Cover: "It's Our People That Make the Difference"
Slade's Ferry Bancorp 2002
Page One: "Passionate Leadership"
Commitment to the cause has always been a hallmark of Slade's Ferry
employees. And our chairman demonstrated that kind of dedication by taking
on the day-to-day management of the organization while serving as interim
president from March through August. Chairman Donald Corrigan, along with
Vice Chair Kenneth Rezendes, kept Slade's Ferry on a steady course and
initiated strategic planning to create a vision for the institution.
As that planning began, it quickly became evident that the bank's permanent
president would need to be passionate about helping the bank reach its full
potential. Our search team envisioned an energetic motivator with the
skills and expertise to refine the strategic plan and to put the results
into practice. We wanted someone who would be excited about reenergizing
the institution and able to develop employees' creativity so that,
together, we could find new ways to address customer needs.
After an exhaustive search, the board unanimously elected Mary Lynn Lenz to
become the new president and CEO of Slade's Ferry Bancorp. With 28 years
of financial services experience and a background in retail banking, Lenz
is well equipped to take the torch passed on to her by Donald Corrigan and
to address the dynamic needs of the bank while honoring its traditions.
With strength and decisiveness, the board of Slade's Ferry Bancorp charted
a new course and placed a passionate new leader at the helm in 2002.
Page Two: "Top-of-the-Line Customer Service"
We are people with deep roots here in the south coast. Tradition, honesty
and integrity mean something to us. That's why banking relationships are
so important. Slade's Ferry customers look to their local banker to be a
trusted confidant, counselor and partner. They seek advice on how to pay
for college, a wedding, or a new home and how to plan for retirement. But
our customers also want assurances that they'll be well prepared to
confront the unexpected curveballs that life can sometimes throw --like
braces for your 13-year-old, a new hot water heater or shocks on your 1998
sedan.
"My parents, and my husband's parents are long-time customers of Slade's
Ferry, so I guess we were destined to become customers too," said Kelly
Meehan. "We decided to re-mortgage our house to take advantage of low
rates and to begin a remodeling project after our recent wedding. Connie
[Barbosa, vice president of mortgage originations] provided amazing
customer service. She kept us posted every step of the way. In fact, we
were so pleased that we just opened a checking account too."
The tellers, customer service specialists and branch managers at Slade's
Ferry take pride in the one-on-one relationships that we build with our
customers. We understand the needs of the people that we serve and help
our customers' money work to its fullest advantage. By knowing both
customer needs and the depth of the Slade's Ferry product line, we can help
our customers meet their financial goals.
In 2002 Slade's Ferry promoted new products in the marketplace. Home
equity lines were advertised in the fourth quarter and more than 225
customers took advantage of the historically low interest rates being
offered. With a reorganized Slade's Ferry Bank in 2003, customers can
expect new products and a reenergized customer service team to respond to
customers' banking needs in the months to come.
Page Three: "Attentive Lenders"
Successful commercial banking relationships are true partnerships. Lenders
commit themselves to learning your business and you come to rely on us for
expert advice and products tailored to fit your needs. At Slade's Ferry,
your small business isn't just another number. You've invested in us, and
that's why we invest time and manpower in your business.
Roy Enoksen, CEO of Eastern Fisheries, is one customer who appreciates the
value of his relationship with his banker, Bob Howard. Roy started his 50
million-dollar business by purchasing one fishing boat in 1978. Back then
he had a commercial checking account at Slade's Ferry. Over the years, his
business has grown into a corporation with five different business lines.
In 2002, his scalloping business alone harvested 70 million pounds of
scallops, satisfying 20 percent of domestic consumption. Consequently, his
commercial banking needs have changed. And Slade's Ferry has been right
there beside him, every step of the way.
"My banker understands my industry and the local marketplace," said
Enoksen. "I can call him at a moment's notice for help on a specific
problem, or ask him to set aside a few hours to participate in a strategic
planning session. Either way, I know I can count on Slade's Ferry to be
there for Eastern Fisheries."
With real estate in Boston's Route 128/Interstate 495 belt reaching new
highs and commuter rail soon reaching into Fall River, southeastern
Massachusetts is ripe for explosive commercial growth. Slade's Ferry is
positioning itself for changes in the marketplace by adding lenders to its
team so that the bank's commitment to attentive service will not be
compromised as it gains market share in the years to come.
Page Four: "Commitment to Community"
When you examine the banking industry, you quickly realize that bigger
isn't always better. After all, how can a lending institution out of
Boston, Pittsburgh or even Providence for that matter, know the small
business needs of Somerset, affordable housing issues facing Fall River or
the lending needs of a social services organization in New Bedford. Living
in the communities that you serve is the foundation of solid community
banking.
Slade's Ferry employees are volunteering alongside you at the PTA meeting,
sharing your checkout aisle at the corner market, and coaching your kids at
the YMCA. The bank understands the people of southeastern Massachusetts
because our employees are an integral part of the fabric of the community.
That's why we were there when New Bedford Community Health Center, the
Child & Family Services of Greater New Bedford and the Fairhaven Community
Nurses Association needed lending assistance in 2002.
"We couldn't have responded to the community need appropriately, without
the assistance of Slade's Ferry," said Rob Mendes of the New Bedford Boys &
Girls Club. "We've been here in this neighborhood for 133 years, but the
demand for our services has been growing exponentially in recent years. We
serve up to 1,500 children each year so we needed more recreation and
education space." With financing assistance from Ed Sousa at Slade's
Ferry, the club added a new 20-station computer room and a dedicated
classroom for tutorial assistance, along with a 8,200 square-foot gymnasium
which will help to nurture yet another generation's healthy minds and
bodies.
As Slade's Ferry grows, our commitment to the communities we serve will
never waiver. It is our goal to define and provide greater focus to our
charitable giving efforts in the coming year.
Page Five: BOARD OF DIRECTORS, Slade's Ferry Bancorp - Slade's Ferry Trust
Co.
Thomas B. Almy
Architect
Peter G. Collias, Esquire
Clerk/Secretary of Bancorp and Bank
Law Office of Peter G. Collias
Donald T. Corrigan
Chairman of the Board - Slade's Ferry Bancorp
Chairman of the Board - Slade's Ferry Trust Co.
Melvyn A. Holland
Treasurer
Rosenfield Raymon Restivo, PC
Certified Public Accountants
Mary Lynn D. Lenz
President/Chief Executive Officer -
Slade's Ferry Bancorp
President/Chief Executive Officer
Slade's Ferry Trust Co.
William Q. MacLean, Jr.
Account Executive
Sylvia Insurance Agency, Inc.
Francis A. Macomber
President - LeComte's All Star Dairy, Inc.
Majed Mouded, MD
Physician
Shaun O'Hearn, Sr.
President - Bolger & O'Hearn, Inc.
Lawrence J. Oliveira, DDS
Orthodontist
Peter Paskowski
Past President - Slade's Ferry Trust Co.
Kenneth R. Rezendes
Vice Chairman - Slade's Ferry Bancorp
Chairman - K. R. Rezendes, Inc.
William J. Sullivan
President - Sullivan Funeral Homes, Inc.
Charles Veloza
President - Charlie's Oil Co., Inc.
David F. Westgate
President - Quequechan Management Corp.
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, 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)
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 21, 2003 was
approximately $45,668,574. On that date, there were 3,952,185.757 shares of
Slade's Ferry Bancorp Common Stock, $.01 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for Annual Meeting of Stockholders April 14, 2003
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 four 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 $40.3
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 established 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, provided the means for the Bank
to invest into the REIT certain designated, bank-owned real estate mortgage
loans. The income derived on these loans was 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 35,300 personal
savings, checking and money market accounts, and 9,400 personal certificates
of deposit and individual retirement accounts. Its commercial base consists
of over 3,200 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, 2002, commitments under standby letters of credit aggregate
approximately $636,400.
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 currently 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 FRB 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
specified 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 subscribing 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 the
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,
however, 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, 2002 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 2002, 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 a joint examination
in 2001, and the most recent joint examination in 2002, a revised Memorandum
of Understanding was entered into to be implemented during the first and
second quarters of 2003.
Management has made substantial progress towards addressing the
provisions of the Memorandum but certain areas require continued efforts.
Key areas that require attention going forward are the full implementation
of management and strategic plans, asset quality improvement and refinement
to both the loan and investment policies.
During the life of the agreement, the Bank must maintain a Tier 1
Leverage Capital Ratio of at least seven (7) percent.
The Board of Directors and bank management have made great strides
addressing issues and concerns within the Memorandum of Understanding, and
are committed to continue to take action to comply with the remaining
provisions.
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.
6
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, 2002, December 31, 2001, and December 31, 2000. Averages are
daily averages.
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
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 $ 40,088 $ 2,337 5.83% $ 47,036 $ 4,757 10.11% $ 48,445 $ 4,504 9.30%
Commercial Real Estate 157,900 10,947 6.93% 153,395 12,989 8.47% 152,580 14,194 9.30%
Residential Real Estate 48,069 3,446 7.17% 38,819 2,868 7.39% 36,558 2,877 7.87%
Consumer Loans 8,447 547 6.48% 12,093 940 7.77% 11,216 911 8.12%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Loans 254,504 17,277 6.79% 251,343 21,554 8.57% 248,799 22,486 9.04%
Federal Funds Sold & FHLB
Overnight Deposits 24,033 348 1.45% 23,136 819 3.54% 9,558 583 6.10%
U.S. Treas/Govt Agencies 70,385 3,688 5.24% 72,778 4,258 5.85% 68,606 4,421 6.44%
States & Political
Subdivisions 14,044 799 5.69% 12,498 777 6.22% 11,889 787 6.62%
Mutual Funds 117 7 5.98% 45 2 4.44% 55 3 5.45%
Marketable Equity
Securities 4,087 106 2.59% 4,116 91 2.21% 4,241 89 2.10%
Other Investments 1,182 33 2.79% 1,037 67 6.46% 1,066 79 7.41%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Earning Assets 368,352 22,258 6.04% 364,953 27,568 7.55% 344,214 28,448 8.26%
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for Loan Losses (5,462) (5,109) (4,202)
Unearned Income (347) (443) (552)
Cash and Due From Banks 15,250 13,351 12,883
Other Assets 22,760 21,837 20,938
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets $400,553 $394,589 $373,281
==================================================================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY:
Savings $ 62,078 570 0.92% $ 53,613 $ 878 1.64% $ 50,210 $ 1,006 2.00%
NOW's 42,259 348 0.82% 37,834 700 1.85% 37,785 1,183 3.13%
Money Market Accounts 9,250 24 0.26% 9,415 120 1.27% 10,607 174 1.64%
CD's > $100M 32,384 1,117 3.45% 34,483 1,796 5.21% 31,689 1,537 4.85%
Other Time Deposits 124,974 4,644 3.72% 141,698 7,839 5.53% 138,637 8,019 5.78%
FHLB Advances & Other
Borrowings 18,553 1,225 6.60% 15,734 993 6.31% 12,402 780 6.29%
- ----------------------------------------------------------------------------------------------------------------------------------
Total Interest-bearing
Liabilities 289,498 7,928 2.74% 292,777 12,326 4.21% 281,330 12,699 4.51%
Demand Deposits 69,787 64,549 58,588
Other Liabilities 1,466 1,738 1,836
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Total Liabilities 360,751 359,064 341,754
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock 39 38 37
Paid-in Capital 27,343 26,264 25,109
Retained Earnings 12,684 9,516 7,648
Accumulated Other
Comprehensive Income (Loss) (264) (293) (1,267)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 39,802 35,525 31,527
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities &
Stockholders' Equity $400,553 $394,589 $373,281
==================================================================================================================================
Net Interest Income $14,330 $15,242 $15,749
==================================================================================================================================
Net Interest Spread 3.30% 3.34% 3.75%
==================================================================================================================================
Net Yield on Earning Assets 3.89% 4.18% 4.58%
==================================================================================================================================
- --------------------
On a fully taxable equivalent basis based on tax rate of 27.70% for 2002,
31.40% for 2001, and 33.30% for 2000. Interest income on investments and
net interest income includes a fully taxable equivalent adjustment of
$221,000 in 2002, $244,000 in 2001, and $262,000 in 2000.
Average balance includes non-accruing loans. The effect of including
such loans is to reduce the average rate earned on the Company's loans.
7
NET INTEREST INCOME - CHANGES DUE TO VOLUME AND RATE(1)
2002 vs. 2001 2001 vs. 2000
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 $ (471) $ 23 $ (494) $ 236 $ 655 $ (419)
US Treas/Govt Agencies (570) (133) (437) (163) 257 (420)
States & Political Subdivisions 22 92 (70) (10) 39 (49)
Mutual Funds 5 3 2 (1) 0 (1)
Marketable Securities 15 (1) 16 2 (3) 5
Other Investments (34) 7 (41) (12) (2) (10)
Commercial Loans (2,420) (554) (1,866) 253 (136) 389
Commercial Real Estate (2,042) 347 (2,389) (1,205) 73 (1,278)
Residential Real Estate 578 673 (95) (9) 173 (182)
Consumer Loans (393) (260) (133) 29 70 (41)
- --------------------------------------------------------------------------------------------------------------
Total Interest Income (5,310) 197 (5,507) (880) 1,126 (2,006)
- --------------------------------------------------------------------------------------------------------------
Interest Expense:
Savings Accounts (308) 109 (417) (128) 62 (190)
NOW Accounts (352) 59 (411) (483) 1 (484)
Money Market Accounts (96) (1) (95) (54) (17) (37)
CD's > 100 M (679) (774) 95 259 141 118
Other Time Deposits (3,195) (91) (3,104) (180) 173 (353)
FHLB Advances & Other
Borrowings 232 182 50 213 210 3
- --------------------------------------------------------------------------------------------------------------
Total Interest Expense (4,398) (516) (3,882) (373) 570 (943)
- --------------------------------------------------------------------------------------------------------------
Net Interest Income $ (912) $ 713 $(1,625) $ (507) $ 556 $(1,063)
==============================================================================================================
- --------------------
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 27.70% for 2002, 31.40% for 2001, and 33.30% for 2000.
8
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, 2002, 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.
9
INTEREST RATE - SENSITIVITY GAPS
Repricing Period at December 31, 2002
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 $ 19,500 $ 0 $ 0 $ 0 $ 0 $ 19,500
Investment Securities(1) 28,200 15,451 19,347 7,992 8,078 79,068
Loans 93,946 35,175 40,130 36,706 59,055 265,012
--------------------------------------------------------------------------
Total Earning Assets $141,646 $50,626 $59,477 $44,698 $67,133 $363,580
--------------------------------------------------------------------------
Interest Bearing Liabilities:
NOW Checking and Savings
Deposits $ 33,218 $16,609 $16,609 $44,290 $ 0 $110,726
Money Market Deposits 2,435 1,217 1,217 3,246 0 8,115
Term Deposits 128,663 13,579 2,272 0 0 144,514
FHLB Advances 0 1,000 0 0 18,185 19,185
Other Borrowings 0 0 0 0 0 0
--------------------------------------------------------------------------
Total Interest-bearing Liabilities $164,316 $32,405 $20,098 $47,536 $18,185 $282,540
--------------------------------------------------------------------------
Net Interest Sensitivity Gap $(22,670) $18,221 $39,379 $(2,838) $48,948 $ 81,040
Cumulative Gap $(22,670) $(4,449) $34,930 $32,092 $81,040
Cumulative Gap as a Percent of
Total Assets (5.69%) (1.12%) 8.77% 8.06% 20.34%
==========================================================================
- --------------------
Excludes money market mutual funds which are carried in cash and
cash equivalents.
In addition to the GAP report, the Company also uses an
Asset/Liability Model Performance 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 300 basis points or down 100 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 Percentage of
(Basis Points) Net Interest Income Dollar Impact
- --------------------------------------------------------------------------------------
+300 (6.55%) ($965,000)
-100 (2.30%) ($338,000)
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.
10
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) 2002 2001 2000
- -----------------------------------------------------------------------------
US Treasury Securities and
Obligations of US Government
Corporations and Agencies $ 0 $ 2,750 $ 6,948
Obligations of States and
Political Subdivisions of the States 13,693 13,528 12,094
Mortgage-backed securities 2 3 59
Foreign Debt Securities 1 1 1
- -----------------------------------------------------------------------------
Total $13,696 $16,282 $19,102
=============================================================================
In the following table, the carrying value of Held-to-Maturity
securities maturing within stated periods as of December 31, 2002, is shown
with the weighted average interest yield from securities falling within the
range of maturities:
US Treasury Obligations
& Government of States & Mortgage- Foreign
Corporations Political Backed Debt
(Dollars in Thousands) & Agencies Subdivisions(1) Securities(2) Securities Total
- ------------------------------------------------------------------------------------------------
Due in 1 year or less:
Amount $ 0 $ 3,310 $ 0 $ 0 $ 3,310
Yield 0.00% 4.97% 0.00% 7.50% 4.97%
Due in 1 to 5 years:
Amount 0 6,980 2 1 6,983
Yield 0.00% 5.83% 7.84% 0.00% 5.83%
Due in 5 to 10 years:
Amount 0 1,360 0 0 1,360
Yield 0.00% 8.30% 0.00% 0.00% 8.30%
Due after 10 years:
Amount 0 2,043 0 0 2,043
Yield 0.00% 6.39% 0.00% 0.00% 6.39%
- ------------------------------------------------------------------------------------------------
Amount $ 0 $13,693 $ 2 $ 1 $13,696
================================================================================================
Yield 0.00% 5.95% 7.84% 7.50% 5.95%
================================================================================================
- --------------------
Rates of tax exempt securities are shown assuming a 27.70% tax rate.
Mortgage-backed securities stated using average life.
11
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) 2002 2001 2000
- ---------------------------------------------------------------------
US Treasury Securities and
Obligations of US Government
Corporations and Agencies $26,424 $34,240 $40,934
Mortgage-backed Securities 32,512 36,129 22,089
Corporate Debt Securities 2,673 2,941 1,473
Marketable Equity Securities 3,986 6,015 4,582
- ---------------------------------------------------------------------
Total $65,595 $79,325 $69,078
=====================================================================
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, 2002, 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 $ 3,811 $ 3,703 $1,010 $ 8,524
Yield 5.42% 4.12% 5.85% 4.91%
Due in 1 to 5 years:
Amount 22,613 27,923 1,663 52,199
Yield 3.745% 5.23% 6.17% 4.62%
Due in 5 to 10 years:
Amount 0 755 0 755
Yield 0.00% 6.01% 0.00% 6.01%
Due after 10 years:
Amount 0 131 0 131
Yield 0.00% 5.99% 0.00% 5.99%
- -------------------------------------------------------------------------------------
Amount $26,424 $32,512 $2,673 $61,609
=====================================================================================
Yield 3.99% 5.12% 6.05% 4.68%
=====================================================================================
- --------------------
Mortgage-backed securities stated using average life.
12
The following table shows the amortized cost basis and fair value of
the major categories of Held-to-Maturity securities as of December 31, 2002:
Gross Gross
Amortized Unrealized 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 $13,693 $573 $7 $14,259
Mortgage-backed securities 2 0 0 2
Foreign debt securities 1 0 0 1
- ---------------------------------------------------------------------------------------------------------------
Total $13,696 $573 $7 $14,262
===============================================================================================================
Investments in Available-for-Sale securities are carried at fair value
on the balance sheet and are summarized as follows as of December 31, 2002.
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 $26,424 $239 $ 0 $26,663
Mortgage-backed securities 32,512 922 0 33,434
Corporate debt securities 2,673 106 0 2,779
Marketable equity securities 3,986 53 784 3,255
- ---------------------------------------------------------------------------------------------------------------
Total $65,595 $1,320 $784 $66,131
===============================================================================================================
Increase in Stockholder's Equity:
(In Whole Dollars)
Net unrealized gain on Available-for-Sale Securities $ 535,854
Less tax effect (312,582)
---------
$ 223,272
=========
13
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) 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Commercial, financial and agricultural $ 30,455 $ 45,238 $ 49,331 $ 46,354 $ 43,777
Real estate - construction and land development 14,078 7,600 8,601 5,014 3,773
Real estate - residential 90,330 60,936 55,871 52,330 51,220
Real estate - commercial 122,932 128,888 128,327 127,938 112,913
Consumer 6,881 10,643 12,872 9,393 6,477
Nonprofit 293 236 1,036 904 0
Obligations of states and political subdivisions 0 21 61 0 3
Other 43 322 54 116 67
- ---------------------------------------------------------------------------------------------------------------------
Total Gross Loans 265,012 253,884 256,153 242,049 218,230
Allowance for Loan Losses (4,854) (5,484) (4,776) (3,766) (3,569)
Unamortized adjustment to fair value (0) (0) (9) (20) (32)
Unearned Income (342) (382) (519) (594) (691)
- ---------------------------------------------------------------------------------------------------------------------
Net Loans $259,816 $248,018 $250,849 $237,669 $213,938
=====================================================================================================================
The following table shows the maturity distributions and interest rate
sensitivity of selected loan categories at December 31, 2002.
Within One to Five After Five
(Dollars in Thousands) One Year Years Years Total
- ----------------------------------------------------------------------------------------------------
Commercial, financial, and agricultural $23,842 $ 5,217 $1,396 $30,455
Real Estate - construction & land development 258 10,687 3,133 14,078
- ----------------------------------------------------------------------------------------------------
Total $24,100 $15,904 $4,529 $44,533
====================================================================================================
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 $3,841 $ 2,772 $ 6,613
Real Estate - construction & land development 3,459 10,361 13,820
- ---------------------------------------------------------------------------------------------
Total $7,300 $13,133 $20,433
=============================================================================================
14
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
December 31,
- ---------------------------------------------------------------------------------------------------------
(Dollars in Thousands) 2002 2001 2000 1999 1998
Nonaccrual loans $635 $1,138 $2,415 $1,777 $3,331
Loans 90 days or more past due
and still accruing 8 444 335 248 317
Real estate acquired by foreclosure
or substantively repossessed 0 0 0 353 1,026
- ---------------------------------------------------------------------------------------------------------
Total nonperforming assets $643 $1,582 $2,750 $2,378 $4,674
- ---------------------------------------------------------------------------------------------------------
Restructured debt performing in accordance
with amended terms, not included above $166 $ 186 $ 53 $ 518 $ 867
- ---------------------------------------------------------------------------------------------------------
Percentage of nonaccrual loans to total loans 0.24% 0.45% 0.94% 0.73% 1.53%
Percentage of nonaccrual loans, restructured
loans and real estate acquired by foreclosure
or substantively repossessed to total assets 0.20% 0.34% 0.64% 0.74% 1.54%
Percentage of allowance for loan losses to
nonaccrual loans 764.20% 481.90% 197.76% 211.92% 107.15%
Nonaccrual loans include restructured loans of $166,000 at December
31, 2002; $137,000 at December 31, 2001; $153,000 at December 31, 2000; $0
at December 31, 1999; and $0 at December 31, 1998.
Information with respect to nonaccrual and restructured loans for the
past five years ending December 31 is as follows:
December 31,
- ----------------------------------------------------------------------------------------------------
(Dollars in Thousands) 2002 2001 2000 1999 1998
- ----------------------------------------------------------------------------------------------------
Nonaccrual loans $635 $1,138 $2,415 $1,777 $3,331
Interest income that would have been
recorded under original terms $303 $ 109 $ 228 $ 146 $ 318
Interest income recorded during the period $121 $ 6 $ 22 $ 37 $ 37
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 $0.6 Million at year end 2002,
from $1.6 Million reported at year end 2001.
Nonaccrual loans is the largest component of nonperforming assets, and
at December 31, 2002, this category decreased by $.5 Million from December
31, 2001. There are no loans greater than $0.2 Million in this category,
which is comprised of $0.4 Million of residential mortgages and $0.2 Million
of other types of loans.
Loans that became nonaccrual during the current year amounted to
$482,762. Offsetting this increase were receipts of loan payments of
$780,329 and loans of $99,990 that were deemed uncollectable and charged off
to the Allowance for Loan Losses. There were two nonaccrual status loans
that were transferred to accrual status during the year 2002 totaling
$105,825.
15
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 consecutive months of payments are made, then it is
reclassified as an accruing loan. When it is determined that the
collectability 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) 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
Balance at January 1 $5,484 $4,776 $3,766 $3,569 $3,694
- -----------------------------------------------------------------------------------------------------
Charge-offs:
Commercial (336) (73) (194) (221) (0)
Real estate-construction (0) (0) (0) (0) (0)
Real estate-mortgage (20) (0) (23) (23) (716)
Installment/Consumer (26) (28) (138) (158) (76)
- -----------------------------------------------------------------------------------------------------
(382) (101) (355) (402) (792)
- -----------------------------------------------------------------------------------------------------
Recoveries:
Commercial 17 14 50 11 8
Real estate-construction 0 0 0 0 0
Real estate-mortgage 38 29 92 24 43
Installment/Consumer 7 16 23 14 16
- -----------------------------------------------------------------------------------------------------
62 59 165 49 67
- -----------------------------------------------------------------------------------------------------
Net Charge-offs (320) (42) (190) (353) (725)
- -----------------------------------------------------------------------------------------------------
Provision (benefit) charged to operations (310) 750 1,200 550 600
- -----------------------------------------------------------------------------------------------------
Balance at December 31 $4,854 $5,484 $4,776 $3,766 $3,569
=====================================================================================================
Allowance for Loan Losses as a percent of
year end loans 1.83% 2.16% 1.86% 1.56% 1.64%
Ratio of net charge-offs to average loans
outstanding (0.13%) (0.02%) (0.08%) (0.15%) (0.34%)
16
The Allowance for Loan Losses at year end December 31, 2002 was
$4,854,388 and $5,484,519, $4,776,360, $3,765,872, and $3,569,282 for years
ending 2001, 2000, 1999, and 1998 respectively. The Allowance for Loan
Losses as a percent of year end loans was 1.83% in 2002, 2.16% in 2001,
1.86% in 2000, 1.56% in 1999, and 1.64% in 1998.
The level of the Allowance for Loan Losses is reviewed by management
on an ongoing basis and encompasses several factors to evaluate the risk
inherent in the loan portfolio. These factors include but are not limited
to growth in the loan portfolio, risk characteristics of the types of loans
in the portfolio, current economic conditions in the market area, trends in
loan delinquencies and charge-offs, the value of underlying collateral
securing loans, and other external and internal factors.
During 2002, the implementation of an intensive process for evaluating
loan loss provisions and the adequacy of the Allowance for Loan Losses took
into account net charged off loans, a reduction in higher credit risk
weighted loans such as commercial and industrial, commercial real estate,
and consumer loans that resulted in a lower Allowance for Loan Loss
requirement. This reduction in higher credit risk weighted loans resulted
in no addition to the loan loss provision for 2002 and a recovery of
$310,000 from 2001 provisions, as loan growth during 2002 was generally in
lower credit risk weighted one-four family residential loans, including home
equity loans.
Management's assessment of the adequacy of the Allowance for Loan
Losses is reviewed by regulatory agencies, the Company's independent
accountants, and outside loan review consultants.
The Company's provision for loan losses was a benefit to earnings in
2002 of $310,000.. Prior years' provisions were $750,000, $1,200,000,
$550,000 and $600,000 for years ending 2001, 2000, 1999, and 1998
respectively. In 2002, the Company realized recoveries of previously
charged-off loans of $62,000. Recoveries recorded in previous years were
$59,000, $165,000, $49,000, and $67,000 in 2001, 2000, 1999, and 1998
respectively.
17
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, 2002 December 31, 2001 December 31, 2000 December 31, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------------------
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) $1,155(1) 11.60% $1,629(1) 17.91% $1,466(1) 19.66% $1,356(1) 19.52% $1,249(1) 20.06%
Real estate
Construction 70 5.31% 41 2.99% 47 3.36% 34 2.07% 27 1.73%
Real estate
Mortgage 3,465(2) 80.48% 3,585(2) 74.77% 2,970(2) 71.91% 1,924(2) 74.48% 1,964(2) 75.21%
Consumer(3) 164(4) 2.61% 229(4) 4.33% 293(4) 5.07% 452(4) 3.93% 329(4) 3.00%
- -------------------------------------------------------------------------------------------------------------------------------
$4,854 100.00% $5,484 100.00% $4,776 100.00% $3,766 100.00% $3,569 100.00%
==============================================================================================================================
- --------------------
Includes amounts specifically reserved for impaired loans of
$412,761 as of December 31, 2002, $780,029 as of December 31, 2001,
$281,248 as of December 31, 2000, $234,205 as of December 31, 1999
and $128,207 as of December 31, 1998, as required by Financial
Accounting Standard No. 114, Accounting for Impairment of Loans.
Includes amounts specifically reserved for impaired loans of
$34,757 as of December 31, 2002, $413,663 as of December 31, 2001,
$132,911 as of December 31, 2000, $147,884 as of December 31, 1999, and
$187,554 as of December 31, 1998, 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 $29,606
as of December 31, 2002, $1,632 as of December 31, 2001, $10,398 as of
December 31, 2000, $39,241 as of December 31, 1999 and $9,126 as of
December 31, 1998 as required by Financial Accounting Standard No. 114,
Accounting for Impairment of Loans
Includes commercial, financial, agricultural and nonprofit.
The composition of the loan portfolio has become more diversified
through 2002, resulting in a lesser degree of credit risk, and therefore a
reduction in the allowance for loan losses maintained to cover estimated
losses in the loan portfolio.
The loan portfolio's largest segment of loans is still commercial real
estate loans, which represent 46% of gross loans compared to 51% in 2001.
Residential real estate loans represent 34% of gross loans in 2002 compared
to 24% at December 31, 2001. 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.
Real estate residential loans are both loans secured by one-to-four
family property and home equity loans. Home equity loans are generally
revolving lines of credit and are typically secured by second mortgages on
one-to-four family owner-occupied properties.
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 condition of the borrower(s), the location of the real estate,
the quality of management, and general economic and competitive conditions.
When granting a residential
18
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.
Real estate construction loans comprise of both residential and
commercial construction loans throughout our market area.
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 50% liquidation
value to inventories; 25% to furniture, fixtures and equipment; and 70% to
accounts receivable less than 90 days of invoice date. Commercial loans
represent 11% of the loan portfolio as of December 31, 2002, compared to 18%
as of December 31, 2001.
Consumer loans are both secured and unsecured borrowings and represent
only 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.
Total loan charge-offs in 2002 amounted to $382,000, when compared to
losses of $101,000 in 2001, $355,000 in 2000, $402,000 in 1999, and $792,000
in 1998. The real estate-mortgage category incurred a loss of $20,000 in
2002 compared to no losses in 2001, $23,000 in 2000, $23,000 in 1999, and
$716,000 in 1998.
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.
The following table sets forth the average amount and the average rate
paid on deposits for the periods indicated.
2002 2001 2000
- -----------------------------------------------------------------------------------------------
Average Average Average Average Average Average
(Dollars in Thousands) Balance Rate Balance Rate Balance Rate
- -----------------------------------------------------------------------------------------------
Noninterest-bearing Demand
Deposits $ 69,787 0.00% $ 64,549 0.00% $ 58,588 0.00%
Interest-bearing Demand Deposits 42,259 0.82 37,834 1.85 37,785 3.13
Savings Deposits 62,078 0.92 53,613 1.64 50,210 2.00
Money Market Deposits 9,250 0.26 9,415 1.27 10,607 1.64
Time Deposits
$100,000 or More 32,384 3.45 34,483 5.21 31,689 4.85
Other Time Deposits 124,974 3.72 141,698 5.53 138,637 5.78
- ----------------------------------------------------------------------------------------------
Totals $340,732 1.97% $341,592 3.32% $327,516 3.64%
==============================================================================================
19
As of December 31, 2002, time certificates of deposit in amounts of
$100,000 or more had the following maturities:
(Dollars in Thousands)
Three months or less $12,385
Over three months through six months 7,046
Over six months through twelve months 6,464
Twelve months and over 2,020
-------
$27,915
=======
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,
2002 2001 2000
------------------------------
Return on Average Assets 0.74% 0.81% 1.09%
Return on Average Equity 7.45% 9.04% 12.92%
Dividend Payout Ratio 47.50% 52.63% 36.84%
Equity to Assets Ratio 9.94% 9.00% 8.45%
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) 2002 2001 2000
- ------------------------------------------------------------------------------------
Balance at December 31 $ 0 $ 465 $1,200
Maximum Amount Outstanding at Any Month's End $1,222 $1,237 $1,220
Average Amount Outstanding During the Year $ 484 $ 706 $ 723
Weighted Average Interest Rate During the Year 1.69% 4.03% 7.07%
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 2002 or 2001 to meet short-term liquidity needs. Tax
payments made by our customers, which are owed to the Federal Reserve Bank
Treasury Tax and Loan account, are classified as other borrowed funds.
There is also $19,185,338 in borrowings from the Federal Home Loan Bank as
of December 31, 2002 which represent the match funding program that is
available to qualified borrowers. These borrowings totaled $16,983,087 at
year end 2001.
20
Accounting for Deferred Income Taxes
- ------------------------------------
The net deferred tax asset at year end 2002 was $1,849,723. 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 2002 was $4,099,735.
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, 2002, 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 2003)
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 currently a party to any material pending legal
proceedings; however, see Note 11 - Commitments and Contingent Liabilities
of the Consolidated Financial Statements, Page F-23.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 2002, 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, 2002.
2002 2001
- -------------------------------------------------------
High Low High Low
- -------------------------------------------------------
1st Quarter 15.40 13.55 10.00 8.81
- -------------------------------------------------------
2nd Quarter 15.35 13.81 11.90 9.00
- -------------------------------------------------------
3rd Quarter 15.00 13.05 13.75 10.26
- -------------------------------------------------------
4th Quarter 13.74 11.66 14.00 11.10
- -------------------------------------------------------
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 four quarterly cash dividends of $.09 per share for a total of $.36 per
share paid in 2002. 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.
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) 2002 2001 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
EARNINGS DATA
Interest Income $ 22,037 $ 27,324 $ 28,186 $ 25,553 $ 24,306
Interest Expense 7,928 12,327 12,699 10,754 10,711
Net Interest Income 14,109 14,997 15,487 14,799 13,595
Provision (Benefit) for Loan Losses (310) 750 1,200 550 600
Noninterest Income 2,533 1,769 1,857 2,086 1,568
Noninterest Expense 12,852 11,408 10,206 10,556 8,984
Income Before Income Taxes 4,100 4,608 5,938 5,779 5,579
Applicable Income Taxes 1,134 1,398 1,864 1,923 2,216
Net Income 2,966 3,210 4,074 3,856 3,363
PER SHARE DATA (1)
Net Income-Basic $ 0.76 $ 0.84 $ 1.09 $ 1.060 $ 0.940
Net Income-Diluted $ 0.75 $ 0.84 $ 1.09 $ 1.050 $ 0.940
Cash Dividends $ 0.36 $ 0.44 $ 0.40 $ 0.358 $ 0.265
Book Value (at end of period) $ 10.45 $ 9.94 $ 9.41 $ 8.567 $ 8.200
Avg. Shs. Outstanding 3,908,901 3,830,575 3,743,138 3,650,275 3,572,329
Shares Outstanding Year End 3,937,763 3,869,924 3,789,503 3,520,409 3,446,413
BALANCE SHEET DATA
Assets $ 398,375 $ 394,761 $ 388,619 $ 358,121 $ 340,355
Loans 265,012 253,884 256,153 242,049 218,230
Unearned Discount 342 382 519 594 691
Allowance for Loan Losses 4,854 5,484 4,776 3,766 3,569
Loans, Net 259,816 248,018 250,849 237,669 213,938
Goodwill 2,173 2,173 2,400 2,627 2,854
Investments 80,618 96,401 88,109 81,806 79,978
Deposits 335,633 337,043 337,001 316,431 303,786
Stockholders' Equity 41,167 38,466 35,674 31,664 29,707
FINANCIAL RATIOS
Net Yield on Interest Earning Assets (2) 3.89% 4.18% 4.58% 4.71% 4.70%
Net Interest Spread (2) 3.30 3.34 3.75 3.99 3.91
Net Income as a Percentage of
Average Assets 0.74 0.81 1.09 1.11 1.06
Average Equity 7.45 9.04 12.92 12.56 11.98
Dividend Payout Ratio 47.50 52.63 36.84 34.36 28.54
Average Equity to
Average Assets 9.94 9.00 8.45 8.85 8.86
- --------------------
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.
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.
Forward-looking Statements
- --------------------------
This Form 10-K 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.
2002 Items of Significance
* In 2002, Slade's Ferry Bancorp recorded net income of $2,965,552 or
$0.75 per share on a diluted basis compared to $3,210,253 or $0.84 per
share on a diluted basis in 2001. This represents a decrease of
$244,701 or 7.6% in net income and $0.09 or 10.71% per share on a
diluted basis between 2002 and 2001.
* Return on average equity for 2002 was 7.45%, down by 1.59% when
compared to 9.04% reported in 2001. Return on average assets for 2002
was .74%, down by .07% when compared to .81% reported in 2001.
26
* Book value of the Company's common stock increased to $10.45 in 2002
from $9.94 reported in 2001 and $9.41 reported in 2000.
RESULTS OF OPERATIONS
Net interest income, which is the difference between interest and
dividend income earned on earning assets and interest paid on interest-
bearing liabilities is the main contributor to net income. Increases or
decreases in interest rates due to economic conditions affect the yields
earned on loans and investments and the cost of deposits and borrowings
required to fund these earning assets. On a fully tax equivalent basis, our
net interest income was $14.3 Million in 2002, $15.2 Million in 2001, and
$15.7 Million in 2000. Although we had growth of $3.4 Million in average
earning assets from $365.0 Million in 2001 to $368.4 Million in 2002, the
historical low interest rate environment throughout 2002 continues to
compress our net interest margins, as loans and investments reprice at lower
interest rates due to refinancing opportunities and prepayments. Average
earning assets produced a fully taxable equivalent yield of 6.04% in 2002,
compared to 7.55% in 2001, and 8.26% in 2000.
The loan portfolio, which generally generates higher interest yields
than our investment portfolio represented 63.54% of average assets in 2002,
compared to 63.70% in 2001, and 66.65% in 2000. Although average loans
remained flat on average from 2001 to 2002, total actual gross loans
increased by $11.1 Million from $253.9 Million as of December 31, 2001, to
$265.0 Million as of December 31, 2002. This increase occurred during the
last quarter of 2002 due to the Bank's aggressive solicitation of both
residential mortgages and home equity loan products.
Partially offsetting the decrease in the earning asset yield of 1.51%
from 7.55% as of December 31, 2001 to 6.04% as of year end 2002, was a
reduction of 1.47% in the cost funding the earning assets from 4.21% as of
year end 2001 to 2.74% as of year end 2002. The decrease in the cost of
funds in 2002 reflects the low interest rate environment and the repricing
of certificates of deposit and other deposit products at lower rates.
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 3.30% in 2002 from 3.34% in 2001
and 3.75% reported in 2000.
Net yield on earning assets, which represents net interest income as a
percentage of average earning assets decreased to 3.89% in 2002 from 4.18%
in 2001 and 4.58% in 2000. 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 Company provides for loan losses to maintain the Allowance for
Loan Losses at a level that management believes to be adequate to absorb
future charge-offs of loans deemed uncollectable. As previously stated,
during 2002 the implementation of an intensive process for evaluating loan
loss provision and adequacy of the Allowance for Loan Losses resulted in no
addition to the provision for loan losses during 2002 and a recovery of
$310,000 from 2001 provisions. As the composition of our loan portfolio
gradually changed from higher credit risk weighted loans, such as commercial
real estate and commercial and industrial, to residential and home equity
loans requiring less credit risk weight and reserve allowance. The Bank's
provision for 2002 was a benefit to earnings of $310,000, compared to
expense provisions of $750,000 recorded in 2001 and $1,200,000 in 2000.
27
Total Other Income for 2002 increased by $763,285 or 43.1% to
$2,532,817 from $1,769,532 recorded during 2001. Service charges on deposit
accounts decreased slightly in 2002 to $551,060 when compared to $561,370 in
2001 and $564,444 in 2000. 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 and free consumer deposit products being offered.
Gains on sales and calls of available-for-sale securities increased by
$610,898, from $14,934 recorded as of December 31, 2001 to $625,832 as of
December 31, 2002. The gain recorded in 2000 was $333,581. During 2002, the
Bank incurred significant writedowns on equity securities totaling $1.2
Million. For tax planning purposes, asset liability management and
liquidity, the Company determined to sell various debt securities and
realize gains to partially offset the writedown loss.
Gains on the sale of other real estate owned (OREO) is a result of
sales of real estate acquired through the foreclosure process. In 2002 and
2001, the Bank had no other real estate owned. The Bank realized a gain on
the sale of OREO of $49,758 recognized in 2000.
Increase in cash surrender value of life insurance policies associated
with both the Directors' Life Insurance and Executive Officers' Life
Insurance increased by $92,197 from $351,023 reported as of year end 2001 to
$443,220 in 2002. This increase is due to an annual increase in the cash
surrender value of these policies. Purchase of policies in 2002 for
executives totaled $1,610,000, 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, and ATM card usage.
Total Other Expense increased by $1,443,415 to $12,851,802, when
compared to $11,408,387 recorded in 2001. Total Other Expense was
$10,255,640 in 2000. Salaries and Employee Benefits, which is the largest
component of this category, increased by $243,987 to $7,368,364, up from
$7,124,377 recorded in 2001. In 2000, Salaries and Benefits were $6,070,057.
These increased expenses in 2002 were due to general wage adjustments,
staff additions, the hiring of a new Chief Executive Officer (CEO), and
expenses associated with a severance agreement entered into with the former
CEO upon his early retirement. Occupancy and Equipment Expense combined
totaled $1,323,413 in 2002, down by $103,442 when compared to $1,426,855
reported in 2001. Occupance and Equipment Expense was $1,390,355 in 2000.
Costs associated with stationery and supplies were $276,824 in 2002,
an increase of $35,638 when compared to $241,186 in 2001. These same costs
were $224,501 in 2000.
Professional fees associated with legal, audit, collection and
repossession, and consultant expenses increased by $184,356, from $364,680
in 2001 to $549,036 in 2002. These expenses in 2000 were $385,079. The
increase in 2002 is related to consultant services provided by the new CEO
prior to her official election, and human resource, investment advisory,
strategy planning and asset liability management consultants. Also,
additional professional services were provided in the search for a new CEO.
28
Marketing Expenses attributed to advertising, business development,
and public relations decreased by $66,277, from $421,480 in 2001 to $355,203
in 2002. Marketing Expense in 2000 was $556,960. 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 decreased by $2,190 in
2002, from $160,305 in 2001 to $158,115. In 2000, this cost was $63,684.
The Bank incurred total writedown charges of $1,240,868 on certain
equity securities during 2002. During the third quarter of 2002, the
Company determined that with a very volatile, uncertain stock market, equity
securities with significant declines in fair market value would be written
down to fair market value and sold. In addition, writedown charges were
incurred on certain publicly-traded securities whose decline in fair market
value was other than temporary and deemed impaired. In writing down these
equity securities to fair market value and recognizing capital losses, the
Company took advantage of tax benefits derived by offsetting this year's
capital losses against current and previous years' capital gains.
There were no security writedowns in 2001 or 2000. Management reviews
and monitors security valuations and impairment issues at least on a
quarterly basis to determine if declines in market values are other than
temporary.
The following table sets forth the components of the line item Other
Expense.
2002 2001 2000
- -----------------------------------------------------------------------------
Amortization of
Goodwill $ 0 $ 226,800 $ 226,800
Communications 322,020 326,234 308,636
Other Real Estate Owned Expense 0 0 38,000
Committee Fees 212,250 190,900 189,350
Other Various Expense 1,045,709 925,570 802,218
- -----------------------------------------------------------------------------
Other Expense Total $1,579,979 $1,669,504 $1,565,004
=============================================================================
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 discontinued 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. In accordance with the accounting
standard, the Company tested its goodwill for impairment as of January 1,
2002 and December 31, 2002. The Company determined that its goodwill as of
those dates was not impaired.
Communications Expense decreased by $4,214 in 2002. This expense was
$326,234 and $308,636 respectively for 2001 and 2000.
Since the Bank had no Other Real Estate Owned during 2002, and 2001, no
expenses relating to this property were incurred. In 2000, expenses
incurred to sell other real estate owned was $38,000.
29
Committee fees increased by $21,350 from $190,900 reported in 2001 to
$212,250 in 2002. This expense in 2000 was $189,350. Additional committee
meetings were necessary during 2002 while interviewing candidates for the
CEO position.
Other Various Expenses increased by $120,139 in 2002 from $925,570
reported in 2001 to $1,045,709. This expense in 2000 was $802,218.
Income before income taxes totaled $4,099,735 as of year-end 2002, a
decrease of $508,550 when compared to $4,608,285 reported as of December 31,
2001. Applicable taxes decreased by $263,849 to $1,134,183 when compared to
$1,398,032 reported in the prior year.
The Company's net earnings were $2,965,552, $3,210,253, and $4,074,439
for 2002, 2001, and 2000 respectively. Diluted earnings per share were $.75
for twelve months ending December 31, 2002 compared to $.84 for the same
period in 2001.
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
subsidiary. Slade's Ferry Trust Company formed a REIT subsidiary in 1999,
Slade's Ferry Preferred Capital Corporation. The Bank received a notice
from the DOR dated November 6, 2002 pertaining to tax year filings of 1999,
2000, and 2001. This notice assessed additional state excise taxes and
interest due of $1,659,449. The Company has not recorded any expense for
this notice in its financial statements at this time, and the Company
intends to vigorously appeal any and all assessments.
In a matter that may affect the assessment described above, on March
5, 2003, the Commonwealth of Massachusetts enacted tax legislation that
imposes taxes on the Bank for the above described dividends paid by the
Bank's REIT to the Bank. The new tax, including interest, for the Bank is
approximately $1,971,000 covering the years ending 1999, 2000, 2001, and
2002. The Company will expense this amount in its financial statements for
the quarter ending March 31, 2003, net of the tax benefit of approximately
$686,000. The Company believes the legislation will be challenged,
especially the retroactive provisions, on the constitutional and other
grounds. The Company would support such a challenge and otherwise intends
to defend vigorously its position.
30
Unaudited Quarterly Financial Summary
(Dollars in Thousands)
- ---------------------------------------------------------------------------------
March 31 June 30 September 30 December 31
- ---------------------------------------------------------------------------------
2002:
Revenues $6,250 $5,991 $6,534 $5,795
Operating Income 1,078 (8) 1,588 1,442
Net Income 782 57 1,251 876
Earnings per share
Basic $ 0.20 $ 0.01 $ 0.32 $ 0.23
Diluted $ 0.20 $ 0.01 $ 0.32 $ 0.22
2001:
Revenues $7,619 $7,349 $7,375 $6,751
Operating Income 1,259 1,002 1,214 1,133
Net Income 869 715 832 794
Earnings per share
Basic $ 0.23 $ 0.19 $ 0.22 $ 0.20
Diluted $ 0.23 $ 0.19 $ 0.22 $ 0.20
FINANCIAL CONDITION
Loans
The composition of our loan portfolio has changed since December 31,
2001.Loan demand for residential real estate and home equity loans increased
during 2002 as new and existing homeowners took advantage of the lower
interest rates. During the fourth quarter of 2002, the Bank aggressively
solicited both residential and home equity loans resulting in a year end net
increase in loans of 11.1%, from $253.9 Million as of December 31, 2001 to
$265.0 reported for the same period in 2002. New commercial loan
commitments decreased due to the uncertainty of the economy and focused on
refinancing existing debt to lower rates. The largest segment of the loan
portfolio is commercial real estate loans representing 46% of total loans
compared to 51% as of December 31, 2001. 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 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 dependent 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 risk division. In turn, the borrowing
request is further evaluated by the Loan Committee and all loans in excess
of $250,000 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 and
home equity loans, which accounts for 34% of the loan portfolio and is
comprised of first mortgages on one to four family
31
properties and second mortgages. These loan types were 24% of the loan
portfolio as of December 31, 2001. 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 20% of the portfolio and are comprised of
commercial and industrial loans which are generally short-term loans to
finance business inventory, consumer credit installment loans, automobile
financing, nonprofit and real estate construction 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 gain or loss, net of taxes for the
Available-for Sale securities, is reflected in Stockholders Equity as a
separate component.
The Available-for-Sale category at December 31, 2002 had net
unrecognized gains of $535,854 of which $1,266,775 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 $730,921 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, 2002, the amount invested in
marketable equity securities at amortized cost was 5.0% of the total
investment portfolio distributed over various business sectors.
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 to 15 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.
32
Deposits and Other Liabilities
Total deposits remained flat through most of 2002. 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 $8.4 Million from
$271.7 Million to $263.3 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 $7.0 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,
2002, the Bank had $19.2 Million of loans match-funded with FHLB compared to
$17.0 Million at year end 2001.
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.
33
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, 2002, for the period from 0
days to 2 years, the Company has a cumulative negative gap position of $4.4
Million. This equates to a percentage of total assets of a negative 1.12%
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 up 300 basis points or down 100 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, 2002 Dollar Impact
- -------------------------------------------------------------------------
+300 (6.55%) ($965,000)
-100 (2.30%) ($338,000)
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 $0.6 Million at year
end 2002, from $1.6 Million reported at year end 2001. At year end 2000,
nonperforming assets totaled $2.8 Million.
Nonaccrual loans is the largest component of nonperforming assets, and
at December 31, 2002, this category decreased to $0.6 Million from $1.1
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 or a commercial real estate
loan becomes past due 90 days or more, or a residential real estate loan
becomes past due 120 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.
34
If it is determined that collectability 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.
Loans 90 days or more past due but still accruing decreased to $7,700
at year end 2002 from $444,000 reported at year end 2001. 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, 2002 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 $166,000 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 at the
loan's obtainable market value, or the fair value of the collateral if the
loan is collateral dependent. Smaller-balance homogeneous loans are
considered by the Company to include residential loans, consumer loans, and
credit card loans.
At December 31, 2002, there were $2,497,626 in loans which the Company
has determined to be impaired, of which $2,497,626 have a related allowance
for credit losses of $477,124. As of December 31, 2001, the recorded
investment in impaired loans was $7,521,689, of which $7,461,437 have a
related allowance for credit losses of $1,195,324. 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.
35
Allowance for Loan Losses
- -------------------------
The table below illustrates the changes in the Allowance for Loan
Losses for the periods indicated.
- --------------------------------------------------------------------------------------------------
(Dollars In Thousands) 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------
Balance at January 1 $ 5,484 $ 4,776 $ 3,766 $ 3,569 $ 3,694
-----------------------------------------------------------
Charge Offs:
Commercial (336) (73) (194) (221) (0)
Real estate construction 0 (0) (0) (0) (0)
Real estate mortgage (20) (0) (23) (23) (716)
Installment/Consumer (26) (28) (138) (158) (76)
-----------------------------------------------------------
(382) (101) (355) (402) (792)
-----------------------------------------------------------
Recoveries:
Commercial 17 14 50 11 8
Real estate construction 0 0 0 0 0
Real estate mortgage 38 29 92 24 43
Installment/Consumer 7 16 23 14 16
-----------------------------------------------------------
62 59 165 49 67
-----------------------------------------------------------
Net charge offs (320) (42) (190) (353) (725)
-----------------------------------------------------------
Provision (benefit) charged
to operations (310) 750 1,200 550 600
-----------------------------------------------------------
Balance at December 31 $ 4,854 $ 5,484 $ 4,776 $ 3,766 $ 3,569
-----------------------------------------------------------
Allowance for Loan Losses
as a percent of year end loans 1.83% 2.16% 1.86% 1.56% 1.64%
Ratio of net charge offs to
average loans outstanding (0.13%) (0.02%) (0.08%) (0.15%) (0.34%)
The Allowance for Loan Losses is available to absorb losses on loans
deemed by management as uncollectable. In assessing the adequacy of the
level of the allowance, management considers the status of nonaccrual loans
and specific borrower situations, the current 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
uncollectable. The Allowance for Loan Losses as a percentage of outstanding
loans at December 31, 2002, was 1.83% compared to 2.16% reported at year end
2001. The ratios at years ending 2000, 1999, and 1998 were 1.86%, 1.56% and
1.64% respectively. In 2002, the Company deducted $310,000 from the
Allowance and recovered $62,397 from previously charged-off loans.
Loans charged-off during 2002 totaled $382,528 resulting in net
charge-offs of $320,131. Net charge-offs for prior years were $41,841,
$189,512, $353,410, and $724,583 for 2001, 2000, 1999 and 1998 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.
36
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, drawdowns 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 2002 was primarily provided by the proceeds from the
maturities and sales of securities totaling $56.5 Million, and advances, net
of payments, from the Federal Home Loan Bank of $2.2 Million. These were
offset by purchases of securities of $40.8 Million, loan originations,
principal collections and purchased loans of $11.5 Million, and purchases of
life insurance policies for Executive Officers of $1.6 Million. Other
factors affecting liquidity included cash provided by other operating
activities and cash used in financing activities as indicated in the cash
flow statements.
Capital
- -------
As of December 31, 2002, the Company had total capital of $41,167,004.
This represents an increase of $2,700,873 from $38,466,131 reported on
December 31, 2001. The increase in capital was a combination of several
factors. Additions consisted of twelve months earnings of $2,965,552 and
transactions originating through the Dividend Reinvestment Program whereby
10,062.350 shares were issued for cash contributions of $138,112 and
47,172.146 shares were issued for $676,313 in lieu of cash dividend
payments. There were also stock options exercised resulting in $72,683, net
of tax benefit. These additions were offset by dividends paid of
$1,412,840.
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
37
minimum pension liability adjustment. On December 31, 2001, the Available-for-
Sale portfolio had unrealized losses, net of taxes, of $120,943, and on
December 31, 2002, as a result of current market values, the portfolio
reflects unrealized gains, net of taxes, of $223,272. There was an increase
in the minimum pension liability adjustment from $106,246, net of taxes,
recorded December 31, 2001 to $234,180 as of December 31, 2002.
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, the Bank is required to maintain a seven (7) percent Tier I
Leverage Capital. As of December 31, 2002, this ratio was 8.00%.
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, 2002.
38
The following table illustrates the capital position of Slade's Ferry
Bancorp and Slade's Ferry Trust Company for years ending December 31, 2002
and 2001.
Slade's Ferry Bancorp 2002 2001
- ---------------------------------------------------------------------------------------------------
(Dollars in Thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
Total Capital (to Risk Weighted Assets) $ 41,540 14.84% $ 39,393 14.43%
Minimum required 22,291 8.00 21,832 8.00
Excess 19,249 6.84 17,561 6.43
Tier I Capital (to Risk Weighted Assets) 38,040 13.59 35,956 13.18
Minimum required 11,146 4.00 10,916 4.00
Excess 26,894 9.59 25,040 9.18
Risk Adjusted Assets, net of goodwill,
Nonqualifying intangibles, excess allowance
and excess deferred tax assets 278,650 272,900
Tier I Capital (Leverage Ratio) 38,040 9.48 35,956 8.98
Minimum required 16,053 4.00 16,025 4.00
Excess 21,987 5.48 19,931 4.98
Quarterly average total assets, net of goodwill,
Nonqualifying intangibles and excess deferred
tax assets 401,325 400,625
Slade's Ferry Trust Company 2002 2001
- ---------------------------------------------------------------------------------------------------
(Dollars in Thousands) Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------
Total Capital (to Risk Weighted Assets) $ 35,240 12.63% $ 34,046 12.55%
Minimum required 22,208 8.00 21,697 8.00
Excess 13,032 4.63 12,349 4.55
Tier I Capital (to Risk Weighted Assets) 31,753 11.38 30,630 11.29
Minimum required 11,104 4.00 10,849 4.00
Excess 20,649 7.38 19,781 7.29
Risk Adjusted Assets, net of goodwill,
Nonqualifying intangibles, excess allowance
and excess deferred tax assets 277,600 271,225
Tier I Capital (Leverage Ratio) 31,753 8.00 30,630 7.74
Minimum required (1) 15,868 4.00 15,834 4.00
Excess 15,885 4.00 14,796 3.74
Quarterly average total assets, net of goodwill,
Nonqualifying intangibles and excess deferred
tax assets 396,700 395,850
- --------------------
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.
39
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 Rate Sensitivity GAPS
Report" for a discussion of market risk.
ITEM 8
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated 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.
40
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 14, 2003. 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 14, 2003. 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 14, 2003. 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 14, 2003. The information set
forth under this heading of such Proxy Statement is incorporated herein by
reference.
41
ITEM 14
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, within
the 90 days prior to the date of this report, the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief
Financial Officer of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. In designing and evaluating
the Company's disclosure controls and procedures, the Company and its
management recognize that any controls and procedures, no matter how well
designed and operated, can provide only a reasonable assurance of achieving
the desired control objectives, and management necessarily was required to
apply its judgment in evaluating and implementing possible controls and
procedures. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that they believe the Company's disclosure
controls and procedures are reasonably effective to ensure that information
required to be disclosed by the Company in the reports it files or submits
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 rules regarding
disclosure and control procedures, we intend to continue to review and
document our disclosure controls and procedures, including our internal
controls and procedures for financial reporting, and may from time to time
make changes aimed at enhancing their effectiveness and to ensure that our
systems evolve with our business.
(b) Changes in internal controls.
None.
42
ITEM 15
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
15(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 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.
A report on Form 8-K dated November 12, 2002 was filed with the
Securities and Exchange Commission reporting under Item 5 the election
of Mary Lynn D. Lenz as President and Chief Executive Officer of the
Company replacing Kenneth R. Rezendes. Ms. Lenz is also the President
and Chief Executive Officer of Slade's Ferry Bank ("the Bank"), the
Company's wholly owned subsidiary. Mr. Rezendes remains on the Board
of Directors of the Company as vice-chairman.
A report on Form 8-K dated March 6, 2003 was filed with the Securities
and Exchange Commission reporting under Item 5 the announcement of
establishing a liability in the first quarter of 2003 of approximately
$1.3 Million for additional state taxes, including interest (net of any
federal tax deduction associated with such taxes and interest) as a
result of new legislation that retroactively disallows the deduction for
dividends received from a real estate investment trust subsidiary
('REIT') for fiscal years 1999 through 2002.
43
CERTIFICATIONS
I, Mary Lynn D. Lenz, certify that:
1. I have reviewed this annual report on Form 10-K of Slade's Ferry
Bancorp;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c. Presented in this annual 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 annual 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: March 18, 2003 /s/ Mary Lynn D. Lenz
-------------------------------------
President/Chief Executive Officer
44
CERTIFICATIONS
I, Edward Bernardo, Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Slade's Ferry
Bancorp;
2. Based on my knowledge, this annual 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 annual 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 annual 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
annual 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 annual report (the "Evaluation Date"); and
c. Presented in this annual 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: March 18, 2003 /s/ Edward Bernardo Jr
-----------------------
Treasurer
Chief Financial Officer/
Chief Accounting Officer
45
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 Annual Report on Form 10-K of the Company for the annual
period ended December 31, 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-K fairly represents in
all material respects, the financial condition and results of
operations of the Company.
March 18, 2003 /s/ Mary Lynn D. Lenz
- -------------- ---------------------
(Date) (Signature) Mary Lynn D. Lenz
President/Chief Executive Officer
March 18, 2003 /s/ Edward Bernardo Jr
- -------------- ----------------------
(Date) (Signature) Edward Bernardo Jr.
Vice President/Treasurer
Chief Financial Officer/
Chief Accounting Officer
46
SIGNATURES
- ----------
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on March 18, 2003.
Slade's Ferry Bancorp
By/s/ Mary Lynn D. Lenz
---------------------
Mary Lynn D. Lenz, President/
Chief Executive Officer and Director
In accordance with the requirements of the Exchange Act, this report has
been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Thomas B. Almy 03/18/03 /s/ Edward Bernardo Jr. 03/18/03
- --------------------------------------- -----------------------------------
Thomas B. Almy Edward Bernardo Jr.
Director Treasurer/Chief Financial Officer/
Chief Accounting Officer
/s/ Donald T. Corrigan 03/18/03 /s/ Peter G. Collias 03/18/03
- --------------------------------------- -----------------------------------
Donald T. Corrigan Peter G. Collias
Chairman of the Board and Director Director
/s/ Mary Lynn D. Lenz 03/18/03 /s/ Melvyn A. Holland 03/18/03
- --------------------------------------- -----------------------------------
Mary Lynn D. Lenz Melvyn A. Holland
President/CEO and Director Director
/s/ William Q. MacLean Jr. 03/18/03 /s/ Francis A. Macomber 03/18/03
- --------------------------------------- -----------------------------------
William Q. MacLean Jr. Francis A. Macomber
Director Director
/s/ Majed Mouded, MD 03/18/03 /s/ Shaun O'Hearn Sr. 03/18/03
- --------------------------------------- -----------------------------------
Majed Mouded, MD Shaun O'Hearn Sr.
Director Director
/s/ Lawrence J. Oliveira, DDS 03/18/03 /s/ Peter Paskowski 03/18/03
- --------------------------------------- -----------------------------------
Lawrence J. Oliveira, DDS Peter Paskowski
Director Director
/s/ Kenneth R. Rezendes 03/18/03 /s/ William J. Sullivan 03/18/03
- --------------------------------------- -----------------------------------
Kenneth R. Rezendes William J. Sullivan
Vice Chairman and Director Director
/s/ Charles Veloza 03/18/03 /s/ David F. Westgate 03/18/03
- --------------------------------------- -----------------------------------
Charles Veloza David F. Westgate
Director Director
47
INDEX TO FINANCIAL STATEMENTS
Slade's Ferry Bancorp and Subsidiaries Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 2002
and December 31, 2001 F-3
Consolidated Statements of Income for the years ended
December 31, 2002, December 31, 2001 and December 31, 2000 F-4
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2002,
December 31, 2001 and December 31, 2000 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, December 31, 2001 and December 31, 2000 F-7
Notes to Consolidated Financial Statements F-9
F-1
[LOGO]
SHATSWELL, MacLEOD & COMPANY, P.C.
----------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
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, 2002 and 2001 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, 2002. 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, 2002
and 2001, and the consolidated results of their operations and their cash
flows for each of the years in the three-year period ended December 31,
2002, 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 15, 2003 (except for Note 11 which
is March 5, 2003)
F-2
SLADE'S FERRY BANCORP AND SUBSIDIARY
------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 2002 and 2001
--------------------------
ASSETS 2002 2001
- ------ ------------ ------------
Cash and due from banks $ 14,985,461 $ 13,730,752
Interest bearing demand deposits with other banks 8,508 174,945
Money market mutual funds 222,567 86,613
Federal Home Loan Bank overnight deposit 10,000,000 6,000,000
Federal funds sold 9,500,000 8,700,000
------------ ------------
Cash and cash equivalents 34,716,536 28,692,310
Interest bearing time deposit with other bank 200,000 100,000
Investments in available-for-sale securities (at fair value) 65,907,926 79,105,537
Investments in held-to-maturity securities (fair values of
$14,262,405 as of December 31, 2002 and $16,590,243 as of
December 31, 2001) 13,696,254 16,281,712
Federal Home Loan Bank stock 1,013,400 1,013,400
Loans, net of allowance for loan losses of $4,854,388 in
2002 and $5,484,519 in 2001 259,816,056 248,017,635
Premises and equipment 6,067,879 6,455,837
Goodwill 2,173,368 2,173,368
Accrued interest receivable 1,492,591 1,953,989
Cash surrender value of life insurance 9,750,661 7,697,441
Deferred taxes 1,849,723 2,202,139
Other assets 1,690,589 1,067,195
------------ ------------
Total assets $398,374,983 $394,760,563
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Deposits:
Noninterest-bearing $ 72,277,469 $ 65,293,871
Interest-bearing 263,355,063 271,749,471
------------ ------------
Total deposits 335,632,532 337,043,342
Federal Home Loan Bank advances 19,185,338 16,983,087
Other borrowed funds 465,216
Other liabilities 2,336,109 1,749,787
------------ ------------
Total liabilities 357,153,979 356,241,432
------------ ------------
Preferred stockholders' equity in a subsidiary company 54,000 53,000
------------ ------------
Stockholders' equity:
Common stock, par value $.01 per share;
authorized 10,000,000 shares; issued and outstanding
3,937,762.9 shares in 2002 and 3,869,924.9 shares
in 2001 39,378 38,700
Paid-in capital 27,693,199 26,761,997
Retained earnings 13,445,335 11,892,623
Accumulated other comprehensive loss (10,908) (227,189)
------------ ------------
Total stockholders' equity 41,167,004 38,466,131
------------ ------------
Total liabilities and stockholders' equity $398,374,983 $394,760,563
============ ============
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, 2002, 2001 and 2000
--------------------------------------------
2002 2001 2000
----------- ----------- -----------
Interest and dividend income:
Interest and fees on loans $17,276,773 $21,554,165 $22,486,187
Interest and dividends on securities:
Taxable 3,826,659 4,410,499 4,588,612
Tax-exempt 577,982 533,287 524,652
Interest on federal funds sold 227,229 598,934 509,738
Other interest 127,831 226,785 77,157
----------- ----------- -----------
Total interest and dividend income 22,036,474 27,323,670 28,186,346
----------- ----------- -----------
Interest expense:
Interest on deposits 6,703,002 11,333,086 11,918,906
Interest on Federal Home Loan Bank advances 1,216,559 965,008 728,622
Interest on other borrowed funds 8,193 28,436 51,143
----------- ----------- -----------
Total interest expense 7,927,754 12,326,530 12,698,671
----------- ----------- -----------
Net interest and dividend income 14,108,720 14,997,140 15,487,675
Provision (benefit) for loan losses (310,000) 750,000 1,200,000
----------- ----------- -----------
Net interest and dividend income after
provision (benefit) for loan losses 14,418,720 14,247,140 14,287,675
----------- ----------- -----------
Other income:
Service charges on deposit accounts 551,060 561,370 564,444
Overdraft service charges 333,977 257,586 250,454
Gain on sales and calls of available-for-sale
securities, net 625,832 14,934 333,581
Gain on sales of other real estate owned, net 49,758
Increase in cash surrender value of
life insurance policies 443,220 351,023 282,855
Other income 578,728 584,619 425,101
----------- ----------- -----------
Total other income 2,532,817 1,769,532 1,906,193
----------- ----------- -----------
Other expense:
Salaries and employee benefits 7,368,364 7,124,377 6,070,057
Occupancy expense 845,366 861,407 822,890
Equipment expense 478,047 565,448 567,465
Stationary and supplies 276,824 241,186 224,501
Professional fees 549,036 364,680 385,079
Marketing expense 355,203 421,480 556,960
FDIC deposit insurance premium 158,115 160,305 63,684
Writedown of securities 1,240,868
Other expense 1,579,979 1,669,504 1,565,004
----------- ----------- -----------
Total other expense 12,851,802 11,408,387 10,255,640
----------- ----------- -----------
Income before income taxes 4,099,735 4,608,285 5,938,228
Income taxes 1,134,183 1,398,032 1,863,789
----------- ----------- -----------
Net income $ 2,965,552 $ 3,210,253 $ 4,074,439
=========== =========== ===========
Earnings per common share $ .76 $ .84 $ 1.09
=========== =========== ===========
Earnings per common share assuming dilution $ .75 $ .84 $ 1.09
=========== =========== ===========
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, 2002, 2001 and 2000
--------------------------------------------
Accumulated
Other
Comprehensive
Common Paid-in Retained Income
Stock Capital Earnings (Loss) Total
------- ----------- ----------- ----------- -----------
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
Comprehensive income:
Net income 2,965,552
Other comprehensive income 216,281
Comprehensive income 3,181,833
Issuance of common stock from dividend
reinvestment plan 472 675,841 676,313
Stock issuance relating to optional
cash contribution plan 100 138,012 138,112
Stock options exercised 106 94,963 95,069
Tax benefit of stock options 22,386 22,386
Dividends on minority interest preferred
stock ($40.00 per share) (4,320) (4,320)
Dividends declared ($.36 per share) (1,408,520) (1,408,520)
------- ----------- ----------- ----------- -----------
Balance, December 31, 2002 $39,378 $27,693,199 $13,445,335 $ (10,908) $41,167,004
======= =========== =========== =========== ===========
F-5
SLADE'S FERRY BANCORP AND SUBSIDIARY
------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Years Ended December 31, 2002, 2001 and 2000
--------------------------------------------
(continued)
2002 2001 2000
--------- --------- ----------
Other comprehensive income and reclassification
disclosure for the years ended December 31:
Unrealized gains (losses) on securities
Net unrealized gains on available-for-sale securities $ 53,577 $ 853,519 $1,279,547
Reclassification adjustment for realized (gains) losses
in net income 615,036 (14,934) (333,581)
--------- --------- ----------
Net unrealized gains on securities 668,613 838,585 945,966
Income tax expense (324,398) (362,985) (391,915)
--------- --------- ----------
Net of tax amount 344,215 475,600 554,051
--------- --------- ----------
Minimum pension liability adjustment (216,583) (138,992) (35,752)
Income tax benefit 88,649 56,889 14,633
--------- --------- ----------
Net of tax amount (127,934) (82,103) (21,119)
--------- --------- ----------
Other comprehensive income, net of tax $ 216,281 $ 393,497 $ 532,932
========= ========= ==========
Accumulated other comprehensive loss consists of the following as of
December 31:
2002 2001 2000
--------- --------- ----------
Net unrealized gains (losses) on available-for-sale securities,
net of taxes $ 223,272 $(120,943) $ (596,543)
Minimum pension liability adjustment, net of taxes (234,180) (106,246) (24,143)
--------- --------- ----------
Accumulated other comprehensive loss $ (10,908) $(227,189) $ (620,686)
========= ========= ==========
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, 2002, 2001 and 2000
--------------------------------------------
2002 2001 2000
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 2,965,552 $ 3,210,253 $ 4,074,439
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization, net of accretion of securities 162,144 152,995 2,929
Gain on sales and calls of available-for-sale securities, net (625,832) (14,934) (333,581)
Writedown of securities 1,240,868
Change in unearned income (40,927) (137,081) (75,141)
Provision (benefit) for loan losses (310,000) 750,000 1,200,000
Depreciation and amortization 637,342 685,577 709,152
(Gain) loss on sale of property and equipment 501 (107,109)
Gain on sales of other real estate owned, net (49,758)
Increase in cash surrender value of life insurance
policies (443,220) (351,023) (282,855)
Amortization of goodwill 226,800 226,800
Accretion, net of amortization of fair market value
adjustments (8,550) (11,400)
(Increase) decrease in other assets (29,839) 12,061 (2,114)
(Increase) decrease in prepaid expenses 142,237 (28,262) 52,580
Increase in income taxes receivable (714,639) (120,379)
(Increase) decrease in interest receivable 461,398 397,937 (409,175)
Increase (decrease) in other liabilities 211,588 (4,085) 61,352
Increase (decrease) in accrued expenses 159,259 (158,468) (379,813)
Increase (decrease) in interest payable (13,394) (53,826) 76,045
Deferred tax (benefit) expense 116,667 (196,033) (260,758)
Increase (decrease) in taxes payable (180,512) 680,208
------------ ------------ ------------
Net cash provided by operating activities 3,919,705 4,075,361 5,278,910
------------ ------------ ------------
Cash flows from investing activities:
Increase in interest bearing time deposits with other banks (100,000) (100,000)
Purchases of available-for-sale securities (37,391,128) (61,088,695) (13,211,935)
Proceeds from sales of available-for-sale securities 16,853,893 891,375 2,884,051
Proceeds from maturities of available-for-sale securities 33,638,864 49,790,967 4,880,762
Purchases of held-to-maturity securities (3,417,675) (4,156,673) (5,317,668)
Proceeds from maturities of held-to-maturity securities 5,990,548 6,971,893 5,737,924
Loan originations and principal collections, net (11,209,891) 19,935,261 (9,609,846)
Purchases of loans (300,000) (17,767,255) (4,589,892)
Recoveries of loans previously charged off 62,397 58,821 165,300
Capital expenditures (253,582) (464,323) (405,533)
Proceeds from sale of property and equipment 10,099 202,109
Proceeds from sales of other real estate owned 143,853
Investment in life insurance policies (1,610,000) (515,500) (4,918,838)
------------ ------------ ------------
Net cash provided by (used in) investing activities 2,273,525 (6,242,020) (24,241,822)
------------ ------------ ------------
F-7
SLADE'S FERRY BANCORP AND SUBSIDIARY
------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
Years Ended December 31, 2002, 2001 and 2000
--------------------------------------------
(continued)
2002 2001 2000
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts 22,661,421 7,818,060 13,929,857
Net increase (decrease) in time deposits (24,072,231) (7,775,619) 6,639,857
Long-term advances from Federal Home Loan Bank 3,450,000 6,428,000 8,100,000
Payments on Federal Home Loan Bank long-term advances (1,247,749) (2,170,821) (2,130,859)
Net decrease in other borrowed funds (465,216) (734,784) (48,461)
Proceeds from issuance of common stock 814,425 877,582 891,835
Stock options exercised 95,069 14,026
Fractional shares paid in cash (2,025)
Dividends paid (1,405,723) (1,644,158) (1,479,575)
Repurchase of minority interest preferred stock (1,500)
Issuance of minority interest preferred stock 2,500
------------ ------------ ------------
Net cash provided by (used in) financing activities (169,004) 2,798,260 25,914,655
------------ ------------ ------------
Net increase in cash and cash equivalents 6,024,226 631,601 6,951,743
Cash and cash equivalents at beginning of year 28,692,310 28,060,709 21,108,966
------------ ------------ ------------
Cash and cash equivalents at end of year $ 34,716,536 $ 28,692,310 $ 28,060,709
============ ============ ============
Supplemental disclosures:
Interest paid $ 7,941,148 $ 12,380,356 $ 12,622,626
Income taxes paid 1,732,155 1,894,956 1,444,339
Loans originating from the sales of other real estate owned 259,000
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, 2002, 2001 and 2000
--------------------------------------------
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. 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, 2002 includes $2,640,000
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 consolidated 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.
Residential real estate loans are generally placed on nonaccrual when
reaching 120 days past due or in process of foreclosure. All closed-
end consumer loans 90 days or more past due and any equity line in
the process of foreclosure are placed on nonaccrual status. Secured
consumer loans are written down to realizable value and unsecured
consumer loans are charged-off upon reaching 120 or 180 days past due
depending on the type of loan. Commercial real estate loans and
commercial business loans and leases which are 90 days or more past
due are generally placed on nonaccrual status, unless secured by
sufficient cash or other assets immediately convertible to cash.
When a loan has been placed on nonaccrual status, previously accrued
and uncollected interest is reversed against interest on loans. A
loan can be returned to accrual status when collectibility of
principal is reasonably assured and the loan has performed for a
period of time, generally six months.
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.
F-10
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.
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. Estimated lives are 3
to 40 years for buildings and 2 to 20 years for furniture and
equipment. Leasehold improvements are amortized over the lesser of
the life of the lease or the estimated life of the improvements.
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.
F-11
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:
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.
F-12
EARNINGS PER SHARE:
Basic earnings per share represents income available to common
stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential common
shares that may be issued by the Company relate solely to outstanding
stock options, and are determined using the treasury stock method.
STOCK BASED COMPENSATION:
At December 31, 2002, the Company has a stock-based employee
compensation plan which is described more fully in Note 16. The
Company accounts for the plan under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. No stock-based employee
compensation cost is reflected in net income (except for appreciation
from options surrendered as described in Note 16), as all options
granted under this plan had an exercise price equal to the market
value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition
provisions of SFAS Statement No. 123, "Accounting for Stock-Based
Compensation", to stock-based employee compensation.
For the years Ended
December 31,
-------------------
2002 2001 2000
---------- ---------- ----------
Net income, as reported $2,965,552 $3,210,253 $4,074,439
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 59,377 80,475 114,540
---------- ---------- ----------
Pro forma net income $2,906,175 $3,129,778 $3,959,899
========== ========== ==========
Earnings per share:
Basic - as reported $.76 $.84 $1.09
Basic - pro forma $.74 $.82 $1.06
Diluted - as reported $.75 $.84 $1.09
Diluted - pro forma $.74 $.81 $1.06
RECENT ACCOUNTING PRONOUNCEMENTS:
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.
F-13
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 had no immediate effect on the Company's
consolidated financial statements since it had no pending business
combinations as of June 30, 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. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets".
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 was effective as follows:
All of the provisions of SFAS No. 142 were applied in fiscal years
beginning after December 15, 2001, to all goodwill and intangible
assets recognized in the Company'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 was being amortized at the rate of $226,800 per year.
Under SFAS No. 142 this amortization was discontinued after December
31, 2001 but is subject to the impairment review requirements of SFAS
No. 142.
In accordance with SFAS No. 142 the Company tested its goodwill for
impairment as of January 1, 2002 and December 31, 2002. The Company
determined that its goodwill as of those dates was not impaired.
F-14
The following is a reconciliation of reported net income adjusted for
adoption of SFAS No. 142 for the years ended December 31:
2002 2001 2000
---------- ---------- ----------
Reported net income $2,965,552 $3,210,253 $4,074,439
Add back goodwill amortization, net of
tax effect 133,971 133,971
---------- ---------- ----------
Adjusted net income $2,965,552 $3,344,224 $4,208,410
========== ========== ==========
Basic earnings per share:
Reported net income $.76 $.84 $1.09
Goodwill amortization .03 .03
---- ---- -----
Adjusted net income $.76 $.87 $1.12
==== ==== =====
Diluted earnings per share:
Reported net income $.75 $.84 $1.09
Goodwill amortization .03 .03
---- ---- -----
Adjusted net income $.75 $.87 $1.12
==== ==== =====
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS No. 144 supercedes SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," but retains the basic recognition and measurement
model for assets held for use and held for sale. The provisions of
SFAS No. 144 are required to be adopted starting with fiscal years
beginning after December 15, 2001. This Statement did not have a
material impact on the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement
requires that a liability for a cost associated with an exit or
disposal activity be recognized and measured initially at fair value
only when the liability is incurred. SFAS No. 146 is effective for
exit or disposal activities that are initiated after December 31,
2002. Management does not anticipate that this Statement will have
any material impact on the Company's consolidated financial
statements.
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, SFAS 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 SFAS No. 141
"Business Combinations" and No. 142 "Goodwill and Other Intangible
Assets". Thus, the requirement in paragraph 5 of 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 SFAS No. 147. In
addition, SFAS Statement No. 147 amends SFAS 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 SFAS No. 144 requires for other long-lived assets
that are held and used.
F-15
Paragraph 5 of SFAS No. 147, which relates to the application of the
purchase method of accounting, was 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
were effective on October 1, 2002. Transition provisions for
previously recognized unidentifiable intangible assets in paragraphs
8-14 were effective on October 1, 2002, with earlier application
permitted. There was no impact on the Company's consolidated
financial statements on adoption of this Statement.
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, 2002:
Debt securities issued by the U.S. Treasury
and other U.S. government corporations
and agencies $26,423,978 $ 239,307 $ 80 $26,663,205
Mortgage-backed securities 32,511,788 921,833 56 33,433,565
Corporate debt securities 2,672,502 105,771 2,778,273
Marketable equity securities 3,986,371 52,916 783,837 3,255,450
----------- ---------- ---------- ----------
65,594,639 1,319,827 783,973 66,130,493
Money market mutual funds included in cash
and cash equivalents (222,567) (222,567)
----------- ---------- ---------- ----------
$65,372,072 $1,319,827 $ 783,973 $65,907,926
=========== ========== ========== ===========
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
=========== ========== ========== ===========
F-16
Gross Gross
Net Unrecognized Unrecognized
Carrying Holding Holding Fair
Amount Gains Losses Value
----------- -------- ------- -----------
Held-to-maturity securities:
December 31, 2002:
Debt securities issued by states of the
United States and political subdivisions
of the states $13,693,091 $573,177 $ 7,127 $14,259,141
Mortgage-backed securities 2,163 101 2,264
Foreign debt securities 1,000 1,000
----------- -------- ------- -----------
$13,696,254 $573,278 $ 7,127 $14,262,405
=========== ======== ======= ===========
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
Foreign debt securities 1,000 1,000
----------- -------- ------- -----------
$16,281,712 $319,795 $11,264 $16,590,243
=========== ======== ======= ===========
The scheduled maturities of securities (other than equity securities) were
as follows as of December 31, 2002:
Available-For-Sale Held-To-Maturity
------------------ --------------------------------
Fair Net Carrying Fair
Value Amount Value
----------- ------------ -----------
Due within one year $ 4,669,064 $ 3,309,472 $ 3,344,434
Due after one year through five years 23,757,975 6,981,002 7,377,223
Due after five years through ten years 1,014,439 1,360,333 1,439,282
Due after ten years 2,043,284 2,099,202
Mortgage-backed securities 33,433,565 2,163 2,264
----------- ------------ -----------
$62,875,043 $13,696,254 $14,262,405
=========== =========== ===========
During 2002, proceeds from sales of available-for-sale securities amounted
to $16,853,893. Gross realized gains and gross realized losses on those
sales amounted to $725,961 and $97,410, respectively. 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. The tax expense applicable to these net realized gains
amounted to $245,565, $6,112 and $136,534 for the years ended December 31,
2002, 2001 and 2000, respectively.
There were no securities of issuers whose aggregate carrying amount
exceeded 10% of stockholders' equity as of December 31, 2002.
Total carrying amounts of $2,963,317 and $4,554,448 of debt securities were
pledged to secure treasury tax and loan, trust department and public funds
on deposit as of December 31, 2002 and 2001, respectively.
F-17
NOTE 4 - LOANS
- --------------
Loans consisted of the following as of December 31:
2002 2001
------------ ------------
Commercial, financial and agricultural $ 30,454,898 $ 45,237,663
Real estate - construction and land development 14,077,763 7,600,286
Real estate - residential 90,330,046 60,936,137
Real estate - commercial 122,931,918 128,887,954
Consumer 6,881,094 10,642,900
Nonprofit 293,202 236,388
Obligations of states and political subdivisions 21,400
Other 42,757 321,587
------------ ------------
265,011,678 253,884,315
Allowance for loan losses (4,854,388) (5,484,519)
Unearned income (341,234) (382,161)
------------ ------------
Net loans, carrying amount $259,816,056 $248,017,635
============ ============
Certain directors and executive officers of the Company and companies in
which they have significant ownership interest were customers of the Bank
during 2002. Total loans to such persons and their companies amounted to
$5,974,212 as of December 31, 2002. During the year ended December 31,
2002, $8,425,060 of advances were made and repayments totaled $8,868,272.
Changes in the allowance for loan losses were as follows for the years
ended December 31:
2002 2001 2000
---------- ---------- ----------
Balance at beginning of period $5,484,519 $4,776,360 $3,765,872
Loans charged off (382,528) (100,662) (354,812)
Provision (benefit) for loan losses (310,000) 750,000 1,200,000
Recoveries of loans previously charged off 62,397 58,821 165,300
---------- ---------- ----------
Balance at end of period $4,854,388 $5,484,519 $4,776,360
========== ========== ==========
The following table sets forth information regarding nonaccrual loans and
accruing loans 90 days or more overdue as of December 31:
2002 2001
---- ----
Nonaccrual loans $ 635,227 $1,138,497
========== ==========
Accruing loans which are 90 days or more overdue $ 7,747 $ 443,882
========== ==========
F-18
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:
2002 2001
---------------------- -------------------------
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 $2,497,626 $477,124 $7,461,437 $1,195,324
Loans for which there is no related allowance for credit
losses 60,252
---------- -------- ---------- ---------
Totals $2,497,626 $477,124 $7,521,689 $1,195,324
========== ======== ========== ==========
Average recorded investment in impaired loans during
the year ended December 31 $3,283,438 $6,134,847
========== ==========
Related amount of interest income recognized during the
time, in the year ended December 31, that the loans
were impaired
Total recognized $ 254,159 $ 562,278
========== ==========
Amount recognized using a cash-basis method
of accounting $ 99,081 $ 157,735
========== ==========
NOTE 5 - PREMISES AND EQUIPMENT
- -------------------------------
The following is a summary of premises and equipment as of December 31:
2002 2001
---- ----
Land $ 1,710,368 $ 1,710,368
Buildings 6,955,758 6,940,613
Furniture and equipment 4,677,474 4,449,637
Leasehold improvements 383,436 383,436
----------- -----------
13,727,036 13,484,054
Accumulated depreciation and amortization (7,659,157) (7,028,217)
----------- -----------
$ 6,067,879 $ 6,455,837
=========== ===========
NOTE 6 - DEPOSITS
- -----------------
The aggregate amount of time deposit accounts in denominations of $100,000
or more as of December 31, 2002 and 2001 was $27,915,361 and $33,448,818,
respectively.
For time deposits as of December 31, 2002, the scheduled maturities for
each of the following three years ended December 31, are:
2003 $128,662,622
2004 13,579,817
2005 2,271,843
------------
Total $144,514,282
============
Deposits from related parties held by the Company as of December 31, 2002
and 2001 amounted to $2,286,572 and $2,773,437, respectively.
F-19
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, 2002, and thereafter, are summarized as follows:
AMOUNT
------
2003 $ 282,347
2004 1,296,281
2005 320,097
2006 342,617
2007 361,666
Thereafter 16,582,330
-----------
$19,185,338
===========
Interest rates on FHLB advances ranged from 4.89 percent to 7.72 percent.
At December 31, 2002, the weighted average interest rate on FHLB advances
was 6.69 percent.
As of December 31, 2002, a $3,000,000 advance from the FHLB maturing in
2015 is redeemable at par at the option of the FHLB on January 7, 2003 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.
Borrowings from the FHLB are secured by a blanket lien on qualified
collateral, consisting primarily of loans with first mortgages secured by
one to four family properties, certain unencumbered investment securities
and other qualified assets.
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.
NOTE 9 - INCOME TAXES
- ---------------------
The components of income tax expense are as follows for the years ended
December 31:
2002 2001 2000
---------- ---------- ----------
Current:
Federal $ 920,469 $1,513,874 $2,086,337
State 97,047 80,191 38,210
---------- ---------- ----------
1,017,516 1,594,065 2,124,547
---------- ---------- ----------
Deferred:
Federal 79,782 (162,866) (253,043)
State 36,885 (56,212) (87,440)
Change in the valuation allowance 23,045 79,725
---------- ---------- ----------
116,667 (196,033) (260,758)
---------- ---------- ----------
Total income tax expense $1,134,183 $1,398,032 $1,863,789
========== ========== ==========
F-20
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:
2002 2001 2000
------ ------ ------
% 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 (8.5) (6.5) (4.6)
Dividends received deduction (.6) (.4) (.3)
Unallowable expenses .6 .7 .2
Amortization of goodwill 1.7 1.3
State tax, net of federal tax benefit 2.2 .3 (.6)
Change in valuation allowance .5 1.4
---- ---- ----
Effective tax rates 27.7% 30.3% 31.4%
---- ---- ----
The Company had gross deferred tax assets and gross deferred tax
liabilities as follows as of December 31:
2002 2001
---------- ----------
Deferred tax assets:
Allowance for loan losses $1,853,640 $2,111,553
Deferred loan fees 144,487 155,543
Interest on non-performing loans 124,928 79,299
Accrued employee benefits 198,896 200,903
Deferred compensation 56,034
Writedown of securities 52,941
Minimum pension liability adjustment 162,267 73,618
Net unrealized holding loss on available-for-sale
equity securities 248,513 231,643
Other adjustments 670 10,408
---------- ----------
Gross deferred tax assets 2,842,376 2,862,967
Valuation allowance (154,814) (102,770)
---------- ----------
2,687,562 2,760,197
---------- ----------
Deferred tax liabilities:
Accelerated depreciation (208,833) (197,939)
Prepaid pensions (116,204) (135,471)
Discount accretion (1,434) (2,504)
Deferred gain on stock conversion (2,317) (2,317)
Net unrealized holding gain on available-for-sale
debt securities (509,051) (219,827)
---------- ----------
Gross deferred tax liabilities (837,839) (558,058)
---------- ----------
Net deferred tax assets $1,849,723 $2,202,139
========== ==========
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.
F-21
The following tables set forth information about the plan as of December 31
and the years then ended:
2002 2001
---------- ----------
Change in projected benefit obligation:
Benefit obligation at beginning of year $1,125,986 $1,199,450
Interest cost 70,896 77,745
Actuarial loss 106,111 86,454
Expected distributions (113,185) (237,663)
---------- ----------
Benefit obligation at end of year 1,189,808 1,125,986
---------- ----------
Change in plan assets:
Plan assets at estimated fair value at beginning of year 830,561 1,048,186
Actual return on plan assets (44,745) (5,274)
Benefits paid (113,185) (212,351)
---------- ----------
Fair value of plan assets at end of year 672,631 830,561
---------- ----------
Funded status at end of year (517,177) (295,425)
Unrecognized net actuarial loss 680,356 510,841
Unrecognized prior service cost 34,365 21,189
Unamortized net obligation existing at date of adoption of SFAS No. 87 86,365 94,372
---------- ----------
Net amount recognized $ 283,909 $ 330,977
========== ==========
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost $ 283,909 $ 330,977
Accrued benefit liability (517,177) (295,425)
Intangible asset 120,730 115,561
Accumulated other comprehensive loss before income tax benefit 396,447 179,864
---------- ----------
Net amount recognized $ 283,909 $ 330,977
========== ==========
The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.0% for 2002 and
2001. The weighted-average expected long-term rate of return on assets was
7.0% for 2002 and 2001.
Components of net periodic benefit cost:
2002 2001 2000
------- ------- -------