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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended March 31, 2003
--------------
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 (I.R.S. Employer
of incorporation or organization) Identification Number)
100 Slade's Ferry Avenue 02726
Somerset, Massachusetts -----
- ------------------------ (Zip Code)
(Address of principal
executive offices)
(508)675-2121
-------------
(Registrant's telephone number, including area code)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
------- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common stock ($.01 par value) 3,953,309.576 shares as of March 31, 2003.
------------------------------------------------------------------------
1
PART I
ITEM 1
Financial Statements
- --------------------
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2003 December 31, 2002
-------------------------------------
(Unaudited)
ASSETS:
Cash, due from banks and
interest-bearing demand
deposits with other banks $ 21,825,096 $ 14,993,969
Money market mutual funds 73,399 222,567
Federal Home Loan Bank
overnight deposit 5,000,000 10,000,000
Federal funds sold 12,500,000 9,500,000
---------------------------------
Cash and Cash Equivalents 39,398,495 34,716,536
Interest-bearing time
deposits with other banks 200,000 200,000
Investment securities (1) 13,337,730 13,696,254
Investment securities available-for-sale(2) 59,760,817 65,907,926
Federal Home Loan Bank stock 1,237,500 1,013,400
Loans, net 268,411,377 259,816,056
Premises and equipment 6,096,519 6,067,879
Goodwill 2,173,368 2,173,368
Accrued interest receivable 1,485,251 1,492,591
Cash surrender value of life insurance 10,082,831 9,750,661
Other assets 2,708,239 3,540,312
---------------------------------
TOTAL ASSETS $404,892,127 $398,374,983
=================================
LIABILITIES & STOCKHOLDERS' EQUITY:
Deposits $342,774,499 $335,632,532
Federal Home Loan Bank advances 19,116,595 19,185,338
Other liabilities 2,528,822 2,336,109
---------------------------------
TOTAL LIABILITIES 364,419,916 357,153,979
---------------------------------
Preferred stockholders' equity in a
Subsidiary company 54,000 54,000
STOCKHOLDERS' EQUITY:
Common stock 39,534 39,378
Paid in capital 27,909,728 27,693,199
Retained earnings 12,397,357 13,445,335
Accumulated other comprehensive income (loss) 71,592 (10,908)
---------------------------------
TOTAL STOCKHOLDERS' EQUITY 40,418,211 41,167,004
---------------------------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $404,892,127 $398,374,983
=================================
Investment securities are to be held to maturity and have a
fair market value of $14,016,909 as of March 31, 2003 and
$14,262,405 as of December 31, 2002.
Securities classified as available-for-sale are stated at fair
value with any unrealized gains or losses reflected as an adjustment
in Stockholders' Equity, net of tax effect.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
(UNAUDITED)
3 MONTHS ENDING MARCH 31,
2003 2002
------------------------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $4,166,512 $4,519,745
Interest and dividends on investments 848,949 1,201,182
Other interest 45,323 59,635
------------------------
Total interest and dividend income 5,060,784 5,780,562
------------------------
INTEREST EXPENSE:
Interest on deposits 1,227,793 1,948,982
Interest on Federal Home Loan Bank
and other borrowed funds 317,493 263,272
------------------------
Total interest expense 1,545,286 2,212,254
------------------------
Net interest and dividend income 3,515,498 3,568,308
Provision for loan losses 141,000 187,500
------------------------
Net interest and dividend income
after provision for loan losses 3,374,498 3,380,808
------------------------
OTHER INCOME:
Service charges on deposit accounts 133,768 141,590
Overdraft service charges 121,669 60,050
Loss on sales of available-for-sale securities (40,918) (2,818)
Increase in cash surrender value of
life insurance policies 108,170 114,636
Other income 151,977 155,772
------------------------
Total other income 474,666 469,230
------------------------
OTHER EXPENSE:
Salaries and employee benefits 1,789,437 1,790,501
Occupancy expense 262,981 211,193
Equipment expense 123,165 125,450
Stationery and supplies 60,204 74,564
Professional fees 242,880 63,151
Marketing expense 94,273 100,979
Other expense 427,306 406,013
------------------------
Total other expense 3,000,246 2,771,851
------------------------
Income before income taxes and
extraordinary item 848,918 1,078,187
Income taxes 256,032 296,265
------------------------
Net Income before extraordinary item 592,886 781,922
Extraordinary item, net of income taxes (1,285,066) 0
------------------------
NET INCOME (LOSS) $ (692,180) $ 781,922
========================
Basic earnings (loss) per share:
Income before extraordinary item $ 0.15 $ 0.20
Extraordinary item, net of income tax (0.33) 0.00
------------------------
Net income (loss) $ (0.18) $ 0.20
========================
Diluted earnings (loss) per share:
Income before extraordinary item $ 0.15 $ 0.20
Extraordinary item, net of income tax (0.32) 0.00
------------------------
Net income (loss) $ (0.17) $ 0.20
========================
Basic average shares outstanding 3,948,584 3,879,855
========================
Diluted average shares outstanding 3,974,797 3,913,569
========================
Dividends per share $ 0.09 $ 0.09
========================
Comprehensive Income (Loss) (1) $ (609,680) $ 418,331
========================
Calculated using the change in accumulated other comprehensive income
(loss) for the period and net income (loss) for the period.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
----------------------------
(Unaudited)
2003 2002
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (692,180) $ 781,922
Adjustments to reconcile net income to net cash
provided by operating activities:
Accretion, net of amortization of securities 48,396 30,885
Loss on sales of available-for-sale securities, net 40,918 2,818
Change in unearned income (14,897) (42,675)
Provision for loan losses 141,000 187,500
Depreciation and amortization 151,015 152,139
Increase in cash surrender value
of life insurance policies (108,170) (114,636)
Decrease in taxes receivable 857,305 0
Deferred tax expense 52,940 0
(Increase) decrease in other assets (5,068) 66,266
(Increase) decrease in prepaid expenses (31,528) 39,041
(Increase) decrease in interest receivable 7,340 (77,849)
Increase (decrease) in other liabilities (30,923) 21,257
Decrease in accrued expenses (216,993) (80,981)
Increase (decrease) in interest payable (17,565) 5,041
Increase in taxes payable 456,795 102,346
Decrease in minority interest in subsidiary 0 (1,500)
-----------------------------
Net cash provided by operating activities $ 638,385 $ 1,071,574
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (6,502,300) (6,346,491)
Proceeds from maturities of
available-for-sale securities 12,603,546 7,228,248
Purchases of held-to-maturity securities (927,105) (1,429,214)
Proceeds from maturities of
held-to-maturity securities 1,281,502 3,244,133
Purchase of Federal Home Loan Bank stock (224,100) 0
Net (increase) decrease in loans (8,735,956) 1,520,474
Recoveries of loans previously charged off 14,532 8,793
Capital expenditures (178,055) (67,409)
Investment in life insurance policies (224,000) 0
-----------------------------
Net cash provided by (used in) investing activities $(2,891,936) $ 4,158,534
-----------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
----------------------------
(Unaudited)
(Continued)
2003 2002
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW,
money market and savings accounts $ 7,243,537 $ 6,172,344
Net decrease in time deposits (101,570) (8,371,326)
Advances on Federal Home Loan Bank borrowings,
net of payments (68,743) (1,062,808)
Net increase in other borrowed funds 0 749,857
Proceeds from issuance of common stock 216,685 209,283
Dividends paid (354,399) (347,281)
-----------------------------
Net cash provided by (used in) financing activities $ 6,935,510 (2,649,931)
-----------------------------
Net increase in cash and cash equivalents 4,681,959 2,580,177
Cash and cash equivalents at beginning of year 34,716,536 28,692,310
-----------------------------
Cash and cash equivalents at end of year $39,398,495 $31,272,487
=============================
SUPPLEMENTAL DISCLOSURES;
Interest paid $ 1,562,851 $ 2,207,213
Income taxes paid (received) $ (52,690) $ 193,919
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SLADE'S FERRY BANCORP AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2003
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America (GAAP) for interim financial information and
the instructions to Form 10-Q and, accordingly, do not include all of the
information and footnotes required by GAAP for complete financial
statements. In the opinion of the management of Slade's Ferry Bancorp (the
"Company"), all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the three months ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2003.
The year-end condensed consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required
by GAAP.
Note B - Accounting Policies
- ----------------------------
The accounting principles followed by Slade's Ferry Bancorp and subsidiary
and the methods of applying these principles which materially affect the
determination of financial position, results of operations, or changes in
financial position are consistent with those used for the year ended
December 31, 2002.
The consolidated financial statements of Slade's Ferry Bancorp include its
wholly-owned subsidiary, Slade's Ferry Trust Company, and its subsidiaries,
Slade's Ferry Realty Trust, Slade's Ferry Securities Corporation, Slade's
Ferry Preferred Capital Corporation, and Slade's Ferry Loan Company. All
significant intercompany balances have been eliminated.
Note C - Stock Based Compensation
- ---------------------------------
At March 31, 2003, the Company has a stock-based employee compensation plan.
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 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.
3 Months Ending March 31,
2003 2002
----------------------
Net income (loss), as reported $(692,180) $781,922
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 0 0
----------------------
Pro forma net income $(692,180) $781,922
======================
Earnings (loss) per share:
Basic - as reported $ (.18) $ .20
Basic - pro forma $ (.18) $ .20
Diluted - as reported $ (.17) $ .20
Diluted - pro forma $ (.17) $ .20
6
Note D - Impact of New Accounting Standards
- -------------------------------------------
Statement of Financial Accounting Standards No. 141, "Business
Combinations", improves the consistency of the accounting and reporting for
business combinations by requiring that all business combinations be
accounted for under a single method - the purchase method. Use of the
pooling-of-interests method is no longer permitted. Statement No. 141
requires that the purchase method be used for business combinations
initiated after June 30, 2001. The adoption of SFAS No. 141 will have no
immediate effect on the Company's consolidated financial statements since it
had no pending business combinations as of December 31, 2001, or as of the
accompanying consolidated financial statements.
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 also issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which is effective for fiscal years beginning after
December 15, 2001. Under prior accounting standards, goodwill resulting
from a business combination was amortized on a straight-line basis over 15
years. As a result of SFAS No. 142, goodwill is generally no longer
amortized as an expense after 2001, but instead will be reviewed and tested
for impairment using a fair value methodology and assessment. Goodwill will
be tested at least annually for impairment. Management does not anticipate
an impairment adjustment to the goodwill reflected in the accompanying
condensed consolidated balance sheet. In accordance with SFAS No. 142, the
Company, as of January 1, 2002, ceased the amortization of the goodwill
balance of $2.2 Million.
In 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.
7
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 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. This Statement did not have a 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 Statement 72 to recognize (and subsequently amortize) any excess of the
fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible
asset no longer applies to acquisitions within the scope of SFAS No. 147.
In addition, SFAS 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.
Paragraph 5 of SFAS No. 147, which relates to the application of the
purchase method of accounting, is effective for acquisitions for which the
date of acquisition is on or after October 1, 2002. The provisions in
paragraph 6 related to accounting for the impairment or disposal of certain
long-term customer-relationship intangible assets were effective on October
1, 2002. Transition provisions for previously recognized unidentifiable
intangible assets were effective on October 1, 2002. Transition provisions
for previously
8
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 E - Contingency and Extraordinary Item
- -------------------------------------------
The Massachusetts Department of Revenue ("DOR") has issued Notices of Intent
to assess additional state excise taxes to several financial institutions in
the Commonwealth that have established real estate investment trusts
("REIT") in their corporate structure. The DOR contends that dividends
received by banks from REIT subsidiaries are fully taxable in Massachusetts.
The Company believes that the Massachusetts statute that provides for the
dividend received deduction of 95% of certain dividend distributions applies
to dividends that have been made to banks by their REIT subsidiary. Slade's
Ferry Trust Company formed a REIT subsidiary in 1999, Slade's Ferry
Preferred Capital Corporation. The Bank 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 imposed
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
expensed this amount in its financial statements for the quarter ended March
31, 2003, net of the tax benefit of approximately $686,000 and classified it
as an extraordinary item on the statement of income for the three months
ended March 31, 2003. The Company believes the legislation will be
challenged, especially the retroactive provisions, on constitutional and
other grounds. The Company would support such a challenge and otherwise
intends to defend vigorously its position.
9
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of
- ---------------------------------------------------------------------------
Operation
- ---------
Forward-looking Statements
- --------------------------
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements regarding the strength of the company's capital and asset
quality. Other such statements may be identified by words such as
"believes," "will," "expects," "project," "may," "developments,"
"strategic," "launching," "opportunities," "anticipates," "estimates,"
"intends," "plans," "targets" and similar expressions. These statements are
based upon the current beliefs and expectations of Slade's Ferry Bancorp's
management and are subject to significant risks and uncertainties. Actual
results may differ materially from those set forth in the forward-looking
statements as a result of numerous factors.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations expressed in
our forward-looking statements: (1) enactment of adverse government
regulation; (2) competitive pressures among depository and other financial
institutions may increase significantly and have an effect on pricing,
spending, third-party relationships and revenues; (3) the strength of the
United States economy in general and specifically the strength of the New
England economies may be different than expected, resulting in, among other
things, a deterioration in overall credit quality and borrowers' ability to
service and repay loans, or a reduced demand for credit, including the
resultant effect on the Bank's loan portfolio, levels of charge-offs and
non-performing loans and allowance for loan losses; (4) changes in the
interest rate environment may reduce interest margins and adversely impact
net interest income; and (5) changes in assumptions used in making such
forward-looking statements. Should one or more of these risks materialize
or should underlying beliefs or assumptions prove incorrect, Slade's Ferry
Bancorp's actual results could differ materially from those discussed. All
subsequent written and oral forward-looking statements attributable to
Slade's Ferry Bancorp or any person acting on its behalf are expressly
qualified in their entirety by the cautionary statements set forth above.
Slade's Ferry Bancorp does not intend or undertake any obligation to update
any forward-looking statement to reflect circumstances or events that occur
after the date the forward-looking statements are made.
Financial Condition
- -------------------
Total assets increased by $6.5 Million, or 1.6% from $398.4 Million reported
as of December 31, 2002 to $404.9 Million as of March 31, 2003. This
increase in assets was primarily generated by deposit growth of $7.1
Million, offset by a decrease in stockholders' equity of $0.7 Million.
Cash and cash equivalents increased by $4.7 Million, from $34.7 Million
reported as of year-end 2002 to $39.4 Million at March 31, 2003. Most of
the increase in this category was in cash, due from banks, and interest-
bearing demand deposits with other banks, which increased by $6.8 Million
from $15.0 Million reported as of December 31, 2002 to $21.8 Million as of
March 31, 2003. This increase of $6.8 Million was offset by decreases in
investments in short-term federal funds sold, overnight deposits with the
Federal Home Loan Bank, and money market mutual funds totaling $2.1 Million.
The investment portfolio represents the second largest component of the
Company's assets and consists of securities in the Available-for-Sale
category and securities in the Held-to-Maturity category. The designation
of which category the security is to be classified is determined at the time
of the purchase of the investment instrument.
10
Total investments comprised of both investment securities held-to-maturity
and available-for-sale decreased by $6.5 Million from $79.6 Million reported
at December 31, 2002 to $73.1 Million at March 31, 2003. The decrease in
investments of $6.5 Million combined with the $7.1 Million increase in
deposits provided the liquidity to fund loan growth and the increase in Cash
and Cash Equivalents.
The Held-to-Maturity category consists predominately of securities issued by
states of the United States and political subdivisions of states. The
Company has the positive intent and ability to hold these securities to
maturity. In managing the Held-to-Maturity portfolio, the Company seeks to
maximize its return and maintain consistency to meet short and long term
liquidity forecasts by purchasing securities with maturities laddered within
a short-term period of 1-3 years, a mid-term period of 3-5 years, and some
securities extending out to 10 years. The Company does not purchase
investments with off-balance sheet characteristics, such as swaps, options,
futures, and other hedging activities that are called derivatives. The main
objective of the investment policy is to provide adequate liquidity to meet
reasonable declines in deposits and any anticipated increases in the loan
portfolio, to provide safety of principal and interest, to generate earnings
adequate to provide a stable income, and to fit within the overall
asset/liability management objectives of the Company.
Investment Securities are securities that the Company will hold to maturity
and are carried at amortized cost on the balance sheet, and are summarized
as follows as of March 31, 2003:
Amortized Gross Unrealized Gross Unrealized
(Dollars in Thousands) Cost Basis Holding Gains Holding Losses Fair Value
- ----------------------------------------------------------------------------------------------------
Debt securities issued by states of
the United States and political
subdivisions of the states $13,335 $679 $0 $14,014
Mortgage-backed securities 2 0 0 2
Other debt securities 1 0 0 1
- --------------------------------------------------------------------------------------------------
Total $13,338 $679 $0 $14,017
==================================================================================================
Securities in the Available-for-Sale category are securities that the
Company intends to hold for an indefinite period of time, but not
necessarily to maturity. These securities may be sold in response to
interest rate changes, liquidity needs or other factors. Any unrealized
gains or losses, net of taxes, are reflected in Stockholders' Equity as a
separate component.
Investments in Available-for-Sale securities are carried at fair value on
the balance sheet and are summarized as follows as of March 31, 2003:
Gains in Losses in
Accumulated Accumulated
Other Other
Amortized Comprehensive Comprehensive
(Dollars in Thousands) Cost Basis Income Income Fair Value
- -----------------------------------------------------------------------------------------------
Debt securities issued by the U. S.
Treasury and other U. S.
Government corporations and
Agencies $25,625 $ 239 $ 2 $25,862
Marketable Equities 3,672 223 959 2,936
Mortgage-backed securities 27,721 961 0 28,682
Corporate Bonds 2,168 113 0 2,281
- ---------------------------------------------------------------------------------------------
Total $59,186 $1,536 $961 $59,761
=============================================================================================
11
Effect on Stockholders' Equity as of March 31, 2003:
(In Whole Dollars)
Unrealized gain on Available-for-Sale Securities $575,178
Less tax effect (269,406)
Net unrealized gain on Available-for-Sale Securities $305,772
The Available-for-Sale category at March 31, 2003 had net unrealized gains
net of taxes of $305,772 of which $1,310,842 are net unrealized gains (net
of tax) attributed to securities of the U.S. Treasury, other U.S. Government
corporations and agencies, corporate bonds, and mortgage-backed securities,
and $735,664 are net unrealized losses (net of tax) attributable to
marketable equity securities.
Securities of the U.S. Treasury, U.S. Government corporations and agencies,
and mortgage-backed securities have little or no credit risk, other than
being sensitive to changes in interest rates; and if held-to-maturity, these
securities will mature at par. The Company amortizes premiums and accretes
discounts over the life of the securities.
Marketable equity securities, however, have a greater risk as they are
subject to rapid market fluctuations. These securities are constantly
monitored and evaluated to determine their suitability for sale, retention
in the portfolio, or possible writedowns due to impairment issues.
Management minimizes its risk by limiting the total amount invested into
marketable equity securities. At March 31, 2003, the amount invested in
marketable equity securities was 4.0% of the total investment portfolio
distributed over various business sectors.
Total net loans increased by $8.6 Million from $259.8 Million reported at
December 31, 2002 to $268.4 Million at March 31, 2003. Residential real
estate, home equity, and construction loan products increased during the
three months ending March 31, 2003 as new and existing customers took
advantage of the lower interest rate environment. In the first quarter of
2003, due to an aggressive advertising campaign to promote historically low
home equity and mortgage rates, the Bank originated more than $11.0 Million
in residential real estate loans, and $7.8 Million in home equity loans.
These increases were partially offset by decreases in indirect auto loans
and various commercial loans and credit lines. In addition, loan
amortization, prepayment, and refinancing also offset some of the increase
in new loan volume.
The composition of our loan portfolio continues to change. Loan demand for
residential real estate and home equity loans continues to be strong, and
commercial loan borrowers, due to the uncertainty of the economy, focus on
refinancing existing debt at lower rates.
12
INFORMATION WITH RESPECT TO NONACCRUAL AND PAST DUE LOANS
AT MARCH 31, 2003 AND 2002 AND DECEMBER 31, 2002 AND 2001
At March 31, At December 31,
- -----------------------------------------------------------------------------------------------------
(Dollars in Thousands) 2003 2002 2002 2001
- -----------------------------------------------------------------------------------------------------
Nonaccrual Loans $ 509 $ 887 $ 635 $ 1,138
Loans 90 days or more past due and still accruing 194 0 8 444
Real estate acquired by foreclosure
or substantively repossessed 0 0 0 0
Percentage of nonaccrual loans to total gross loans 0.19% 0.35% 0.24% 0.45%
Percentage of nonaccrual loans, restructured loans,
and real estate acquired by foreclosure or
substantively repossessed to total assets 0.13% 0.22% 0.20% 0.34%
Percentage of allowance for loan losses
to nonaccrual loans 979.57% 625.93% 764.20% 481.73%
The $0.5 Million in nonaccrual loans as of March 31, 2003 consists of $0.4
Million of real estate mortgages and $0.1 Million attributed to commercial
loans. Nonaccrual loans include restructured loans of $119,000 at March 31,
2003.
The Company's nonperforming assets as a total increased by approximately
$0.1 Million, from $0.6 Million reported on December 31, 2002 to $0.7
Million as of March 31, 2003. The Company considers nonaccrual loans, loans
past due 90 days or more but still accruing, and real estate acquired by
foreclosure or substantively repossessed as nonperforming assets.
Nonaccrual loans, which is the largest component of nonperforming assets,
decreased by $125,840 during the three months ending March 31, 2003. Loans
90 day or more but still accruing increased by $185,768 during the first
three months of 2003. These loans are expected to improve or pay off within
the second quarter of 2003. As of March 31, 2003, there was no real estate
acquired by foreclosure.
The percentage of nonaccrual loans to total gross loans decreased from 0.24%
reported at year end 2002 to 0.19% at March 31, 2003 due to a decrease in
the nonaccrual category. The percentage of nonaccrual loans and real estate
acquired by foreclosure or substantively repossessed to total assets also
decreased due to the decrease in nonaccrual loans.
INFORMATION WITH RESPECT TO INTEREST ON NONACCRUAL AND PAST DUE
LOANS AT MARCH 31, 2003 AND 2002 AND DECEMBER 31, 2002 AND 2001
At March 31, At December 31,
- --------------------------------------------------------------------------------------
(Dollars in Thousands) 2003 2002 2002 2001
- --------------------------------------------------------------------------------------
Nonaccrual Loans $509 $887 $635 $1,138
Interest income that would have been recorded
under original terms 10 78 303 109
Interest income recorded during the period 3 64 121 6
13
The Company stops accruing interest on a loan once it becomes past due 90
days or more unless there is adequate collateral and the financial condition
of the borrower is sufficient. When a loan is placed on nonaccrual status,
all previously accrued but unpaid interest is reversed and charged against
current income. Interest is thereafter recognized in that category only when
payments are received and the loan becomes current.
Loans in the nonaccrual category will remain in that category until the
possibility of collection no longer exists, the loan is paid off or becomes
current. When a loan is determined to be uncollectible, it is then charged
off against the Allowance for Loan Losses.
Statement of Financial Accounting Standards No. 114 "Accounting by Creditors
for Impairment of a Loan" applies to all loans except large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment, loans measured at fair value or at a lower of cost or fair
value, leases, and debt securities as defined in Statement 115. Statement
114 requires that impaired loans be valued at the present value of expected
future cash flows discounted at the loan's effective interest rate or as a
practical expedient, at the loan's observable market value of the collateral
if the loan is collateral dependent. Smaller balance homogeneous loans are
considered by the Company to include consumer installment loans and credit
card loans.
At March 31, 2003, there were $2,299,825 of loans which the Company has
determined to be impaired, with a related allowance for credit losses of
$380,691. In addition, principal reductions, loan payoffs, charged off
balances, loan upgrades, and a change in our impairment identification
methodology are other factors resulting in a decrease of impaired loans.
There were no other loans classified for regulatory purposes at March 31,
2003 that management reasonably expects will materially impact future
operating results, liquidity or capital resources.
14
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Three Months Years Ended
Ended March 31, December 31,
- ---------------------------------------------------------------------------------
(Dollars in Thousands) 2003 2002 2002 2001
- ---------------------------------------------------------------------------------
Balance at January 1 $4,854 $5,484 $5,484 $4,766
Charge-offs:
Commercial (0) (263) (336) (73)
Real estate - construction (0) (0) (0) (0)
Real estate - mortgage (10) (0) (20) (0)
Installment/consumer (14) (3) (26) (28)
- ---------------------------------------------------------------------------------
Total Charge-offs (24) (266) (382) (101)
- ---------------------------------------------------------------------------------
Recoveries:
Commercial 6 4 17 14
Real estate - construction 0 0 0 0
Real estate - mortgage 7 3 38 29
Installment/consumer 2 2 7 16
- ---------------------------------------------------------------------------------
Total Recoveries 15 9 62 59
- ---------------------------------------------------------------------------------
Net Charge-offs (9) (257) (320) (42)
- ---------------------------------------------------------------------------------
Additions charged to operations 141 188 (310) 750
- ---------------------------------------------------------------------------------
Balance at end of period $4,986 $5,415 $4,854 $5,484
=================================================================================
Ratio of net charge-offs to
average loans outstanding (0.01%) (0.10%) (0.13%) (0.02%)
The Allowance for Loan Losses at March 31, 2003 was $4,985,820, compared to
$4,854,388 at year-end 2002. The Allowance for Loan Losses as a percentage
of outstanding loans was 1.82% at March 31, 2003, and 1.83% at December 31,
2002.
The Company provides for loan losses to maintain the Allowance for Loan
Losses at a level that management believes to be adequate to absorb losses
inherent in the loan portfolio.
As the composition of our loan portfolio gradually changes from higher
credit risk weighted loans, such as commercial real estate and commercial
and industrial, to residential and home equity loans, less reserve allowance
will be required. The Bank's provision recorded for the three months ending
March 31, 2003 was $141,000, compared to $188,000 recorded from the same
period in the previous year. Loans charged off were $382,000 in 2002,
$101,000 in 2001, $24,000 in the three months ended March 31, 2003, and
$266,000 for the same period in 2002. Recoveries of loans previously
charged off were $62,000 in 2002, $59,000 in 2001, $15,000 in the three
months ended March 31, 2003, and $9,000 for the same period in 2002.
Management believes that the Allowance for Loan Losses of $4,985,820 is
adequate to absorb any losses that are estimated to occur, due to the Bank's
strong collateral position and the current asset quality.
The level of the Allowance for Loan Losses is evaluated by management and
encompasses several factors. These factors include but are not limited to
recent trends in the nonperforming loans, the adequacy of the assets that
collateralize the nonperforming loans, the level of nonaccrual loans,
current economic conditions in the market area, and various other external
and internal factors. Management's assessment of the adequacy of the
Allowance for Loan Losses is reviewed by regulators, the Company's
independent accountants, and outside loan review consultants.
15
This table shows an allocation of the allowance for loan losses as of the
end of each of the periods indicated.
March 31, 2003 December 31, 2002 December 31, 2001
-----------------------------------------------------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
-----------------------------------------------------------------------------
(Dollars in Thousands)
Domestic:
Commercial (5) $1,093(1) 11.15% $1,155(1) 11.60% $1,629(1) 17.91%
Real estate - Construction 83 5.86% 70 5.31% 41 2.99%
Real estate - mortgage 3,681(2) 80.87% 3,465(2) 80.48% 3,585(2) 74.77%
Consumer(3) 129(4) 2.12% 164(4) 2.61% 229(4) 4.33%
--------------------------------------------------------------------------
$4,986 100.00% $4,854 100.00% $5,484 100.00%
==========================================================================
- ------------------------------------
Includes amounts specifically reserved for impaired loans of
$322,945 as of March 31, 2003, $412,761 as of December 31, 2002,
and $780,029 as of December 31, 2001 as required by Financial
Accounting Standard No. 114, Accounting for Impairment of Loans.
Includes amounts specifically reserved for impaired loans of
$43,172 as of March 31, 2003, $34,757 as of December 31, 2002, and
$413,663 as of December 31, 2001 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
$14,574 as of March 31, 2003, $29,606 as of December 31, 2002, and
$1,632 as of December 31, 2001 as required by Financial Accounting
Standard No. 114, Accounting for Impairment of Loans.
Includes commercial, financial, agricultural and nonprofit loans.
The loan portfolio's largest segment of loans is commercial real estate
loans, which represent 45% of gross loans. Residential real estate,
represents 37% of gross loans. The Company requires a loan to value ratio
of 80% in both commercial and residential mortgages. These mortgages are
secured by real properties which have a readily ascertainable appraised
value.
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 unit
supply and demand and various conditions. When granting these loans, the
Company evaluates the financial statements of the borrower(s), the location
of the real estate, the quality of management, profitability, and general
economic and competitive conditions. When granting a residential mortgage,
the Company reviews the borrower(s) repayment history on past debts, and
assesses the borrower(s) ability to meet existing obligations and payments
on the proposed loans.
Real estate construction loans comprise both residential and commercial
construction loans throughout our market area.
16
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 March 31, 2003, compared to 17% as
of March 31, 2002.
Consumer loans are both secured and unsecured borrowings and represent only
2% of the total loan portfolio as of March 31, 2003. 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.
The allocation of the Allowance for Loan Losses is based on management's
judgement of estimated losses in the respective portfolios. While
management has allocated reserves to various portfolio segments, the
Allowance is general in nature and is available for the portfolio in its
entirety.
Total deposits at March 31, 2003 were $342.8 Million, an increase of $7.2
Million, compared to $335.6 Million at December 31, 2002. The Bank's first
quarter campaign to promote money market accounts has been successful,
generating more than $8.9 Million in deposits. More than three-quarters of
accounts opened during the quarter were new account relationships.
Results of Operations
- ---------------------
The Company's operating performance is dependent on net interest and
dividend income, which is the difference between interest income earned on
loans and investments and interest expense paid on deposits and borrowed
funds. The level of net interest income achieved is significantly impacted
by several factors such as economic conditions, interest rates,
asset/liability management, and corporate tax and strategic planning. Net
interest and dividend income for March 31, 2003 decreased by $52,810 to
$3,515,498 when compared to $3,568,308 recorded during the same period in
2002. Total interest and dividend income decreased by $719,778 partially
offset by a decrease in total interest expense of $666,968. The Company's
net interest margin decreased by 4 basis points from 3.97% reported at March
31, 2002 to 3.93% as of March 31, 2003.
The Provision for Loan Losses is a charge against earnings and funds the
Allowance for Loan Losses. It is management's desire to maintain the
Allowance for Loan Losses at a level that is adequate to absorb inherent
losses within the loan portfolio. In determining the appropriate level of
the allowance for loan losses, management takes into consideration past and
anticipated loss experience, prevailing economic conditions, evaluations of
underlying collateral, and the volume of the loan portfolio and balance of
nonperforming and classified loans. Management assesses the allowance for
loan losses at least on a monthly basis. After a thorough and detailed
analysis and assessment during the first quarter of 2003, the allowance for
loan losses was considered adequate to absorb inherent losses within the
loan portfolio. The Bank's provision during the three month period ending
March 31, 2003 was $141,000, compared to $187,500 for the same period in
2002.
Total Other Income increased by $5,436 for the first three months in 2003,
when compared to the same period in 2002. Service charges on both deposit
accounts and overdrafts combined increased by $53,797. This increase in
service charge income was partially offset by a $40,918 net loss recognized
on the sale of a certain equity security. After a downgrade in the rating,
and a negative outlook on the Company's future performance, management felt
it prudent to sell this stock and recognize a loss. There was a decrease of
$6,466 in the cash surrender value of life insurance policies income
associated with both the Directors' and Executive Officers' life insurance
programs.
17
The line item Other Income decreased slightly by $3,795 when compared to the
first three months of 2002. These income items represent earnings derived
from safe deposit box rentals, checkbook printing revenue, exchange and
commission fees, customer investment commission fees, and ATM/debit card
usage fees.
The category Total Other Expense, made up of various noninterest expenses,
increased by $228,395 or 8.2% to $3,000,246 recorded during the first three
months ending March 31, 2003, compared to $2,771,851 reported for the same
period in 2002. Salaries and employee benefits decreased by $1,064.
Occupancy and equipment expenses combined totaled $386,146 during the first
quarter of 2003, compared to $336,643 in 2002, an increase of $49,503,
primarily due to increased snow removal cost resulting from a cold, severe
winter, and higher energy cost. The expenses for stationery and supplies
decreased by $14,360 from $74,564 reported during the first three months in
2002 to $60,204 during the first three months in 2003. Professional service
fees increased by $179,729 from the first three months of 2002 compared to
2003. This increase reflects costs associated with marketing, advertising,
investment advisory, information technology consulting services, and
collection and repossession expenses. Marketing expenses attributed to
production and media costs for television and radio commercials, print
advertising and other direct marketing decreased by $6,706.
The following table sets forth the components of the line item Other
Expense, which reflects an increase of $21,293 for the first quarter in 2003
compared to the same period reported in 2002.
Three Months
--------------------------------
2003 2002 Variance
--------------------------------
Communications/Postage $ 90,949 $ 81,240 $ 9,709
Committee Fees 39,800 46,550 (6,750)
Other Expenses 296,557 278,223 18,334
-------------------------------
$427,306 $406,013 $21,293
===============================
Other Expense increased by $21,293. Communication/Postage Expense increased
by $9,709 due to the increase in postage cost effective June 2002.
Committee Fees decreased by $6,750, and Other Miscellaneous Expense
increased by $18,334, primarily as a result of an increase in appraisal fees
on property associated with home equity loans.
Income before income taxes and Extraordinary item was $848,918 for the
three-month period ending March 31, 2003 compared to $1,078,187 reported for
the same period in the prior year. Taxes totaled $256,032, down by $40,233
when compared to $296,265 reported for the same period in 2002, as a result
of lower taxable income in 2003.
Net income before extraordinary item for the three months ended March 31,
2003 was $592,886 or $0.15 per share (basic and diluted) from $781,922 or
$0.20 per share (basic and diluted) for the same period in the previous
year.
As previously announced in the Company's March 6, 2003 press release, a
$1,285,000 charge to earnings required due to a retroactive change to
Massachusetts tax law was recorded during the quarter ending March 31, 2003.
As a result of the new legislation, a deduction for dividends received from
a real estate investment trust subsidiary ("REIT") is disallowed
retroactively for fiscal years 1999-2002. This charge to earnings recorded
as an extraordinary item, net of tax benefits, was the primary reason for
the decrease in first quarter 2003 net income and resulted in a $0.33 per
share decrease in this quarter's earnings when compared to the same quarter
in 2002.
18
The extraordinary item charge of $1,285,066 to earnings resulted in a net
loss for the quarter of $692,180 or $0.18 per share basic and $0.17 per
share diluted as compared to net income of $781,922 for the same period in
the previous year.
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 five 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. As of March 31, 2003, there was $19.1 Million in
advances outstanding from the Federal Home Loan Bank.
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 during the first quarter 2003 was primarily provided by the
proceeds from the maturities and calls of securities totaling $13.9 Million.
These were offset by purchases of securities of $7.6 Million, loan
originations, principal collections and purchased loans of $8.7 Million, and
purchases of life insurance policies for Executive Officers of $0.2 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 March 31, 2003, the Company had total capital of $40,418,211. This
represents a decrease of $748,793 from $41,167,004 reported on December 31,
2002. The decrease in capital was a combination of several factors. Three
months earnings resulted in a net loss of $692,180. Transactions
originating through the Dividend Reinvestment Program resulted in 3,311.111
shares being issued for cash contributions of $45,999
19
and 12,235.539 shares being issued for $170,686 in lieu of cash dividend
payments. These additions were offset by dividends declared of $355,798.
Also, affecting capital is accumulated other comprehensive income (loss)
which reflects net unrealized gains or losses, net of taxes, on securities
classified as Available-for-Sale and the minimum pension liability
adjustment. On December 31, 2002 the Available-for-Sale portfolio had
unrealized losses, net of taxes, of $120,943, and on March 31, 2003, as a
result of current market values, the portfolio reflects unrealized losses,
net of taxes, of $305,772. There was no change in the minimum pension
liability adjustment of $234,180, net of taxes, recorded 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.
At March 31, 2003 the actual Risk Based Capital of the Bank was $30,991,000
for Tier 1 Capital, exceeding the minimum requirements of $11,382,960 by
$19,608,040. Total Capital of $34,568,000 exceeded the minimum requirements
of $22,765,920 by $11,802,080 and Leverage Capital of $30,991,000 exceeded
the minimum requirements of $15,677,520 by $15,313,480. In addition to the
"minimum" capital requirements, "well capitalized" standards have also been
established by the Federal Banking Regulators.
The table below illustrates the capital ratios of the Company and the Bank
on March 31, 2003 and at December 31, 2002.
Well March 31, 2003 December 31, 2002
Capitalized -----------------------------------
Requirement Bancorp Bank Bancorp Bank
- ---------------------------------------------------------------------------------
Total Capital
(to Risk Weighted Assets) > or =10% 14.03% 12.15% 14.84% 12.63%
Tier 1 Capital
(to Risk Weighted Assets) > or = 6% 12.77% 10.89% 13.59% 11.38%
Leverage Capital
(to Average Assets) > or = 5% 9.65% 7.91% 9.48% 8.00%
Under the revised informal agreement entered into with the Massachusetts
Commissioner of Banks and the Federal Deposit Insurance Corporation,
effective January 17, 2002, the Bank is required to maintain a seven (7)
percent Tier I Leverage Capital ratio. As of March 31, 2003, this ratio was
7.91% compared to 8.0% at year-end 2002.
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 March 31, 2003.
20
ITEM 3
Quantitative and Qualitative Disclosure of Market Risk
- ------------------------------------------------------
Interest Rate Risk
- ------------------
Volatility in interest rates requires the Company to manage interest rate
risk that arises from the differences in the timing of repricing of assets
and liabilities. The Company considers interest rate risk, the exposure of
earnings to adverse movements in interest rates, to be a significant market
risk as it could potentially have an affect on the Company's financial
condition and results of operation.
The Company's Asset-Liability Management Committee, comprised of the Bank's
Executive Management team, has the responsibility of managing interest rate
risk, and monitoring and adjusting the difference between interest-sensitive
assets and interest-sensitive liabilities ("GAP" position) within various
time periods.
Management's objective is to reduce and control the volatility of its net
interest margin by managing the relationship of interest-earning assets and
interest-bearing liabilities. In order to manage this relationship, the
committee utilizes a GAP report prepared on a monthly basis. The GAP report
indicates the differences or gap between interest-earning assets and
interest-bearing liabilities in various maturity or repricing time periods.
This, in conjunction with certain assumptions, and other related factors,
such as anticipated changes in interest rates and projected cash flows from
loans, investments and deposits, provides management a means of evaluating
interest rate risk.
In addition to the GAP report, the Company also uses an analysis to
measure the exposure of net interest income to changes in interest rates
over a relatively short (i.e., 12 months) time frame. The analysis projects
future interest income and interest expense from the Company's interest-
earning assets and interest-bearing liabilities. Depending on the GAP
position, the Company's policy limit on interest rate risk specifies that if
interest rates were to change immediately, up or down 200 basis points,
estimated net interest income for the next twelve months would not decline
by more than ten percent.
The following table reflects the Company's estimated exposure as a
percentage of estimated net interest income for the next twelve months,
assuming an immediate change in interest rates:
Rate Change Estimated Exposure as a Percentage of Net Interest Income
(Basis Points) March 31, 2003
- ------------------------------------------------------------------------------
+200 (5.28)%
-200 (0.87)%
The model used to monitor earnings-at-risk provides management a measurement
tool to assess the effect of changes in interest rates on the Company's
current and future earnings. The 10% limit established by the Company
provides an internal tolerance level to control interest rate risk exposure.
21
ITEM 4 CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
As required by new Rule 13a-15 under the Securities Exchange Act of 1934,
within the 90 days prior to the date of this report, we carried out an
evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon that evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that they believe that,
as of the date of completion of the evaluation, our disclosure controls and
procedures were effective to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported, within the time periods
specified in the Securities and Exchange Commission's rules and forms. In
connection with the new rules, we will continue to review and document our
disclosure controls and procedures, including our internal controls and
procedures for financial reporting, on an ongoing basis, and may from time
to time make changes aimed at enhancing their effectiveness and to ensure
that our systems evolve with our business.
(b) Changes in internal controls.
None.
22
PART II
Other Information
ITEM 6
Exhibits and Reports on Form 8-K
- --------------------------------
(a) Exhibits: See exhibit index.
(b) 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 Massachusetts legislation that retroactively disallows
the tax deduction for dividends received from a real estate investment
trust subsidiary ('REIT') for fiscal years 1999 through 2002.
23
EXHIBIT INDEX
Exhibit No. Description Note
3.1 Articles of Incorporation of Slade's Ferry Bancorp as amended (1)
3.2 By-laws of Slade's Ferry Bancorp as amended (2)
10.1 Slade's Ferry (formerly Weetamoe) Bancorp
1996 Stock Option Plan (as amended) (3)
10.2 Noncompetition Agreement between Slade's Ferry
Trust Company and Edward S. Machado (A substantially
identical contract exists with Peter Paskowski) (4)
10.3 Supplemental Executive Retirement Agreement between Slade's
Ferry (formerly Weetamoe) Bancorp and Donald T. Corrigan (5)
10.4 Supplemental Executive Retirement Agreement between Slade's
Ferry (formerly Weetamoe) Bancorp and James D. Carey (2)
10.5 Supplemental Executive Retirement Agreement between Slade's
Ferry (formerly Weetamoe) Bancorp and Manuel J. Tavares (2)
10.6 Swansea Mall Lease (4)
10.7 Form of Director Supplemental Retirement Program Director
Agreement, Exhibit I thereto (Slade's Ferry Trust Company
Director Supplemental Retirement Program Plan) and
Endorsement Method Split Dollar Plan Agreement thereunder
for Thomas B. Almy. (Similar forms of agreement entered into
between Slade's Ferry Trust Company and the other directors) (6)
10.8 Form of Directors' Paid-up Insurance Policy for Thomas B. Almy
(part of the Director Supplemental Retirement Program).
(Similar forms of policy entered into by Company
for other directors). (7)
10.9 Form of Officers' Paid-up Endorsement Method Split
Dollar Plan Agreement and Insurance Policies for
Janice Partridge (Similar forms of policies entered into
by Company for its President and other Vice Presidents) (8)
10.10 Supplemental Executive Retirement Agreement between
Slade's Ferry Bancorp and Mary Lynn D. Lenz.
10.11 Change-in-Control Severance Agreement between
Slade's Ferry Bancorp, Slade's Ferry Trust Company
and Mary Lynn D. Lenz
10.12 Confidentiality and Non-Solicitation Agreement between
Slade's Ferry Bancorp and Mary Lynn D. Lenz
11.0 Computation of Per Share Earnings
99 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to Sarbanes-Oxley Act
of 2002
Incorporated by reference to the Registrant's Registration
Statement on Form SB-2 filed with the Commission on
April 14, 1997.
Incorporated by reference to the Registrant's Form 10-KSB for
the fiscal year ended December 31, 1996.
Incorporated by reference to the Registrant's Form 10-Q for
the quarter ended June 30, 1999.
Incorporated by reference to the Registrant's Registration
Statement on Form S-4 File No. 33-32131
Incorporated by reference to the Registrant's Form 10-KSB for
the fiscal year ended December 31, 1994.
Incorporated by reference to the Registrant's Form 10-Q for
the quarter ended March 31,1999
Incorporated by reference to the Registrant's Form 10-QSB for
the quarter ended June 30, 1998.
Incorporated by reference to the Registrant's Form 10-Q for
the quarter ended June 30, 2000.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SLADE'S FERRY BANCORP
---------------------------------
(Registrant)
May 14, 2003 /s/ Mary Lynn D. Lenz
- ------------ ---------------------------------
(Date) (Signature) Mary Lynn D. Lenz
President/Chief Executive Officer
May 14, 2003 /s/ Edward Bernardo Jr.
- ------------ ---------------------------------
(Date) (Signature) Edward Bernardo Jr.
Vice President/Treasurer
Chief Financial Officer/
Chief Accounting Officer
25
CERTIFICATIONS
I, Mary Lynn D. Lenz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Slade's Ferry
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date:
5. The registrant's other certifying officer 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 officer 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: May 14, 2003 /s/ Mary Lynn D. Lenz
---------------------------------
President/Chief Executive Officer
26
CERTIFICATIONS
I, Edward Bernardo, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Slade's Ferry
Bancorp;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date:
5. The registrant's other certifying officer 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 officer 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: May 14, 2003 /s/ Edward Bernardo Jr.
-----------------------------------
Vice President/Treasurer
Chief Financial Officer/
Chief Accounting Officer
27