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 June 30, 2006
-------------------
Commission file number 000-23904
---------------------
SLADE'S FERRY BANCORP.
------------------------------------
(Exact name of registrant as specified in its character)
Massachusetts 04-3061936
------------------------------- ----------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Slade's Ferry Avenue 02726
Somerset, Massachusetts ----------------------------------
---------------------------------------- (Zip code)
(Address of principal executive offices)
(508)-675-2121
----------------------------------------------------
(Registrant's telephone number, including area code)
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) 4,171,990 outstanding shares as of July 31, 2006.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
PART I
ITEM 1 - Financial Statements (Unaudited)........................................................... 3
* Consolidated Balance Sheets - June 30, 2006 and December 31, 2005
* Consolidated Statements of Income - Six Months Ended June 30, 2006 and 2005
* Consolidated Statements of Income - Three Months Ended June 30, 2006 and 2005
* Consolidated Statement of Changes in Stockholder's Equity - Six Months Ended
June 30, 2006
* Consolidated Statements of Cash Flows - Six Months Ended June 30, 2006 and 2005
* Notes to Consolidated Financial Statements
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 13
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk................................. 36
ITEM 4 - Controls and Procedures.................................................................... 38
PART II
ITEM 1 - Legal Proceedings.......................................................................... 39
ITEM 1A - Risk Factors.............................................................................. 39
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds................................ 39
ITEM 3 - Defaults Upon Senior Securities............................................................ 40
ITEM 4 - Submission of Matters to a Vote of Security Holders........................................ 40
ITEM 5 - Other Information.......................................................................... 40
ITEM 6 - Exhibits................................................................................... 40
2
ITEM 1
FINANCIAL STATEMENTS
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 2006 December 31, 2005
------------- -----------------
Assets (In thousands)
Cash and due from banks $ 22,319 $ 17,782
Interest-bearing demand deposits with other banks 970 36
Federal funds sold 6,200 2,200
-------- --------
Cash and cash equivalents 29,489 20,018
Interest-bearing certificates of deposit with other banks 100 100
Securities available for sale 88,744 94,298
Securities held to maturity (fair value approximates of $26,275
as of June 30, 2006 and $28,858 as of December 31, 2005) 27,235 29,306
Federal Home Loan Bank stock, at cost 6,304 6,304
Loans, net of allowance for loan losses of $4,366 at June 30, 2006
and $4,333 at December 31, 2005 426,678 409,610
Premises and equipment, net 5,746 5,917
Goodwill 2,173 2,173
Accrued interest receivable 2,091 2,298
Bank-owned life insurance 12,097 11,884
Deferred tax assets, net 2,846 2,089
Other assets 1,850 1,917
-------- --------
$605,353 $585,914
======== ========
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing $ 80,710 $ 80,705
Interest-bearing 349,358 335,141
-------- --------
Total deposits 430,068 415,846
Short-term borrowings 10,000 7,000
Long-term borrowings 93,043 100,865
Subordinated debentures 10,310 10,310
Due to broker 9,509 --
Accrued expenses and other liabilities 2,575 3,038
-------- --------
Total liabilities 555,505 537,059
Stockholders' equity:
Common stock, par value $0.01 per share; authorized 10,000,000
shares; issued and outstanding 4,164,042 shares at June 30, 2006
and 4,132,200 shares at December 31, 2005 42 41
Additional paid-in capital 31,608 31,014
Retained earnings 19,782 18,998
Accumulated other comprehensive loss (1,484) (1,198)
Unearned compensation (100) --
-------- --------
Total stockholders' equity 49,848 48,855
-------- --------
$605,353 $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)
Six Months Ended June 30,
2006 2005
---- ----
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $ 13,120 $ 10,993
Interest and dividends on securities:
Taxable 2,550 2,430
Tax-exempt 134 175
Interest on federal funds sold 64 157
Other interest 18 11
---------- ----------
Total interest and dividend income 15,886 13,766
Interest expense:
Interest on deposits 4,167 2,616
Interest on Federal Home Loan Bank advances 2,365 1,985
Interest on subordinated debentures 394 291
---------- ----------
Total interest expense 6,926 4,892
---------- ----------
Net interest and dividend income 8,960 8,874
Provision for loan losses 39 65
---------- ----------
Net interest income, after provision for loan losses 8,921 8,809
Noninterest income:
Service charges on deposit accounts 659 420
Gain on sales of assets -- 51
Gain (loss) on sales and calls of available-for-sale
securities, net (169) 17
Increase in cash surrender value of life insurance policies 213 258
Other income 546 363
---------- ----------
Total noninterest income 1,249 1,109
Noninterest expense:
Salaries and employee benefits 4,398 4,095
Occupancy and equipment expense 983 809
Professional fees 800 614
Marketing expense 187 328
Other expense 1,334 1,091
---------- ----------
Total noninterest expense 7,702 6,937
---------- ----------
Income before income taxes 2,468 2,981
Provision for income taxes 935 1,033
---------- ----------
Net income $ 1,533 $ 1,948
========== ==========
Earnings per share:
Basic $ 0.37 $ 0.48
========== ==========
Diluted $ 0.37 $ 0.47
========== ==========
Average common shares outstanding:
Basic 4,151,091 4,094,939
========== ==========
Diluted 4,168,271 4,123,796
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
4
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30,
2006 2005
---- ----
(In thousands, except per share data)
Interest and dividend income:
Interest and fees on loans $ 6,685 $ 5,727
Interest and dividends on securities:
Taxable 1,217 1,199
Tax-exempt 65 84
Interest on federal funds sold 53 92
Other interest 10 7
---------- ----------
Total interest and dividend income 8,030 7,109
Interest expense:
Interest on deposits 2,256 1,457
Interest on Federal Home Loan Bank advances 1,209 1,074
Interest on subordinated debentures 170 155
---------- ----------
Total interest expense 3,635 2,686
---------- ----------
Net interest and dividend income 4,395 4,423
Provision for loan losses -- 15
---------- ----------
Net interest income, after provision for loan losses 4,395 4,408
Noninterest income:
Service charges on deposit accounts 352 212
Gain on sales of assets -- 11
Gain (loss) on sales and calls of available-for-sale
securities, net (172) 15
Increase in cash surrender value of life insurance policies 106 111
Other income 260 191
---------- ----------
Total noninterest income 546 540
Noninterest expense:
Salaries and employee benefits 2,287 2,120
Occupancy and equipment expense 490 400
Professional fees 388 307
Marketing expense 109 229
Other expense 678 566
---------- ----------
Total noninterest expense 3,952 3,622
---------- ----------
Income before income taxes 989 1,326
Provision for income taxes 363 478
---------- ----------
Net income $ 626 $ 848
========== ==========
Earnings per share:
Basic $ 0.15 $ 0.21
========== ==========
Diluted $ 0.15 $ 0.21
========== ==========
Average common shares outstanding:
Basic 4,156,481 4,112,969
========== ==========
Diluted 4,170,610 4,132,712
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
5
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 Unearned
Stock Stock Capital Earnings Loss Compensation Total
-----------------------------------------------------------------------------------------------
(In thousands, except per share data)
Balance at December 31, 2005 4,132,200 $ 41 $31,014 $18,998 $(1,198) $ - $48,855
Comprehensive income:
Net income - - - 1,533 - - 1,533
Other comprehensive loss - - - - (286) - (286)
-------
Comprehensive income 1,247
-------
Issuance of common stock 16,842 - 302 - - - 302
Stock options exercised 28,000 1 304 - - 305
Tax benefit of stock options
exercised - - 82 - - 82
Stock-based compensation - - 136 - - 136
Purchase of treasury stock (13,000) - (230) - - (230)
Unearned compensation - - - - - (100) (100)
Dividends declared ($.18
per share) - - - (749) - - (749)
-----------------------------------------------------------------------------------------------
Balance at June 30, 2006 4,164,042 $ 42 $31,608 $19,782 $(1,484) $(100) $49,848
===============================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
6
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
-------------------------
2006 2005
---- ----
(In thousands)
Cash flows from operating activities:
Net income $ 1,533 $ 1,948
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization, net of accretion of securities 65 152
Loss (gain) on sales and calls of available-for-sale securities, net 169 (17)
Change in net deferred loan fees (10) 40
Provision for loan losses 39 65
Deferred tax provision (benefit) (491) 127
Depreciation and amortization 439 392
Gain on sale of assets -- (51)
Increase in cash surrender value of life insurance (213) (246)
Stock-based compensation 136 --
Net change in:
Other assets 67 146
Accrued interest receivable 224 (214)
Other liabilities (463) 512
-------- --------
Net cash provided by operating activities 1,495 2,854
-------- --------
Cash flows from investing activities:
Activity in available-for-sale securities:
Purchases (6,440) (20,769)
Sales 15,196 1,826
Maturities, calls and paydowns 5,611 6,548
Activity in held-to-maturity securities:
Maturities, calls and paydowns 2,046 4,256
Purchases of Federal Home Loan Bank stock -- (1,255)
Loan principal originations, net (17,097) (29,200)
Recoveries of loans previously charged off, net -- 57
Capital expenditures (268) (1,046)
Proceed from sale of property and equipment -- 28
Proceeds from sale of investment real estate -- 653
Redemption of life insurance policy -- 120
-------- --------
Net cash used in investing activities (952) (38,782)
-------- --------
The accompanying notes are an integral part of these consolidated financial statements.
7
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Six Months Ended June 30,
-------------------------
2006 2005
---- ----
(In thousands)
Cash flows from financing activities:
Net increase (decrease) in noninterest-bearing deposits $ 5 $ (2,639)
Net increase in interest-bearing deposits 14,217 9,372
Short-term advances from Federal Home Loan Bank 43,000 --
Long-term advances from Federal Home Loan Bank -- 20,000
Payments on Federal Home Loan Bank short-term advances (40,000) --
Payments on Federal Home Loan Bank long-term advances (7,822) (208)
Proceeds from issuance of common stock 302 316
Stock options exercised 305 316
Purchase of treasury stock (230) --
Unearned compensation (100) --
Dividends paid (749) (738)
-------- --------
Net cash provided by financing activities 8,928 26,419
-------- --------
Net increase (decrease) in cash and cash equivalents 9,471 (9,509)
Cash and cash equivalents at beginning of period 20,018 35,194
-------- --------
Cash and cash equivalents at end of period $ 29,489 $ 25,685
======== ========
Supplemental disclosures:
Interest paid $ 7,105 $ 4,772
Income taxes paid $ 475 $ 883
Non-cash disclosure:
Due to broker $ 9,509 $ --
The accompanying notes are an integral part of these consolidated financial statements.
8
SLADE'S FERRY BANCORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 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 six months
ended June 30, 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., 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,
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
six months ended June 30, 2006. In accordance with SFAS No. 123(R), for the six
months ended June 30, 2006, the Company has expensed, on a straight line basis,
the previously unrecognized compensation costs related to the non-vested
portion of awards granted and outstanding as of January 1, 2006 based on the
grant-date fair value of those awards as calculated under the original
provisions of Statement No. 123. Fair value has been determined using
Black-Scholes option-pricing
9
model. Compensation costs are now being recognized over the period the employee
is required to provide services to obtain the award. The impact of adopting SFAS
No. 123(R) was a reduction of income before income taxes of $136,000 and a
reduction of net income by $98,000 for the six months ended June 30, 2006. Basic
and diluted earnings per share were reduced by $0.02 and $0.03 per share,
respectively. The impact of adopting SFAS No. 123(R) was a reduction of income
before income taxes of $70,000 and a reduction of net income of $51,000 for the
three months ended June 30, 2006. Basic and diluted earnings per share were
reduced by $0.01 per share.
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.
A summary of the status of the Company's stock option plans (shares in
thousands) are presented below:
Stock Options Outstanding
---------------------------
Shares Available Weighted-Average
Options for Grant Shares Exercise Price
------- ---------------- ------ ----------------
Balance at December 31, 2005 164 255 $15.92
Granted (8) 8 18.40
Stock options exercised - (28) 10.89
Shares vested - - -
Forfeited or expired - (4) 14.18
--- ---
Balance at June 30, 2006 156 231
=== ===
The weighted-average grant-date fair value of options granted during the six
months ended June 30, 2006 was $18.40. The total intrinsic value of options
exercised during the six months ended June 30, 2006 was $325,000.
A summary of options outstanding (shares in thousands) at June 30, 2006 is as
follows:
Stock Options
-----------------------------
Outstanding Exercisable
----------- -----------
Total number of shares 231 203
Weighted average exercise price $ 18.18 $ 18.03
Aggregate intrinsic value (in thousands) $ 4,198 $ 3,360
Weighted average remaining contractual
term (in months) 11 11
10
The fair value of each option award is estimated on the date of grant based on
a number of factors including volatilities, dividends, and expected terms.
Listed below is a summary of the factors we employed:
June 30, 2006
-------------
Expected volatility 24% - 33%
Weighted-average volatility 29%
Expected dividends 1.90%
Expected term (in years) 5 - 10
Risk-free rate 3.98% - 5.22%
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 and six months ended June 30, 2005.
[OBJECT OMITTED]]
Three Months Ended Six Months Ended
June 30, June 30,
2005 2005
------------------ ----------------
(In thousands, except per share data)
Net income, as reported $ 848 $1,948
Deduct: stock-based employee compensation expense
determined under fair value method, net of
related tax effects 26 63
----- ------
Net income, pro forma $ 822 $1,885
===== ======
Earnings per share - basic As reported $0.21 $0.48
===== ======
Pro forma $0.20 $0.46
===== ======
Earnings per share - assuming dilution As reported $0.21 $0.47
===== ======
Pro forma $0.20 $0.46
===== ======
11
NOTE D - PENSION PLAN
---------------------
The components of net periodic pension expense (income) are as follows:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2006 2005 2006 2005
---- ---- ---- ----
(In thousands)
Interest cost $ 16 $ 21 $ 33 $ 43
Expected return on plan assets (29) (37) (58) (74)
Settlements 133 - 133 -
Recognized net actuarial loss 8 9 15 17
---- ---- ---- ----
Net periodic benefit expense (income) $128 $ (7) $123 $(14)
==== ==== ==== ====
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.
12
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 $605.4
million, consolidated net loans and leases of $426.7 million, consolidated
deposits of $430.1 million and consolidated shareholders' equity of $49.8
million as of June 30, 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 the
context otherwise requires.
13
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 JUNE 30, 2006 AND DECEMBER 31, 2005
------------------------------------------------------------------------
GENERAL
-------
Total assets increased by $19.5 million, or 3.3%, from $585.9 million at
December 31, 2005 to $605.4 million at June 30, 2006. Total net loans increased
by $17.1 million, or 4.2%, from $409.6 million to $426.7 million. Deposits
increased by $14.2 million, or 3.4%, from $415.8 million to $430.1 million. The
increase in deposits was partially offset by a decrease in Federal Home Loan
Bank advances of $4.8 million.
CASH AND CASH EQUIVALENTS
-------------------------
Cash and cash equivalents increased by $9.5 million, from $20.0 million at
December 31, 2005 to $29.5 million at June 30, 2006. This increase was due
primarily to uninvested proceeds from an investment exchange at June 30, 2006
(see "Investment Portfolio", below).
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.
14
Our total investment portfolio decreased from $129.9 million at December 31,
2005 to $122.3 million at June 30, 2006, a decrease of 5.9%. The decrease is
the result of sales, maturities, calls and paydowns of certain state and
municipal obligations and mortgage-backed securities. Those funds were used to
provide liquidity for current loan growth.
An overriding investment strategy is to allow the investment portfolio to
decrease through normal paydowns and maturities and reinvest these funds into
higher yielding loans or investments. At June 30, 2006, the portfolio duration
was approximately 3.1 years which was within our 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 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 the flexibility to alter the
investment strategy 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. Available-for-sale securities decreased from $94.3
million at December 31, 2005 to $88.7 million at June 30, 2006.
On June 20, 2006, the Board of Directors approved a strategy to restructure the
available-for-sale investment portfolio through the sale of approximately $14.5
million of low-yielding obligations of government-sponsored enterprises.
Realized losses amounted to $176,000 or 1.2% of the underlying cost basis of
these securities. All purchases and sales relating to this reinvestment
strategy were reflected in the financial statements as of June 30, 2006.
The following table shows the amortized cost basis and fair value of securities
available for sale at June 30, 2006 and December 31, 2005.
June 30, 2006 December 31, 2005
---------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
(In thousands)
Debt Securities:
Government-sponsored enterprises $34,450 $33,504 $50,443 $49,581
Corporate 9,517 9,057 9,564 9,014
Mortgage-backed 42,640 41,867 31,574 31,232
------- ------- ------- -------
Total debt securities 86,607 84,428 91,581 89,827
------- ------- ------- -------
Marketable equity securities 3,306 3,151 3,426 3,271
Mutual funds 1,215 1,165 1,205 1,200
------- ------- ------- -------
Total securities available for sale $91,128 $88,744 $96,212 $94,298
======= ======= ======= =======
15
SECURITIES HELD TO MATURITY
The held-to-maturity portfolio consists of mortgage-backed securities and
securities issued by states and municipalities. These securities are carried at
amortized cost. Held-to-maturity securities decreased from $29.3 million at
December 31, 2005 to $27.2 million at June 30, 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 and fair value of securities
held to maturity at June 30, 2006 and December 31, 2005.
June 30, 2006 December 31, 2005
---------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
(In thousands)
State and municipal obligations $ 6,098 $ 6,164 $ 6,766 $ 6,892
Mortgage-backed securities 21,137 20,111 22,540 21,966
------- ------- ------- -------
Total securities held to maturity $27,235 $26,275 $29,306 $28,858
======= ======= ======= =======
LOANS
-----
Our 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 our competitors.
Total net loans were 70.5% of total assets at June 30, 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. 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 $211.3 million and
comprised 49.0% of the total gross loan portfolio at June 30, 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.
16
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 that adjust every one or three years
from the outset of the loan.
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 saleable, we have not chosen to sell these loans. Rather, we maintain
them in our portfolio, consistent with our income and interest rate risk
management targets.
Residential real estate loans totaled $127.0 million and comprised 29.4% of the
total gross loan portfolio at June 30, 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
Commercial business loans consist 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 the invoice date.
Commercial loans totaled $50.0 million and comprised 11.6% of the total gross
loan portfolio at June 30, 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 this aspect of 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 $23.3 million and comprised
5.4% of total gross loan portfolio at June 30, 2006. At December 31, 2005, the
construction and land development loans totaled $21.5 million or 5.2% of total
gross loans. Again with the implementation of our loan portfolio management
team, our commercial loan officers are able to manage 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. Interest
rates on our home equity lines of credit are generally indexed to the Wall
Street Journal Prime Rate and adjust on a monthly basis.
Home equity lines of credit totaled $17.1 million and comprised 4.0% of the
total gross loan portfolio at June 30, 2006. At December 31, 2005, home equity
lines of credit totaled $17.9 million, or 4.3% of total gross loans.
17
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.
Consumer loans totaled $2.7 million and comprised 0.6% of the total gross loan
portfolio at June 30, 2006. At December 31, 2005, the consumer loans totaled
$2.6 million, or 0.6% of total gross loans.
The following table summarizes our loan portfolio by category at June 30, 2006
and December 31, 2005.
Percentage
June 30, 2006 December 31, 2005 Increase/(Decrease)
------------- ----------------- -------------------
(Dollars in thousands)
Real estate mortgage loans:
Commercial $211,280 $213,815 -1.19%
Residential 126,943 120,345 5.48%
Construction and land development 23,359 21,490 8.70%
Home equity lines of credit 17,122 17,915 -4.43%
Commercial, financial and agricultural 50,015 38,111 31.24%
Consumer loans 2,671 2,623 1.83%
-------- -------- ------
Total loans 431,390 414,299 4.13%
Less: Allowance for loan losses (4,366) (4,333) 0.76%
Net deferred loan fees (346) (356) -2.81%
-------- -------- ------
Loans, net $426,678 $409,610 4.17%
======== ======== ======
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 a
weaker overall general market environment relating to commercial real estate
and home equity lines of credit.
The following table presents information with respect to non-performing loans
at the dates indicated.
At June 30, 2006 At December 31, 2005
---------------- --------------------
(Dollars in thousands)
Non-accrual loans $ 441 $ 906
Loans 90 days or more past due and still accruing - -
------- -------
Total non-performing loans $ 441 $ 906
======= =======
Percentage of non-accrual loans to total loans 0.10% 0.22%
Percentage of allowance for loan losses to non-accrual loans 990.02% 478.26%
18
The $441,000 in non-accrual loans as of June 30, 2006 consists of $402,000 of
commercial real estate loans, $34,000 of residential real estate loans and
$5,000 of consumer loans. There were no restructured or impaired loans included
in non-accrual loans for the six months ended June 30, 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 and future payments are reasonably
assured. When a loan, or any portion of a loan, is determined to be
uncollectible, it is charged off to the Allowance for Loan Losses. If
applicable, any real estate securing the loan is acquired through foreclosure,
and recorded as Other Real Estate Owned at the then fair market value, and
thereby reducing the amount required to be charged against the Allowance for
Loan Losses.
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. For 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 loans is lower than the carrying value of that
loan. Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. We do 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.
19
ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
The table below illustrates the changes in the Allowance for Loan Losses for
the periods indicated.
Six Months Ended June 30,
-------------------------
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 6 -
------ ------
6 -
------ ------
Recoveries:
Real estate mortgage loans:
Commercial - -
Residential - -
Home equity lines of credit - 16
Commercial, financial and agricultural loans - 32
Consumer - 9
------ ------
- 57
------ ------
Net loan recoveries (charge-offs) (6) 57
Provision for loan losses 39 65
------ ------
Balance at end of period $4,366 $4,223
====== ======
Allowance for loan losses as a percent of loans 1.02% 1.08%
====== ======
Ratio of net loan 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. 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.
20
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 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 six months ended June 30, 2006 as
compared to a provision of $65,000 for the six months ended June 30, 2005. The
allowance for loan losses as a percentage of total loans outstanding declined
from 1.05% at December 31, 2005 to 1.01% at June 30, 2006. The decline in the
provision for loan losses in 2006, as compared to the same period in 2005, was
primarily attributable to refinements in calculating the risk components
inherent in our loan portfolio. These refinements in the allocated risk factors
attributable to all loan pools were finalized in the second quarter of 2006.
This table below shows an allocation of the allowance for loan losses at the
dates indicated. The unallocated portion of the allowance for loan losses is
reflected in the allocation for real estate mortgage loans.
June 30, 2006 December 31, 2005
------------------------------------------------------------------
Percent of Loans in Percent of Loans
Each Category to in Each Category
Amount Total Loans Amount to Total Loans
------ ------------------- ------ ----------------
(Dollars in thousands)
Commercial $ 775 11.6% $ 905 9.2%
Real estate construction 247 5.4% 248 5.2%
Real estate mortgage 3,157 82.4% 3,056 85.0%
Consumer 187 0.6% 124 0.6%
------------------------ ------------------------
$4,366 100.0% $4,333 100.0%
======================== ========================
21
DEPOSITS
--------
We continue our efforts to competitively price deposit 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 competition from local branches of
nationwide and regional banks as well as local banks and credit unions. Our
total deposits increased from $415.8 million at December 31, 2005 to $430.1
million at June 30, 2006, an increase of $14.2 million or 3.4%. The increase in
total deposits was primarily attributable to increases in term deposits. A
$10.0 million certificate of deposit from the Commonwealth of Massachusetts
that is to be used to assist in promoting job growth through loans to
qualifying small businesses, and other reinvestments from lower-yielding
deposit products made up the majority of this increase.
The following table presents deposits by category at June 30, 2006 and December
31, 2005.
Percentage
June 30, 2006 December 31, 2005 Increase/(Decrease)
------------------------------------------------------------
(Dollars in thousands)
Demand deposits $ 80,710 $ 80,705 0.01%
NOW 53,118 55,493 -4.28%
Regular and other savings 82,288 87,146 -5.57%
Money market deposits 27,595 29,835 -7.51%
-------- -------- ----
Total non-certificate accounts 243,711 253,179 -3.74%
-------- -------- ----
Term certificates less than $100,000 120,723 116,861 3.30%
Term certificates of $100,000 or more 65,634 45,806 43.29%
-------- -------- ----
Total certificate accounts 186,357 162,667 14.56%
-------- -------- ----
Total deposits $430,068 $415,846 3.42%
======== ======== ====
BORROWINGS
----------
Short- and long-term advances from the Federal Home Loan Bank of Boston
totaling $103.0 million at June 30, 2006, as compared to $107.9 million at
December 31, 2005, a decrease of $4.8 million or 4.5%. Our strategy is to
utilize advances from the Federal Home Loan Bank in conjunction with the
investment portfolio runoffs to fund loans as required. There was no change in
the balance of our subordinated debentures.
22
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED
------------------------------------------------------------
JUNE 30, 2006 AND 2005
----------------------
GENERAL
-------
Net income decreased from $1.9 million or $0.47 per share on a diluted basis,
for the six months ended June 30, 2005 to $1.5 million or $0.37 per share on a
diluted basis, for the six months ended June 30, 2006, a decrease of 21.30%.
Net interest and dividend income increased by $86,000 or 1.00%, from $8.9
million to $9.0 million when comparing the six months ended June 30, 2005 and
2006. Over the same period, the provision for loan losses decreased from
$65,000 to $39,000. Non-interest income increased by $140,000 or 12.62% from
$1.1 million to $1.2 million for the six months ended June 30, 2005 and 2006.
Non-interest expenses increased by $765,000 or 11.03%, from $6.9 million for
the six months ended June 30, 2005 to $7.7 million for the six months ended
June 30, 2006.
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 $2.1 million or 15.40%, to $15.9
million for the six months ended June 30, 2006 from $13.8 million for the six
months ended June 30, 2005. This increase is attributable to the growth in the
loan portfolio and higher yields on loans. The average balance of loans
increased by $35.5 million or 9.23% and the yield on the loan portfolio
increased from 5.76% for the six months ended June 30, 2005 to 6.30% for the
six months ended June 30, 2006. The increase was principally 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
decreased by $29,000, on a fully taxable equivalent basis, for the six months
ended June 30, 2006 compared to the six months ended June 30, 2005,
respectively. The decrease was due to a combination of higher rates and reduced
average balances, and the lack of a second quarter dividend declaration by the
Federal Home Loan Bank of Boston. Based on preliminary information from the
Federal Home Loan Bank, it is expected that this dividend will be declared in
the third quarter of 2006.
INTEREST EXPENSE
----------------
Total interest expense increased by $2.0 million or 41.58%, from $4.9 million
for the six months ended June 30, 2005 to $6.9 million for the six months ended
June 30, 2006. Market interest rates and our own deposit rates have also
increased. Interest on deposits increased by $1.6 million or 59.29% when
comparing the six months ended June 30, 2006 and 2005. In response to
competitive pressures and the rising rate environment, we raised rates on
certain 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 1.66% for the
six months ended June 30, 2005 to 2.49% for the six months ended June 30, 2006.
Interest expense associated with the Federal Home Loan Borrowings increased by
$380,000 due to a combination of rate increases and volume increases related to
the need to fund loan growth. Interest expense associated with subordinated
debentures increased by $103,000, the result of increased market interest
rates. The debentures carry an adjustable rate of interest tied to the
three-month LIBOR rate.
23
NET INTEREST MARGIN
-------------------
As a result of the current interest rate environment and our corresponding rate
increases on deposit accounts, the net interest margin has compressed 15 basis
points from 3.46% for the six months ended June 30, 2005 to 3.31% at June 30,
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.
PROVISION FOR LOAN LOSSES
-------------------------
After thorough review and analysis of the adequacy of the loan loss reserve,
management deemed it prudent to provide $39,000 for possible loan losses for
the six months ended June 30, 2006 compared to $65,000 for possible loan losses
for the six months ended June 30, 2005. The decline in the provision for loan
losses in 2006 was attributable to continued improvements in the overall loan
quality, combined with the refinements made in the allocated risk factors
attributable to all components of our loan portfolio, during the six months
ended June 30, 2006, as compared to the same period in 2005.
24
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 six
months ended June 30, 2006 and 2005. Average balances reported are daily
averages.
Six Months Ended June 30,
------------------------------------------------------------------------------------
2006 2005
---------------------------------------- ----------------------------------------
Average Interest Average Average Interest Average
Balance Income/Expense Rate Balance Income/Expense Rate
---------------------------------------- ----------------------------------------
Assets: (Dollars in thousands)
------
Interest earning assets (2)
Loans:
Commercial $ 44,416 $ 1,658 7.53% $ 30,272 $ 907 6.04%
Commercial real estate 228,745 7,319 6.45% 220,402 6,561 6.00%
Residential real estate 144,352 4,066 5.68% 131,579 3,457 5.30%
Consumer 2,557 77 6.07% 2,312 68 5.93%
----------------------- -----------------------
Total loans 420,070 13,120 6.30% 384,565 10,993 5.76%
Federal funds sold 2,738 64 4.71% 12,606 157 2.51%
Taxable debt securities 109,752 2,394 4.40% 106,927 2,235 4.21%
Tax-exempt debt securities (1) 6,260 208 6.69% 8,127 271 6.72%
Marketable equity securities 4,355 74 3.43% 4,809 83 3.48%
FHLB stock 6,304 82 2.62% 5,485 112 4.12%
Other investments 650 18 5.58% 775 11 2.86%
----------------------- -----------------------
Total interest earning assets 550,129 15,960 5.85% 523,294 13,862 5.34%
Allowance for loan losses (4,358) ------- (4,163) -------
Deferred loan fees (330) (401)
Cash and due from banks 12,951 18,311
Other assets 26,229 25,575
-------- --------
$584,621 $562,616
======== ========
Liabilities and Stockholders' Equity:
Interest bearing liabilities
Savings accounts $ 83,637 $ 529 1.28% $ 91,619 $ 468 1.03%
NOW accounts 56,715 361 1.28% 48,242 231 0.97%
Money market accounts 26,898 258 1.93% 37,311 218 1.18%
Time deposits 169,791 3,019 3.59% 141,333 1,699 2.42%
FHLB advances 110,998 2,365 4.30% 104,460 1,985 3.83%
Subordinated debt 10,310 394 7.71% 10,310 291 5.69%
----------------------- -----------------------
Total interest bearing liabilities 458,349 6,926 3.05% 433,275 4,892 2.28%
Demand deposits 73,868 ------- 79,334 -------
Other liabilities 842 2,594
-------- --------
Total liabilities 533,059 515,203
Total stockholders' equity 51,562 47,413
-------- --------
$584,621 $562,616
======== ========
Net interest income $ 9,034 $ 8,970
======= =======
Net interest spread 2.80% 3.06%
==== ====
Net interest margin 3.31% 3.46%
==== ====
(1) On a fully taxable basis based on tax rate of 35.0% for 2006 and 2005. Interest income on investments and net interest
income includes a fully taxable equivalent adjustment of $74,000 in 2006 and $96,000 in 2005.
(2) 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.
25
The following table presents the changes in components of net interest income
for the six months ended June 30, 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.
Six Months Ended June 30,
2006 vs. 2005 Increase (Decrease)
---------------------------------
Total Due to Due to
Change Volume Rate
---------------------------------
(In thousands)
Commercial loans $ 751 $ 492 $ 259
Commercial real estate 758 255 503
Residential real estate 609 349 260
Consumer loans 9 7 2
Federal funds sold (93) (177) 84
Taxable debt securities 159 60 99
Tax-exempt debt securities (63) (62) (1)
Marketable equity securities (9) (8) (1)
FHLB Stock (30) 14 (44)
Other investments 7 (3) 10
--------------------------------
Total interest income 2,098 927 1,171
--------------------------------
Savings accounts 61 (46) 107
NOW accounts 130 45 85
Money market accounts 40 (80) 120
Time deposits 1,320 391 929
FHLB advances 380 129 251
Subordinated debt 103 - 103
--------------------------------
Total interest expense 2,034 439 1,595
--------------------------------
Net interest income $ 64 $ 488 $ (424)
================================
NON-INTEREST INCOME
-------------------
Non-interest income increased from $1.1 million for the six months ended June
30, 2005 to $1.2 million for the six months ended June 30, 2006, an increase of
$140,000 or 12.6%. Service charges on deposit accounts increased by $239,000 or
56.9% from $420,000 for the six months ended June 30, 2005 to $659,000 for the
six months ended June 30, 2006. This was the result of an increase in overdraft
fees with the implementation of an overdraft protection program partially
offset by a decrease in service charges on checking accounts. For the six
months ended June 30, 2006, and in accordance with the previously-mentioned
investment portfolio restructuring strategy, we recognized losses on the sale
of securities, including certain low-yielding investments in order to acquire
higher yielding assets, in the amount of $169,000 when compared to a gain of
$17,000 for the six months ended June 30, 2005. Cash surrender value increases
pertaining to bank-owned life insurance policies decreased $45,000 to $213,000
for the six months ended June 30, 2006 from $258,000 for the six months ended
June 30, 2005. Additionally, other income increased from $363,000 for the six
months ended June 30, 2005 to $546,000 for the six months ended June 30, 2006,
primarily as a result of increased commissions earned on the sale of
non-deposit investment products, combined with increased volumes in official
check fees and debit card income.
26
NON-INTEREST EXPENSE
--------------------
Non-interest expense increased from $6.9 million for the six months ended June
30, 2005 to $7.7 million for the six months ended June 30, 2006, an increase of
$765,000 or 11.0%. Salaries and employee benefits increased by $303,000 or
7.4%, from $4.1 million for the six months ended June 30, 2005 to $4.4 million
for the six months ended June 30, 2006. The increase in salaries and benefits
includes the adoption of SFAS 123(R) effective January 1, 2006 applicable to
the Company's stock-based employee compensation plan which resulted in the
recognition of $136,000 in expense, and settlement accounting recognized on the
Bank's defined benefit pension plan totaling $133,000. Occupancy and equipment
expense for the six months ended June 30, 2006 increased $174,000 to $983,000
as compared to $809,000 for the six months ended June 30, 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 $186,000 due primarily to the outsourcing of our internal audit
function commencing January 1, 2006 and consultations regarding accounting and
regulatory matters. Marketing expense decreased $141,000 to $187,000 for the
six months ended June 30, 2006 from $328,000 for the six months ended June 30,
2005 which is attributable to the timing of certain advertising and community
sponsorship initiatives in 2006. Other expense increased $243,000 or 22.3% from
$1.1 million for the six months ended June 30, 2005 to $1.3 million for the six
months ended June 30, 2006. This increase was due to the increased volume of
internet banking and cash management fees, increased postage cost, the
outsourcing of our courier service, and the increase of meetings and committee
fees for two additional Board members when compared to June 30, 2005.
PROVISION FOR INCOME TAXES
--------------------------
Income before income taxes was $3.0 million for the six months ended June 30,
2005 as compared to $2.5 million for the six months ended June 30, 2006.
Provision for income taxes totaled $1.0 million and $935,000 for the six months
ended June 30, 2005 and 2006, respectively, representing effective tax rates of
34.65% and 37.88%, respectively. The increase in the overall tax rate was due
to a decline in income for the Bank's subsidiaries which are taxed at a lower
state tax rate, a decline in federally exempt municipal income and a decrease
in cash surrender value of life insurance, which is tax-exempt income,
recognized in the six months ended June 30, 2006 compared to 2005.
27
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
--------------------------------------------------------------
JUNE 30, 2006 AND 2005
----------------------
GENERAL
-------
Net income decreased from $848,000 or $0.21 per share on a diluted basis, for
the three months ended June 30, 2005 to $626,000 or $0.15 per share on a
diluted basis, for the three months ended June 30, 2006, a decrease of 26.2%.
Net interest and dividend income remained stable when comparing the three
months ended June 30, 2005 and 2006. The provision for loan losses decreased by
$15,000 for the three months ended June 30, 2006. Non-interest income increased
by $6,000 or 1.1% from $540,000 to $546,000 for the three months ended June 30,
2005 and 2006. Non-interest expense increased by $330,000 or 9.1%, from $3.6
million for the three months ended June 30, 2005 to $4.0 million for the three
months ended June 30, 2006.
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 $921,000 or 13.0%, from $7.1 million
for the three months ended June 30, 2005 to $8.0 million for the three months
ended June 30, 2006. This increase can be attributed to both the growth in the
loan portfolio as well as an increase in yields on loans. The average balance
of loans increased by $29.6 million or 7.52% and an increase in yield on the
loan portfolio from 5.84% for the three months ended June 30, 2005 to 6.34% for
the three months ended June 30, 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 decreased by
$45,000, on a fully taxable equivalent basis, for the three months ended June
30, 2006 compared to the three months ended June 30, 2005. The decrease was due
to a combination of higher rates off set by a reduction in average balances,
and the lack of a second quarter dividend declaration by the Federal Home Loan
Bank of Boston. Preliminary indications from the Federal Home Loan Bank are
that this dividend will be declared in the third quarter of 2006.
INTEREST EXPENSE
----------------
Total interest expense increased by $949,000 or 35.33%, from $2.7 million for
the three months ended June 30, 2005 to $3.6 million for the three months ended
June 30, 2006. In response to competitive pressures and the rising rate
environment, we raised rates on certain 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 1.82% for the three months ended June 30, 2005 to 2.65%
for the three months ended June 30, 2006. The interest expense on Federal Home
Loan Bank borrowings increased $135,000 during this same time period due
primarily to associated rate increases. Interest expense associated with
subordinated debentures increased by $15,000, the result of increased market
interest rates. The debentures carry an adjustable rate of interest tied to the
three-month LIBOR rate.
28
NET INTEREST MARGIN
-------------------
As a result of the current interest rate environment and our corresponding rate
increases on deposit accounts, the net interest margin has compressed 14 basis
points from 3.36% for the three months ended June 30, 2005 to 3.22% at June 30,
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.
PROVISION FOR LOAN LOSSES
-------------------------
After thorough review and analysis of the adequacy of the loan loss reserve,
management deemed it prudent to provide no provision for possible loan losses
for the three months ended June 30, 2006 compared to $15,000 for possible loan
losses for the three months ended June 30, 2005. The decline in the provision
for loan losses in 2006 was attributable to continued improvements in the
overall loan quality, combined with refinements made in the allocated risk
factors attributable to all components of our loan portfolio, during the three
months ended June 30, 2006, as compared to the same period in 2005.
29
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 June 30, 2006 and 2005. Average balances reported are daily
averages.
Three Months Ended June 30,
--------------------------------------------------------------------------------------
2006 2005
----------------------------------------- -----------------------------------------
Average Interest Average Average Interest Average
Balance Income/Expense Rate Balance Income/Expense Rate
----------------------------------------- -----------------------------------------
Assets: (Dollars in thousands)
------
Interest earning assets (2)
Loans:
Commercial $ 46,111 $ 885 7.70% $ 32,019 $ 491 6.15%
Commercial real estate 228,558 3,710 6.51% 224,863 3,414 6.09%
Residential real estate 145,725 2,051 5.65% 134,281 1,786 5.33%
Consumer 2,565 39 6.10% 2,225 36 6.49%
--------------------------- -------------------------
Total loans
422,959 6,685 6.34% 393,388 5,727 5.84%
Federal funds sold 4,387 53 4.85% 13,051 92 2.83%
Taxable debt securities 108,068 1,182 4.39% 107,093 1,113 4.17%
Tax-exempt debt securities (1) 6,099 102 6.68% 7,787 129 6.66%
Marketable equity securities 4,344 35 3.23% 4,653 23 1.98%
FHLB stock 6,304 - 0.00% 5,905 63 4.28%
Other investments 650 10 6.17% 799 7 3.51%
--------------------------- -------------------------
Total interest earning assets 552,811 8,067 5.85% 532,676 7,154 5.39%
---------- ---------
Allowance for loan losses (4,373) (4,205)
Deferred loan fees (310) (486)
Cash and due from banks 13,932 18,115
Other assets 26,432 25,057
---------- ----------
$ 588,492 $ 571,157
========== ==========
Liabilities and Stockholders'
-----------------------------
Equity:
Interest bearing liabilities
Savings accounts $ 82,199 $ 272 1.33% $ 93,492 $ 264 1.13%
NOW accounts 57,648 188 1.31% 26,789 151 2.26%
Money market accounts 25,709 149 2.32% 56,829 99 0.70%
Time deposits 175,539 1,647 3.76% 144,393 943 2.62%
FHLB advances 110,802 1,209 4.38% 110,118 1,074 3.91%
Subordinated debt 10,310 170 6.61% 10,310 155 6.03%
--------------------------- -------------------------
Total interest bearing
liabilities 462,207 3,635 3.15% 441,931 2,686 2.44%
---------- ---------
Demand deposits 73,494 79,401
Other liabilities 707 2,388
---------- ----------
Total liabilities 536,408 523,720
Total stockholders' equity 52,084 47,437
---------- ----------
$ 588,492 $ 571,157
========== ==========
Net interest income $ 4,432 $ 4,468
=========== =========
Net interest spread 2.70% 2.95%
======= =======
Net interest margin 3.22% 3.36%
======= =======
(1) On a fully taxable basis based on 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 $45,000 in 2005.
(2) 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.
30
The following table presents the changes in components of net interest income
for the three months ended June 30, 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 June 30,
2006 vs. 2005 Increase (Decrease)
--------------------------------------------
Total Due to Due to
Change Volume Rate
--------------------------------------------
(In thousands)
Commercial loans $ 395 $ 251 $ 144
Commercial real estate 296 57 239
Residential real estate 265 157 108
Consumer loans 3 5 (2)
Federal funds sold (39) (83) 44
Taxable debt securities 69 10 59
Tax-exempt debt securities (28) (28) -
Marketable equity securities 12 (2) 14
FHLB Stock (63) 2 (65)
Other investments 3 (2) 5
---------------------------------------------
Total interest income
913 367 546
---------------------------------------------
Savings accounts 8 (35) 43
NOW accounts 37 137 (100)
Money market accounts 50 (117) 167
Time deposits 704 233 471
FHLB advances 135 7 128
Subordinated debt 15 - 15
---------------------------------------------
Total interest expense 949 225 724
---------------------------------------------
Net interest income $ (36) $ 142 $ (178)
=============================================
NON-INTEREST INCOME
-------------------
Non-interest income increased from $540,000 for the three months ended June 30,
2005 to $546,000 for the three months ended June 30, 2006, an increase of
$6,000 or 1.11%. Increases in service charges on deposit accounts and increases
in the volumes of official check fees and debit card income were offset
primarily by recognized losses on the sale of securities, including certain
low-yielding investments in order to acquire higher yielding assets, in
accordance with the previously-mentioned investment portfolio restructuring
strategy.
NON-INTEREST EXPENSE
--------------------
Non-interest expense increased from $3.6 million for the three months ended
June 30, 2005 to $4.0 for the three months ended June 30, 2006, an increase of
$330,000 or 9.11%. Salaries and employee benefits increased by $167,000 or
7.88%, from $2.1 million for the three months ended June 30, 2005 to $2.3
million for the three months ended June 30, 2006. The increase in salaries and
benefits includes the adoption of SFAS 123(R) effective January 1, 2006
applicable to the Company's stock-based employee compensation plan which
resulted in the recognition of $71,000 in expense and settlement accounting
recognized on the Bank's defined benefit pension plan totaling $133,000, which
were partially offset by other reductions in salary expense with associated
benefit costs due to outsourcing initiatives. Occupancy and equipment expense
for the three months
31
ended June 30, 2006 increased $90,000 to $490,000 as compared to $400,000 for
the three months ended June 30, 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 $81,000 as a result of outsourcing
the internal audit function commencing January 1, 2006. Marketing expense
decreased $120,000 to $109,000 for the three months ended June 30, 2006 from
$229,000 for the three months ended June 30, 2005 which is attributable to the
timing of certain advertising and community sponsorship initiatives in 2006.
Other expense increased $112,000 or 19.79% from $566,000 for the three months
ended June 30, 2005 to $678,000 for the three months ended June 30, 2006. The
increase in other expense was due to the recognition of $42,000 of losses due to
implementation of an overdraft protection program combined with expenses
attributable to the increased volumes of internet banking and cash management
fees, postal cost increases, the outsourcing of our courier service, and the
increase of meetings and committee fees for two additional Board of Director
members when compared to the three months ended June 30, 2005.
PROVISION FOR INCOME TAXES
--------------------------
Income before income taxes was $1.3 million for the three months ended June 30,
2005 as compared to $1.0 million for the three months ended June 30, 2006.
Provision for income taxes totaled $478,000 and $363,000 million for the three
months ended June 30, 2005 and 2006, respectively, representing effective tax
rates of 36.05% and 36.70%, respectively. The increase in the overall tax rate
was due to a decline in income for the Bank's subsidiaries which are taxed at a
lower state tax rate, a decline in federally exempt municipal income and a
decrease in the cash surrender value of life insurance, which is tax-exempt
income, recognized in the three months ended 2006 compared to 2005.
32
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 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 the 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 six months ended
June 30, 2006, cash flow from maturities of securities was $7.7 million and the
proceeds from sales of securities totaled $15.1 million. In comparison
maturities of securities aggregated $10.8 million, and the proceeds from sales
of securities aggregated $1.8 million for the six months ended June 30, 2005.
Purchases of securities for the six months ended June 30, 2006 totaled $6.4
million without the due to broker amount reflected on the June 30, 2006 balance
sheet as compared to $20.8 million at June 30, 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 June 30, 2006,
the Bank's outstanding borrowings from the Federal Home Loan Bank of Boston
were $103.0 million. The Bank has the capacity to borrow in excess of
additional $40.0 million at the Federal Home Loan Bank.
Loan originations for the six months ended June 30, 2006 totaled $58.4 million.
Commitments to originate loans at June 30, 2006 were $6.5 million, excluding
unadvanced construction funds totaling $16.6 million, unadvanced commercial
lines of credit totaling $18.2 million and unadvanced home equity lines
totaling $16.7 million. Management believes that adequate liquidity is
available to fund loan commitments utilizing deposits, loan amortization,
maturities of securities, or borrowings.
Liquidity declined marginally during the six months ended June 30, 2006 due
primarily to a greater reliance on Federal Home Loan Bank borrowings.
CAPITAL
-------
At June 30, 2006, our total shareholders' equity was $49.8 million, an increase
of $993,000 from $48.9 million at December 31, 2005. Additions to shareholders'
equity consisted primarily of net income of $1.5 million for the six months
ended June 30, 2006. In addition, there were 16,842 shares issued at a value of
$302,000, pursuant to our Dividend Reinvestment Program, in lieu of cash
dividends or for optional cash contributions. Furthermore, stock option
exercises resulted in the issuance of 28,000 shares common stock at a value of
$305,000, including a tax benefit compensation expense of $82,000 and
stock-based compensation of $136,000. These additions were offset by dividends
declared of $749,000, the purchase of treasury stock of $230,000, the
contribution of $100,000 to a trust for the purchase of our common stock and an
accumulated other comprehensive loss of $286,000.
33
In May 2006, the Board authorized the purchase of 50,000 shares of common stock
to be held in trust for future restricted stock awards under the 2004 Equity
Incentive Plan. The $100,000, which is reflected on our balance sheet as
unearned compensation under stockholder's equity has been contributed to the
trust to fund the purchase of some of these shares. No shares have been awarded
to date.
Under the requirements for Risk Based and Leverage Capital of the federal
banking agencies, a minimum level of capital will vary among banks based on
safety and soundness of operations. Risk Based Capital ratios are calculated
with reference to risk-weighted assets, which include both on and off balance
sheet exposure.
In addition to meeting the required levels, the Company's and the Bank's
capital ratios met the criteria of the well-capitalized category established by
the federal banking agencies at June 30, 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 10.11% and 14.97%, respectively, at June 30,
2006. Slade's Ferry Bancorp's Tier I Capital leverage ratio and Tier I Capital
to risk weighted assets ratio at December 31, 2005 were 10.07% and 14.66%,
respectively. The Tier I Capital leverage ratio and Tier I Capital to risk
weighted assets ratio for the Bank are 8.73% and 12.00%, respectively, at June
30, 2006. The Bank's Tier I Capital leverage ratio and Tier I Capital to risk
weighted assets ratio at December 31, 2005 were 8.56% and 12.51%, respectively.
34
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.
35
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 and
decrease in interest rate shocks. 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 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 -10.90% (19)
-200 2.77% 6
36
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 12.97% N/A
+200 11.55% -1.42%
-200 13.07% 0.10%
37
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 June 30, 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.
38
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 three months ended June 30, 2006.
---------------------------------------------------------------------------------------------------------------------------
(c) Total Number
of Shares (d) Maximum Number (or
(a) Total Purchased as Part Approximate Dollar Value)
Number of (b) Average of Publicly of Shares that may yet be
Shares Price Paid Announced Plans or Purchased under the Plans
Period Purchased per Share Programs or Programs (1)
---------------------------------------------------------------------------------------------------------------------------
April 1, 2006 through April 30, 2006 - N/A - N/A
---------------------------------------------------------------------------------------------------------------------------
May 1, 2006 through May 31, 2006 6,000 (2) $ 17.40 - N/A
---------------------------------------------------------------------------------------------------------------------------
June 1, 2006 through June 30, 2006 5,000 (2) $ 17.01 - N/A
---------------------------------------------------------------------------------------------------------------------------
Total 11,000 $ 17.22 - N/A
---------------------------------------------------------------------------------------------------------------------------
(1) On July 18, 2006 the Company announced a stock repurchase plan pursuant to which the Company may repurchase up
to 208,036 shares of its outstanding common stock. The shares shown in this table were not repurchased pursuant
to this plan.
(2) These shares were purchased privately negotiated sales.
39
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's Shareholders was held on May 17, 2006 with
the following mater being voted upon and with the indicated results:
ELECTION OF DIRECTORS FOR TERMS EXPIRING IN 2009
Votes
--------------------------------
Nominee For Withheld
------------------------------------- --------- --------
Peter G. Collias 3,008,394 30,212
Melvyn A. Holland 2,995,917 42,689
Jean F. MacCormack 3,010,035 28,571
Shaun O'Hearn, Sr. 2,998,389 40,217
Carl Ribeiro 3,011,199 27,407
William J. Sullivan 2,997,201 41,405
ITEM 5
OTHER INFORMATION
None.
ITEM 6
EXHIBITS
Exhibits: See exhibit index.
40
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)
August 11, 2006 /s/ Mary Lynn D. Lenz
------------------------------ --------------------------------------
(Date) Mary Lynn D. Lenz
President and
Chief Executive Officer
August 11, 2006 /s/ Deborah A. McLaughlin
------------------------------- --------------------------------------
(Date) Deborah A. McLaughlin
Executive Vice President
Chief Financial Officer and Chief
Operations Officer
41
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 (3)
of Slade's Ferry Bank
10.1 Slade's Ferry Bancorp. 1996 Stock Option Plan, as amended (4)
10.2 Supplemental Executive Retirement Agreement between Slade's Ferry Bancorp. (5)
and Manuel J. Tavares
10.3 Form of Director Supplemental Retirement Program Director Agreement, (6)
Exhibit 1 thereto (Slade's Ferry Trust Company Director Supplemental
Retirement Program Plan) and Endorsement Method Split Dollar Plan
Agreement thereunder.
10.4 Form of Directors' Paid-up Insurance Policy (part of the Director Supplemental (7)
Retirement Program).
10.5 Supplemental Executive Retirement Agreement between Slade's Ferry Bancorp. (8)
and Mary Lynn D. Lenz
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
(1) Incorporated by reference to the Registrant's Registration Statement on Form SB-2 filed with
the Commission on April 14, 1997.
(2) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on June 22,
2006.
(3) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on December
21, 2004.
(4) Incorporated by reference to the Registrant's Form 10-Q/A for the quarter ended June 30, 1999.
(5) Incorporated by reference to the Registrant's Form 10-K/ASB for the fiscal year ended December
31, 1996.
(6) Incorporated by reference to Exhibit 10 to the Registrant's Form 10-Q/A for the quarter ended
March 31, 1999.
(7) Incorporated by reference to Exhibit 10 to the Registrant's Form 10-Q/ASB for the quarter ended
June 30, 1998.
42
(8) Incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-Q/A for the quarter
ended March 31, 2003.
(9) Incorporated by reference to Exhibit 10.11 to the Registrant's Form 10-Q/A for the quarter
ended June 30, 2004.
(10) Incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-Q/A for the quarter ended
September 30, 2004.
(11) Incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-Q/A for the quarter ended
September 30, 2004.
(12) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on January 13,
2005.
(13) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on January 14,
2005.
(14) Incorporated by reference to Appendix C to the Registrant's Proxy Statement filed on April 9,
2004.
(15) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31,
2003.
43