UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended March 31, 2002
--------------
Commission file number 000-23904
---------
SLADE'S FERRY BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3061936
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Slade's Ferry Avenue
Somerset, Massachusetts 02726
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(508)675-2121
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common stock ($.01 par value) 3,883,812.878 shares as of March 31, 2002.
------------------------------------------------------------------------
PART I
ITEM 1
Financial Statements
--------------------
SLADE'S FERRY BANCORP
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 December 31, 2001
-----------------------------------
(Unaudited)
ASSETS:
Cash and due from banks $ 15,734,362 $ 13,730,752
Interest-bearing demand deposits with other banks 201,521 174,945
Money market mutual funds 136,604 86,613
Federal Home Loan Bank overnight deposit 5,000,000 6,000,000
Federal funds sold 10,200,000 8,700,000
--------------------------------
Cash and Cash Equivalents 31,272,487 28,692,310
Interest-bearing time deposit with other banks 100,000 100,000
Investment securities(1) 14,466,066 16,281,712
Securities available for sale(2) 77,600,074 79,105,537
Federal Home Loan Bank stock 1,013,400 1,013,400
Loans, net 246,343,543 248,017,635
Premises and equipment 6,371,108 6,455,837
Goodwill 2,173,368 2,173,368
Accrued interest receivable 2,031,838 1,953,989
Cash surrender value of life insurance 7,812,077 7,697,441
Other assets 3,388,902 3,269,334
--------------------------------
TOTAL ASSETS $392,572,863 $394,760,563
================================
LIABILITIES & STOCKHOLDERS' EQUITY:
Deposits $334,844,360 $337,043,342
Federal Home Loan Bank advances 15,920,279 16,983,087
Other borrowed funds 1,215,073 465,216
Other liabilities 1,797,450 1,749,787
--------------------------------
TOTAL LIABILITIES 353,777,162 356,241,432
--------------------------------
Preferred stockholders' equity in a
subsidiary company 51,500 53,000
--------------------------------
STOCKHOLDERS' EQUITY:
Common stock 38,839 38,700
Paid in capital 26,971,141 26,761,997
Retained earnings 12,325,001 11,892,623
Accumulated other comprehensive loss (590,780) (227,189)
--------------------------------
TOTAL STOCKHOLDERS' EQUITY 38,744,201 38,466,131
--------------------------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $392,572,863 $394,760,563
================================
--------------------
Investment securities are to be held to maturity and have a fair
market value of $14,695,068 as of March 31, 2002 and $16,590,243 as of
December 31, 2001.
Securities classified as Available for Sale are stated at fair value
with any unrealized gains or losses reflected as an adjustment in
Stockholders' Equity.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
(UNAUDITED)
3 MONTHS ENDING MARCH 31,
2002 2001
------------------------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $4,519,745 $5,766,499
Interest and dividends on investments 1,201,182 1,251,616
Other interest 59,635 194,642
------------------------
Total interest and dividend income 5,780,562 7,212,757
------------------------
INTEREST EXPENSE:
Interest on deposits 1,948,982 3,104,971
Interest on Federal Home Loan Bank advances 260,056 199,948
Interest on other borrowed funds 3,216 10,366
------------------------
Total interest expense 2,212,254 3,315,285
------------------------
Net interest and dividend income 3,568,308 3,897,472
Provision for loan losses 187,500 187,500
------------------------
Net interest and dividend income
after provision for loan losses 3,380,808 3,709,972
------------------------
OTHER INCOME:
Service charges on deposit accounts 141,590 140,923
Overdraft service charges 60,050 64,055
Gain (loss) on sales of available for sale securities, net (2,818) 0
Increase in cash surrender value of life insurance policies 114,636 92,866
Other income 155,772 108,278
------------------------
Total other income 469,230 406,122
------------------------
OTHER EXPENSE:
Salaries and employee benefits 1,790,501 1,783,102
Occupancy expense 211,193 248,791
Equipment expense 125,450 143,542
Stationery and supplies 74,564 52,285
Professional fees 63,151 102,124
Marketing expense 100,979 101,598
Other expense 406,013 425,807
------------------------
Total other expense 2,771,851 2,857,249
------------------------
Income before income taxes 1,078,187 1,258,845
Income taxes 296,265 389,480
------------------------
NET INCOME $ 781,922 $ 869,365
========================
Basic earnings per share $ 0.20 $ 0.23
========================
Diluted earnings per share $ 0.20 $ 0.23
========================
Basic average shares outstanding 3,879,855 3,803,755
========================
Diluted average shares outstanding 3,913,569 3,805,580
========================
Dividends Per Share $ .09 $ .08
========================
Comprehensive Income(1) $ 418,331 $1,137,796
========================
--------------------
Calculated using the change in accumulated other comprehensive income
(loss) for the period and net income for the period.
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
----------------------------
(Unaudited)
2002 2001
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 781,922 $ 869,365
Adjustments to reconcile net income to
net cash provided by operating activities:
Accretion, net of amortization of securities 30,885 9,163
Gain on sales of available-for-sale securities, net 2,818 0
Change in unearned income (42,675) (46,341)
Provision for loan losses 187,500 187,500
Depreciation and amortization 152,139 182,666
Increase in cash surrender value of
life insurance policies (114,636) 0
Amortization of goodwill 0 56,700
Accretion, net of amortization of fair market
value adjustments 0 (2,850)
(Increase) decrease in other assets 66,266 (145,250)
Decrease in prepaid expenses 39,041 11,370
(Increase) decrease in interest receivable (77,849) 85,813
Increase (decrease) in other liabilities 21,257 (30,399)
Decrease in accrued expenses (80,981) (187,112)
Increase (decrease) in interest payable 5,041 (1,157)
Increase in taxes payable 102,346 155,228
Decrease in minority interest in subsidiary (1,500) 0
---------------------------
Net cash provided by operating activities 1,071,574 1,144,696
---------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities (6,346,491) (13,431,233)
Proceeds from maturities of available-for-sale securities 7,228,248 15,225,305
Purchases of held-to-maturity securities (1,429,214) (1,094,000)
Proceeds from maturities of held-to-maturity securities 3,244,133 981,617
Net decrease in loans 1,520,474 5,751,042
Recoveries of loans previously charged off 8,793 6,483
Capital expenditures (67,409) (141,138)
---------------------------
Net cash used in investing activities 4,158,534 7,298,076
---------------------------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
----------------------------
(Unaudited)
(Continued)
2002 2001
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, NOW, money
market and savings accounts $ 6,172,344 $ (8,600,472)
Net increase (decrease) in time deposits (8,371,326) 909,454
Payments on Federal Home Loan Bank, net (1,062,808) (38,183)
Net increase (decrease) in other borrowed funds 749,857 (1,021,188)
Proceeds from issuance of common stock 209,283 186,625
Dividends paid (347,281) (304,725)
---------------------------
Net cash provided by financing activities (2,649,931) (8,868,489)
---------------------------
Net increase (decrease) in cash and cash equivalents 2,580,177 (425,717)
Cash and cash equivalents at beginning of year 28,692,310 28,060,709
---------------------------
Cash and cash equivalents at end of year $31,272,487 $ 27,634,992
===========================
SUPPLEMENTAL DISCLOSURES;
Interest paid $ 2,207,213 $ 3,316,442
Income taxes paid $ 193,919 $ 234,252
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
SLADE'S FERRY BANCORP AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2002
Note A - Basis of Presentation
------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America (GAAP) for interim financial information and
the instructions to Form 10-Q and, accordingly, do not include all of the
information and footnotes required by GAAP for complete financial
statements. In the opinion of the management of Slade's Ferry Bancorp (the
"Company"), all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2002 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2002.
The year-end condensed consolidated balance sheet data was derived from
audited financial statements, but does not include all disclosures required
by GAAP.
Note B - Accounting Policies
----------------------------
The accounting principles followed by Slade's Ferry Bancorp and subsidiary
and the methods of applying these principles which materially affect the
determination of financial position, results of operations, or changes in
financial position are consistent with those used at year end 2001.
The consolidated financial statements of Slade's Ferry Bancorp include its
wholly-owned subsidiary, Slade's Ferry Trust Company, and its subsidiaries,
the Slade's Ferry Realty Trust, the Slade's Ferry Securities Corporation,
Slade's Ferry Preferred Capital Corporation, and Slade's Ferry Loan Company.
All significant intercompany balances have been eliminated.
Note C - Impact of New Accounting Standards
-------------------------------------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". Statement No. 133, as amended by SFAS
No. 138, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. The Statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The Company
adopted this Statement as of January 1, 2001. In management's opinion, the
adoption of SFAS No. 133 did not have a material effect on the Company's
consolidated financial statements.
FASB has issued SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This Statement
replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," and rescinds SFAS Statement No.
127, "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125". SFAS No. 140 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of
liabilities. This statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. This statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March
31, 2001; however, the disclosure provisions are effective for fiscal years
ending after December 15, 2000. The adoption of this statement did not have
a material impact on the Company's financial position or results of
operation.
Statement of Financial Accounting Standards No. 141, "Business
Combinations", improves the consistency of the accounting and reporting for
business combinations by requiring that all business combinations be
6
accounted for under a single method - the purchase method. Use of the
pooling-of-interests method is no longer permitted. Statement No. 141
requires that the purchase method be used for business combinations
initiated after June 30, 2001. The adoption of SFAS No. 141 will have no
immediate effect on the Company's consolidated financial statements since it
had no pending business combinations as of December 31, 2001, or as of the
accompanying consolidated financial statements.
In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which is effective for fiscal years beginning after
December 15, 2001. Under prior accounting standards, goodwill resulting from
a business combination was amortized against income over its estimated
useful life. As a result of SFAS No. 142, goodwill is generally no longer
amortized as an expense after 2001, but instead will be reviewed and tested
for impairment using a fair value methodology and assessment. Goodwill will
be tested at least annually for impairment. Management does not anticipate
an impairment adjustment to the goodwill reflected in the accompanying
condensed consolidated balance sheet upon adoption of SFAS No. 142 on
January 1, 2002. The effect of adopting SFAS No. 142 will be that the
Company will cease to amortize the goodwill balance of $2.2 Million, which
will reduce amortization of goodwill by $226,800 in 2002.
ITEM 2
Management's Discussion and Analysis
------------------------------------
Financial Condition
-------------------
Total assets decreased by $2.2 Million, or .6% from $394.8 Million at
December 31, 2001 to $392.6 Million at March 31, 2002. The decrease of $2.2
Million is directly attributed to a decline in deposits, specifically
certificate of deposit balances. Although our time deposit interest rates
are competitive within our local market area, the lower interest rates
offered during 2001 and through the first quarter of 2002, reflecting a
series of reductions in interest rates initiated by the Federal Reserve
Board, caused some customers to seek higher yields and alternative
investment products.
During the first quarter of 2002, loan demand improved as both consumer and
commercial borrowers continued to take advantage of the lower interest rate
environment that prevailed throughout 2001 and the first three months of
2002. Although new loan requests and commitments increased, a large loan
payoff, combined with amortization of the existing loan portfolio during the
three months ending March 31, 2002, resulted in a net decrease in loans of
$1.7 Million. The combined investment portfolio decreased by $3.3 Million
from $95.4 Million reported as of December 31, 2001 to $92.1 Million at
March 31, 2002. The decrease in our loan and investment portfolios provided
the liquidity to fund the withdrawals of our certificates of deposit and
payment of a $1.0 Million loan advance from the Federal Home Loan Bank that
matured in January 2002.
The investment portfolio represents the second largest component of the
Company's assets and consists of securities in the Available-for-Sale
category and securities in the Held-to-Maturity category. The designation of
which category the security is to be classified as is determined at the time
of the purchase of the investment instrument.
The Held-to-Maturity category consists predominately of securities of the U.S.
Treasury, U.S. Government corporation and agencies, and securities issued by
states of the United States and political subdivisions of states. The
Company has the positive intent and ability to hold these securities to
maturity. In managing the Held-to-Maturity portfolio, the Company seeks to
maximize its return and maintain consistency to meet short and long term
liquidity forecasts by purchasing securities with maturities laddered within
a short-term period of 1-3 years, a mid-term period of 3-5 years, and some
securities extending out to 10 years. The Company does not purchase
investments with off-balance sheet characteristics, such as swaps, options,
futures, and other
7
hedging activities that are called derivatives. The main objective of the
investment policy is to provide adequate liquidity to meet reasonable
declines in deposits and any anticipated increases in the loan portfolio, to
provide safety of principal and interest, to generate earnings adequate to
provide a stable income, and to fit within the overall asset/liability
management objectives of the Company.
Investment Securities are securities that the Company will hold to maturity
and are carried at amortized cost on the balance sheet, and are summarized
as follows as of March 31, 2002.
Amortized Gross Unrealized Gross Unrealized
(Dollars in Thousands) Cost Basis Holding Gains Holding Losses Fair Value
-----------------------------------------------------------------------------------------------------------
Debt securities issued by the U. S.
Treasury and other U. S.
Government corporations and
Agencies $ 750 $ 7 $ 0 $ 757
Debt securities issued by states of the
United States and political
subdivisions of the states 13,712 246 24 13,934
Mortgage-backed securities 3 0 0 3
Other debt securities 1 0 0 1
---------------------------------------------------------------------------------------------------------
Total $14,466 $253 $24 $14,695
=========================================================================================================
Securities in the Available-for-Sale category are securities that the
Company intends to hold for an indefinite period of time, but not
necessarily to maturity. These securities may be sold in response to
interest rate changes, liquidity needs or other factors. Any unrealized
gains or losses, net of taxes, are reflected in Stockholders' Equity as a
separate component.
Investments in Available-for-Sale securities are carried at fair value on
the balance sheet and are summarized as follows as of March 31, 2002.
Gains in Losses in
Accumulated Accumulated
Other Other
Amortized Comprehensive Comprehensive
(Dollars in Thousands) Cost Basis Income Income Fair Value
-------------------------------------------------------------------------------------------------
Debt securities issued by the U. S.
Treasury and other U. S.
Government corporations and
agencies $31,640 $359 $ 117 $31,882
Marketable Equities 5,905 319 1,345 4,879
Mortgage-backed securities 37,842 222 213 37,851
Corporate Bonds 2,936 56 4 2,988
-----------------------------------------------------------------------------------------------
Total $78,323 $956 $1,679 $77,600
===============================================================================================
Decrease to Stockholders' Equity:
(In Whole Dollars)
Unrealized loss on Available-for-Sale Securities $ 723,489
Less tax effect (238,954)
---------
Net unrealized loss on Available-for-Sale Securities $ 484,535
=========
8
The Available-for-Sale category at March 31, 2002 had net unrealized losses
net of taxes of $484,535, of which $183,963 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 $668,498 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 security.
Marketable equity securities, however, have a greater risk as they are
subject to rapid market fluctuations. These securities are constantly
monitored and evaluated to determine their suitability for sale or retention
in the portfolio. Management minimizes its risk by limiting the total amount
invested into marketable equity securities to 6.5% of the total investment
portfolio. At March 31, 2002, the amount invested in marketable equity
securities was 6.3% of the total investment portfolio distributed over
various business sectors.
INFORMATION WITH RESPECT TO NONACCRUAL AND PAST DUE LOANS
AT MARCH 31, 2002 AND 2001 AND DECEMBER 31, 2001 AND 2000
At March 31, At December 31,
------------------------------------------------------------------------------------------
(Dollars in Thousands) 2002 2001 2001 2000
------------------------------------------------------------------------------------------
Nonaccrual Loans $ 839 $2,263 $1,138 $2,415
Loans 90 days or more past due and
still accruing 0 181 444 335
Real estate acquired by foreclosure
or substantively repossessed 0 0 0 0
Percentage of nonaccrual loans to total gross loans 0.33% 0.90% 0.45% 0.94%
Percentage of nonaccrual loans, restructured loans,
and real estate acquired by foreclosure or
substantively repossessed to total assets 0.25% 0.59% 0.34% 0.64%
Percentage of allowance for loan losses
to nonaccrual loans 645.4% 218.02% 481.90% 197.76%
The $0.8 Million in nonaccrual loans as of March 31, 2002 consists of $0.6
Million of real estate mortgages and $0.2 Million attributed to commercial
loans. Nonaccrual loans include restructured loans of $133,000 at March 31,
2002.
The Company's nonperforming assets as a total decreased by $0.3 Million at
March 31, 2002, from $1.1 Million reported on December 31, 2001 to $.8
Million as of March 31, 2002. The Company considers nonaccrual loans, loans
past due 90 days or more but still accruing, and real estate acquired by
foreclosure or substantively repossessed as nonperforming assets. Nonaccrual
loans, which is the largest component of nonperforming assets, decreased by
$299,253 during the first quarter of 2002. Loans 90 day or more but still
accruing decreased by $443,882 during the current quarter.
The percentage of nonaccrual loans to total gross loans decreased from 0.45%
reported at year end to 0.33% at March 31, 2002 due to a decrease in the
nonaccrual category. The percentage of nonaccrual loans and real estate
acquired by foreclosure or substantively repossessed to total assets
decreased due to the decrease in nonaccrual loans.
9
INFORMATION WITH RESPECT TO INTEREST ON NONACCRUAL AND PAST DUE
LOANS AT MARCH 31, 2002 AND 2001 AND DECEMBER 31, 2001 AND 2000
At March 31, At December 31,
-----------------------------------------------------------------------------------
(Dollars in Thousands) 2002 2001 2001 2000
-----------------------------------------------------------------------------------
Nonaccrual Loans $839 $2,263 $1,138 $2,415
Interest income that would have been recorded
under original terms 18 60 109 228
Interest income recorded during the period 1 14 6 22
The Company stops accruing interest on a loan once it becomes past due 90
days or more unless there is adequate collateral and the financial condition
of the borrower is sufficient. When a loan is placed on a nonaccrual status,
all previously accrued but unpaid interest is reversed and charged against
current income. Interest is thereafter recognized only when payments are
received and the loan becomes current.
Loans in the nonaccrual category will remain until the possibility of
collection no longer exists, the loan is paid off or becomes current. When a
loan is determined to be uncollectible, it is then charged off against the
Allowance for Loan Losses.
Statement of Financial Accounting Standards No. 114 "Accounting by Creditors
for Impairment of a Loan" applies to all loans except large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment, loans measured at fair value or at a lower of cost or fair
value, leases, and debt securities as defined in Statement 115. Statement
114 requires that impaired loans be valued at the present value of expected
future cash flows discounted at the loan's effective interest rate or as a
practical expedient, at the loan's observable market value of the collateral
if the loan is collateral dependent. Smaller balance homogeneous loans are
considered by the Company to include consumer installment loans and credit
card loans.
At March 31, 2002, there were $3,177,560 of loans which the Company has
determined to be impaired, of which $3,117,308 have a related allowance for
credit losses of $566,806. Loans deemed to be impaired decreased substantially
from the $7,521,689 reported as of December 31, 2001. At year end 2001,
impaired loans included one large loan relationship of $2,556,000; but as of
March 31, 2002, payments continue to be current and this loan has been removed
from impairment status. In addition, principal reductions, loan payoffs,
charged off balances, loan upgrades, and a change in our impairment
identification methodology are other factors resulting in a decrease of
impaired loans. Management is not aware of any other loans that pose a
potential credit risk, or where the loans are current but the borrowers are
experiencing financial difficulty.
There were no other loans classified for regulatory purposes at March 31,
2002 that management reasonably expects will materially impact future
operating results, liquidity or capital resources.
10
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Three Months Years Ended
At March 31, At December 31,
--------------------------------------------------------------------------
(Dollars in Thousands) 2002 2001 2001 2000
--------------------------------------------------------------------------
Balance at January 1 $5,484 $4,776 $4,776 $3,766
--------------------------------------------------------------------------
Charge-offs:
Commercial (263) (30) (73) (194)
Real estate - construction 0 0 (0) 0
Real estate - mortgage 0 0 (0) (23)
Installment/consumer (3) (6) (28) (138)
--------------------------------------------------------------------------
Total Charge-offs (266) (36) (101) (355)
--------------------------------------------------------------------------
Recoveries:
Commercial 4 4 14 50
Real estate - construction 0 0 0 0
Real estate - mortgage 3 0 29 92
Installment/consumer 2 2 16 23
--------------------------------------------------------------------------
Total Recoveries 9 6 59 165
--------------------------------------------------------------------------
Net Charge-offs (257) (30) (42) (190)
--------------------------------------------------------------------------
Additions charged to operations 188 188 750 1,200
--------------------------------------------------------------------------
Balance at end of period $5,415 $4,934 $5,484 $4,776
==========================================================================
Ratio of net charge-offs to
average loans outstanding (0.10%) (.012%) (0.02%) (0.08%)
The Allowance for Loan Losses at March 31, 2001 was $5,415,088, compared to
$5,484,519 at year end 2001. The Allowance for Loan Losses as a percentage
of outstanding loans was 2.15% at March 31, 2002, and 2.16% at December 31,
2001.
The Bank provided $750,000 in 2001, $1,200,000 in 2000, and $187,500 as of
March 31, 2002 to the Allowance for Loan Losses. Loans charged off were
$101,000 as of December 31, 2001, $355,000 in 2000, and $266,000 as of March
31, 2002. Recoveries on loans previously charged off were $59,000 in 2001,
$165,000 in 2000, and $9,000 as of March 31, 2002. Management believes that
the Allowance for Loan Losses of $5,415,088 is adequate to absorb any losses
that are estimated to occur, due to the Bank's strong collateral position
and the current asset quality.
The level of the Allowance for Loan Losses is evaluated by management and
encompasses several factors. These factors include but are not limited to
recent trends in the nonperforming loans, the adequacy of the assets that
collateralize the nonperforming loans, the level of nonaccrual loans,
current economic conditions in the market area, and various other external
and internal factors. During 2000, management made the decision to change
the methodology and guidelines used in calculating the adequate level of
loan loss reserves. Increasing credit risk due to a higher commercial real
estate loan portfolio and a rising interest rate environment are responsible
for the review and change in the methodology and guidelines. Management's
assessment of the adequacy of the Allowance for Loan Losses is reviewed by
regulators, the Company's independent accountants, and outside loan review
consultants.
11
This table shows an allocation of the allowance for loan losses as of the
end of each of the periods indicated.
March 31, 2002 December 31, 2001 December 31, 2000
---------------------------------------------------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
---------------------------------------------------------------------------
(Dollars in Thousands)
Domestic:
Commercial(5) $1,788(1) 16.77% $1,629(1) 17.91% $1,466(1) 19.66%
Real estate - Construction 47 3.52 41 2.99 47 3.36
Real estate - mortgage 3,426(2) 76.02 3,585(2) 74.77 2,970(2) 71.91
Consumer(3) 154(4) 3.69 229(4) 4.33 293(4) 5.07
------------------------------------------------------------------------
$5,415 100.00% $5,484 100.00% $4,776 100.00%
========================================================================
--------------------
Includes amounts specifically reserved for impaired loans of $516,288
as of March 31, 2002, $780,029 as of December 31, 2001, and $281,248
as of December 31, 2000 as required by Financial Accounting Standard
No. 114, Accounting for Impairment of Loans.
Includes amounts specifically reserved for impaired loans of $46,425
as of March 31, 2002, $413,663 as of December 31, 2001, and $132,911
as of December 31, 2000 as required by Financial Accounting Standard
No. 114, Accounting for Impairment of Loans.
Includes consumer, obligations of states and political subdivisions
and other.
Includes amounts specifically reserved for impaired loans of $4,093 as
of March 31, 2002, $1,632 as of December 31, 2001, and $10,398 as of
December 31, 2000 as required by Financial Accounting Standard No.
114, Accounting for Impairment of Loans.
Includes commercial, financial, agricultural and nonprofit loans.
The loan portfolio's largest segment of loans is commercial real estate
loans, which represent 58% of gross loans. Residential real estate,
represents 18% of gross loans. The Company requires a loan to value ratio of
80% in both commercial and residential mortgages. These mortgages are
secured by real properties which have a readily ascertainable appraised
value.
Generally, commercial real estate loans have a higher degree of credit risk
than residential real estate loans because they depend primarily on the
success of the business. When granting these loans, the Company evaluates
the financial statements 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.
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 40% liquidation value to
inventories, 25% to furniture, fixtures and equipment; and 60% to accounts
receivable. Commercial loans represent 19% of the loan portfolio.
Consumer loans are generally unsecured credits and represent 5% of the total
loan portfolio. These loans have a higher degree of risk than residential
mortgage loans. The underlying collateral of a secured consumer loan
12
tends to depreciate in value. Consumer loans are typically made based on the
borrower's ability to repay the loan through continued financial stability.
The Company endeavors to minimize risk by reviewing the borrower's repayment
history on past debts, and assessing the borrower's ability to meet existing
obligations on the proposed loans.
The allocation of the Allowance for Loan Losses is based on management's
judgement of potential losses in the respective portfolios. While management
has allocated reserves to various portfolio segments, the Allowance is
general in nature and is available for the portfolio in its entirety.
Results of Operations
---------------------
The Company's performance of operations is very 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 strategic planning. Net interest
and dividend income for the three months ending March 31, 2002 decreased by
$329,164 to $3,568,308 when compared to $3,897,472 recorded during the same
period in 2001. Total interest and dividend income decreased by $1,432,195
partially offset by a decrease in total interest expense of $1,103,031.
Although our net interest margin stabilized during the first quarter of
2002, the series of reductions in interest rates throughout 2001 impacted
our net interest margin, as a result of loan and investment repricing at
lower interest rates due to refinancing and prepayments.
The 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 future
possible charge-offs of loans deemed to be uncollectible. The Bank's
provision during the three month period ending March 31, 2002 was $187,500,
the same amount provided during the same period in 2001.
Total Other Income increased by $63,108 for the first quarter in 2002, from
$406,122 reported for the first quarter in 2001 to $469,230 in 2002. Service
charges on both deposit accounts and overdrafts combined decreased slightly
by $3,338. The Bank realized a $2,818 loss on the sale of one security
during the first three months of 2002. There were no losses realized on the
sale of securities during the first quarter of 2001. There was an increase
of $21,770 in the cash surrender value of life insurance policies associated
with both the Directors' and Executive Officers' life insurance programs.
The purchase of additional policies during 2001 for newly hired executives
totaled $515,500 and continues to generate additional earnings.
The line item Other Income increased by $47,494 when compared to the first
three months of 2001. These income items represent earnings derived from
safe deposit box rentals, checkbook printing revenue, exchange and
commission fees, customer investment commission fees, ATM/debit card usage
fees, and recoveries of previously recorded losses relating to check fraud.
The category Other Expense, made up of various noninterest expenses,
decreased by $85,398 to $2,771,851 recorded during the first three months
ending March 31, 2002, compared to $2,857,249 reported for the same period
in 2001. Salaries and employee benefits increased by $7,399 due to general
wage adjustments and staff additions. Occupancy and equipment expenses
combined totaled $336,643 during the first quarter in 2002, compared to
$392,333 in 2001, a decrease of $55,690. The mild winter experienced during
the first quarter of 2002 contributed to lower utility and snow removal
costs. The expenses for stationery and supplies increased by $22,279 from
$52,285 reported during the first quarter in 2001 to $74,564 in 2002. This
increase was a result of additional cost for stationery and envelopes
required for marketing and business development. Professional service fees
decreased by $38,973 from the first quarter of 2001 to 2002. This decrease
reflects cost associated with legal and consulting services and collection
and repossession expenses. Marketing
13
expenses attributed to production and media costs for television and radio
commercials, print advertising and other direct marketing decreased slightly
by $619.
The following table sets forth the components of the line item Other
Expense, which reflects a decrease of $19,794 for the first quarter in 2002
compared to the same period reported in 2001.
March 31, 2002 March 31, 2001 Variance
--------------------------------------------
Amortization of Goodwill $ 0 $ 56,700 $(56,700)
Communications 81,240 82,912 (1,672)
Committee Fees 46,550 40,910 5,640
Other Miscellaneous Expenses 278,223 245,285 32,938
-----------------------------------------
$406,013 $425,807 $(19,794)
=========================================
The decrease of $19,794 was primarily due to a decrease of $56,700 in
amortization expense pertaining to goodwill, due to the implementation of
SFAS No. 142 previously mentioned, partially offset by an increase of
$32,938 in various other miscellaneous expenses.
Income before income taxes was $1,078,187 for the three month period ending
March 31, 2002 compared to $1,258,845 reported for the same period in the
prior year. Taxes totaled $296,265 down by $93,215 when compared to $389,480
reported for the first quarter in 2001. Net Income of $781,922 was down by
10.06% or $87,443 for the first quarter in 2002 compared to $869,365 in the
same period in 2001. Diluted earnings per share for the first quarter in
2002 was $0.20 compared to $0.23 reported in 2001.
Liquidity
---------
The Company's principal sources of funds are customer deposits, loan
amortization, loan payoffs, and the maturities of investment securities.
Through these sources, funds are provided for customer withdrawals from
their deposit accounts, loan originations, draw-downs on loan commitments,
acquisition of investment securities and other normal business activities.
Investors' capital also provides a source of funding.
The largest source of funds is provided by depositors. The largest component
of the Company's deposit base is reflected in the Time Deposit category. The
Company does not participate in brokered deposits. Deposits are obtained
from consumers and commercial customers within the Bank's community
reinvestment area, being Bristol County, Massachusetts and several abutting
towns in Rhode Island.
The Company also has the ability to borrow funds from correspondent banks,
the Federal Home Loan Bank, as well as the Federal Reserve Bank of Boston by
pledging various investment securities as collateral. During the first
quarter in 2001 and 2002, the Bank was not required to borrow short-term
funds to meet current liquidity needs. Tax payments made by our customers
which are owed to the Federal Reserve Bank Treasury
Tax and Loan account are classified as short-term borrowings. As of March
31, 2002, there is also $15,920,279 in advances from the Federal Home Loan
Bank representing the match funding program that is available to qualified
borrowers and an investment growth strategy transaction.
Excess available funds are invested on a daily basis as Federal Funds Sold
and can be withdrawn daily. The Bank attempts through its cash management
strategies to maintain a level of Federal Funds Sold to further enhance its
liquidity, providing funds to meet lending and other cash requirements.
14
Liquidity represents the ability of the Bank to meet its funding
requirements. In assessing the appropriate level of liquidity, the Bank
considers deposit levels, lending requirements, and investment maturities in
light of prevailing economic conditions. Through this assessment, the Bank
manages its liquidity level to optimize earnings and respond to fluctuations
in customer borrowing needs.
At March 31, 2002, the Bank's liquidity ratio stood at 35.1%, slightly
higher than the 34.9% level reported at December 31, 2001. The liquidity
ratio is determined by dividing the Bank's short term assets (cash and due
from banks, interest bearing deposits due from other banks, securities, and
federal funds sold) by the Bank's total deposits. Management believes the
Bank's liquidity to be adequate to meet the current and presently
foreseeable needs of the Bank.
Capital
-------
As of March 31, 2002, the Company had total capital of $38,744,201. This
represents an increase of $278,070 from $38,466,131 reported on December 31,
2001. The increase in capital was a combination of several factors.
Additions consisted of three months earnings of $781,922 and transactions
originating through the Dividend Reinvestment Program whereby 2,782.986
shares were issued for cash contributions of $39,923 and 11,105.008 shares
were issued for $169,360 in lieu of cash dividend payments. These additions
were offset by dividends paid of $349,543.
Also, affecting capital is accumulated other comprehensive income (loss)
which reflects net unrealized gains or losses, net of taxes, on securities
classified as Available-for-Sale and the minimum pension liability
adjustment. On December 31, 2001 the Available-for-Sale portfolio had
unrealized losses, net of taxes, of $120,943, and on March 31, 2002, as a
result of current market values, the portfolio reflects unrealized losses,
net of taxes, of $484,535. There was no change in the minimum pension
liability adjustment of $106,245, net of taxes, recorded December 31, 2001.
Under the requirements for Risk Based and Leverage Capital of the federal
banking agencies, a minimum level of capital will vary among banks based on
safety and soundness of operations. Risk Based Capital ratios are calculated
with reference to risk-weighted assets, which include both on and off
balance sheet exposure.
At March 31, 2002 the actual Risk Based Capital of the Bank was $30,919,000
for Tier 1 Capital, exceeding the minimum requirements of $10,711,400 by
$20,207,600. Total Capital of $34,292,000 exceeded the minimum requirements
of $21,422,800 by $12,689,200 and Leverage Capital of $30,919,000 exceeded
the minimum requirements of $15,432,840 by $15,486,160. 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, 2002 and at December 31, 2001.
Well March 31, 2002 December 31, 2001
Capitalized ---------------- -----------------
Requirement Bancorp Bank Bancorp Bank
-------------------------------------------------------------------------------
Total Capital (to Risk
Weighted Assets) > or = 10% 14.57% 12.81% 14.43% 12.55%
-------------------------------------------------------------------------------
Tier 1 Capital (to Risk
Weighted Assets) > or = 6% 13.32% 11.55% 13.18% 11.29%
-------------------------------------------------------------------------------
Leverage Capital (to
Average Assets) > or = 5% 9.18% 8.01% 8.98% 7.74%
-------------------------------------------------------------------------------
15
Under the revised informal agreement entered into with the Massachusetts
Commissioner of Banks and the Federal Deposit Insurance Corporation,
effective January 17, 2002, the Bank is required to maintain a seven (7)
percent Tier I Leverage Capital ratio. As of March 31, 2002, this ratio was
8.01% compared to 7.74% at year end 2001.
In addition to meeting the required levels, the Company and the Bank's
capital ratios meet the criteria of the "well capitalized" category
established by the federal banking agencies as of March 31, 2002.
ITEM 3
Quantitative and Qualitative Disclosure of Market Risk
------------------------------------------------------
Interest Rate Risk
------------------
Volatility in interest rates requires the Company to manage interest rate
risk that arises from the differences in the timing of repricing of assets
and liabilities. The Company considers interest rate risk, the exposure of
earnings to adverse movements in interest rates, to be a significant market
risk as it could potentially have an affect on the Company's financial
condition and results of operation.
The Company's Asset-Liability Management Committee, comprised of the Bank's
Executive Management team, has the responsibility of managing interest rate
risk, and monitoring and adjusting the difference between interest-sensitive
assets and interest-sensitive liabilities ("GAP" position) within various
time periods.
Management's objective is to reduce and control the volatility of its net
interest margin by managing the relationship of interest-earning assets and
interest-bearing liabilities. In order to manage this relationship, the
committee utilizes a GAP report prepared on a monthly basis. The GAP report
indicates the differences or gap between interest-earning assets and
interest-bearing liabilities in various maturity or repricing time periods.
This, in conjunction with certain assumptions, and other related factors,
such as anticipated changes in interest rates and projected cash flows from
loans, investments and deposits, provides management a means of evaluating
interest rate risk.
In addition to the GAP report, the Company also uses an analysis to measure
the exposure of net interest income to changes in interest rates over a
relatively short (i.e., 12 months) time frame. The analysis projects future
interest income and expenses from the Company's earning assets and interest-
bearing liabilities. Depending on the GAP position, the Company's policy
limit on interest rate risk specifies that if interest rates were to change
immediately up or down 200 basis points, estimated net interest income for
the next twelve months should not decline by more than ten percent. The
following table reflects the Company's estimated exposure as a percentage of
estimated net interest income for the next twelve months, assuming an
immediate change in interest rates:
Estimated Exposure as a
Rate Change Percentage of Net Interest Income
(Basis Points) March 31, 2002
------------------------------------------------------
+200 (2.01)%
-200 (4.47)%
The model used to monitor earnings-at-risk provides management a measurement
tool to assess the effect of changes in interest rates on the Company's
current and future earnings. The 10% limit established by the Company
provides an internal tolerance level to control interest rate risk exposure.
16
Part II
Other Information
ITEM 6
Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits: See exhibit index.
(b) Reports on Form 8-K: A report on Form 8-K dated February 7, 2002 was
filed with the Securities and Exchange Commission reporting under Item 5
the announcement of the early retirement as of March 29, 2002 of James D.
Carey, President and Chief Executive Officer of the Bank and Executive
Vice President of the Company.
17
EXHIBIT INDEX
Exhibit No. Description Page
----------- ----------- ----
3.1 Articles of Incorporation of Slade's Ferry Bancorp
as amended (1)
3.2 By-laws of Slade's Ferry Bancorp as amended (2)
10.1 Slade's Ferry (formerly Weetamoe) Bancorp 1996 Stock
Option Plan (as amended) (3)
10.2 Noncompetition Agreement between Slade's Ferry Trust
Company and Edward S. Machado (A substantially
identical contract exists with Peter Paskowski) (4)
10.3 Supplemental Executive Retirement Agreement between
Slade's Ferry (formerly Weetamoe) Bancorp and
Donald T. Corrigan (5)
10.4 Supplemental Executive Retirement Agreement between
Slade's Ferry (formerly Weetamoe) Bancorp and James
D. Carey (2)
10.5 Supplemental Executive Retirement Agreement between
Slade's Ferry (formerly Weetamoe) Bancorp and
Manuel J. Tavares (2)
10.6 Swansea Mall Lease (4)
10.7 Form of Director Supplemental Retirement Program
Director Agreement, Exhibit I thereto (Slade's
Ferry Trust Company Director Supplemental Retirement
Program Plan) and Endorsement Method Split Dollar
Plan Agreement thereunder for Thomas B. Almy.
(Similar forms of agreement entered into between
Slade's Ferry Trust Company and the other directors) (6)
10.8 Form of Directors' Paid-up Insurance Policy for
Thomas B. Almy (part of the Director Supplemental
Retirement Program). (Similar forms of policy
entered into by Company for other directors) (7)
10.9 Form of Officers' Paid-up Endorsement Method Split
Dollar Plan Agreement and Insurance Policies for
Janice Partridge (Similar forms of policies entered
into by Company for its President and other Vice
Presidents) (8)
--------------------
Incorporated by reference to the Registrant's Registration Statement
on Form SB-2 filed with the Commission on April 14, 1997.
Incorporated by reference to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1996.
Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended June 30, 1999.
Incorporated by reference to the Registrant's Registration Statement
on Form S-4 File No. 33-32131
Incorporated by reference to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1994.
Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended March 31,1999
Incorporated by reference to the Registrant's Form 10-QSB for the
quarter ended June 30, 1998.
Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended June 30, 2000.
18
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 10, 2002 /s/ Kenneth R. Rezendes
-------------------- -------------------------------------
(Date) (Signature) Kenneth R. Rezendes
President/Chief
Executive Officer
May 10, 2002 /s/ Donald T. Corrigan
-------------------- -------------------------------------
(Date) (Signature) Donald T. Corrigan
Chairman of the
Board of Directors
May 10, 2002 /s/ Edward Bernardo Jr.
-------------------- -------------------------------------
(Date) (Signature) Edward Bernardo Jr.
Vice President/Treasurer
Chief Financial Officer/
Chief Accounting Officer
19