UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2006
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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
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in rule 12b-2 of the
Exchange Act. (Check one):
Large Accelerated Filer [ ] Accelerated Filer [ ] Non Accelerated Filer [X]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
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) 4,165,125
outstanding shares as of April 30, 2006.
----------------------------------------
TABLE OF CONTENTS
Part I
ITEM 1 - Financial Statements (Unaudited) 3
- Consolidated Financial Statements of Slade's Ferry Bancorp.
and Subsidiary
- Consolidated Balance Sheets - March 31, 2006 and December 31, 2005
- Consolidated Statements of Income - Three Months Ended
March 31, 2006 and 2005
- Consolidated Statement of Changes in Stockholder's Equity -
Three Months Ended March 31, 2006
- Consolidated Statements of Cash Flows - Three Months Ended
March 31, 2006 and 2005
- Notes to Consolidated Financial Statements
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk 28
ITEM 4 - Controls and Procedures 30
Part II
ITEM 1 - Legal Proceedings 31
ITEM 1A - Risk Factors 31
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds 31
ITEM 3 - Defaults Upon Senior Securities 32
ITEM 4 - Submission of Matters to a Vote of Security Holders 32
ITEM 5 - Other Information 32
ITEM 6 - Exhibits 32
1
ITEM 1
FINANCIAL STATEMENTS
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, 2006 December 31, 2005
-------------- -----------------
Assets (In thousands)
------
Cash and due from banks $ 16,116 $ 17,782
Interest-bearing demand deposits with other banks 661 36
Federal funds sold - 2,200
-------- --------
Cash and cash equivalents 16,777 20,018
Interest-bearing certificates of deposit with other banks 100 100
Securities available for sale 92,435 94,298
Securities held to maturity (fair value approximates $27,734
at March 31, 2006 and $28,858 as ofat December 31, 2005) 28,201 29,306
Federal Home Loan Bank stock, at cost 6,304 6,304
Loans, net of allowance for loan losses of $4,372
at March 31, 2006 and $4,333 at December 31, 2005 414,396 409,610
Premises and equipment, net 5,857 5,917
Goodwill 2,173 2,173
Accrued interest receivable 2,354 2,298
Bank-owned life insurance 11,991 11,884
Deferred tax assets, net 2,108 2,089
Other assets 2,048 1,917
-------- --------
$584,744 $585,914
======== ========
Liabilities and Stockholders'' Equity
-------------------------------------
Deposits:
Noninterest-bearing $ 75,754 $ 80,705
Interest-bearing 332,035 335,141
-------- --------
Total deposits 407,789 415,846
Short-term borrowings 20,500 7,000
Long-term borrowings 93,752 100,865
Subordinated debentures 10,310 10,310
Accrued expenses and other liabilities 2,654 3,038
-------- --------
Total liabilities 535,005 537,059
Stockholders' equity:
Common stock, par value $0.01 per share; authorized 10,000,000
shares; issued and outstanding 4,155,712 shares at March 31,
2006 and 4,132,200 shares at December 31, 2005 41 41
Additional paid-in capital 31,405 31,014
Retained earnings 19,530 18,998
Accumulated other comprehensive loss (1,237) (1,198)
-------- --------
Total stockholders' equity 49,739 48,855
-------- --------
$584,744 $585,914
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
2006 2005
---------- ----------
(In thousands, except share data)
Interest and dividend income:
Interest and fees on loans $ 6,435 $ 5,266
Interest and dividends on securities:
Taxable 1,333 1,231
Tax-exempt 69 91
Interest on federal funds sold 11 65
Other interest 8 4
---------- ----------
Total interest and dividend income 7,856 6,657
---------- ----------
Interest expense:
Interest on deposits 1,911 1,159
Interest on Federal Home Loan Bank advances 1,156 911
Interest on subordinated debentures 224 136
---------- ----------
Total interest expense 3,291 2,206
---------- ----------
Net interest and dividend income 4,565 4,451
Provision for loan losses 39 50
---------- ----------
Net interest income, after provision for loan losses 4,526 4,401
---------- ----------
Noninterest income:
Service charges on deposit accounts 307 208
Gain on sales and calls of available-for-sale securities, net 3 2
Increase in cash surrender value of life insurance policies 107 147
Other income 286 212
---------- ----------
Total noninterest income 703 569
---------- ----------
Noninterest expense:
Salaries and employee benefits 2,111 1,975
Occupancy and equipment expense 493 409
Professional fees 412 307
Marketing expense 78 99
Other expense 656 525
---------- ----------
Total noninterest expense 3,750 3,315
---------- ----------
Income before income taxes 1,479 1,655
Provision for income taxes 572 555
---------- ----------
Net income $ 907 $ 1,100
========== ==========
Earnings per share:
Basic $ 0.22 $ 0.27
========== ==========
Diluted $ 0.22 $ 0.27
========== ==========
Average common shares outstanding:
Basic 4,149,686 4,076,707
========== ==========
Diluted 4,160,028 4,113,256
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
Accumulated
Shares of Additional Other
Common Common Paid-in Retained Comprehensive
Stock Stock Capital Earnings Loss Total
-------------------------------------------------------------------------
(In thousands, except share data)
Balance at December 31, 2005 4,132,200 $41 $31,014 $18,998 $(1,198) $48,855
Comprehensive income:
Net income - - 907 - 907
Other comprehensive income (loss) - - - (39) (39)
-------
Comprehensive income 868
-------
Issuance of common stock 8,512 - 155 - - 155
Stock options exercised 22,000 - 228 - - 228
Tax benefit of stock options exercised - 69 - - 69
Stock-based compensation - 65 - - 65
Purchase of treasury stock (7,000) - (126) - - (126)
Dividends declared ($.09 per share) - - (375) - (375)
-------------------------------------------------------------------------
Balance at March 31, 2006 4,155,712 $41 $31,405 $19,530 $(1,237) $49,739
=========================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
5
SLADE''S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
----------------------------
2006 2005
-------- --------
(In thousands)
Cash flows from operating activities:
Net income $ 907 $ 1,100
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization, net of accretion of securities 32 59
Gain on sales and calls of available-for-sale securities, net (3) (2)
Change in net deferred loan fees (15) 37
Provision for loan losses 39 50
Deferred tax provision (benefit) 80 (418)
Depreciation and amortization 221 184
Gain on sale of loans, net - (40)
Increase in cash surrender value of life insurance (107) (147)
Net change in:
Other assets (131) 1,070
Accrued interest receivable (56) (86)
Other liabilities (384) (85)
-------- --------
Net cash provided by operating activities 583 1,722
-------- --------
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases (489) (767)
Sales 665 892
Maturities 1,602 1,670
Activity in held-to-maturity securities:
Maturities 1,092 1,772
Purchases of Federal Home Loan Bank stock - (1,255)
Loan principal originations, net (4,810) (17,299)
Recoveries of loans previously charged off - 25
Capital expenditures (161) (696)
Proceeds from sale of investment real estate - 652
Redemption of life insurance policy - 132
-------- --------
Net cash used in investing activities (2,101) (14,874)
-------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
6
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Three Months Ended March 31,
----------------------------
2006 2005
-------- --------
(In thousands)
Cash flows from financing activities:
Net decrease in noninterest-bearing deposits $ (4,951) $ (3,630)
Net decrease in interest-bearing deposits (3,106) (10,737)
Short-term advances from Federal Home Loan Bank 17,000 -
Long-term advances from Federal Home Loan Bank 10,000 20,000
Payments on Federal Home Loan Bank short-term advances (13,500) -
Payments on Federal Home Loan Bank long-term advances (7,113) (106)
Proceeds from issuance of common stock 155 154
Stock-based compensation 65 -
Stock options exercised 228 196
Purchase of treasury stock (126) -
Dividends paid (375) (368)
-------- --------
Net cash provided (used) by financing activities (1,723) 5,509
-------- --------
Net decrease in cash and cash equivalents (3,241) (7,643)
Cash and cash equivalents at beginning of period 20,018 35,194
-------- --------
Cash and cash equivalents at end of period $ 16,777 $ 27,551
======== ========
Supplemental disclosures:
Interest paid $ 3,291 $ 2,132
Income taxes paid $ 475 $ 555
The accompanying notes are an integral part of these consolidated financial
statements.
7
SLADE'S FERRY BANCORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2006
Note A - Basis of Presentation
------------------------------
The accompanying unaudited 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, 2006 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2006.
The year-end consolidated financial data was derived from audited financial
statements, but does not include all disclosures required by GAAP. This Form
10-Q should be read in conjunction with the Company's Annual Report filed on
Form 10-K for the year ended December 31, 2005.
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, 2005, except for the adoption of Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment, ("SFAS 123(R)" or the
"Statement") effective January 1, 2006 applicable to the Company's stock-
based employee compensation plans. See Note C
The consolidated financial statements include the accounts of Slade's Ferry
Bancorp. (the "Company"), its wholly-owned subsidiary, Slade's Ferry Trust
Company (the "Bank") and the Bank's wholly-owned subsidiaries. All
significant inter-company balances and transactions have been eliminated in
consolidation. The Company accounts for its wholly-owned subsidiary, Slade's
Ferry Statutory Trust I, are using the equity method.
Slade's Ferry Statutory Trust I, a subsidiary of the Company, was formed on
March 17, 2004 to sell capital securities to the public through a third
party trust pool. In accordance with Financial Accounting Standards Board
("FASB") Interpretation No. 46R, "Consolidation of Variable Interest
Entities" ("FIN 46R"), the subsidiary has not been included in the
consolidated financial statements.
Slade's Ferry Loan Company was dissolved in early 2005.
Note C - Stock Based Compensation
---------------------------------
The Company adopted Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, ("SFAS 123 (R)" or the "Statement") effective January
1, 2006 applicable to the Company's stock-based employee compensation plans.
The Company's stock-based compensation plans are described in Note 15 to the
Company's consolidated financial statements included in its Form 10-K for
the year ended December 31, 2005. No changes have been made to the plans
during the three months ended March 31, 2006 and no awards were granted
under the plans during this period. In accordance with SFAS No. 123(R), for
the three months ended March 31, 2006, the Company has recognized
compensation costs related to the non-vested portion of awards outstanding
as of January 31, 2006 based on the grant-date fair value of those awards as
calculated
8
under the original provisions of Statement No. 123. Fair value has been
determined using Black-Scholes option-pricing model. Compensation costs are
now being recognized over the period the employee is required to provide
services for the award. The impact of adopting SFAS No. 123(R) was a
reduction of income before income taxes of $65,000 and a reduction of net
income by $47,000 for the three months ended March 31, 2006. Basic and
diluted earnings per share were reduced by $0.01 per share. At March 31,
2006, non-vested stock options pertaining to 36,166 shares of common stock
were outstanding with a weighted average fair value ranging from $5.07 to
$7.20 and will vest within the next 14 months.
The intrinsic value of options exercised during the three months ended
March 31, 2006 amounted to $229,000. At March 31, 2006 the intrinsic value of
options outstanding and options exercisable amounted to $4,185,000 and
$3,495,000, respectively.
Prior to the adoption of SFAS No. 123(R), the Company accounted for the
plans under the recognition and measurement principles of Accounting
Principle Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations. Accordingly, no stock-based
employee compensation cost was reflected in net income, as all options
granted under the plans 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
Statement of Financial Accounting Standards ("SFAS") Statement No. 123(R),
"Accounting for Stock-Based Compensation," to stock-based employee
compensation for the three months ended March 31, 2005.
2005
------
(In thousands)
Net income, as reported $1,100
Deduct: stock-based employee compensation
expense determined under fair value
method, net of related tax effects 38
------
Net income, pro forma $1,062
======
Earnings per share - basic As reported $ 0.27
======
Pro forma $ 0.26
======
Earnings per share - assuming dilution As reported $ 0.27
======
Pro forma $ 0.26
======
Note D - Pension Plan
---------------------
The components of net periodic pension income are as follows:
Three Months Ended March 31,
-----------------------------
2006 2005
---- ----
(In thousands)
Interest cost $ 17 $ 21
Expected return on plan assets (29) (37)
Recognized net actuarial loss 7 9
---- ----
$ (5) $ (7)
==== ====
The Company previously disclosed in its consolidated financial statements
for the year ended December 31, 2005 that it expects to make no
contributions to the plan in 2006.
9
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Slade's Ferry Bancorp., a Massachusetts corporation, is a bank holding
company headquartered in Somerset, Massachusetts with consolidated assets of
$584.7 million, consolidated net loans and leases of $414.4 million,
consolidated deposits of $407.8 million and consolidated shareholders'
equity of $49.7 million as of March 31, 2006. We conduct our business
principally through our wholly-owned subsidiary, Slade's Ferry Trust Company
(referred to herein as the "Bank"), a Massachusetts-chartered trust company.
Our common stock is quoted on the Nasdaq Capital Market under the symbol
"SFBC."
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. Such statements may be identified by words such as "believes,"
"will," "expects," "project," "may," "could," "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 our 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.
As used throughout this report, the terms "we," "our," "us," or the
"Company" refer to Slade's Ferry Bancorp. and its consolidated subsidiary,
unless context otherwise requires.
10
Critical Accounting Policies
----------------------------
Our significant accounting policies are incorporated by reference to Note 1
to our Consolidated Financial Statements filed within Form 10-K for the year
ended December 31, 2005. In preparing consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the balance sheet and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change in the
near term relate to the determination of the allowance for loan losses and
other-than-temporary impairment losses.
Allowance for loan losses. The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
Other than temporary impairment. In estimating other-than-temporary-
impairment losses, management considers (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent and
ability of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value.
Comparison of Financial Condition at March 31, 2006 and December 31, 2005
-------------------------------------------------------------------------
General
-------
Total assets decreased by $1.2 million, or 0.2%, from $585.9 million at
December 31, 2005 to $584.7 million at March 31, 2006. The decrease was the
result of a decline in the investment portfolio, totaling $3.0 million,
along with a decline in cash and cash equivalents totaling $3.2 million. The
decrease in the investment portfolio and cash and cash equivalents were
partially offset by an increase in the loan portfolio. Total net loans
increased by $4.8 million, or 1.2%, from $409.6 million to $414.4 million.
During the first quarter of 2006, deposits decreased by $8.1 million, or
1.9%, from $415.8 million to $407.8 million. The decrease in deposits was
offset by an increase in Federal Home Loan Bank advances totaling $6.4
million.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents decreased by $3.2 million, from $20.0 million at
December 31, 2005 to $16.8 million at March 31, 2006. The decrease funded a
portion of the growth in the loan portfolio.
Investment Portfolio
--------------------
The main objectives of our investment portfolio are to achieve a competitive
rate of return over a reasonable time period and to provide liquidity.
Our total investment portfolio decreased from $129.9 million at December 31,
2005 to $126.9 million at March 31, 2006, a decrease of 2.3%. The decrease
is the result of the maturity, calls and paydowns of certain state
11
and municipal obligations and mortgage-backed securities. Those funds were
used to provide liquidity for current loan growth.
The current investment strategy is to reduce the investment portfolio
through normal paydowns and maturities and reinvest these funds into higher
yielding loans. At March 31, 2006, the portfolio duration was 3.4 years
within the investment policy limit of 5 years. We do not purchase
investments with imbedded derivative characteristics, or free-standing
derivative instruments such as swaps, options, or futures.
Securities Held to Maturity
The held-to-maturity portfolio consists of mortgage-backed securities and
securities issued by states and municipalities. Held-to-maturity securities
decreased from $29.3 million at December 31, 2005 to $28.2 million at March
31, 2006. Management has designated these mortgage-backed securities to
secure advances from the FHLB. We have the positive intent and ability to
hold these securities to maturity.
The following table shows the amortized cost basis, gross unrealized gains
and losses, and fair value of securities held to maturity at March 31, 2006
and December 31, 2005.
March 31, 2006 December 31, 2005
-------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
(In thousands)
State and municipal obligations $ 6,099 $ 6,194 $ 6,766 $ 6,892
Mortgage-backed securities 22,102 21,540 22,540 21,966
------- ------- ------- -------
Total securities held to maturity $28,201 $27,734 $29,306 $28,858
======= ======= ======= =======
Securities Available for Sale
Securities not designated as held-to-maturity are designated as available
for sale. Although we do not anticipate the sale of these securities, the
designation as available for sale allows us the flexibility to alter our
investment strategies and sell these securities when conditions warrant.
Additionally, marketable equity securities that have no maturity date must
be designated as available-for-sale. These securities are carried at fair
value. The available-for-sale securities portfolio includes obligations and
mortgage-backed securities of government-sponsored enterprises, corporate
debt and equity securities.
12
The following table shows the amortized cost basis, gross unrealized gains
and losses, and fair value of securities available for sale at March 31,
2006 and December 31, 2005.
March 31, 2006 December 31, 2005
-------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
(In thousands)
Debt Securities:
Government-sponsored enterprises $50,452 $49,524 $50,443 $49,581
Corporate 9,540 9,070 9,564 9,014
Mortgage-backed 29,958 29,501 31,574 31,232
------- ------- ------- -------
Total debt securities 89,950 88,095 91,581 89,827
------- ------- ------- -------
Marketable equity securities 3,253 3,159 3,426 3,271
Mutual funds 1,215 1,181 1,205 1,200
------- ------- ------- -------
Total securities available for sale $94,418 $92,435 $96,212 $94,298
======= ======= ======= =======
Loans
-----
The loan portfolio consists primarily of residential and commercial real
estate loans, construction and land development loans, commercial loans,
home equity lines of credit and consumer loans originated primarily in our
market area. There are no foreign loans outstanding. Interest rates charged
on loans are affected principally by the demand for such loans, the supply
of money available for lending purposes and the rates offered by the Bank's
competitors. Total net loans were 70.9% of total assets at March 31, 2006,
as compared to 69.9% of total assets at December 31, 2005.
Multi-Family and Commercial Real Estate Lending
We originate multi-family and commercial real estate loans that are
generally secured by five or more unit apartment buildings and properties
used for business purposes such as small office buildings, restaurants or
retail facilities primarily located in our primary market area. Loans
secured by multi-family and commercial real estate properties generally
involve larger principal amounts and a greater degree of risk than one-to-
four family residential mortgage loans. Because payments on loans secured by
multi-family and commercial real estate properties are often dependent on
successful operation or management of the properties, repayment of such
loans may be subject to adverse conditions in the real estate market or the
economy. We seek to minimize these risks through our underwriting standards.
Multi-family and commercial real estate loans totaled $213.7 million and
comprised 51% of the total gross loan portfolio at March 31, 2006. At
December 31, 2005, the multi-family and commercial real estate loan
portfolio totaled $213.8 million, or 51.6% of total gross loans.
Residential Lending
We currently offer fixed-rate, one-to-four family mortgage loans with terms
from 10 to 30 years and a number of adjustable-rate mortgage ("ARM") loans
with terms of up to 30 years and interest rates which adjust every one or
three years from the outset of the loan.
13
We generally underwrite our residential real estate loans to comply with
secondary market standards established by the Federal National Mortgage
Association. Although loans are underwritten to standards that make them
readily salable, we have not chosen to sell these loans, rather to maintain
them in portfolio, consistent with our income and interest rate risk
management targets.
Residential real estate loans totaled $123.7 million and comprised 29.5% of
the total gross loan portfolio at March 31, 2006. At December 31, 2005, the
residential real estate loan portfolio totaled $120.3 million, or 29.1% of
total gross loans. Due to competitive pricing our residential loan portfolio
continues to increase.
Commercial Loans
The commercial business loan portfolio consists of loans and lines
predominantly collateralized by inventory, furniture and fixtures, and
accounts receivable. In assessing the collateral for this type of loan, we
apply 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 totaled $41.8 million and comprised 10% of the total gross
loan portfolio at March 31, 2006. At December 31, 2005, the commercial loan
portfolio totaled $38.1 million, or 9.2% of total gross loans. With the
implementation of our loan portfolio management team our commercial loan
officers are able to concentrate their efforts on business development.
Construction Lending
Fixed-rate construction loans are originated for the development of one-to-
four family residential properties. Although we do not generally make loans
secured by raw land, our policies permit the origination of such loans.
Construction loan proceeds are disbursed periodically in increments as
construction progresses and as inspections by an independent construction
specialist warrant.
Construction and land development loans totaled $20.5 million and comprised
4.9% of total gross loan portfolio at March 31, 2006. At December 31, 2005,
construction and land development loan portfolio totaled $21.5 million or
5.2% of total gross loans. With the implementation of our loan portfolio
management team our commercial loan officers are able to concentrate their
efforts on business development.
Home Equity Lines of Credit
Home equity lines of credit are secured by second mortgages on owner-
occupied, one-to-four family residences located in our primary market area.
Our home equity lines of credit generally have interest rates, indexed to
the Wall Street Journal Prime Rate, that adjust on a monthly basis.
Home equity lines of credit totaled $16.8 million and comprised 4% of the
total gross loan portfolio at March 31, 2006. At December 31, 2005, the home
equity line of credit portfolio totaled $17.9 million, or 4.3% of total
gross loans.
Consumer Lending
Consumer loans secured by rapidly depreciable assets such as recreational
vehicles and automobiles entail greater risks than one-to-four family,
residential mortgage loans. Consumer loans are typically made based on the
borrower's ability to repay the loan through continued financial stability.
We endeavor 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 loan. Consumer loans are both secured and
unsecured borrowings.
14
Consumer loans totaled $2.6 million and comprised 0.6% of the total gross
loan portfolio at March 31, 2006 and March 31, 2005.
The following table summarizes our loan portfolio by category at March 31,
2006 and December 31, 2005.
Percentage
March 31, 2006 December 31, 2005 Increase (Decrease)
-------------- ----------------- -------------------
(In thousands)
Real estate mortgage loans:
Commercial $213,733 $213,815 (0.04%)
Residential 123,716 120,345 2.80%
Construction and land development 20,499 21,490 (4.61%)
Home equity lines of credit 16,758 17,915 (6.46%)
Commercial, financial and agricultural loans 41,781 38,111 9.63%
Consumer loans 2,622 2,623 (0.04%)
-------- -------- -----
Total loans 419,109 414,299 1.16%
Less: Allowance for loan losses (4,372) (4,333) 0.90%
Net deferred loan fees (341) (356) (4.21%)
-------- -------- -----
Loans, net $414,396 $409,610 1.17%
======== ======== =====
The increases in the loan portfolio are the result of the continued demand
by small businesses for commercial and industrial loans and the normal
origination process for residential loans. These increases were partially
offset by the overall general market environment relating to construction
loans and home equity lines of credit.
The following table presents information with respect to non-performing
loans as of the dates indicated.
At March 31, At December 31,
2006 2005
------------ ---------------
(Dollars in thousands)
Non-accrual loans $ 446 $ 906
Loans 90 days or more past due and still accruing 100 -
------- -------
Total non-performing loans $ 546 $ 906
======= =======
Percentage of non-accrual loans to total loans 0.11% 0.22%
Percentage of allowance for loan losses to non-accrual loans 980.27% 478.30%
The $446,000 in non-accrual loans as of March 31, 2006 consists mainly of
$405,000 of commercial real estate loans, $38,000 of residential real estate
loans and $3,000 of consumer loans. There were no restructured loans
included in non-accrual loans for the first three months of 2006.
It is our policy to manage our loan portfolio in order to recognize problem
loans at an early stage and thereby minimize loan losses. Loans are
considered delinquent when any payment of principal or interest is one month
or more past due. We generally commence collection procedures when accounts
are 15 days past due. Generally, when a loan becomes past due 90 days or
more, management discontinues the accrual of interest and reverses
previously accrued interest, unless the credit is well-secured and in
process of collection. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought current
15
and future payments are reasonably assured. When a loan is determined to be
uncollectible, it is charged off to the Allowance for Loan Losses or, if
applicable, any real estate that is securing the loan is acquired through
foreclosure, and recorded as Other Real Estate Owned. At March 31, 2006, the
Bank had a time note fully collateralized by real estate which is in the
process of being renewed that was not placed on non-accrual status.
Management defines non-performing loans to include non-accrual loans, loans
past due 90 days or more and still accruing, and restructured loans not
performing in accordance with amended terms.
Statement of Financial Accounting Standards No. 114 "Accounting by Creditors
for Impairment of a Loan" ("SFAS No. 114") 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 the lower of cost or fair
value. SFAS No. 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 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 consumer loans for
impairment disclosures. A loan is considered impaired when, based on current
information and events, it is probable that we 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, 2006 there were $546,000 of loans which we have determined to
be impaired, with a related allowance for credit losses of $63,000.
16
Analysis of Allowance for Loan Losses
The table below illustrates the changes in the Allowance for Loan Losses for
the periods indicated.
Three Months Ended March 31,
----------------------------
2006 2005
------- -------
(Dollars in thousands)
Balance at beginning of period $4,333 $4,101
Charge-offs:
Real estate mortgage loans:
Commercial - -
Residential - -
Home equity lines of credit - -
Commercial, financial and agricultural loans - -
Consumer - -
------ ------
- -
------ ------
Recoveries:
Real estate mortgage loans:
Commercial - -
Residential - 16
Home equity lines of credit - -
Commercial, financial and agricultural loans - 8
Consumer - 1
------ ------
- 25
------ ------
Net loan recoveries (charge-offs) - 25
Provision for loan losses 39 50
------ ------
Balance at end of period $4,372 $4,176
====== ======
Allowance for loan losses as a percent of loans at end of period 1.04% 1.05%
====== ======
Ratio of net recoveries (charge-offs) to average loans outstanding 0.00% 0.01%
====== ======
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower
than the carrying value of that loan. The general component covers non-
classified loans and is based on historical loss experience adjusted for
qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect management's estimate of probable losses.
The unallocated component of the allowance reflects the margin of
imprecision inherent in the underlying assumptions used in the methodologies
for estimating specific and general losses in the portfolio.
As the composition of the loan portfolio gradually changes and diversifies
from higher credit risk weighted loans, such as commercial real estate and
commercial, to residential and home equity loans, a lower overall
17
reserve allowance rate will be required. After thorough review and analysis
of the adequacy of the loan loss allowance, management determined a
provision for losses of $39,000 was required for the three months ended
March 31, 2006 as compared to a provision of $50,000 for the three months
ended March 31, 2005. The allowance for loan losses as a percentage of
total loans outstanding declined from 1.05% at December 31, 2005 to 1.04% at
March 31, 2006. The decline in the provision for loan losses in 2006 was
attributable to the decrease in commercial loan activity during the first
quarter of 2006, as compared to the first quarter of 2005.
This table below shows an allocation of the allowance for loan losses at the
dates indicated.
March 31, 2006 December 31, 2005
-------------------------- --------------------------
Percent of Loans Percent of Loans
in Each Category in Each Category
Amount to Total Loans Amount to Total Loans
--------------------------------------------------------
(Dollars in thousands)
Commercial $ 715 10.0% $ 905 9.2%
Real estate construction 101 4.9% 248 5.2%
Real estate mortgage 3,500 84.5% 3,056 85.0%
Consumer 56 0.6% 124 0.6%
-------------------- --------------------
$4,372 100.0% $4,333 100.0%
==================== ====================
18
Deposits
--------
We continue our efforts to competitively price products and develop and
maintain relationship banking with our customers. The flow of deposits is
influenced significantly by general economic conditions, changes in money
market rates, prevailing interest rates and the aggressive competition from
local branches of nationwide and regional as well as local banks and credit
unions. Our total deposits decreased from $415.8 million at December 31,
2005 to $407.8 million at March 31, 2006, a decrease of $8.1 million or
1.9%. We believe this decrease is attributable to the level of competition
in our market area.
The following table presents deposits by category at March 31, 2006 and
December 31, 2005.
Percentage
March 31, 2006 December 31, 2005 Increase/(Decrease)
----------------------------------------------------------
(Dollars in thousands)
Demand deposits $ 75,754 $ 80,705 (6.13%)
NOW 55,132 55,493 (0.65%)
Regular and other savings 85,769 87,146 (1.58%)
Money market deposits 26,679 29,835 (10.58%)
-------- -------- ------
Total non-certificate accounts 243,334 253,179 (3.89%)
-------- -------- ------
Term certificates less than $100,000 114,968 116,861 (1.62%)
Term certificates of $100,000 or more 49,487 45,806 8.04%
-------- -------- ------
Total certificate accounts 164,455 162,667 1.10%
-------- -------- ------
Total deposits $407,789 $415,846 (1.94%)
======== ======== ======
Federal Home Loan Bank Advances
-------------------------------
Advances from the Federal Home Loan Bank totaled $114.3 million at March 31,
2006, as compared to $107.9 million at December 31, 2005, an increase of
$6.4 million or 5.9%. Management's strategy is to utilize advances from the
Federal Home Loan Bank in conjunction with the investment portfolio to fund
loans and deposit runoff. There was no change in the balance of our
subordinated debentures or underlying trust preferred securities.
Comparison of Results of Operations for the Three Months Ended
--------------------------------------------------------------
March 31, 2006 and 2005
-----------------------
General
-------
Net income decreased from $1.1 million or $0.27 per share on a diluted
basis, for the three months ended March 31, 2005 to $907,000 or $0.22 per
share on a diluted basis, for the three months ended March 31, 2006, a
decrease of 17.5%. Net interest and dividend income increased by $114,000 or
2.6%, from $4.5 million to $4.6 million when comparing the three months
ended March 31, 2005 and 2006. Over the same period, the provision for loan
losses decreased from $50,000 to $39,000. Non-interest income increased by
$134,000 or 23.6% from $569,000 to $703,000 for the quarters ended March 31,
2005 and 2006. Non-interest expenses increased by $435,000 or 13.1%, from
$3.3 million for the three months ended March 31, 2005 to $3.8 million for
the three months ended March 31, 2006.
19
Interest Income
---------------
Our operating performance is dependent on net interest and dividend income,
the difference between interest and dividend income earned on loans and
investments and interest expense paid on deposits and borrowed funds. The
level of net interest income and dividend income is significantly impacted
by factors such as economic conditions, interest rates, asset/liability
management, and strategic planning.
Interest and dividend income increased by $1.2 million or 18.0%, from $6.7
million for the three months ended March 31, 2005 to $7.9 million for the
three months ended March 31, 2006. This increase can be attributed to the
growth in the loan portfolio, as the average balance of loans increased by
$43.0 million or 11.56%. The yield on the loan portfolio increased from
5.71% for the three months ended March 31, 2005 to 6.26% for the three
months ended March 31, 2006. The increase was the result of a greater volume
and higher rates earned on commercial and real estate loans reflecting
current market conditions. Interest and dividends on investments increased
by $18,000, on a fully taxable equivalent basis, for the three months ended
March 31, 2006 compared to the three months ended March 31, 2005,
respectively. The increase in interest and dividends on investments
reflected a higher yield on investments, partially offset by a decrease in
the average balance of the investment portfolio, which decreased from an
average balance of $138.0 million for the 2005 period to $129.7 million for
the 2006 period.
Interest Expense
----------------
Total interest expense increased by $1.1 million or 49.2%, from $2.2 million
for the three months ended March 31, 2005 to $3.3 million for the three
months ended March 31, 2006. The increase was based on management's strategy
to utilize FHLB advances to supplement deposit runoff. Market interest rates
and our own deposit rates have also increased. Interest on deposits
increased by $752,000 or 64.9% when comparing the three months ended March
31, 2006 and 2005. The increase is attributed primarily to increases in the
interest rates offered on deposit products. In response to competitive
pressures and the rising rate environment, we raised all rates on our
deposit products with the most significant increases in certificate of
deposit and certain money-market based products. As a result of the rate
increases, the weighted average cost of deposits increased from 1.49% for
the three months ended March 31, 2005 to 2.33% for the three months ended
March 31, 2006. Interest expense associated with subordinated debentures
increased by $88,000, the result of increased market interest rates. The
debentures carry an adjustable rate of interest tied to the three-month
LIBOR rate.
Net Interest Margin
-------------------
As a result of the current interest rate environment and our rate increases
on deposit accounts, the net interest margin has compressed 14 basis points
from 3.56% for the three months ended March 31, 2005 to 3.41% at March 31,
2006. The compression in net interest margin was mostly due to the rise in
short term rates and the prolonged flatness of the yield curve, which has
reduced the gap between short and intermediate-term interest rates and the
spread between what banks earn on loans and securities and pay on deposits
and borrowings.
20
The following table sets forth our average assets, liabilities, and
stockholders' equity, interest income earned and interest paid, average
rates earned and paid, net interest spread and the net interest margin for
the three months ended March 31, 2006, and 2005. Average balances reported
are daily averages.
Three Months Ended March 31,
-----------------------------------------------------------------------------------
2006 2005
--------------------------------------- ---------------------------------------
Average Interest Average Average Interest Average
Balance Income/Expense Rate Balance Income/Expense Rate
--------------------------------------- ---------------------------------------
(Dollars in thousands)
Assets:
-------
Interest earning assets (2)
Loans:
Commercial $ 42,701 $ 773 7.34% $ 28,506 $ 417 5.93%
Commercial real estate 228,934 3,609 6.39% 214,475 3,155 5.97%
Residential real estate 142,962 2,015 5.72% 128,848 1,661 5.23%
Consumer 2,550 38 6.04% 2,353 33 5.69%
----------------------- -----------------------
Total loans 417,147 6,435 6.26% 374,182 5,266 5.71%
Federal funds sold 1,072 11 4.16% 12,157 65 2.17%
Taxable debt securities 110,937 1,211 4.43% 106,755 1,135 4.31%
Tax-exempt debt securities (1) 6,422 106 6.69% 8,472 140 6.70%
Marketable equity securities 4,332 40 3.74% 4,946 46 3.77%
FHLB stock 6,304 82 5.28% 5,060 50 4.01%
Other investments 650 8 4.99% 650 4 2.50%
----------------------- -----------------------
Total interest earning assets 546,864 7,893 5.85% 512,222 6,706 5.31%
Allowance for loan losses (4,342) ------ (4,120) ------
Deferred loan fees (349) (460)
Cash and due from banks 13,295 16,538
Other assets 26,721 27,442
-------- --------
$582,189 $551,622
======== ========
Liabilities and Stockholders' Equity:
-------------------------------------
Interest bearing liabilities
Savings accounts $ 85,090 $ 257 1.22% $ 89,855 $ 205 0.93%
NOW accounts 55,772 173 1.26% 46,326 81 0.71%
Money market accounts 28,100 109 1.57% 41,187 119 1.17%
Time deposits 163,980 1,372 3.39% 138,106 754 2.21%
FHLB advances 111,197 1,156 4.22% 98,738 911 3.74%
Subordinated debt 10,310 224 8.81% 10,310 136 5.35%
----------------------- -----------------------
Total interest-bearing
liabilities 454,449 3,291 2.94% 424,522 2,206 2.11%
Demand deposits 76,137 ------ 77,287 ------
Other liabilities 2,350 2,366
-------- --------
Total liabilities 532,936 504,175
Total stockholders' equity 49,253 47,447
-------- --------
$582,189 $551,622
======== ========
Net interest income $4,602 $4,500
====== ======
Net interest spread 2.91% 3.20%
==== ====
Net interest margin 3.41% 3.56%
==== ====
On a fully taxable basis based on a tax rate of 35.0% for 2006 and
2005. Interest income on investments and net interest income includes
a fully taxable equivalent adjustment of $37,000 in 2006 and $49,000
in 2005.
Average balance includes non-accruing loans. The effect of including
such loans, although not material, is to reduce the average rate
earned on the Company's loans.
21
The following table presents the changes in components of net interest
income for the three months ended March 31, 2006 and 2005, which are the
result of changes in interest rates and the changes that the result of
changes in volume of the underlying asset or liability. Changes that are
attributable to the changes in both rate and volume have been allocated
equally to rate and volume.
Three Months Ended March 31,
2006 vs. 2005 Increase (Decrease)
Total Due to Due to
Change Volume Rate
---------------------------------
(In thousands)
Commercial loans $ 356 $ 232 $ 124
Commercial real estate 454 220 234
Residential real estate 354 190 164
Consumer loans 5 3 2
Federal funds sold (54) (87) 33
Taxable debt securities 76 45 31
Tax-exempt debt securities (34) (34) -
Marketable equity securities (6) (6) -
FHLB Stock 32 14 18
Other investments 4 - 4
-----------------------------
Total interest income 1,187 577 610
-----------------------------
Savings accounts 52 (13) 65
NOW accounts 92 23 69
Money market accounts (10) (44) 34
Time deposits 618 179 439
FHLB advances 245 122 123
Subordinated debt 88 - 88
-----------------------------
Total interest expense 1,085 267 818
-----------------------------
Net interest income $ 102 $ 310 $(208)
=============================
Provision for Loan Losses
-------------------------
The provision for loan losses is a charge against earnings and increases the
allowance for loan losses. We maintain the allowance for loan losses at a
level that we believe is adequate to absorb inherent losses within the loan
portfolio. The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral
and prevailing economic conditions. This evaluation is inherently subjective
as it requires estimates that are susceptible to significant revision as
more information becomes available. After thorough review and analysis of
the adequacy of the loan loss reserve, management deemed it prudent to
provide $39,000 and $50,000 for possible loan losses for the quarters ended
March 31, 2006 and 2005, respectively. The decline in the provision for loan
losses in 2006 was attributable to the decrease of commercial loan activity
during the first quarter of 2006, as compared to the first quarter of 2005.
22
Non-Interest Income
-------------------
Non-interest income increased from $569,000 for the three months ended March
31, 2005 to $703,000 for the three months ended March 31, 2006, an increase
of $134,000 or 23.6%. Service charges on deposit accounts increased by
$99,000 from $208,000 for the three months ended March 31, 2005 to $307,000
for the three months ended March 31, 2006. This was the result of an
increase in overdraft fees with the implementation of the overdraft
protection program offset by the decrease in service charges on checking
accounts. Cash surrender value increases pertaining to bank-owned life
insurance policies decreased $40,000 to $107,000 for the three months ended
March 31, 2006 from $147,000 for the three months ended March 31, 2005.
Other income increased from $212,000 for the three months ended March 31,
2005 to $286,000 for the three months ended March 31, 2006. This was the
result of increased volume in official check fees, debit card income and
commissions earned on the sales of non-deposit investment products.
Non-Interest Expense
--------------------
Non-interest expense increased from $3.3 million for the three months ended
March 31, 2005 to $3.8 for the three months ended March 31, 2006, an
increase of $435,000 or 13.1%. Salaries and employee benefits increased by
$136,000 or 6.9%, from $2.0 million for the three months ended March 31,
2005 to $2.1 million for the three months ended March 31, 2006. The increase
in salaries and benefits was attributed to the adoption of SFAS 123(R)
effective January 1, 2006 applicable to the Company's stock-based employee
compensation plan resulting in the recognition of $65,000 in expense and the
additions to staff with associated benefit costs. Occupancy and equipment
expense for the three months ended March 31, 2006 increased $84,000 to
$493,000 as compared to $409,000 for the three months ended March 31, 2005.
The increase was the result of additional depreciation expense incurred from
both the Assonet branch that was opened April 2005 and the upgrade in
software associated with the modernization of teller and platform systems.
Professional fees increased $105,000 as a result of the increase relating to
various accounting and regulatory matters incurred during the quarter ended
March 31, 2006. Marketing expense decreased $21,000 to $78,000 for the three
months ended March 31, 2006 from $99,000 for the three months ended March
31, 2005. The decrease in marketing expense is attributable to the timing
issue of advertising and community sponsorship initiatives in 2006. Other
expense increased $131,000 or 25.0% from $525,000 for the three months ended
March 31, 2005 to $656,000 for the three months ended March 31, 2006. The
increase in other expense was due to the increased volume of internet
banking and cash management fees, the cost of postage, recognition of losses
due to the implementation of the overdraft protection program, the outsource
of the courier service, and the increase of meetings and committee fees for
two additional Board of Director members when compared to March 31, 2005.
Provision for Income Taxes
--------------------------
Income before income taxes was $1.7 million for the three months ended March
31, 2005 as compared to $1.5 million for the three months ended March 31,
2006. Provision for income taxes totaled $572,000 and $555,000 for the
quarters ended March 31, 2006 and 2005, respectively, representing effective
tax rates of 38.7% and 33.5%, respectively. The increase in the overall tax
rate was due to a decline in income at the Bank's subsidiaries which are
taxed at a lower rate, a decline in federally exempt municipal income and a
decrease in cash surrender value recognized in the first quarter of 2006
compared to 2005.
Liquidity
---------
Our principal sources of funds are customer deposits, amortization and
payoff of existing loan principal, and sales, amortization or maturities of
various investment securities. The Bank is a voluntary member of the Federal
Home Loan Bank of Boston (the "FHLB") and as such, may take advantage of the
FHLB's borrowing programs to enhance liquidity and leverage its favorable
capital position. The Bank also may draw on lines of credit at the FHLB
23
or the Federal Reserve Board (the "FRB"), and enter into repurchase or
reverse repurchase agreements with authorized brokers. These various
sources of liquidity are used to fund withdrawals, new loans, and
investments.
Management seeks to promote deposit growth while controlling cost of funds.
Sales-oriented programs to attract new depositors and the cross-selling of
various products to its existing customer base are currently in place.
Management reviews, on an ongoing basis, possible new products, with
particular attention to products and services, which will aid in retaining
our base of lower-costing deposits.
Maturities and sales of investment securities provide us with liquidity. Our
policy of purchasing shorter-term debt securities reduces market risk in the
bond portfolio while providing significant cash flow. For the three months
ended March 31, 2006, cash flow from maturities of securities was $2.7
million, proceeds from sales of securities totaled $0.7 million, compared to
maturities of securities of $3.4 million, and proceeds from sales of
securities of $0.9 million for the three months ended March 31, 2005.
Purchases of securities for the three months ended March 31, 2006 totaled
$0.5 million as compared to $0.8 million at March 31, 2005.
Amortization and pay-offs of the loan portfolio also provide us with
significant liquidity. Traditionally, amortization and pay-offs are
reinvested into loans.
We have also used borrowed funds as a source of liquidity. At March 31,
2006, the Bank's outstanding borrowings from the FHLB were $114.3 million.
The Bank has the capacity to borrow in excess of $36 million additional at
the FHLB.
Loan originations for the three months ended March 31, 2006 totaled $7.1
million. Commitments to originate loans at March 31, 2006 were $5.7 million,
excluding unadvanced construction funds totaling $11.5 million, unadvanced
commercial lines of credit totaling $15.9 million and unadvanced home equity
lines totaling $17.3 million. Management believes that adequate liquidity is
available to fund loan commitments utilizing deposits, loan amortization,
maturities of securities, or borrowings.
The decline in liquidity is due to the utilization advances from the Federal
Home Loan Bank in conjunction with the investment portfolio of maturities,
calls and paydowns of certain state and municipal obligations and mortgage-
backed securities to provide liquidity for current loan growth and deposit
runoff.
Capital
-------
At March 31, 2006, our total shareholders' equity was $49.7 million, an
increase of $884,000 from $48.9 million at December 31, 2005. The increase
in capital was a combination of several factors. Additions consisted
primarily of net income of $907,000 for the quarter ended March 31, 2006.
There were 8,512 shares issued at a value of $155,000, pursuant to the
Dividend Reinvestment Program, in lieu of cash dividends or for optional
cash contributions and exercised stock options resulted in the issuance of
22,000 shares common stock at a value of $297,000, including a tax benefit
compensation expense of $65,000. These additions were offset by dividends
declared of $375,000, purchase of treasury stock of $126,000 and accumulated
other comprehensive loss of $39,000.
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.
24
In addition to meeting the required levels, Slade's Ferry Bancorp's and the
Bank's capital ratios meet the criteria of the well-capitalized category
established by the federal banking agencies as of March 31, 2006 and at
December 31, 2005. The Tier I Capital leverage ratio and Tier I Capital to
risk weighted assets ratio for Slade's Ferry Bancorp are 10.17% and 14.38%,
respectively, for the three months ended March 31, 2006. Slade's Ferry
Bancorp's Tier I Capital leverage ratio and Tier I Capital to risk weighted
assets ratio for the year ended December 31, 2005 are 10.07% and 14.66%,
respectively. The Tier I Capital leverage ratio and Tier I Capital to risk
weighted assets ratio for Slade's Ferry Trust Company are 8.77% and 12.30%,
respectively, for the three months ended March 31, 2006. Slade's Ferry Trust
Company's Tier I Capital leverage ratio and Tier I Capital to risk weighted
assets ratio for the year ended December 31, 2005 are 8.56% and 12.51%,
respectively.
25
Off-Balance Sheet Arrangements
------------------------------
We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that are material to investors.
26
ITEM 3
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We consider interest rate risk to be a significant market risk as it could
potentially have an effect on our financial condition and results of
operation. The definition of interest rate risk is the exposure of our
earnings to adverse movements in interest rates, arising from the
differences in the timing of repricing of assets and liabilities; the
differences in the various pricing indices inherent in our assets and
liabilities; and the effects of overt and embedded options in our assets and
liabilities. Our Asset/Liability Committee, comprised of the executive
management, is responsible for managing and monitoring interest rate risk,
and reviewing with the Board of Directors, at least quarterly, the interest
rate risk positions, the impact changes in interest rates would have on net
interest income, and the maintenance of interest rate risk exposure within
approved guidelines.
The potentially volatile nature of market interest rates requires us to
manage interest rate risk on an active and dynamic basis. Our objective is
to reduce and control the volatility of net interest income to within
tolerance levels established by the Board of Directors, by managing the
relationship of interest-earning assets and interest-bearing liabilities. In
order to manage this relationship, the Asset/Liability Committee utilizes an
income simulation model to measure the net interest income at risk under
differing interest rate scenarios. Additionally, the Committee uses Economic
Value of Equity ("EVE") analysis to measure the effects of changing interest
rates on the market values of rate-sensitive assets and liabilities, taken
as a whole. The Board of Directors and management believe that static
measures of timing differences, such as "gap analysis", do not accurately
assess the levels of interest rate risk inherent in our balance sheet. Gap
analysis does not reflect the effects of overt and embedded options on net
interest income, given a shift in interest rates, nor does it take into
account basis risk, the risk arising from using various different indices on
which to base pricing decisions.
The income simulation model currently utilizes a 200 basis point increase in
interest rates and a 200 basis point decrease in rates. 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 rates. Prepayment speeds for loans are based on median dealer forecasts
for each interest rate scenario.
The Board of Directors has established a risk limit of a 5.00% change in net
interest income for each 100 basis point shift in market interest rates. The
limit established by the Board provides an internal tolerance level to
control interest rate risk. We are within our policy-mandated risk limit for
net interest income at risk.
The following table reflects our estimated exposure as a percentage of net
interest income and the change in basis points for the next twelve months,
assuming an immediate change in interest rates set forth below:
Rate Change Estimated Exposure as a Percentage Change
(Basis Points) of Net Interest Income (Basis Points)
------------------------------------------------------------------------
+200 -11.44% -20
-200 3.03% 6
27
Additionally we use the model to estimate the effects of changes in interest
rates on our EVE. EVE represents our theoretical market value, given the
rate shocks applied in the model. The Board of Directors has established a
risk limit for EVE which provides that the EVE will not fall below 6.00%,
the FDIC's minimum capital level to be classified as "well capitalized". We
are within our risk limit for EVE.
The following table presents the changes in EVE given rate shocks.
Rate Change Economic Value Change from
(Basis Points) of Equity Flat Rates
-------------- -------------- -----------
FLAT 13.46% N/A
+200 12.45% -1.01%
-200 11.79% -1.67%
28
ITEM 4
CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as of
the end of the period covered by this report, the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief
Financial Officer of the effectiveness of the Company's disclosure controls
and procedures. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of March 31, 2006 to ensure that information
required to be disclosed by the Company in the reports it files or submits
under the Exchange Act is (i) recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange
Commission's rules and forms and (ii) accumulated and communicated to the
Company's management, including its principal executive officer and
principal financial officer, as appropriate to allow timely decisions
regarding disclosure. In connection with the rules regarding disclosure and
control procedures, we intend to continue to review and document our
disclosure controls and procedures, including our internal controls and
procedures for financial reporting, and may from time to time make changes
aimed at enhancing their effectiveness and to ensure that our systems evolve
with our business.
(b) Changes in Internal Controls over Financial Reporting
There were no changes in the Company's internal controls over financial
reporting identified in connection with the Company's evaluation of its
disclosure controls and procedures that occurred during the Company's last
fiscal quarter that have materially affected, or are reasonably likely to
materially affect the Company's internal control over financial reporting.
29
PART II
OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
None.
ITEM 1A
RISK FACTORS
There have been no material changes to the risk factors that are included in
our Annual Report on Form 10-K for the year ended December 31, 2005 that
could affect our business, results of operations or financial condition.
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
This table provides certain information with respect to our purchase of our
common stock during the quarter ended March 31, 2006.
(c) Total Number of (d) Maximum Number (or
(a) Total Shares Purchased as Approximate Dollar
Number of Part of Publicly Value) of Shares that may
Shares (b) Average Price Announced Plans or yet be Purchased under the
Period Purchased Paid per Share Programs Plans or Programs
-------------------------------------------------------------------------------------------------------------
January 1, 2006
through
January 31, 2006 - N/A - N/A
-------------------------------------------------------------------------------------------------------------
February 1, 2006
through
February 28, 2006 7,000 $17.96 - N/A
-------------------------------------------------------------------------------------------------------------
March 1, 2006
through
March 31, 2006 - N/A - N/A
-------------------------------------------------------------------------------------------------------------
Total 7,000 $17.96 - N/A
-------------------------------------------------------------------------------------------------------------
30
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
Exhibits: See exhibit index.
31
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 12, 2006 /s/ Mary Lynn D. Lenz
------------------- ---------------------------------------------
(Date) Mary Lynn D. Lenz
President
Chief Executive Officer & Interim Chairperson
May 12, 2006 /s/ Deborah A. McLaughlin
------------------- ---------------------------------------------
(Date) Deborah A. McLaughlin
Executive Vice President
Chief Financial Officer & Chief
Operations Officer
32
EXHIBIT INDEX
Exhibit No. Description Item
----------- ----------- ----
3.1 Amended and Restated Articles of Incorporation of
Slade's Ferry Bancorp. (1)
3.2 Amended and Restated Bylaws of Slade's Ferry Bancorp. (2)
3.3 Articles of Amendment to the Amended and Restated
Articles of Incorporation of Slade's Ferry Bank (3)
10.1 Slade's Ferry Bancorp. 1996 Stock Option Plan,
as amended (4)
10.2 Supplemental Executive Retirement Agreement between
Slade's Ferry Bancorp. and Manuel J. Tavares (5)
10.3 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. (6)
10.4 Form of Directors' Paid-up Insurance Policy (part of
the Director Supplemental Retirement Program). (7)
10.5 Supplemental Executive Retirement Agreement between
Slade's Ferry Bancorp. and Mary Lynn D. Lenz (8)
10.6 Employment Agreement between Slade's Ferry Bancorp.
and Mary Lynn D. Lenz (9)
10.7 Employment Agreement between Slade's Ferry Bancorp.
and Deborah A. McLaughlin (10)
10.8 Employment Agreement between Slade's Ferry Bancorp.
and Manuel J. Tavares (11)
10.9 Form Change of Control Agreement (12)
10.10 Severance Pay Plan (13)
10.11 Slade's Ferry Bancorp. 2004 Equity Incentive Plan (14)
11.1 Statement Regarding Computation of Per Share Earnings
14.1 Code of Ethics (15)
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
--------------------
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-Q filed with the
Commission on May 12, 2005.
Incorporated by reference to the Registrant's Form 8-K filed with the
Commission on December 21, 2004.
Incorporated by reference to the Registrant's Form 10-Q/A for the
quarter ended June 30, 1999.
Incorporated by reference to the Registrant's Form 10-K/ASB for the
fiscal year ended December 31, 1996.
Incorporated by reference to Exhibit 10 to the Registrant's Form
10-Q/A for the quarter ended March 31, 1999.
Incorporated by reference to Exhibit 10 to the Registrant's Form
10-Q/ASB for the quarter ended June 30, 1998.
33
Incorporated by reference to Exhibit 10.10 to the Registrant's Form
10-Q/A for the quarter ended March 31, 2003.
Incorporated by reference to Exhibit 10.11 to the Registrant's Form
10-Q/A for the quarter ended June 30, 2004.
Incorporated by reference to Exhibit 10.7 to the Registrant's Form
10-Q/A for the quarter ended September 30, 2004.
Incorporated by reference to Exhibit 10.8 to the Registrant's Form
10-Q/A for the quarter ended September 30, 2004.
Incorporated by reference to the Registrant's Form 8-K filed with the
Commission on January 13, 2005.
Incorporated by reference to the Registrant's Form 8-K filed with the
Commission on January 14, 2005.
Incorporated by reference to Appendix C to the Registrant's Proxy
Statement filed on April 9, 2004
Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 2003.
34