlier application permitted. The
Company does not expect that there will be any substantial impact on the
Company's consolidated financial statements on adoption of this Statement.
Contingency
- -----------
The Massachusetts Department of Revenue ("DOR") has issued Notices of Intent
to Assess additional state excise taxes to several financial institutions in
the Commonwealth that have established real estate investment trusts
("REIT") in their corporate structure. The DOR contends that dividends
received by banks from REIT subsidiaries are fully taxable in Massachusetts.
The Company believes that the Massachusetts statute that provides for the
dividend received deduction of 95% of certain dividend distributions applies
to dividends that have been made to banks by their REIT subsidiary. Slade's
Ferry Trust Company formed a REIT subsidiary in 1999, Slade's Ferry
Preferred Capital Corporation. The Bank has recently received notices from
the DOR pertaining to tax year filings of 1999, 2000, and 2001. These
notices assessed additional state excise taxes due of $1,454,000 plus
interest. The Company has not recorded a provision in its financial
statements at this time, and the Company intends to vigorously appeal any
and all assessments.
8
ITEM 2
Management's Discussion and Analysis of Financial Condition
- -----------------------------------------------------------
and Results of Operation
- ------------------------
Forward-looking Statements
- --------------------------
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements regarding the strength of the company's capital and asset
quality. Other such statements may be identified by words such as
"believes," "will," "expects," "project," "may," "developments,"
"strategic," "launching," "opportunities," "anticipates," "estimates,"
"intends," "plans," "targets" and similar expressions. These statements are
based upon the current beliefs and expectations of Slade's Ferry Bancorp's
management and are subject to significant risks and uncertainties. Actual
results may differ materially from those set forth in the forward-looking
statements as a result of numerous factors.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations expressed in
our forward-looking statements: (1) enactment of adverse government
regulation; (2) competitive pressures among depository and other financial
institutions may increase significantly and have an effect on pricing,
spending, third-party relationships and revenues; (3) the strength of the
United States economy in general and specifically the strength of the New
England economies may be different than expected, resulting in, among other
things, a deterioration in overall credit quality and borrowers' ability to
service and repay loans, or a reduced demand for credit, including the
resultant effect on the Bank's loan portfolio, levels of charge-offs and
non-performing loans and allowance for loan losses; (4) changes in the
interest rate environment may reduce interest margins and adversely impact
net interest income; and (5) changes in assumptions used in making such
forward-looking statements. Should one or more of these risks materialize or
should underlying beliefs or assumptions prove incorrect, Slade's Ferry
Bancorp's actual results could differ materially from those discussed. All
subsequent written and oral forward-looking statements attributable to
Slade's Ferry Bancorp or any person acting on its behalf are expressly
qualified in their entirety by the cautionary statements set forth above.
Slade's Ferry Bancorp does not intend or undertake any obligation to update
any forward-looking statement to reflect circumstances or events that occur
after the date the forward-looking statements are made.
Financial Condition
- -------------------
Total assets increased by $7.5 Million, or 1.9% from $394.8 Million reported
as of December 31, 2001 to $402.3 Million as of September 30, 2002. The
increase in asset growth was generated by deposit growth of $4.0 Million, an
increase in net advances from the Federal Home Loan Bank of $2.3 Million,
offset by a reduction in other borrowed funds in the form of Treasury Tax
and Loan deposits of $0.4 Million. The remaining increase of $1.6 Million
was derived from stockholders' equity.
Cash and cash equivalents increased by $23.3 Million from $28.7 Million
reported as of year-end 2001, to $52.0 Million at September 30, 2002. This
increase included investments in short-term federal funds sold and overnight
deposits with the Federal Home Loan Bank which represented $15.3 Million of
the increase. The remaining increase of $8.0 Million was in cash, due from
banks, interest-bearing demand deposits with other banks, and money market
mutual funds. The funding for this increase in liquidity was generated
primarily from a decline in the investment portfolio of $15.8 Million,
deposit growth of $4.0 Million and additional borrowings of $2.3 Million
from the Federal Home Loan Bank. Approximately $12.0 Million of these excess
funds will be invested in short-term investment securities in the fourth
quarter as an asset/liability strategy to improve interest rate spread and
be in a position to reprice these securities at higher yields in 2003, when
9
interest rates are projected to increase. The remaining liquidity will be
used to fund projected growth in loans as we emphasize home equity loan
products in the fourth quarter of 2002.
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 is determined at the time of
the purchase of the investment instrument.
Total investment securities decreased by $15.8 Million from $95.4 Million
reported at December 31, 2001 to $79.6 Million at September 30, 2002. As
part of the Company's quarterly review of the investment portfolio, it was
determined that, with a decline in fair value of certain equity securities
due to market conditions, $1.1 Million of equities with significant declines
in fair market values would be sold in the third quarter of 2002. This
strategy took advantage of federal income tax benefits derived by offsetting
these capital losses against current and previous three years' capital
gains. The decline in value of these equities sold realized a pretax loss of
$947,000, and in connection with the Company's review of the portfolio, the
Company wrote down the carrying value of these securities to fair value as
of June 30, 2002, resulting in a restatement of the financial statements for
the second quarter of 2002. In addition, a writedown charge of $138,263 was
incurred on one equity holding, whose decline in fair value was other than
temporary and deemed impaired. Partially offsetting the total writedown of
$1.1 Million were gains of $585,000 resulting from the sale of $12.3 Million
of various debt securities. This sale was completed for tax planning
purposes, asset/liability management and liquidity.
The Held-to-Maturity category consists predominately of 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.
Investment Securities are securities that the Company will hold to maturity
and are carried at amortized cost on the balance sheet, and are summarized
as follows as of September 30, 2002.
Amortized Gross Unrealized Gross Unrealized
(Dollars in Thousands) Cost Basis Holding Gains Holding Losses Fair Value
- -----------------------------------------------------------------------------------------------------------
Debt securities issued by states of the
United States and political
subdivisions of the states 14,476 597 0 15,073
Mortgage-backed securities 2 0 0 2
Other debt securities 1 0 0 1
- ---------------------------------------------------------------------------------------------------------
Total $14,479 $597 $ 0 $15,076
=========================================================================================================
Securities in the Available-for-Sale category are securities that the
Company intends to hold for an indefinite period of time, but not
necessarily to maturity. These securities may be sold in response to
interest rate changes, liquidity needs or other factors. Any unrealized
gains or losses, net of taxes, are reflected in Stockholders' Equity as a
separate component.
10
Investments in Available-for-Sale securities are carried at fair value on
the balance sheet and are summarized as follows as of September 30, 2002.
Gains in Losses in
Accumulated Accumulated
Other Other
Amortized Comprehensive Comprehensive
(Dollars in Thousands) Cost Basis Income Income Fair Value
- -------------------------------------------------------------------------------------------------
Debt securities issued by the U. S.
Treasury and other U. S.
Government corporations and
agencies $20,064 $ 380 $ 0 $20,444
Marketable Equities 4,177 52 1,079 3,150
Mortgage-backed securities 37,673 825 6 38,492
Corporate Bonds 2,927 99 5 3,021
- -----------------------------------------------------------------------------------------------
Total $64,841 $1,356 $1,090 $65,107
===============================================================================================
Effect on Stockholders' Equity as of September 30, 2002:
(In Whole Dollars)
Unrealized gain on Available-for-Sale Securities $ 266,120
Less tax effect (173,893)
Addition to valuation allowance for deferred tax asset (350,411)
---------
Net unrealized loss on Available-for-Sale Securities $(258,184)
=========
The Available-for-Sale category at September 30, 2002 had net unrealized
losses net of taxes of $258,184 of which $770,369 are net unrealized gains
(net of tax) attributed to securities of the U.S. Treasury, other U.S.
Government corporations and agencies, corporate bonds, and mortgage-backed
securities, and $1,028,553 are net unrealized losses (net of tax)
attributable to marketable equity securities.
Securities of the U.S. Treasury, U.S. Government corporations and agencies,
and mortgage-backed securities have little or no credit risk, other than
being sensitive to changes in interest rates; and if held-to-maturity, these
securities will mature at par. The Company amortizes premiums and accretes
discounts over the life of the securities.
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 September 30, 2002, the amount invested in marketable equity
securities was 5.3% of the total investment portfolio distributed over
various business sectors.
Total net loans decreased slightly by $407,457 from $248.0 Million reported
at December 31, 2001 to $247.6 Million at September 30, 2002. Residential
real estate, home equity, and construction loan products increased during
the nine months ending September 30, 2002 as new and existing customers took
advantage of the lower interest rate environment. Offsetting the increase in
these loan types were decreases in indirect auto loans, and various
commercial loans and credit lines. Although new loan requests and
commitments increased, large loan payoffs due to refinancing combined with
continued amortization of the existing loan portfolio, resulted in a
decrease in net loans of $407,000.
11
INFORMATION WITH RESPECT TO NONACCRUAL AND PAST DUE LOANS
AT SEPTEMBER 30, 2002 AND 2001 AND DECEMBER 31, 2001 AND 2000
At September 30, At December 31,
- ----------------------------------------------------------------------------------------------
(Dollars in Thousands) 2002 2001 2001 2000
- ----------------------------------------------------------------------------------------------
Nonaccrual Loans $ 887 $1,086 $1,138 $2,415
Loans 90 days or more past due and
still accruing 0 14 444 335
Real estate acquired by foreclosure
or substantively repossessed 0 0 0 0
Percentage of nonaccrual loans to
total gross loans 0.35% 0.43% 0.45% 0.94%
Percentage of nonaccrual loans, restructured loans,
and real estate acquired by foreclosure or
substantively repossessed to total assets 0.22% 0.27% 0.29% 0.62%
Percentage of allowance for loan losses
to nonaccrual loans 625.93% 489.69% 481.90% 197.76%
The $0.9 Million in nonaccrual loans as of September 30, 2002 consists of
$0.6 Million of real estate mortgages and $0.3 Million attributed to
commercial loans. Nonaccrual loans include restructured loans of $129,000 at
September 30, 2002.
The Company's nonperforming assets as a total decreased by $0.7 Million,
from $1.6 Million reported on December 31, 2001 to $0.9 Million as of
September 30, 2002. The Company considers nonaccrual loans, loans past due
90 days or more but still accruing, and real estate acquired by foreclosure
or substantively repossessed as nonperforming assets. Nonaccrual loans,
which is the largest component of nonperforming assets, decreased by
$251,137 during the nine months ending September 30, 2002. Loans 90 day or
more but still accruing decreased by $443,882 during the first nine months
of 2002. As of September 30, 2002, there were no loans 90 days or more past
due and still accruing and no real estate acquired by foreclosure.
The percentage of nonaccrual loans to total gross loans decreased from 0.45%
reported at year end 2001 to 0.35% at September 30, 2002 due to a decrease
in the nonaccrual category. The percentage of nonaccrual loans and real
estate acquired by foreclosure or substantively repossessed to total assets
decreased due to the decrease in nonaccrual loans.
INFORMATION WITH RESPECT TO INTEREST ON NONACCRUAL AND PAST DUE
LOANS AT SEPTEMBER 30, 2002 AND 2001 AND DECEMBER 31, 2001 AND 2000
At September 30, At December 31,
- ------------------------------------------------------------------------------------
(Dollars in Thousands) 2002 2001 2001 2000
- ------------------------------------------------------------------------------------
Nonaccrual Loans $887 $1,086 $1,138 $2,415
Interest income that would have been recorded
under original terms 78 222 109 228
Interest income recorded during the period 64 26 6 22
The Company stops accruing interest on a loan once it becomes past due 90
days or more unless there is adequate collateral and the financial condition
of the borrower is sufficient. When a loan is placed on a nonaccrual status,
all previously accrued but unpaid interest is reversed and charged against
current income.
12
Interest is thereafter recognized in that category only when payments are
received and the loan becomes current.
Loans in the nonaccrual category will remain in that category until the
possibility of collection no longer exists, the loan is paid off or becomes
current. When a loan is determined to be uncollectible, it is then charged
off against the Allowance for Loan Losses.
Statement of Financial Accounting Standards No. 114 "Accounting by Creditors
for Impairment of a Loan" applies to all loans except large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment, loans measured at fair value or at a lower of cost or fair
value, leases, and debt securities as defined in Statement 115. Statement
114 requires that impaired loans be valued at the present value of expected
future cash flows discounted at the loan's effective interest rate or as a
practical expedient, at the loan's observable market value of the collateral
if the loan is collateral dependent. Smaller balance homogeneous loans are
considered by the Company to include consumer installment loans and credit
card loans.
At September 30, 2002, there were $2,789,222 of loans which the Company has
determined to be impaired, with a related allowance for credit losses of
$540,444. Loans deemed to be impaired decreased substantially from the
$7,521,689 reported as of December 31, 2001. At year end 2001, impaired
loans included one large loan relationship of $2,556,000; but as of
September 30, 2002, payments continue to be current and this loan has been
removed from impairment status. In addition, principal reductions, loan
payoffs, charged off balances, loan upgrades, and a change in our impairment
identification methodology are other factors resulting in a decrease of
impaired loans.
There were no other loans classified for regulatory purposes at September
30, 2002 that management reasonably expects will materially impact future
operating results, liquidity or capital resources.
13
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Nine Months Years Ended
At September 30, At December 31,
- --------------------------------------------------------------------------
(Dollars in Thousands) 2002 2001 2001 2000
- --------------------------------------------------------------------------
Balance at January 1 $5,484 $4,776 $4,776 $3,766
- --------------------------------------------------------------------------
Charge-offs:
Commercial (288) (44) (73) (194)
Real estate - construction 0 0 (0) 0
Real estate - mortgage (20) 0 (0) (23)
Installment/consumer (26) (22) (28) (138)
- --------------------------------------------------------------------------
Total Charge-offs (334) (66) (101) (355)
- --------------------------------------------------------------------------
Recoveries:
Commercial 11 10 14 50
Real estate - construction 0 0 0 0
Real estate - mortgage 13 26 29 92
Installment/consumer 3 9 16 23
- --------------------------------------------------------------------------
Total Recoveries 27 45 59 165
- --------------------------------------------------------------------------
Net Charge-offs (307) (21) (42) (190)
- --------------------------------------------------------------------------
Additions charged to operations 375 563 750 1,200
- --------------------------------------------------------------------------
Balance at end of period $5,552 $5,318 $5,484 $4,776
==========================================================================
Ratio of net charge-offs to
average loans outstanding (0.12%) (.008%) (0.02%) (0.08%)
The Allowance for Loan Losses at September 30, 2002 was $5,552,553, compared
to $5,484,519 at year end 2001. The Allowance for Loan Losses as a
percentage of outstanding loans was 2.19% at September 30, 2002, and 2.16%
at December 31, 2001.
The Bank provided $750,000 in 2001, $1,200,000 in 2000, and $375,000 in the
nine months ended September 30, 2002 to the Allowance for Loan Losses. Loans
charged off were $101,000 in 2001, $355,000 in 2000, and $334,000 in the
nine months ended September 30, 2002. Recoveries on loans previously charged
off were $59,000 in 2001, $165,000 in 2000, and $27,000 in the nine months
ended September 30, 2002. Management believes that the Allowance for Loan
Losses of $5,552,553 is adequate to absorb any losses that are estimated to
occur, due to the Bank's strong collateral position and the current asset
quality, therefore no provision for loan losses was recorded during the
third quarter of 2002.
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 that
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 was 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.
14
This table shows an allocation of the allowance for loan losses as of the
end of each of the periods indicated.
September 30, 2002 December 31, 2001 December 31, 2000
-----------------------------------------------------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
-----------------------------------------------------------------------------
(Dollars in Thousands)
Domestic:
Commercial(5) $1,454(1) 14.02% $1,629(1) 17.91% $1,466(1) 19.66%
Real estate - Construction 79 5.74 41 2.99 47 3.36
Real estate - mortgage 3,839(2) 77.22 3,585(2) 74.77 2,970(2) 71.91
Consumer(3) 180(4) 3.02 229(4) 4.33 293(4) 5.07
--------------------------------------------------------------------------
$5,552 100.00% $5,484 100.00% $4,776 100.00%
==========================================================================
- --------------------
Includes amounts specifically reserved for impaired loans of $479,881
as of September 30, 2002, $780,029 as of December 31, 2001, and
$281,248 as of December 31, 2000 as required by Financial Accounting
Standard No. 114, Accounting for Impairment of Loans.
Includes amounts specifically reserved for impaired loans of $43,183
as of September 30, 2002, $413,663 as of December 31, 2001, and
$132,911 as of December 31, 2000 as required by Financial Accounting
Standard No. 114, Accounting for Impairment of Loans.
Includes consumer, obligations of states and political subdivisions
and other.
Includes amounts specifically reserved for impaired loans of $17,380
as of September 30, 2002, $1,632 as of December 31, 2001, and $10,398
as of December 31, 2000 as required by Financial Accounting Standard
No. 114, Accounting for Impairment of Loans.
Includes commercial, financial, agricultural and nonprofit loans.
The loan portfolio's largest segment of loans is commercial real estate
loans, which represent 58% of gross loans. Residential real estate,
represents 19% of gross loans. The Company requires a loan to value ratio of
80% in both commercial and residential mortgages. These mortgages are
secured by real properties which have a readily ascertainable appraised
value.
Generally, commercial real estate loans have a higher degree of credit risk
than residential real estate loans because they depend primarily on unit
supply and demand and various conditions. When granting these loans, the
Company evaluates the financial statements of the borrower(s), the location
of the real estate, the quality of management, profitability, 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, and consumer loans are
generally unsecured credits and represent 3% 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.
15
The allocation of the Allowance for Loan Losses is based on management's
judgement of potential losses in the respective portfolios. While management
has allocated reserves to various portfolio segments, the Allowance is
general in nature and is available for the portfolio in its entirety.
Total deposits at September 30, 2002 were $341.0 Million, an increase of
$4.0 Million, compared to $337.0 Million at December 31, 2001. The growth in
deposits during this period was attributable to normal seasonal fluctuations
and uncertainty in the stock market, as consumers look for safety in savings
deposits and term deposit products offering less attractive yields.
Results of Operations
- ---------------------
The Company's performance of operations is dependent on net interest and
dividend income, which is the difference between interest income earned on
loans and investments and interest expense paid on deposits and borrowed
funds. The level of net interest income achieved is significantly impacted
by several factors such as economic conditions, interest rates,
asset/liability management, and corporate tax and strategic planning. Net
interest and dividend income for the nine months ending September 30, 2002
decreased by $737,680 to $10,609,172 when compared to $11,346,852 recorded
during the same period in 2001. Total interest and dividend income decreased
by $4,197,798 partially offset by a decrease in total interest expense of
$3,460,118. Although our net interest margin stabilized during the first
nine months of 2002, the series of reductions in interest rates throughout
2001 impacted our net interest margin, as a result of loan and investment
repricing at lower interest rates due to refinancing and prepayments. The
Company's net interest margin decreased by 25 basis points from 4.24%
reported at September 30, 2001 to 3.99% as of September 30, 2002.
The Provision for Loan Losses is a charge against earnings and funds the
Allowance for Loan Losses. It is management's desire to maintain the
Allowance for Loan Losses at a level that is adequate to absorb inherent
losses within the loan portfolio. In determining the appropriate level of
the allowance for loan losses, management takes into consideration past and
anticipated loss experience, prevailing economic conditions, evaluations of
underlying collateral, and the volume of the loan portfolio and balance of
nonperforming and classified loans. Management assesses the allowance for
loan losses at least on a quarterly basis. After a thorough and detailed
analysis and assessment during the third quarter of 2002, the allowance for
loan losses was considered adequate to absorb inherent losses within the
loan portfolio; therefore no provision for loan losses was provided during
the third quarter of 2002. The Bank's provision during the nine month period
ending September 30, 2002 was $375,000, compared to $562,500 for the same
period in 2001.
Total Other Income increased by $630,476 for the first nine months in 2002,
when compared to the same period in 2001. Service charges on both deposit
accounts and overdrafts combined increased by $31,440. The Bank realized a
$582,540 net gain on the sale of securities during the first nine months of
2002 resulting from the sale of $12.3 Million of debt securities, compared
to a net gain of $7,700 for the same period in 2001. There was an increase
of $50,288 in the cash surrender value of life insurance policies income
associated with both the Directors' and Executive Officers' life insurance
programs. The purchase of additional policies during 2001continues to
generate additional earnings and in 2002, $1,000,000 of Executive Officers
life insurance was purchased.
The line item Other Income decreased by $26,092 when compared to the first
nine months of 2001. These income items represent earnings derived from safe
deposit box rentals, checkbook printing revenue, exchange and commission
fees, customer investment commission fees, and ATM/debit card usage fees.
The category Total Other Expense, made up of various noninterest expenses,
increased by $897,841 to $9,542,102 recorded during the first nine months
ending September 30, 2002, compared to $8,644,261 reported for the same
period in 2001. As previously discussed in the financial condition of our
investment
16
portfolio, the Company recorded a charge of $1.1 Million as a result of
writedowns in various equity securities. This total writedown includes
$947,000 associated with a strategy to take advantage of tax benefits
derived by offsetting this capital loss against current and previous years'
capital gains. The carrying value of these equity securities was written
down to fair market value as of June 30, 2002, and the Company's financial
statements as of June 30, 2002 were amended to reflect this transaction.
These equity securities were actually sold in the third quarter of 2002. In
addition to the $947,000 writedown, a $138,263 writedown charge of one
certain publicly-traded security, whose decline in fair market value was
other than temporary and deemed impaired, was also recorded in the third
quarter of 2002. Exclusive of the total writedown charges of $1.1 Million,
total other expenses decreased by $187,317. Salaries and employee benefits
decreased by $40,213. Occupancy and equipment expenses combined totaled
$1,006,925 during the first three quarters of 2002, compared to $1,098,035
in 2001, a decrease of $91,110. The mild winter experienced during the first
quarter of 2002 contributed to lower utility and snow removal costs. The
expenses for stationery and supplies increased by $48,249 from $167,761
reported during the first nine months in 2001 to $216,010 in 2002. This
increase was a result of additional cost for stationery and envelopes
required for marketing and business development. Professional service fees
increased by $37,417 from the first nine months of 2001 compared to 2002.
This increase reflects costs associated with legal and consulting services
and collection and repossession expenses. Marketing expenses attributed to
production and media costs for television and radio commercials, print
advertising and other direct marketing decreased by $47,355.
The following table sets forth the components of the line item Other
Expense. This table reflects a decrease of $45,389 to $409,036 from $454,425
for the three month period ending September 30, 2002 and a decrease of
$94,305 to $1,273,675 from $1,367,980 for the nine month period ending
September 30, 2002 when compared to September 30, 2001.
Three Months Nine Months
--------------------------------------------------------
2002 2001 Variance 2002 2001 Variance
--------------------------------------------------------
Amortization of Goodwill $ 0 $ 57 $(57) $ 0 $ 170 $(170)
Communications 76 83 (7) 240 250 (10)
Committee Fees 56 60 (4) 150 148 2
Other Miscellaneous Expenses 277 254 23 884 800 84
--------------------------------------------------------
$409 $454 $(45) $1,274 $1,368 $ (94)
======================================================
The decrease in Other Expense of $94,305 for the first nine months of 2002
was primarily due to a decrease of $170,000 in amortization expense
pertaining to goodwill, due to the implementation of SFAS No. 142 previously
mentioned, partially offset by an increase of $83,261 in various other
miscellaneous expenses, which includes approximately $40,000 of stock
appreciation rights exercised.
Income before income taxes was $2,657,683 for the nine-month period ending
September 30, 2002 compared to $3,475,228 reported for the same period in
the prior year. Taxes totaled $568,010 down by $491,293 when compared to
$1,059,303 reported for the same period in 2001, as a result of lower
taxable income in 2002, and a federal income tax benefit derived from the
recognition of capital losses on equity securities during the second quarter
2002.
Net income for the nine months ended September 30, 2002 was 2,089,673 or
$0.54 per share (basic) and $0.53 per share (diluted) from $2,415,925 or
$0.63 per share (basic and diluted) for the same period in the previous
year.
The results of operations for the third quarter in 2002 indicates that the
net interest and dividend income decreased by $260,988 to $3,510,664 from
$3,771,652 reported for the same period in 2001. Total interest and dividend
income decreased by $1,370,379 partially offset by a decrease in total
interest expense of
17
$1,109,391. The Provision for Loan Losses for three months ending September
30, 2002 decreased by $187,500 compared to the same period in 2001.
Total Other Income in the three months ended September 30, 2002 increased by
$530,284. Service charges on deposit accounts and overdraft charges combined
increased by $33,749. Security gains increased by $577,658 from $7,700
recorded during the third quarter of 2001, to $585,358 reported for the same
period in 2002. The security gains were realized from sales in the bond
portfolio. The cash surrender value of bank owned life insurance policies
income increased by $13,200 due to the purchase of additional policies. The
line item Other Income decreased by $94,323 from $233,054 reported at
September 30, 2001 to $138,731 as of September 30, 2002 as a result of the
sale of a vacant parcel of land at our Fairhaven branch that recognized a
gain of $105,000 in 2001.
Total Other Expenses in the three months ended September 30, 2002 increased
by $83,057. Salaries and benefits decreased by $55,511. Occupancy and
equipment expense combined decreased by $1,903. Stationery and supplies
expense decreased by $3,593. Professional fees increased by $68,041
primarily due to the management assessment performed during the third
quarter of 2002. Marketing expenses decreased by $16,851. The item Other
Expense decreased by $45,389 primarily due to a decrease of $56,700 in
amortization expense of goodwill.
Income before taxes for the third quarter in 2002 decreased by $373,739 from
$1,214,291 reported in 2001, to $1,588,030 this year. Associated applicable
income taxes also decreased by $45,276 from 2001 to 2002.
The net income for the three-month period ending September 30, 2002 was
$1,250,997 or an increase of 50.4%, when compared to $831,982 earned in the
third quarter of 2001. Diluted earnings per share were $0.32 compared to
$0.22 per share for the same period in 2001. This increase is primarily a
result of bond gains recognized of $585,358 offset by the writedown of an
equity security of $138,263.
Liquidity
- ---------
The Company's principal sources of funds are customer deposits, loan
amortization, loan payoffs, and the maturities of investment securities.
Through these sources, funds are provided for customer withdrawals from
their deposit accounts, loan originations, drawdowns on loan commitments,
acquisition of investment securities and other normal business activities.
Investors' capital also provides a source of funding.
The largest source of funds is provided by depositors. The largest component
of the Company's deposit base is reflected in the Time Deposit category. The
Company does not participate in brokered deposits. Deposits are obtained
from consumers and commercial customers within the Bank's community
reinvestment area, being Bristol County, Massachusetts and several abutting
towns in Rhode Island.
The Company also has the ability to borrow funds from the Federal Home Loan
Bank, as well as the Federal Reserve Bank of Boston by pledging various
investment securities as collateral. During the third quarter in 2001 and
2002, the Bank was not required to borrow short-term funds to meet current
liquidity needs. Tax payments made by our customers which are owed to the
Federal Reserve Bank Treasury Tax and Loan account are classified as short-
term borrowings. As of September 30, 2002, there is also $19,255,895 in
advances from the Federal Home Loan Bank representing the match funding
program that is available to qualified borrowers and an investment growth
strategy transaction.
Excess available funds are invested on a daily basis as Federal Funds Sold
and can be withdrawn daily. The Bank attempts through its cash management
strategies to maintain a level of Federal Funds Sold to further enhance its
liquidity, providing funds to meet lending and other cash requirements.
Liquidity represents the ability of the Bank to meet its funding
requirements. In assessing the appropriate level of liquidity, the Bank
considers deposit levels, lending requirements, and investment maturities in
light of prevailing economic conditions. Through this assessment, the Bank
manages its liquidity level to optimize earnings and respond to fluctuations
in customer borrowing needs.
At September 30, 2002, the Bank's liquidity ratio stood at 37.2%, slightly
higher than the 34.9% level reported at December 31, 2001. The liquidity
ratio is determined by dividing the Bank's short-term assets (cash and due
from banks, interest-bearing deposits due from other banks, securities, and
federal funds sold) by the Bank's total deposits and short-term borrowings.
Management believes the Bank's liquidity to be adequate to meet the current
and presently foreseeable needs of the Bank.
Capital
- -------
As of September 30, 2002, the Company had total capital of $40,056,755. This
represents an increase of $1,590,624 from $38,466,131 reported on December
31, 2001. The increase in capital was a combination of several factors.
Additions consisted of nine months earnings of $2,089,673 and transactions
originating through the Dividend Reinvestment Program whereby 6,515.685
shares were issued for cash contributions of $92,108 and 34,272.876 shares
were issued for $505,144 in lieu of cash dividend payments, and 10,604
shares were issued due to stock options exercised totaling $95,069. These
additions were offset by dividends declared of $1,054,129.
Also, affecting capital is 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, 2001 the Available-for-Sale portfolio had
unrealized losses, net of taxes, of $120,943, and on September 30, 2002, as
a result of current market values, the portfolio reflects unrealized losses,
net of taxes, of $258,184. There was no change in the minimum pension
liability adjustment of $106,246, net of taxes, recorded 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.
At September 30, 2002 the actual Risk Based Capital of the Bank was
$32,186,000 for Tier 1 Capital, exceeding the minimum requirements of
$10,507,880 by $21,678,120. Total Capital of $35,498,000 exceeded the
minimum requirements of $21,015,760 by $14,482,240 and Leverage Capital of
$32,186,000 exceeded the minimum requirements of $16,015,400 by $16,170,600.
In addition to the "minimum" capital requirements, "well capitalized"
standards have also been established by the Federal Banking Regulators.
The table below illustrates the capital ratios of the Company and the Bank
on September 30, 2002 and at December 31, 2001.
Well September 30, 2002 December 31, 2001
Capitalized ------------------ -----------------
Requirement Bancorp Bank Bancorp Bank
- ---------------------------------------------------------------------------------
Total Capital (to Risk
Weighted Assets) > or = 10% 16.00% 13.51% 14.43% 12.55%
- ---------------------------------------------------------------------------------
Tier 1 Capital (to Risk
Weighted Assets) > or = 6% 14.75% 12.25% 13.18% 11.29%
- ---------------------------------------------------------------------------------
Leverage Capital (to
Average Assets) > or = 5% 9.60% 8.04% 8.98% 7.74%
- ---------------------------------------------------------------------------------
19
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 ratio. As of September 30, 2002, this ratio
was 8.04% compared to 7.74% at year-end 2001.
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 September 30, 2002.
20
ITEM 3
Quantitative and Qualitative Disclosure of Market Risk
- ------------------------------------------------------
Interest Rate Risk
- ------------------
Volatility in interest rates requires the Company to manage interest rate
risk that arises from the differences in the timing of repricing of assets
and liabilities. The Company considers interest rate risk, the exposure of
earnings to adverse movements in interest rates, to be a significant market
risk as it could potentially have an affect on the Company's financial
condition and results of operation.
The Company's Asset-Liability Management Committee, comprised of the Bank's
Executive Management team, has the responsibility of managing interest rate
risk, and monitoring and adjusting the difference between interest-sensitive
assets and interest-sensitive liabilities ("GAP" position) within various
time periods.
Management's objective is to reduce and control the volatility of its net
interest margin by managing the relationship of interest-earning assets and
interest-bearing liabilities. In order to manage this relationship, the
committee utilizes a GAP report prepared on a monthly basis. The GAP report
indicates the differences or gap between interest-earning assets and
interest-bearing liabilities in various maturity or repricing time periods.
This, in conjunction with certain assumptions, and other related factors,
such as anticipated changes in interest rates and projected cash flows from
loans, investments and deposits, provides management a means of evaluating
interest rate risk.
In addition to the GAP report, the Company also uses an analysis to measure
the exposure of net interest income to changes in interest rates over a
relatively short (i.e., 12 months) time frame. The analysis projects future
interest income and expenses from the Company's earning assets and interest-
bearing liabilities. Depending on the GAP position, the Company's policy
limit on interest rate risk specifies that if interest rates were to change
immediately up or down 200 basis points, estimated net interest income for
the next twelve months should not decline by more than ten percent. The
following table reflects the Company's estimated exposure as a percentage of
estimated net interest income for the next twelve months, assuming an
immediate change in interest rates:
Estimated Exposure as a
Rate Change Percentage of Net Interest Income
(Basis Points) September 30, 2002
---------------------------------------------------
+200 (1.00)%
-200 (4.90)%
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.
21
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
As required by new Rule 13a-15 under the Securities Exchange Act of 1934,
within the 90 days prior to the date of this report, we carried out an
evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that they believe that,
as of the date of completion of the evaluation, our disclosure controls and
procedures were effective to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms. In
connection with the new rules, we will continue to review and document our
disclosure controls and procedures, including our internal controls and
procedures for financial reporting, on an ongoing basis, and may from time
to time make changes aimed at enhancing their effectiveness and to ensure
that our systems evolve with our business.
(b) Changes in internal controls.
None.
22
PART II
Other Information
ITEM 6
Exhibits and Reports on Form 8-K
- --------------------------------
(a) Exhibits: See exhibit index.
(b) Reports on Form 8-K: A report on Form 8-K dated September 18, 2002 was
filed with the Securities and Exchange Commission reporting under Item
5 the announcement of the hiring of Mary Lynn D. Lenz as President and
Chief Executive Officer of the Bank effective immediately. She was
also named as Executive Vice President of the Company and appointed to
the Board of Directors of both the Bank and the Company.
23
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
3.1 Articles of Incorporation of Slade's Ferry Bancorp
as amended (1)
3.2 By-laws of Slade's Ferry Bancorp as amended (2)
10.1 Slade's Ferry (formerly Weetamoe) Bancorp 1996 Stock
Option Plan (as amended) (3)
10.2 Noncompetition Agreement between Slade's Ferry Trust
Company and Edward S. Machado (A substantially
identical contract exists with Peter Paskowski) (4)
10.3 Supplemental Executive Retirement Agreement between
Slade's Ferry (formerly Weetamoe) Bancorp and
Donald T. Corrigan (5)
10.4 Supplemental Executive Retirement Agreement between
Slade's Ferry (formerly Weetamoe) Bancorp and
James D. Carey (2)
10.5 Supplemental Executive Retirement Agreement between
Slade's Ferry (formerly Weetamoe) Bancorp and
Manuel J. Tavares (2)
10.6 Swansea Mall Lease (4)
10.7 Form of Director Supplemental Retirement
Program Director Agreement, Exhibit I thereto (Slade's
Ferry Trust Company Director Supplemental Retirement
Program Plan) and Endorsement Method Split Dollar
Plan Agreement thereunder for Thomas B. Almy.
(Similar forms of agreement entered into between
Slade's Ferry Trust Company and the other directors) (6)
10.8 Form of Directors' Paid-up Insurance Policy for
Thomas B. Almy (part of the Director Supplemental
Retirement Program). (Similar forms of policy entered
into by Company for other directors). (7)
10.9 Form of Officers' Paid-up Endorsement Method Split
Dollar Plan Agreement and Insurance Policies for
Janice Partridge (Similar forms of policies entered
into by Company for its President and other Vice
Presidents) (8)
- --------------------
Incorporated by reference to the Registrant's Registration Statement
on Form SB-2 filed with the Commission on April 14, 1997.
Incorporated by reference to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1996.
Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended June 30, 1999.
Incorporated by reference to the Registrant's Registration Statement
on Form S-4 File No. 33-32131
Incorporated by reference to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1994.
Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended March 31,1999
Incorporated by reference to the Registrant's Form 10-QSB for the
quarter ended June 30, 1998.
Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended June 30, 2000.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SLADE'S FERRY BANCORP
-------------------------------------
(Registrant)
November 13, 2002 /s/ Mary Lynn D. Lenz
- ----------------------- -------------------------------------
(Date) (Signature) Mary Lynn D. Lenz
President/Chief
Executive Officer
November 13, 2002 /s/ Edward Bernardo Jr.
- ----------------------- -------------------------------------
(Date) (Signature) Edward Bernardo Jr.
Vice President/Treasurer
Chief Financial Officer/
Chief Accounting Officer
25
CERTIFICATIONS
I, Mary Lynn D. Lenz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Slade's Ferry
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date:
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Mary Lynn D. Lenz
-------------------------------------
President/Chief Executive Officer
26
CERTIFICATIONS
I, Edward Bernardo, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Slade's Ferry
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date:
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Edward Bernardo Jr.
-------------------------------------
Vice President/Treasurer
Chief Financial Officer/
Chief Accounting Officer
27
Mary Lynn D. Lenz, President and Chief Executive Officer, and Edward
Bernardo, Jr. Vice President and Treasurer of Slade's Ferry Bancorp (the
"Company"), each hereby certifies, pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of his
knowledge:
1) this Quarterly Report on Form 10-Q of the Company for the
quarterly period ended September 30, 2002 fully complies with
the requirements of Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (15 U.S.C. 78m or 780(d); and
2) the information contained in this Form 10-Q fairly represents in
all material respects, the financial condition and results of
operations of the Company.
November 13, 2002 /s/ Mary Lynn D. Lenz
- ----------------------- -------------------------------------
(Date) (Signature) Mary Lynn D. Lenz
President/Chief
Executive Officer
November 13, 2002 /s/ Edward Bernardo Jr.
- ----------------------- -------------------------------------
(Date) (Signature) Edward Bernardo Jr.
Vice President/Treasurer
Chief Financial Officer/
Chief Accounting Officer
28