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UNITED STATES
SECURITIES AND EXCHANGE COMMISION
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, 2004
--------------
Commission file number 000-23904
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SLADE'S FERRY BANCORP.
-------------------------------------------------------
(Exact name of registrant as specified in its character)
Massachusetts 04-3061936
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
100 Slade's Ferry Avenue
Somerset, Massachusetts 02726
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip code)
(508)-675-2121
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(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
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Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common stock ($0.01 par value) 4,046,791 shares as of April 30, 2004.
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TABLE OF CONTENTS
Part I
ITEM 1 - Financial Statements of Slade's Ferry Bancorp. and Subsidiary 2
Condensed Consolidated Balance Sheets - March 31, 2004
(Unaudited) and December 31, 2003
Condensed Consolidated Statements of Income and Expense
(Unaudited) - 3 Months Ended March 31, 2004 and 2003
Condensed Consolidated Statement of Changes in Stockholder's
Equity (Unaudited) - 3 Months Ended March 31, 2004
Condensed Consolidated Statements of Cash Flows (Unaudited) - 3
Months Ended March 31, 2004 and 2003
Notes to Condensed Consolidated Financial Statements (Unaudited)
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk 24
ITEM 4 - Controls and Procedures 25
Part II
ITEM 1 - Legal Proceedings 26
ITEM 2 - Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities 26
ITEM 3 - Defaults upon Senior Securities 26
ITEM 4 - Submission of Matters to a Vote of Security Holders 26
ITEM 5 - Other Information 26
ITEM 6 - Exhibits and Reports on Form 8-K 26
1
PART I
ITEM 1
Financial Statements
- --------------------
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2004 December 31, 2003
-----------------------------------
(Unaudited)
ASSETS:
Cash, due from banks and interest-bearing
demand deposits with other banks $ 18,531,706 $ 18,642,370
Money market mutual funds 182,335 63,539
Federal Home Loan Bank overnight deposit 20,000,000 0
Federal funds sold 46,000,000 4,000,000
-------------------------------
Cash and cash equivalents 84,714,041 22,705,909
Interest-bearing time deposits with other banks 100,000 200,000
Investment securities held-to-maturity(1) 9,930,271 11,300,402
Investment securities available-for-sale(2) 42,833,205 47,162,852
Federal Home Loan Bank stock 3,023,800 3,023,800
Loans, net 348,774,965 331,496,525
Premises and equipment 5,846,273 5,894,736
Goodwill 2,173,368 2,173,368
Accrued interest receivable 1,503,337 1,497,104
Cash surrender value of life insurance 11,143,583 10,980,879
Deferred income tax asset, net 1,916,962 1,996,213
Other assets 1,421,583 1,016,753
-------------------------------
TOTAL ASSETS $513,381,388 $439,448,541
===============================
LIABILITIES & STOCKHOLDERS' EQUITY:
Deposits $400,275,674 $333,144,817
Federal Home Loan Bank advances 56,089,327 60,474,864
Subordinated debentures 10,310,000 0
Other liabilities 2,923,110 3,086,719
-------------------------------
Total liabilities 469,598,111 396,706,400
-------------------------------
STOCKHOLDERS' EQUITY:
Common stock 40,276 39,959
Paid-in capital 29,105,262 28,609,206
Retained earnings 14,983,578 14,698,595
Accumulated other comprehensive loss (345,839) (605,619)
-------------------------------
Total stockholders' equity 43,783,277 42,742,141
-------------------------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $513,381,388 $439,448,541
===============================
- --------------------
Investment securities held-to-maturity have a fair market value of
$10,531,498 as of March 31, 2004 and $11,851,713 as of December 31,
2003.
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,
2004 2003
---------------------------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $ 4,892,175 $ 4,166,512
Interest and dividends on investments 529,496 848,949
Other interest 58,714 45,323
---------------------------
Total interest and dividend income 5,480,385 5,060,784
---------------------------
INTEREST EXPENSE:
Interest on deposits 1,122,289 1,227,793
Interest on Federal Home Loan Bank 594,871 317,493
Interest on subordinated debentures 16,250 0
---------------------------
Total interest expense 1,733,410 1,545,286
---------------------------
Net interest and dividend income 3,746,975 3,515,498
Provision for loan losses 246,215 141,000
---------------------------
Net interest and dividend income
after provision for loan losses 3,500,760 3,374,498
---------------------------
OTHER INCOME:
Service charges on deposit accounts 145,497 133,768
Overdraft service charges 123,340 121,669
Gain (loss) on sales of available-for-sale securities, net 34,882 (40,918)
Increase in cash surrender value of life insurance policies 137,704 108,170
Other income 122,235 151,977
---------------------------
Total other income 563,658 474,666
---------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,967,865 1,789,437
Occupancy expense 231,365 262,981
Equipment expense 147,078 123,165
Stationary and supplies 43,585 60,204
Professional fees 226,540 242,880
Marketing expense 56,815 94,273
Other expense 437,232 654,048
---------------------------
Total noninterest expense 3,110,480 3,226,988
---------------------------
Income before income taxes 953,938 622,176
Income taxes 307,944 1,314,356
---------------------------
NET INCOME (LOSS)(1) $ 645,994 $ (692,180)
===========================
Basic earnings (loss) per share $ 0.16 $ (0.18)
===========================
Diluted earnings (loss) per share(3) $ 0.16 $ (0.18)
===========================
Basic averages shares outstanding 4,012,654 3,948,584
===========================
Diluted average shares outstanding(3) 4,069,855 3,948,584
===========================
Dividends per share $ 0.09 $ 0.09
===========================
Comprehensive income (loss)(2) $ 905,774 $ (609,680)
===========================
- --------------------
The quarterly results of operations for the period ended March 31,
2003 have been revised from that previously reported to remove the
extraordinary item. The extraordinary item treatment previously
presented was revised, and its individual components were reclassed to
income tax expense, in the amount of $1,058,324 and other expense in
the amount of $226,742. See Footnote 20 to the Company's audited
consolidated financial statements included in the Company's annual
report on Form 10-K for the year ended December 31, 2003 filed with
the U.S. Securities and Exchange Commission.
Calculated using the change in accumulated other comprehensive income
(loss) for the period and net income (loss) for the period.
For the March 31, 2003 quarter, potential common shares are not
included due to the net loss for the period.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2004
(Unaudited)
Accumulated
Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Loss Total
-------------------------------------------------------------------------
Balance, January 1, 2004 $39,959 $28,609,206 $14,698,595 $(605,619) $42,742,141
Comprehensive income:
Net income 645,994
Other comprehensive income 259,780
Comprehensive income 905,774
Issuance of common stock from
dividend reinvestment plan 74 162,669 162,743
Retired common stock shares (34) (32,334) (32,368)
Stock issuance relating to optional
cash contribution plan 17 38,556 38,573
Stock options exercised 260 327,165 327,425
Dividends declared ($.09 per share) (361,011) (361,011)
-------------------------------------------------------------------------
Balance, March 31, 2004 $40,276 $29,105,262 $14,983,578 $(345,839) $43,783,277
=========================================================================
4
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDING MARCH 31,
(Unaudited)
2004 2003
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 645,994 $ (692,180)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization, net of accretion of securities 44,139 48,396
(Gains) loss on sales of available-for-sale securities, net (34,882) 40,918
Change in unearned income 82,765 (14,897)
Provision for loan losses 246,215 141,000
Depreciation and amortization 166,143 151,015
Increase in cash surrender value of life insurance policies (137,704) (108,170)
Decrease in taxes receivable 227,570 857,305
Deferred tax (benefit) expense (21,125) 52,940
Increase in other assets (557,940) (5,068)
Increase in prepaid expenses (74,461) (31,528)
(Increase) decrease in interest receivable (6,233) 7,340
Increase (decrease) in other liabilities 28,962 (30,923)
Decrease in accrued expenses (244,896) (216,993)
Increase in taxes payable 0 456,795
Increase (decrease) in interest payable 50,831 (17,565)
-----------------------------
Net cash provided by operating activities 415,378 638,385
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of interest-bearing
time deposits with other banks 100,000 0
Purchases of available-for-sale securities (852,027) (6,502,300)
Proceeds from maturities and calls of
available-for-sale securities 5,535,285 12,603,546
Purchases of held-to-maturity securities 0 (927,105)
Proceeds from maturities of held-to-maturity securities 1,367,420 1,281,502
Purchase of Federal Home Loan Bank stock 0 (224,100)
Loan originations and principal collections, net (17,656,475) (8,735,956)
Recoveries of loans previously charged off 49,055 14,532
Capital expenditures (117,680) (178,055)
Investment in life insurance policies (25,000) (224,000)
-----------------------------
Net cash used in investing activities (11,599,422) (2,891,936)
-----------------------------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
----------------------------
(Unaudited)
(Continued)
2004 2003
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW,
and savings accounts 33,773,909 7,243,537
Net increase (decrease) in time deposits 33,356,948 (101,570)
Payments on Federal Home Loan Bank long-term advances (85,537) (68,743)
Net change in short-term advances from
Federal Home Loan Bank (4,300,000) 0
Proceeds from subordinated debentures 10,310,000 0
Proceeds from issuance of common stock 201,316 216,685
Stock options exercised 327,425 0
Retired common stock shares (32,368) 0
Dividends paid (359,517) (354,399)
-----------------------------
Net cash provided by financing activities 73,192,176 6,935,510
-----------------------------
Net increase in cash and cash equivalents 62,008,132 4,681,959
Cash and cash equivalents at beginning of year 22,705,909 34,716,536
-----------------------------
Cash and cash equivalents at the end of period $ 84,714,041 $ 39,398,495
=============================
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 1,682,579 $ 1,562,851
Income taxes paid (received) $ 101,499 $ (52,690)
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
SLADE'S FERRY BANCORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2004
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, 2004 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2004.
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, 2003.
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 (dissolved in December 2003), Slade's
Ferry Statutory Trust I, and Slade's Ferry Loan Company. All significant
intercompany balances have been eliminated.
Note C - Stock Based Compensation
- ---------------------------------
At March 31, 2004, 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 Ended March 31,
2004 2003
------------------------
Net income (loss), as reported $645,994 $(692,180)
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 (loss) $645,994 $(692,180)
=====================
Earnings (loss) per share:
Basic - as reported $ 0.16 $ (0.18)
Basic - pro forma $ 0.16 $ (0.18)
Diluted - as reported $ 0.16 $ (0.18)
Diluted - pro forma $ 0.16 $ (0.18)
7
Note D - Pension Benefits
- -------------------------
The following summarizes the net periodic benefit cost for the three months
ended March 31:
2004 2003
--------------------
Service Cost $ 3,496 $ 1,955
Interest Cost 24,846 14,770
Expected return on plan assets (10,824) (8,095)
Amortization of prior service cost 905 (1,811)
Recognized net actuarial (gain) loss (56,176) 8,776
Amortization of transition (asset) obligation 1,982 1,100
Net periodic benefit cost (income) $(35,771) $16,695
====================
The Company previously disclosed in its consolidated financial statements
for the year ended December 31, 2003 that it expected pension plan
contributions to be $150,000 in 2004. There was no cash contribution made to
the total pension plan during the first quarter 2004.
Note E - Impact of New Accounting Standards
- -------------------------------------------
In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the
disclosure to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has
issued. It also clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 clarifies that a guarantor is
required to disclose (a) the nature of the guarantee; (b) the maximum
potential amount of future payments under the guarantee; (c) the carrying
amount of the liability; (d) the nature and extent of any recourse
provisions or available collateral that would enable the guarantor to
recover the amounts paid under the guarantee.
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.
The initial recognition and initial measurement provisions of FIN 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements in FIN 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company adopted the initial recognition and initial measurement
provisions of FIN 45 effective as of January 1, 2003 and adopted the
disclosure requirements effective as of December 31, 2002. The adoption of
this interpretation did not have a material effect on the Company's
financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of SFAS Statement No.
123" ("SFAS No. 148"). SFAS No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the effect of the
method used on reported results. The transition provisions and disclosure
provisions are required for financial statements for fiscal years ending
after December
8
15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 as
of December 31, 2002 and currently uses the intrinsic value method of
accounting for stock options.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133
on Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This Statement (a) clarifies
under what circumstances a contract with an initial net investment meets the
characteristic of a derivative, (b) clarifies when a derivative contains a
financing component, (c) amends the definition of an underlying to conform
to language used in FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," and (d) amends certain other existing
pronouncements. The provisions of SFAS No. 149 are effective for contracts
entered into or modified after June 30, 2003. There was no substantial
impact on the Company's consolidated financial statements on adoption of
this Statement.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity" ("SFAS No.
150"). This Statement establishes standards for the classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that certain financial
instruments that were previously classified as equity must be classified as
a liability. Most of the guidance in SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15, 2003. This Statement did not have any material effect on the Company's
consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), in an effort to expand upon and
strengthen existing accounting guidance that addresses when a company should
include in its financial statements the assets, liabilities and activities
of another entity. In December 2003, the FASB revised Interpretation No. 46,
also referred to as Interpretation 46 (R) ("FIN 46(R)"). The objective of
this interpretation is not to restrict the use of variable interest entities
but to improve financial reporting by companies involved with variable
interest entities. Until now, one company generally has included another
entity in its consolidated financial statements only if it controlled the
entity through voting interests. This interpretation changes that, by
requiring a variable interest entity to be consolidated by a company only if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the
entity's residual returns or both. The Company is required to apply FIN 46,
as revised, to all entities subject to it no later than the end of the first
reporting period ending after March 15, 2004. However, prior to the required
application of FIN 46, as revised, the Company shall apply FIN 46 or FIN 46
(R) to those entities that are considered to be special-purpose entities as
of the end of the first fiscal year or interim period ending after December
15, 2003. The adoption of this interpretation did not have a material effect
on the Company's consolidated financial statements.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other Postretirement Benefits - an amendment
of SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised
2003)"). This Statement revises employers' disclosures about pension plans
and other postretirement benefit plans. It does not change the measurement
or recognition of those plans required by SFAS No. 87, "Employers'
Accounting for Pensions," SFAS No. 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This Statement retains the
disclosure requirements contained in SFAS No. 132, "Employers' Disclosures
About Pensions and Other Postretirement Benefits," which it replaces. It
requires additional disclosures to those in the original Statement 132 about
assets, obligations, cash flows and net periodic benefit cost of defined
benefit pension plans and other defined benefit postretirement plans. This
Statement is effective for financial statements with fiscal years ending
after December
9
15, 2003 and interim periods beginning after December 15, 2003. Adoption of
this Statement did not have a material impact on the Company's consolidated
financial statements.
10
ITEM 2
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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.
Critical Accounting Policies
Our significant accounting policies are described in Note 2 to our
Consolidated Financial Statements filed within form 10-K for the year ended
December 31, 2003. In preparing financial information, management is
required to make significant judgements, estimates, and assumptions that
impact the reported amounts of certain assets, liabilities, revenues and
expenses. The accounting principles followed by the Company and the methods
of applying these principles conform to accounting principles generally
accepted in the United States, and general banking practices. The Company
considers the following to be its critical accounting policies: allowance
for loan losses, goodwill and other intangible assets other than temporary
impairment of investments, and deferred taxes.
Allowance for loan losses. Establishing an appropriate level of allowance
for loan losses involves a high degree of judgement. The allowance for loan
losses is established through a charge or credit to the provision for loan
losses, and is based on management's projection of the adequate level of the
allowance in relation to the inherent loss exposure in the loan portfolio.
On a monthly basis, management evaluates the adequacy of the allowance which
includes a formal analysis which considers, among other factors, business
and economic conditions and industry trends, the size and characteristics of
the loan portfolio, delinquency trends, charge-off experience, loan growth,
nonaccrual loan trends, and portfolio migration information. Although
management uses available information to project the appropriate level of
the allowance which is based on factors and risk identification procedures
discussed in "Item I Business - Summary of Loan Loss
11
Experience," the use of judgements and projections may change in the future.
Changes in factors or assumptions used by management to determine the
adequacy of the allowance or the availability of new information could cause
the allowance for loan losses to be increased or decreased in future
periods. In addition, bank regulatory agencies, as part of their examination
process, may require the Company to recognize adjustments to the allowance
based on their judgements and projections.
Accounting for Acquisitions and Review of Goodwill. The Company completed an
acquisition in 1996 and used the purchase method of accounting. For
acquisitions under this method, the Company recorded assets acquired and
liabilities assumed at their estimated fair value, which in some instances
involves estimates based on internal and third party pressures, or other
valuation techniques. In addition, this purchase acquisition resulted in
goodwill, which is subject to ongoing periodic impairment tests, and is
evaluated using fair value techniques that contain estimates. If the
estimated fair value is less than the carrying amount, a loss due to
impairment would be recognized to reduce the carrying value to fair value.
Other than temporary impairment. Management records a writedown impairment
charge when it believes an investment experiences a decrease in value that
is other than temporary. In making a decision whether an investment is
permanently impaired, management reviews current and forecasted information
about the underlying investment that is available, applicable industry data,
and analyst reports. When an investment is deemed to be permanently
impaired, it is written down to current fair market value. Future adverse
changes in economic and market conditions, deterioration in credit quality,
and continued poor financial results of underlying investments or other
factors could result in further losses that may not be reflected in an
investment's current book value that could result in future writedown
charges due to impairment.
Deferred tax estimates. The Company uses the asset and liability method for
accounting for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax attributable to differences
between the financial statement carrying amounts of assets and liabilities
and their respective tax basis. The Company must also assess the probability
that deferred tax assets will be recovered from future taxable income, and
establish a valuation allowance for any assets determined not likely to be
recovered. Management exercises judgement in evaluating the amount and
timing of recognition of the resulting deferred tax assets and liabilities,
including projections of future taxable income. These judgements are
estimates and assumptions and are reviewed on a continuing basis.
Financial Condition
Total assets increased by $74.0 million, or 16.8%, from $439.4 million at
December 31, 2003 to $513.4 million at March 31, 2004. The increase in total
assets during the first three months of 2004 was mainly attributable to cash
and cash equivalents experiencing a 273.1% increase. A portion of the
increase in total assets was generated by deposit growth of $67.1 million.
In addition, the Bank participated in a trust preferred offering which
raised gross proceeds in the amount of $10.3 million, providing the Company
with additional regulatory capital that will be used to fund continued
growth of the institution.
Cash and cash equivalents increased by $62.0 million, from $22.7 million
reported as of year-end 2003 to $84.7 million at March 31, 2004. Cash and
cash equivalents, for purposes of reporting cash flows, include cash,
amounts due from banks, interest-bearing demand deposits with other banks,
federal funds sold, overnight deposit with the Federal Home Loan Bank, and
money market mutual funds. The increase in cash and cash equivalents
reflects deposit growth and the proceeds of the offering of trust preferred
securities, offset in part by loan growth.
Total investments, excluding Federal Home Loan Bank stock, decreased by $5.7
million from $58.5 million reported at December 31, 2003 to $52.8 million at
March 31, 2004. The decrease in investments of $5.7 million combined with
the $67.1 million increase in deposits provided the liquidity to fund gross
loan growth of
12
approximately $17.6 million, and contributed to the Federal Funds Sold and
overnight deposit position of $66.0 million.
The investment portfolio represents a component of the Company's assets and
consists of securities in the Held-to-Maturity category and securities in
the Available-for-Sale category. The designation is determined at the time
of purchase.
The Held-to-Maturity category consists predominately of securities issued by
states of the United States and political subdivisions of states and short-
term debt securities issued by the U. S. Treasury. 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 Held-to-Maturity 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, 2004:
Amortized Gross Unrealized Gross Unrealized
(Dollars In Thousands) Cost Basis Holding Gains Holding Losses Fair Value
- -------------------------------------------------------------------------------------------------------------
U. S. Treasury securities and obligations
of U. S. Government Corporations
and Agencies $9,930 $601 $ 0 $10,531
Total $9,930 $601 $ 0 $10,531
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 gain
or loss, net of taxes, for the Available-for-Sale securities, is 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, 2004:
Gains in Losses in
Accumulated Other Accumulated 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 $24,401 $144 $117 $24,428
Marketable Equity Securities 3,999 185 329 3,855
Mortgage-backed Securities 12,597 490 0 13,087
Corporate Debt Securities 1,406 57 0 1,463
Total $42,403 $876 $446 $42,833
13
The Available-for-Sale securities category at March 31, 2004 had net
unrealized gains, net of taxes, of $250,040 of which $345,854 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 $95,814 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 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, 2004, the amount invested in marketable
equity securities was 9.3% of the total market value of the investment
portfolio distributed over various industry sectors.
Total gross loans increased by $17.6 million, or 5.2%, from $336.1 million
reported December 31, 2003, to $353.7 million at March 31, 2004. Residential
mortgage and home equity loans increased by $14.3 million, to $161.5 million
as of March 31, 2004, compared to $147.2 reported at year-end 2003.
Commercial real estate increased by $5.0 million, from $140.6 million
reported December 31, 2003, to $145.6 million at March 31, 2004. The
commercial, construction and consumer portfolios decreased slightly by $0.6
million, $0.9 million and $0.2 million, respectively in 2004.
The loan portfolio continues to diversify. The largest segment of the Bank's
loan portfolio is residential real estate and home equity loans representing
45.7% of total loans as of March 31, 2004 compared to 43.8% as of December
31, 2003. These loans are comprised of first mortgages on one- to four-
family properties, mortgages on multi-family properties, and second
mortgages on one- to four-family properties.
Another component of the loan portfolio is commercial real estate loans
representing 41.2% of the total loans as of March 31, 2004 compared to 41.8%
as of December 31, 2003. These loans are collateralized by various types of
commercial properties, without any predominant type of property or
concentration of credit in any one industry.
The following table shows the Company's amount of loans by category at the
end of March 31, 2004 and December 31, 2003.
(In Thousands) March 31, 2004 December 31, 2003
- --------------------------------------------------------------------------------------
Commercial, financial and agricultural $ 33,340 $ 33,980
Real estate - construction and land development 9,454 10,346
Residential real estate 161,491 147,178
Commercial real estate 145,615 140,572
Consumer 3,751 3,961
Other 95 57
- --------------------------------------------------------------------------------------
Total gross loans 353,746 336,094
Allowance for loan losses (4,445) (4,154)
Unearned income (526) (443)
- --------------------------------------------------------------------------------------
Net loans $348,775 $331,497
======================================================================================
14
INFORMATION WITH RESPECT TO NONACCRUAL AND PAST DUE LOANS
AT MARCH 31, 2004 AND 2003 AND DECEMBER 31, 2003 AND 2002
At March 31, At December 31,
(Dollars In Thousands) 2004 2003 2003 2002
Nonaccrual Loans $ 210 $ 509 $ 407 $ 635
Loans 90 days or more past due and still accruing 0 194 0 8
Real estate acquired by foreclosure
or substantively repossessed 0 0 0 0
Percentage of nonaccrual loans to total gross loans 0.06% 0.19% 0.12% 0.24%
Percentage of nonaccrual loans, restructured loans,
and real estate acquired by foreclosure or
substantively repossessed to total assets 0.04% 0.13% 0.09% 0.16%
Percentage of allowance for loan losses
to nonaccrual loans 2,116.67% 979.57% 1,020.64% 764.41%
The $210,000 in nonaccrual loans as of March 31, 2004 consists mainly of
$158,000 of real estate mortgages and $43,000 attributed to commercial
loans. There were no restructured loans included in nonaccrual loans for the
first three months of 2004.
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 by $197,000, from $407,000
reported on December 31, 2003 to $210,000 as of March 31, 2004.
The percentage of nonaccrual loans to total gross loans decreased from 0.12%
reported at the year end 2003 to 0.06% at March 31, 2004 due to a decrease
in the nonaccrual category and the increase in the total loan portfolio. 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 and increases in total assets.
INFORMATION WITH RESPECT TO INTEREST ON NONACCRUAL AND PAST DUE LOANS
AT MARCH 31, 2004 AND 2003 AND DECEMBER 31, 2003 AND 2002
At March 31, At December 31,
(In Thousands) 2004 2003 2003 2002
Nonaccrual Loans $210 $509 $407 $635
Interest income that would have been recorded
during the period under original terms 12 10 41 303
Interest income recorded during the period 0 3 30 121
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 become 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 the
loan becomes current. When a loan is determined to be uncollectible, it is
then charged
15
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. 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. 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 principle or interest when due
according to the contractual terms of the loan agreement.
At March 31, 2004 there were $1,686,251 of loans which the Company has
determined to be impaired, with a related allowance for credit losses of
$246,024. 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 as of March 31,
2004 that management expects will materially impact future operating
results, liquidity or capital resources.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Three Months Years Ended
Ended March 31, December 31,
(Dollars In Thousands) 2004 2003 2003 2002
Balance at January 1 $ 4,154 $ 4,854 $ 4,854 $ 5,484
Charge-offs:
Commercial, financial and agricultural 0 0 (10) (336)
Commercial real estate 0 0 0 0
Residential real estate 0 (10) (169) (20)
Consumer (4) (14) (32) (26)
Total charge-offs (4) (24) (211) (382)
Recoveries:
Commercial, financial and agricultural 21 6 55 17
Commercial real estate 0 0 0 0
Residential real estate 24 7 44 38
Consumer 4 2 14 7
Total recoveries 49 15 113 62
Net (charge-offs) recoveries 45 (9) (98) (320)
Provision (benefit) charged to (increasing) operations 246 141 (602) (310)
Balance at end of period $ 4,445 $ 4,986 $ 4,154 $ 4,854
Ratio of net charge-offs to
average loans outstanding (0.0013%) (0.0100%) (0.0300%) (0.1300%)
The allowance for loan losses at March 31, 2004 was $4,445,000, compared to
$4,154,000 at year-end 2003. The allowance for loan losses as a percentage
of outstanding loans was 1.26% at March 31, 2004, and 1.24% at December 31,
2003.
The level of the allowance for loan losses is evaluated monthly by
management and reviewed by the Board of Directors. Factors considered in the
evaluation process include growth of the loan portfolio, risk
characteristics of the loan types in the portfolio, the value of underlying
collateral, delinquency and charge off trends, current
16
economic conditions within the Bank's market area, and various other
external and internal factors. The allowance for loan losses is maintained
at a level that management considers to be adequate to absorb estimated
losses within our loan portfolio. Management's assessment of the adequacy of
the allowance for loan losses is reviewed annually by an independent loan
review consultant, the Company's independent auditors, and regulatory
agencies.
As the composition of our loan portfolio gradually changes and diversifies
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. Due to the continued changes in the loan
portfolio, stronger underwriting guidelines, the sale of loans previously
deemed substandard, and overall improvement in credit quality of existing
loans, the overall credit risk embedded in the loan portfolio decreased.
Charge-offs of loans were $211,000 in 2003, $382,000 in 2002, $4,000 in the
first three months ended March 31, 2004, and $24,000 for the same period in
2003. Recoveries of loans previously charged off were $113,000 in 2003,
$62,000 in 2002, $49,000 in the first three months ended March 31, 2004, and
$15,000 for the same period in 2003. Management believes that the allowance
for loan losses of $4,445,000 as of March 31, 2004 is adequate to cover
potential losses in the loan portfolio, based on current information
available to management.
The Bank must maintain an allowance for loan losses at a level that is
sufficient to absorb the projected credit losses associated with the loan
portfolio. Projected credit losses should reflect consideration of all
significant factors that affect repayment as of the evaluation date.
Projected losses on loan categories should reflect historical net charge-off
levels for similar loans, adjusted for changes in current conditions or
other relevant factors. Calculation of historical charge-off rates can range
from a simple average of net charge-offs over a relevant period, to more
complex techniques such as migration analysis.
This table shows an allocation of the allowance for loan losses as of the
end of each of the periods indicated.
March 31, 2004 December 31, 2003 December 31, 2002
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) $ 976(1) 9.42% $ 943(1) 10.11% $1,155(1) 11.60%
Real estate - Construction 51 2.67 52 3.08 70 5.31
Real estate - mortgage 3,302(2) 86.82 3,071(2) 85.62 3,465(2) 80.48
Consumer(3) 116(4) 1.09 88(4) 1.19 164(4) 2.61
$4,445 100.00% $4,154 100.00% $4,854 100.00%
Includes amounts specifically reserved for impaired loans of $235,588
as of March 31, 2004, $251,280 as of December 31, 2003, and $412,761
as of December 31, 2002 as required by Financial Accounting Standard
No. 114, Accounting by Creditors for Impairment of a Loan. (SFAS No.
114)
Includes amounts specifically reserved for impaired loans of $7,827 as
of March 31, 2004, $23,621 as of December 31, 2003, and $34,757 as of
December 31, 2002 as required by SFAS No. 114.
Includes consumer, obligations of states and political subdivisions
and other.
Includes amounts specifically reserved for impaired loans of $118 as
of March 31, 2004, $170 as of December 31, 2003, and $29,606 as of
December 31, 2002 as required by SFAS No. 114.
Includes commercial, financial, agricultural and nonprofit loans.
17
Commercial real estate loans represent 41.2% of gross loans. Residential
real estate, including home equity loans, represents 45.7% 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 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 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.
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
9.4% of the loan portfolio as of March 31, 2004, compared to 11.0% as of
March 31, 2003.
Consumer loans are both secured and unsecured borrowings and, at March 31,
2004, represents only 1.2% of the total loan portfolio, compared to 2% at
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.
Total deposits at March 31, 2004 were $400.3 million, an increase of $67.2
million or 20.2%, compared to $333.1 million at December 31, 2003. Savings
deposit balances and money market accounts increased by $44.7 million during
the quarter. Term certificates of deposit as of March 31, 2004 increased by
$33.4 million when compared to December 31, 2003. This increase was
primarily the result of marketing campaigns designed to attract new
customers and deposits. These new deposits were partially offset by a net
decrease in NOW accounts from December 31, 2003 of $1.7 million.
Total borrowed funds were $56.1 million at March 31, 2004, as compared to
$60.5 million at December 31, 2003, for a decrease of $4.4 million. A short-
term borrowing issuance was repaid in the amount of $4.3 million during the
first quarter of 2004 as a result of liquidity from our successful deposit
campaign.
On March 17, 2004, Slade's Ferry Capital Trust I (the "Trust"), a
Connecticut Statutory trust formed by the Company, completed the sale of
$10.0 million of floating rate trust preferred securities (liquidation
amount of $1,000 per security) in a private placement as part of a pooled
trust preferred securities transaction. The Trust also issued common
securities to the Company and used the net proceeds from the offering to
purchase a like amount of floating rate junior subordinated deferrable
interest debentures of the Company. The subordinated
18
debentures are the sole assets of the Trust. The Company contributed $10
million of the proceeds from the sale of the subordinated debentures to the
Bank as Tier I Capital to support the Bank's growth. Total expenses
associated with the offering approximating $140,000 at March 31, 2004 are
included in other assets and are being amortized on a straight-line basis
over the life of the subordinated debentures.
The trust preferred securities accrue and pay distributions quarterly on
March 17, June 17, September 17 and December 17 of each year, commencing on
June 17, 2004, at a floating rate of 3-Month LIBOR plus 2.79% of the stated
liquidation amount of $1,000 per trust preferred security. At March 31,
2004, this rate was 3.90%. The Company has fully and unconditionally
guaranteed all of the obligations of the Trust, including the semi-annual
distributions and payments on liquidation or redemption of the trust
preferred securities.
The trust preferred securities are mandatorily redeemable upon the maturing
of the subordinated debentures on March 17, 2034 or upon earlier redemption
as provided in the Indenture. The Company has the right to redeem the
subordinated debentures, in whole or in part, on or after March 17, 2009 at
the liquidation amount, plus any accrued but unpaid interest to the
redemption date.
In January 2003, the FASB issued FASB Interpretation No. (FIN) 46,
Consolidation of Variable Interest Entities. This interpretation addresses
the consolidation by business enterprises of variable interest entities as
defined in the interpretation. In December 2003, the FASB issued a revision
to FIN 46 (FIN 46R) to clarify some of the provisions of FIN 46 and to
exempt certain entities from its requirements. FIN 46R is effective for
public entities that have interests in structures that are commonly referred
to as special-purpose entities for periods ending after December 15, 2003.
Application by small business issuers to variable interest entities other
than special-purpose entities is required for periods ending after December
15, 2004. This change is not expected to have a material effect on the
Company's consolidated financial statements.
Total stockholders' equity increased by $1.1 million, from $42.7 million as
reported on December 31, 2003, to $43.8 as of March 31, 2004. A portion of
this increase during the first three months of 2004 resulted from net income
of $0.6 million, and dividend reinvestments of $0.2 million, partially
offset by dividends declared of $0.4 million.
19
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. Total
interest and dividend income for March 31, 2004 increased by $419,601 or
8.3% to $5,480,385 when compared to $5,060,784 recorded during the same
period in 2003. Interest and dividends on loans increased $725,663, or
17.4%, to $4.9 million for the three months ended March 31, 2004 from $4.2
million for the three months ended March 31, 2003. The change was due to the
increase in the commercial and residential loan portfolios. Interest and
dividend income on investments decreased $319,453 or 37.6%. The decrease was
due to the decline in the average balance of investments and a decrease in
the yield on the Company's investment portfolio. Total interest expensed
increased by $188,124 during March 31, 2004 when compared to $1,545,286
recorded during the same period in 2003. This increase was due to additional
interest on FHLB borrowings and interest expense associated with
subordinated debentures entered into during March of 2004. The Company's net
interest margin decreased by 53 basis points from 3.95% reported at March
31, 2003 to 3.42% as of March 31, 2004.
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 losses
inherent 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 on a monthly basis. A provision was made during the first
quarter of 2004 to adequately absorb any credit risk remaining in the
portfolio. The Company's provision during the three month period ended March
31, 2004 was $246,215, compared to $141,000 for the same period in 2003.
Total noninterest income increased by $88,992 or 18.7% to $563,658 for the
three months ending March 31, 2004, compared to $474,666 for the same period
in 2003. This increase is associated with gains on the sales of securities,
increases in service charges on deposit accounts and an increase in cash
surrender value of life insurance, offset by a decrease in customer
investment commission fees, rental income, safe deposit box rentals, ATM and
debit card usage fees and stop payment fees. Service charges on deposit
accounts increased slightly by $11,729, from $133,768 reported as of March
31, 2003, to $145,497 as of March 31, 2004. The cash surrender value of bank
owned life insurance policies associated with both the directors' and
executive officers' life insurance programs increased by $29,534. Other
income decreased slightly by $29,742 when compared to the first three months
of 2003.
Total noninterest expense decreased by $116,508, to $3,110,480 recorded
during the first three months ending March 31, 2004, compared to $3,226,988
reported for the same period in 2003. Salaries and employee benefits
increased by $178,428, or 10.0%, from $1,789,437 reported for the first
three months of 2003, to $1,967,865 expensed for the same period in 2004.
The increase was attributable to additions in staff to support consumer
lending activities, sales incentive commissions paid for achieving sales
production targets, general salary increases due to annual performance
reviews, and annual bonuses. A Chief Operating Officer/Chief Financial
Officer was also hired in the second quarter of 2003, and, during the third
quarter of 2003, a Director of Retail and an Investment Executive were
hired. Occupancy expense totaled $231,365 during the first three months of
2004, compared to $262,981 in 2003, a decrease of $31,616 primarily due to a
cost savings achieved through closing a branch office in Swansea during
2003.
The expenses for stationary and supplies decreased by $16,619 from $60,204
reported as of March 31, 2003 to $43,585 reported for the same period in
2004. This decrease was due to new inventory control procedures and the
closing of one branch office.
20
Professional fees decreased by $16,340, from $242,880 for the first three
months of 2003, to $226,540 reported for the same period in 2004. This
decrease reflects reduced costs associated with consultants for marketing,
advertising, investment advisory, strategic planning, pension actuaries, and
information technology.
Marketing expenses attributed to production and media costs, print
advertising, and other direct marketing decreased by $37,458 or 39.7%, to
$56,815 for the three months ending March 31, 2004, from $94,273 for the
same period in 2003. As the Company launches new deposit products and
internet banking services, the Company expects these costs to rise.
The following table sets forth the components of other expense. This table
reflects a decrease of $216,816 to $437,232 from $654,048 for the three
month period ending March 31, 2004.
Three Months
2004 2003 Variance
Communications/postage $ 86,636 $ 90,949 $ (4,313)
Committee fees 56,300 39,800 16,500
Interest expense (associated with REIT tax treatment) 0 226,742 (226,742)
Other various expenses 294,296 296,557 (2,261)
Other expense total $437,232 $654,048 $(216,816)
Interest expense (associated with REIT tax treatment) decreased $226,742
from the prior period.
The quarterly results of operations for the period ended March 31, 2003 have
been revised from that previously reported to remove the extraordinary item.
The extraordinary item treatment previously presented was revised, and its
individual components were reclassed to income tax expense of $1,058,324 and
$226,742 to other expense. See Footnote 20 to the Company's audited
consolidated financial statements included in the Company's annual report on
Form 10-K for the year ended December 31, 2003 filed with the U.S.
Securities and Exchange Commission.
Income before income taxes totaled $953,938 as of the first quarter of 2004,
an increase of $331,762, or 53.3% as compared to $622,176 reported as of
March 31, 2003. Applicable taxes decreased by $1,006,412 to $307,944 when
compared to $1,314,356 reported for March 31, 2003.
The Company's net earnings for the three months ended March 31, 2004 was
$645,994, or $0.16 per share (basic and diluted) from a net loss of
$692,180, or $(0.18) per share (basic and diluted) for the same period in
the previous year. The loss in 2003 was the result of a $1.3 million charge
taken in accordance with a change in state legislation, which denied the
deduction for dividends received from real estate investment trusts
retroactively to 1999.
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 funding 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 and cash withdrawals
from deposit accounts.
The Company's principle sources of funds are customer deposits, borrowings,
principal and interest payments on outstanding loans and mortgage-backed
securities, maturities of investment securities and funds provided from
operations. Although scheduled payments from amortization of loans,
mortgage-backed securities, and maturing investment securities are
predictable sources of liquidity, deposit cash
21
flows and loan prepayments are influenced by interest rate movement. In
addition, deposit flow could be impacted by other instruments available to
the public such as mutual funds and annuities.
The largest source of funds is provided by depositors. The greatest
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. Deposit flows are
influenced by the level of interest rates, economic conditions, and the
attractiveness of competing deposits and other investment alternatives.
The Bank 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, and in the case of FHLB borrowings, one to four family
residential loans are secured as collateral. Borrowings from the Federal
Home Loan Bank decreased by approximately $4.4 million from December 31,
2003 to March 31, 2004. During 2003, the Bank took advantage of the
favorable low interest rate environment to draw down some longer term
structured funding opportunities, and to hedge against any possible interest
rate risk as a result of the increase in long term, fixed rate residential
mortgages. As of March 31, 2004, the Bank had approximately $15.9 million in
available borrowing capacity with the FHLB that is contingent upon the
purchase of additional FHLB stock.
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 three months of 2004 was primarily provided by a
net increase in deposits of $67.1 million, trust preferred securities of
$10.3 million, and proceeds from maturities and calls of securities totaling
$6.9 million. These were offset by purchases of securities of $852,000, loan
originations, and principal collections. Other factors affecting liquidity
included cash provided by other operating activities and cash used in
financing activities as indicated in the consolidated statements of cash
flows.
Capital
- -------
Total stockholders' equity was $43.8 million at March 31, 2004, as compared
to $42.7 million at December 31, 2003, an increase of $1.1 million. This
increase during 2004 resulted primarily from net income of $646,000 for the
three months ended March 31, 2004, which was partially offset by dividends
declared of $361,000.
The increase in capital was a combination of several factors, including
three months earnings of $645,994 and transactions originating through the
Dividend Reinvestment Program whereby 1,733 shares were issued for optional
cash contributions of $38,573 and 7,391 shares were issued for $162,743 in
lieu of cash dividend payments. There were also stock options exercised
resulting in the issuance of common stock totaling $327,425, including a tax
benefit. These additions were offset by dividends declared of $361,011.
Capital also increased as a result of a decrease in the accumulated other
comprehensive 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, 2003, the Available-for-Sale
portfolio had unrealized losses, net of taxes, of $9,740, and on March 31,
2004, as a result of the change in market values, the portfolio had
unrealized gains, net of taxes, of $250,040. There was no change in the
minimum pension liability adjustment of $595,879, net of taxes, recorded
December 31, 2003.
22
Under the requirements for Risk Based and Leverage Capital of the federal
banking agencies, a minimum level of capital will vary among banks based on
safety and soundness of operations. Risk Based Capital ratios are calculated
with reference to risk-weighted assets, which include both on and off
balance sheet exposure.
In addition to meeting the required levels, the Company and the Bank's
capital ratios meet the criteria of the "well capitalized" category
established by the federal bank regulatory agencies as of March 31, 2004.
At March 31, 2004 the actual total Risk Based Capital of the Bank was
$43,693,000 for Tier 1 Capital, exceeding the minimum requirements of
$14,079,920 by $29,613,080. Total Capital of $48,094,000 exceeded the
minimum requirements of $28,159,840 by $19,934,160 and Leverage Capital of
$43,693,000 exceeded the minimum requirements of $18,652,000 by $25,040,920.
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, 2004 and at December 31, 2003.
Well March 31, 2004 December 31, 2003
Capitalized ---------------- -----------------
Requirement Bancorp Bank Bancorp Bank
----------------------------------------------------
Total Capital (to Risk
Weighted Assets) >10% 16.77% 13.60% 13.64% 11.48%
Tier 1 Capital (to Risk
Weighted Assets) > 6% 12.49% 12.41% 12.39% 10.23%
Leverage Capital (to
Average Assets) > 5% 8.78% 9.37% 9.33% 7.75%
The Bank was required to maintain a 7% Tier 1 Leverage Capital ratio while
under the informal agreement with the Massachusetts Commissioner of Banks
and the Federal Deposit Insurance Corporation which was originally entered
into in 2000, and revised in March of 2003. As a result of the improved
condition and operation of the Bank, the informal agreement was terminated
effective January 22, 2004.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on the Company's
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
ITEM 3
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
Interest Rate Risk
- ------------------
23
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.
Management's objective is to reduce risk and control the vulnerability of
its net interest margin to changes in interest rates by managing the
relationship of interest-earning assets and interest-bearing liabilities.
The interest rate risk is managed by periodic review and evaluation of the
risk potential in certain balance sheet accounts, and determining the level
of risk considered appropriate for our level of capital. This, in
conjunction with certain assumptions and other related factors, such as
anticipated changes in interest rates, liquidity requirements, performance
objectives and strategic plans, provides management a means of evaluating
interest rate risk.
The Company's Finance/Investment Committee, comprised of designated
executive management and directors is responsible for managing and
monitoring interest rate risk, and reviewing with the Board of Directors, at
least quarterly, the Bank's interest rate risk positions, the impact changes
in interest rates would have on net interest income, and the maintenance of
interest rate risks within approved guidelines.
The Company quantifies its interest rate risk exposure using a simulation
model. This simulation analysis is used to measure the exposure to net
interest income to changes in interest rates over a specified time frame.
The simulation analysis projects future interest income and interest expense
under different rate scenarios. Internal guidelines on limitations on
interest rate risk specify that for every 100 basis points of immediate
change in interest rates, projected net interest income over the next twelve
months should not decline by more than 5%.
The simulation model currently utilizes a 300 basis point increase in
interest rates and a 75 basis point decrease in rates. Due to the existing
low interest rate environment in effect with the average Federal Funds
overnight rate trading below .75%, the simulation model only reduces rates
downward by 75 basis points. The interest rate movements used assume an
instant and parallel change in interest rates, and no implementation of any
strategic plans are made in response to the change in interest rates.
Prepayment speeds for loans are based on median dealer forecasts for each
interest rate scenario.
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 as set forth below:
Estimated Exposure as a Percentage
Rate Change of Net Interest Income
(Basis Points) March 31, 2004
+300 (.56)%
-75 (3.69)%
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 limit established by the Company provides
an internal tolerance level to control interest rate risk exposure.
ITEM 4 CONTROLS AND PROCEDURES
Management of the Company, including the Company's President and Chief
Executive Officer and Chief Financial Officer and Chief Operations Officer,
has evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
the end of the period covered by this report. Based upon that evaluation,
the Company's President and Chief Executive
24
Officer and Chief Financial Officer and Chief Operations Officer concluded
that the disclosure controls and procedures were effective, in all material
respects, to ensure that information required to be disclosed in the reports
the Company files and submits under the Exchange Act is recorded, processed,
summarized and reported as and when required.
There have been no changes in the Company's internal control over financial
reporting identified in connection with the evaluation that occurred during
the Company's last fiscal quarter that has materially affected, or that is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
25
PART II
Other Information
ITEM 1
Legal Proceedings
- -----------------
None.
ITEM 2
Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
During the three months ended March 31, 2004, the Company did not repurchase
any of its common stock. The Company currently does not have a stock
repurchase program in place.
ITEM 3
Defaults Upon Senior Securities
None.
ITEM 4
Submission of Matters to a Vote of Security Holders
None.
ITEM 5
Other Information
None.
ITEM 6
Exhibits and Reports on Form 8-K
- --------------------------------
(a) Exhibits: See exhibit index.
(b) A report on Form 8-K, dated April 14, 2004, was furnished to the
Securities and Exchange Commission reporting under Item 12 the release
of information concerning the first quarter 2004 results of operations
and financial condition.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the 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 13, 2004 /s/ Mary Lynn D. Lenz
- ------------ ---------------------------------
(Date) (Signature) Mary Lynn D. Lenz
President/Chief Executive Officer
May 13, 2004 /s/ Deborah A. McLaughlin
- ------------ ---------------------------------
(Date) (Signature) Deborah A. McLaughlin
Chief Operating Officer/
Chief Financial Officer
27
EXHIBIT INDEX
Exhibit No. Description Item
- ----------- ----------- ----
3.1 Articles of Incorporation of Slade's Ferry
Bancorp., as amended (1)
3.2 Bylaws of Slade's Ferry Bancorp., as amended (2)
4.1 Articles of Incorporation of Slade's Ferry
Bancorp., as amended (See Exhibit 3.1and 3.2) (1)
4.2 Bylaws of Slade's Ferry Bancorp., as amended
(See Exhibit 3.2) (2)
10.1 Slade's Ferry (formerly Weetamoe) Bancorp. 1996
Stock Option Plan, as amended (3)
10.2 Supplemental Executive Retirement Agreement
between Slade's Ferry (formerly Weetamoe) Bancorp.
and Donald T. Corrigan (5)
10.3 Supplemental Executive Retirement Agreement
between Slade's Ferry (formerly Weetamoe) Bancorp.
and Manuel J. Tavares (2)
10.4 Swansea Mall Lease (4)
10.5 Form of Director Supplemental Retirement Program
Director Agreement, Exhibit 1 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)
10.6 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)
10.7 Severance Agreement ("Release of All Demands") with
James D. Carey (9)
10.8 Supplemental Executive Retirement Agreement between
Slade's Ferry Bancorp. and Mary Lynn D. Lenz (10)
10.9 Change-in-Control Severance Agreement between
Slade's Ferry Bancorp., Slade's Ferry Trust
Company and Mary Lynn D. Lenz (10)
10.10 Confidentiality and Non-Solicitation Agreement
between Slade's Ferry Bancorp. and Mary Lynn D. Lenz (10)
11.1 Computation of Per Share Earnings
31.1 Rule 13a-14(a)/15d-14(a) Certification of the CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of the CFO
32.1 Section 1350 Certification of the CEO
32.2 Section 1350 Certification of the CFO
28
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-QSB for the
quarter ended March 31, 1996.
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.
Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 2002.
Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended March 31, 2003.
29