UNITED STATES
SECURITIES AND EXCHANGE COMMISION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period quarter ended March 31, 2005
--------------
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 (I.R.S. Employer
of incorporation or organization) Identification Number)
100 Slade's Ferry Avenue
Somerset, Massachusetts 02726
---------------------------------------- ----------------------
(Address of principal executive offices) (Zip code)
(508)-675-2121
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------------ -----------
Indicate by check mark whether the registrant is an accelerated filer (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) 4,114,646 shares as of April 30, 2005.
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TABLE OF CONTENTS
Part I
ITEM 1 - Consolidated Financial Statements of Slade's Ferry Bancorp.
and Subsidiary 2
Consolidated Balance Sheets - March 31, 2005 and
December 31, 2004 (Unaudited)
Consolidated Statements of Income - Three Months Ended
March 31, 2005 and 2004 (Unaudited)
Consolidated Statement of Changes in Stockholder's Equity -
Three Months Ended March 31, 2005 (Unaudited)
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 2005 and 2004 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
ITEM 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk 23
ITEM 4 - Controls and Procedures 25
Part II
ITEM 1 - Legal Proceedings 26
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds 26
ITEM 3 - Defaults upon Senior Securities 26
ITEM 4 - Submission of Matters to a Vote of Security Holders 26
ITEM 5 - Other Information 26
ITEM 6 - Exhibits 27
1
PART I
ITEM 1
FINANCIAL STATEMENTS
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands) March 31, 2005 December 31, 2004
---------------------- -----------------------------------
(Unaudited)
Assets
------
Cash and due from banks $ 19,901 $ 15,984
Interest-bearing demand deposits with other banks 550 410
Federal Home Loan Bank overnight deposit - 5,000
Federal funds sold 7,100 13,800
-------- --------
Cash and cash equivalents 27,551 35,194
Interest-bearing time deposits with other bank 100 100
Investments in available-for-sale securities (at fair value) 80,896 83,882
Investments in held-to-maturity securities (fair values of
$35,883 at March 31, 2005 and $38,112 at December 31, 2004) 35,964 37,773
Federal Home Loan Bank stock 5,905 4,650
Loans, net of allowance for loan losses of $4,176 at
March 31, 2005 and $4,101 at December 31, 2004 379,452 362,265
Premises and equipment 5,427 5,527
Goodwill 2,173 2,173
Accrued interest receivable 2,055 1,969
Cash surrender value of life insurance 11,563 11,548
Deferred taxes 1,321 880
Other assets 3,428 3,871
-------- --------
Total assets $555,835 $549,832
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Noninterest-bearing $ 76,602 $ 80,232
Interest-bearing 308,936 319,673
-------- --------
Total deposits 385,538 399,905
Federal Home Loan Bank advances 110,180 90,286
Subordinated debentures 10,310 10,310
Other liabilities 2,211 2,296
-------- --------
Total liabilities 508,239 502,797
Stockholders' equity:
Common stock, par value $0.01 per share; authorized
10,000,000 shares; issued and outstanding 4,094,333
shares on March 31, 2005 and 4,068,423 shares on
December 31, 2004 41 41
Paid-in capital 30,381 29,976
Retained earnings 17,590 16,893
Accumulated other comprehensive income (loss) (416) 125
-------- --------
Total stockholders' equity 47,596 47,035
-------- --------
Total liabilities and stockholders' equity $555,835 $549,832
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
(Dollars in Thousands, except per share data) 2005 2004
--------------------------------------------- --------- ---------
Interest and dividend income:
Interest and fees on loans $ 5,266 $ 4,892
Interest and dividends on securities 1,322 529
Interest on federal funds sold 65 58
Other interest 4 1
--------- ---------
Total interest and dividend income 6,657 5,480
--------- ---------
Interest expense:
Interest on deposits 1,159 1,122
Interest on Federal Home Loan Bank advances 911 595
Interest on subordinated debentures 136 16
--------- ---------
Total interest expense 2,206 1,733
--------- ---------
Net interest and dividend income 4,451 3,747
Provision for loan losses 50 246
--------- ---------
Net interest and dividend income after provision
for loan losses 4,401 3,501
--------- ---------
Noninterest income:
Service charges on deposit accounts 98 145
Overdraft service charges 110 123
Gain on sale of property and equipment 40 -
Gain on sales and calls of available-for-sale securities, net 2 35
Increase in cash surrender value of life insurance policies 147 138
Other income 172 122
--------- ---------
Total noninterest income 569 563
--------- ---------
Noninterest expense:
Salaries and employee benefits 2,033 1,968
Occupancy expense 239 231
Equipment expense 170 147
Professional fees 307 227
Marketing expense 99 57
Other expense 525 480
--------- ---------
Total noninterest expense 3,373 3,110
--------- ---------
Income before income taxes 1,597 954
Income taxes 532 308
--------- ---------
Net income $ 1,065 $ 646
========= =========
Earnings per common share - basic $ 0.26 $ 0.16
========= =========
Earnings per common share - diluted $ 0.26 $ 0.16
========= =========
Weighted average common shares outstanding - basic 4,076,707 4,012,654
========= =========
Weighted average common shares outstanding - diluted 4,113,256 4,069,855
========= =========
Dividends declared per share $ 0.09 $ 0.09
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
3
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2005 AND DECEMBER 31, 2004
(Unaudited)
Accumulated
Other
Common Paid-in Retained Comprehensive
(Dollars in Thousands, except per share data) Stock Capital Earnings Income (Loss) Total
-----------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 $41 $29,976 $16,893 $ 125 $47,035
Comprehensive income:
Net income - - 1,065 - 1,065
Net unrealized losses on securities
available-for-sale, net of tax and
reclassification adjustment - - - (541) (541)
-------
Comprehensive income - - - - 524
-------
Issuance of common stock from dividend
reinvestment plan - 142 - - 142
Stock issuance relating to optional
cash contribution plan - 12 - - 12
Stock options exercised - 196 - - 196
Tax benefit of stock options exercised - 55 - - 55
Dividends declared ($.09 per share) - - (368) - (368)
-------------------------------------------------------
Balance, March 31, 2005 $41 $30,381 $17,590 $(416) $47,596
=======================================================
The accompanying notes are an integral part of these consolidated financial
statements.
4
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
(Dollars in Thousands) 2005 2004
Cash flows from operating activities:
Net income $ 1,065 $ 646
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization, net of accretion of securities 59 44
Gain on sales and calls of available-for-sale securities, net (2) (35)
Change in unearned income 37 83
Provision for loan losses 50 246
Deferred tax (benefit) expense 244 (21)
Depreciation and amortization 184 166
Gain on sale of property and equipment (40) -
Increase in cash surrender value of life insurance policies (147) (138)
Increase in interest receivable (86) (6)
(Increase) decrease in other assets 443 (404)
Decrease in other liabilities (85) (165)
-------- --------
Net cash provided by operating activities 1,722 416
-------- --------
Cash flows from investing activities:
Decrease in interest-bearing time deposits with other banks - 100
Purchases of available-for-sale securities (767) (852)
Proceeds from sales of available-for-sale securities 892 -
Proceeds from maturities of available-for-sale securities 1,670 5,535
Proceeds from maturities of held-to-maturity securities 1,772 1,367
Purchases of Federal Home Loan Bank stock (1,255) -
Loan originations and principal collections, net (17,299) (17,656)
Recoveries of loans previously charged off 25 49
Purchase of premises and equipment (696) (118)
Proceeds from sale of banking premises 652 -
Proceeds from sale of property and equipment - (25)
Redemption of life insurance policy 132 -
-------- --------
Net cash used in investing activities (14,874) (11,600)
-------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
5
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
Three Months Ended March 31,
(Dollars in Thousands) 2005 2004
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts $ 807 $ 33,774
Net increase (decrease) in time deposits (15,174) 33,357
Short-term advances from Federal Home Loan Bank, net - (4,300)
Long-term advances from Federal Home Loan Bank 20,000 -
Payments on Federal Home Loan Bank long-term advances (106) (85)
Proceeds from issuance of common stock 154 201
Stock options exercised 196 327
Retirement of shares of common stock - (32)
Dividends declared (368) (360)
Proceeds from issuance of subordinated debentures - 10,310
-------- --------
Net cash provided by financing activities 5,509 73,192
-------- --------
Net increase (decrease) in cash and cash equivalents (7,643) 62,008
Cash and cash equivalents at beginning of period 35,194 22,706
-------- --------
Cash and cash equivalents at end of period $ 27,551 $ 84,714
======== ========
Supplemental disclosures:
Interest paid $ 2,132 $ 1,683
Income taxes paid $ 555 $ 101
The accompanying notes are an integral part of these consolidated financial
statements.
6
SLADE'S FERRY BANCORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2005
Note A - Basis of Presentation
------------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial information and the
instructions to Form 10-Q and, accordingly, do not include all of the
information and footnotes required by GAAP for complete financial
statements. In the opinion of the management of Slade's Ferry Bancorp. (the
"Company"), all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2005 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2005.
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, 2004.
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, 2004.
The consolidated financial statements of Slade's Ferry Bancorp. include its
wholly-owned subsidiary, Slade's Ferry Trust Company, and its subsidiaries,
Slade's Ferry Realty Trust, Slade's Ferry Securities Corporation, Slade's
Ferry Securities Corporation II and Slade's Ferry Loan Company. Slade's
Ferry Loan Company is currently in the process of dissolution. All
significant intercompany balances have been eliminated.
Slade's Ferry Statutory Trust I, a subsidiary of the Company, was formed 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.
Note C - Stock Based Compensation
---------------------------------
The Company has a stock-based employee compensation plan. The Company
accounts for the plan under the recognition and measurement principles of
Accounting Principle Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations. No stock-based employee
compensation cost is reflected in net income (except for appreciation from
options surrendered), as all options granted under this plan had an exercise
price equal to the market value of the underlying common stock on the date
of grant.
7
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,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation.
Three Months Ended March 31,
(Dollars in Thousands, except per share data) 2005 2004
--------------------------------------------- ------ ----
Net income, as reported $1,065 $ 646
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects - -
------ -----
Pro forma net income $1,065 $ 646
====== =====
Earnings per share:
Basic - as reported $ 0.26 $0.16
Basic - pro forma $ 0.26 $0.16
Diluted - as reported $ 0.26 $0.16
Diluted - pro forma $ 0.26 $0.16
Note D - Pension Benefits
-------------------------
The following summarizes the net periodic benefit cost for the three months
ended March 31:
(Dollars in Thousands) 2005 2004
---------------------- ---- ----
Service cost $ 1 $ 3
Interest cost 26 25
Expected return on plan assets (41) (11)
Amortization of transition obligation 2 2
Prior service cost recognized 1 1
Recognized net actuarial (gain) loss 21 (56)
---- ----
Net periodic benefit cost (income) $ 10 $(36)
==== ====
The Company previously disclosed in its consolidated financial statements
for the year ended December 31, 2004 that it expects to make no
contributions to the plan in 2005.
Note E - Impact of New Accounting Standards
-------------------------------------------
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). This Statement revises FASB Statement No. 123,
"Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS 123R requires that the cost resulting from all share-based
payment transactions be recognized in the financial statements. It
establishes fair value as the measurement objective in accounting for share-
based payment arrangements and requires all entities to apply a fair-value
based measurement method in accounting for share-based payment transactions
with employees except for equity instruments held by employee share
ownership plans. This Statement was originally to be effective for the
Company as of the beginning of the first interim or annual reporting period
that begins after June 15, 2005. On April 14, 2005, the Securities and
Exchange Commission adopted a rule which allows companies to adopt SFAS 123R
at the beginning of their next fiscal year. Accordingly, the Company will
adopt SFAS 123R effective January 1, 2006. The Company does not believe the
adoption of this Statement will have a material impact on the Company's
financial position or results of operations.
8
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
$555.8 million, consolidated net loans and leases of $379.5 million,
consolidated deposits of $385.5 million and consolidated shareholders'
equity of $47.7 million as of March 31, 2005. 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 Small Cap 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 Bank's loan portfolio, levels of
charge-offs and non-performing loans and allowance for loan
losses;
(4) changes in the interest rate environment may reduce interest
margins and adversely impact net interest income; and
(5) changes in assumptions used in making such forward-looking
statements.
Should one or more of these risks materialize or should underlying beliefs
or assumptions prove incorrect, Slade's Ferry Bancorp's actual results could
differ materially from those discussed.
All subsequent written and oral forward-looking statements attributable to
Slade's Ferry Bancorp or any person acting on its behalf are expressly
qualified in their entirety by the cautionary statements set forth above.
Slade's Ferry Bancorp does not intend or undertake any obligation to update
any forward-looking statement to reflect circumstances or events that occur
after the date the forward-looking statements are made.
As used throughout this report, the terms "we," "our," "us," or the
"Company" refer to Slade's Ferry Bancorp and its consolidated subsidiaries.
9
Critical Accounting Policies
----------------------------
Our significant accounting policies are incorporated by reference from Note
2 to our Consolidated Financial Statements filed within Form 10-K for the
year ended December 31, 2004. In preparing financial information, management
is required to make significant judgements, estimates, and assumptions that
impact the reported amounts of certain assets, liabilities, revenues and
expenses. The accounting principles we follow and the methods of applying
these principles conform to accounting principles generally accepted in the
United States, and general banking practices. We consider the following to
be our critical accounting policies: allowance for loan losses; goodwill and
other intangible assets other than temporary impairment of investments; and
deferred taxes.
Allowance for loan losses. 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 our 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. We record a writedown impairment charge
when we believe an investment experiences a decrease in value that is other
than temporary. In making a decision whether an investment is permanently
impaired, we review current and forecasted information about the underlying
investment that is available, applicable industry data, and analyst reports.
When an investment is deemed to be permanently impaired, it is written down
to current fair market value. Future adverse changes in economic and market
conditions, deterioration in credit quality, and continued poor financial
results of underlying investments or other factors could result in further
losses that may not be reflected in an investment's current book value that
could result in future writedown charges due to impairment.
Deferred tax estimates. We use the asset and liability method for accounting
for income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax attributable to differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax basis. We also assess the probability that deferred tax
assets will be recovered from future taxable income, and establish a
valuation allowance for any assets determined not likely to be recovered.
Our management exercises judgement in evaluating the amount and timing of
recognition of the resulting deferred tax assets and liabilities, including
projections of future taxable income. These judgements are estimates and
assumptions and are reviewed on a continuing basis.
Comparison of Financial Condition at March 31, 2005 and December 31, 2004
-------------------------------------------------------------------------
General
-------
Total assets increased by $6.0 million, or 1.1%, from $549.8 million at
December 31, 2004 to $555.8 million at March 31, 2005. The increase is the
result of growth in the loan portfolio, which increased by $17.2 million or
4.7%, from $362.3 million (net of allowance for loan losses) to $379.5
million. The increase in loans was partially offset by decreases in cash
equivalents totaling $7.6 million and decreases in securities portfolios
totaling $3.8 million. During the first quarter of 2005, deposits decreased
by $14.4 million, or 3.6%, from $399.9 million to $385.5 million. This
decrease is predominantly the result of planned run-off of certificate
10
of deposit "specials" which matured in January of 2005. The decrease in
deposits was offset by an increase in Federal Home Loan Bank advances
totaling $19.9 million.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents decreased by $7.6 million, from $35.2 million
reported at year-end 2004 to $27.6 million at March 31, 2005. The decrease
partially funded the run-off of special-rate certificates of deposit that
matured in January 2005.
Investment Portfolio
--------------------
Total investments, excluding Federal Home Loan Bank stock, decreased by $4.8
million from $121.7 million reported at December 31, 2004 to $116.9 million
at March 31, 2005. The decrease in investments, coupled with the decrease in
federal funds sold, partially funded the planned run-off of premium-rate
certificates of deposit that matured in January 2005. We chose not to offer
a premium-rate certificate in January 2005. Contingent upon our funding
needs, additional premium-rate certificates may be offered in the future.
The main objective of the investment policy is to provide adequate liquidity
to meet reasonable declines in deposits and any anticipated increases in the
loan portfolio, to provide safety of principal and interest, to generate
earnings adequate to provide a stable income, and to fit within our overall
asset/liability management objectives. We do not purchase free standing
derivative instruments, such as swaps, options or futures.
We utilize both a "held-to-maturity" portfolio and an "available-for-sale"
portfolio, as defined in Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities", to
manage investments. Our investment policy requires Board approval before a
trading account can be established. The held-to-maturity portfolio was
originally established for holding high-yielding municipal securities.
During 2004, certain mortgage-backed securities designated as collateral for
FHLB advances were also designated as held-to-maturity. Management has the
ability and intent to hold these securities to their contractual maturity.
We primarily utilize U.S. Government agency securities and agency-insured
mortgage-backed securities as investment vehicles. High-quality corporate
bonds and municipal securities are purchased when an exceptional opportunity
to enhance investment yields arises. Purchases of these investments are
limited to securities that carry a rating of "Baa1" (Moody's) or "BBB+"
(Standard and Poor's), in order to control credit risk within the investment
portfolio. Among other investment criteria, it is management's goal to
maintain a total portfolio duration of less than five years. At March 31,
2005, the portfolio duration was estimated at 2.65 years.
The following table presents the amortized cost, unrealized gains and
losses, and fair value of our portfolio of Investment Securities Held-to-
Maturity at March 31, 2005:
Amortized Gross Unrealized Gross Unrealized
(Dollars in Thousands) Cost Basis Gains Losses Fair Value
---------------------- ---------- ---------------- ---------------- ----------
Debt securities issued by states of
the United States and political
subdivisions of the states $ 8,251 $222 $ 6 $ 8,467
Federal agency mortgage-backed
securities 27,713 - 297 27,416
------- ---- ---- -------
Total $35,964 $222 $303 $35,883
======= ==== ==== =======
Securities in the Available-for-Sale portfolio are securities that we intend
to hold for an indefinite period of time, but not necessarily to maturity.
These securities may be sold in response to interest rate changes, liquidity
needs or other factors. Any unrealized gain or loss, net of taxes, for the
Available-for-Sale securities is reflected in stockholders' equity.
11
The Available-for-Sale portfolio consists primarily of Federal agency
obligations, agency-insured mortgage-backed securities, and high-quality
corporate bonds. We also have a portfolio of common and preferred marketable
equity securities. The equity securities carry a greater level of risk as
they are subject to market fluctuations. These securities are constantly
monitored and evaluated to determine their suitability for sale, retention
in the portfolio, or possible write-downs due to impairment issues. We
minimize risk by limiting the total amount invested in marketable equity
securities. At March 31, 2005, the amount invested in marketable equity
securities was 4.4% of the total market value of the investment portfolio
distributed over various industry sectors.
The following table presents the amortized cost, unrealized gains and
losses, and fair value of our portfolio of Investment Securities Available-
for-Sale at March 31, 2005:
Amortized Gross Unrealized Gross Unrealized
(Dollars in Thousands) Cost Basis Gains Losses Fair Value
------------------------------------------------------------------------------------------------------------
Debt securities issued by the U.S.
Treasury and other U.S. Government
corporations and agencies $41,423 $ 5 $ 651 $40,777
Federal agency mortgage-backed securities 26,385 238 153 26,470
Corporate debt securities 9,089 29 231 8,887
Mutual funds 1,215 1 - 1,216
Marketable equity securities 3,736 153 343 3,546
------------------------------------------------------------
Total $81,848 $426 $1,378 $80,896
============================================================
Loans
-----
The loan portfolio consists of loans originated primarily in our market
area. There are no foreign loans outstanding. The interest rates we charge
on loans are affected principally by the demand for such loans, the supply
of money available for lending purposes and the rates offered by its
competitors. Total net loans increased from 65.9% of total assets at
December 31, 2004, to 68.3% of total assets at March 31, 2005.
The following table shows the amount of loans by category at March 31, 2005
and December 31, 2004.
Percentage
(Dollars In Thousands) March 31, 2005 December 31, 2004 Increase/(Decrease)
----------------------------------------------------------
Commercial, financial and agricultural $ 30,113 $ 26,606 13.18%
Real estate - construction and land development 22,535 24,240 (7.03)
Real estate - residential 101,084 97,496 3.68
Real estate - commercial 205,423 192,822 6.54
Home equity lines of credit 22,556 23,131 (2.49)
Consumer 2,393 2,510 (4.66)
------------------------------------------------
Total loans 384,104 366,805 4.72
Allowance for loan losses (4,176) (4,101) 1.83
Unearned income (476) (439) 8.43
------------------------------------------------
Net loans, carrying amount $379,452 $362,265 4.74%
================================================
12
The increases in the loan portfolio are the result of the normal origination
process. We have been successful in both retention of existing loans and the
origination of new loans, particularly commercial and commercial real estate
loans.
The following table presents information with respect to nonaccrual and past
due loans during the periods indicated.
Information With Respect to Nonaccrual and Past Due Loans
at March 31, 2005 and December 31, 2004
At March 31, At December 31,
(Dollars in Thousands) 2005 2004
---------------------- ------------ ---------------
Non-accrual loans $ 484 $ 506
Interest income that would have been recorded during the
period under original terms 8 67
Interest income recorded during the period 8 44
Loans 90 days or more past due and still accruing real estate
acquired by foreclosure or substantively repossessed - -
Percentage of nonaccrual loans to total gross loans 0.13% .013%
Percentage of nonaccrual loans, restructured loans, and real estate
acquired by foreclosure or substantively repossessed to total
assets 0.09% 0.13%
Percentage of allowance for loan losses to nonaccrual loans 862.81% 810.47%
The $484,000 in non-accrual loans as of March 31, 2005 consists mainly of
$379,000 of real estate mortgages and $106,000 attributed to commercial
loans. There were no restructured loans included in nonaccrual loans for the
first three months of 2005.
We stop accruing interest on a loan once it becomes past due 90 days unless
there is adequate collateral and the financial condition of the borrower is
sufficient. When a loan is placed on nonaccrual status, all previously
accrued but unpaid interest is reversed and charged against current income.
Interest is thereafter recognized only when payments are received and the
loan is no longer past due.
Loans in the nonaccrual category will remain in that category until the
possibility of collection no longer exists, the loan is paid off, or the
loan becomes current. When a loan is determined to be uncollectible, it is
then charged off against the allowance for loan losses.
Statement of Financial Accounting Standards No. 114 "Accounting by Creditors
for Impairment of a Loan" ("SFAS No. 114") applies to all loans except large
groups of smaller-balance homogeneous loans that are collectively evaluated
for impairment, loans measured at fair value or at the lower of cost or fair
value. SFAS No. 114 requires that impaired loans be valued at the present
value of expected future cash flows discounted at the loan's effective
interest rate or as a practical expedient, at the market value of the
collateral if the loan is collateral dependent. Large groups of smaller
balance homogeneous loans are collectively evaluated for impairment.
Accordingly, we do not separately identify individual consumer and
residential loans for impairment disclosures. A loan is considered impaired
when, based on current information and events, it is probable that we will
be unable to collect the scheduled payments of principle or interest when
due according to the contractual terms of the loan agreement.
13
At March 31, 2005 there were $64,300 of loans which we have determined to be
impaired, with a related allowance for credit losses of $3,200.
Analysis of Allowance for Loan Losses
The table below illustrates the changes in the Allowance for Loan Losses for
the periods indicated.
Three Months
Ended March 31,
-----------------
(Dollars in Thousands) 2005 2004
------ ------
Balance at beginning of period $4,101 $4,154
Charge-offs:
Commercial - -
Real estate - construction - -
Real estate - mortgage - -
Installment/Consumer - (4)
-----------------
Total charge-offs - (4)
-----------------
Recoveries:
Commercial 8 21
Real estate - construction - -
Real estate - mortgage 16 24
Installment/Consumer 1 4
-----------------
Total recoveries 25 49
-----------------
Net charge-offs 25 45
Provision charged to operations 50 246
-----------------
Balance at end of period $4,176 $4,445
=================
Allowance for Loan Losses as a percent
of loans 1.09% 1.26%
=================
Ratio of net recoveries (charge-offs) to
average loans outstanding 0.12% 0.00%
=================
We maintain an allowance for possible losses that are inherent in the loan
portfolio. The allowance for loan losses is increased by provisions charged
to operations based on the estimated loan loss exposure inherent in the
portfolio. Management uses a methodology to systematically measure the
amount of estimated loan loss exposure inherent in the portfolio for
purposes of establishing a sufficient allowance for loan losses. The
methodology includes three elements: an analysis of individual loans deemed
to be impaired in accordance with the terms of Statement of Financial
Accounting Standard No. 114, "Accounting by Creditors for Impairment of a
Loan", general loss allocations for various loan types based on loss
experience factors and other qualitative factors, and an unallocated
allowance which is maintained based on management's assessment of many
factors including the risk characteristics of the portfolio, concentrations
of credit, economic conditions that may effect borrowers' ability to pay,
and trends in loan delinquencies and charge-offs. Realized losses, net of
recoveries, are charged directly to the allowance. While management uses the
currently available information in establishing the allowance for loan
losses, adjustments to the allowance may be necessary if
14
future economic conditions differ from the assumptions used in making the
evaluation. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review our allowance for loan
losses.
During 2004 and going forward, we have placed increased emphasis on the
origination of residential real estate loans. Accordingly, as the
composition of the loan portfolio gradually changes and diversifies from
higher credit risk weighted loans, such as commercial real estate and
commercial, financial and agricultural, to residential and home equity
loans, a lower overall reserve allowance rate will be required. We also
continued to take positive steps in reducing the overall level of risk in
the loan portfolio by further enhancing and strengthening our underwriting
guidelines, and by selling impaired real estate loans totaling $8.4 million
in August 2004. We realized a gain of $198,000 on this sale. As a result,
the allowance for loan losses remained relatively constant, increasing from
$4,101,000, or 1.11% of total gross loans at December 31, 2004 to
$4,176,000, or 1.09% of total gross loans at March 31, 2005. After thorough
review and analysis of the adequacy of the loan loss allowance, we recorded
a provision for loan losses of $50,000 for the three months ended March
31,2005, compared to a provision of $246,000 recorded for the three months
ended March 31, 2004. The decreased provision is primarily the result of the
enhanced credit quality achieved with the actions taken in 2004. Loans
charged off were $0 in the three months ended March 31, 2005 compared with
$4,000 for the three months ended March 31, 2004. We realized recoveries of
previously charged-off loans totaling $25,000 for the three months ended
March 31, 2005 compared with recoveries totaling $49,000 for the three
months ended March 31, 2004. Management believes that the Allowance for Loan
Losses of $4,176,000 at March 31, 2005 is adequate to cover potential losses
in the loan portfolio, based on current information available to management.
This table shows an allocation of the allowance for loan losses as of the
end of each of the periods indicated.
March 31, 2005 December 31, 2004
----------------------------- -----------------------------
Percent of Loans Percent of Loans
in Each Category in Each Category
(Dollars in Thousands) Amount to Total Loans Amount to Total Loans
---------------------- ------ ---------------- ------ ----------------
Commercial (4) $ 491(1) 7.84% $ 743(1) 7.26%
Real estate Construction 211 5.87% 236 6.62%
Real estate - residential 430 32.19% 421 32.87%
Real estate - commercial 2,994 53.48% 2,568 52.57%
Consumer (2) 50(3) 0.62% 133(3) 0.68%
------ ------ ------ ------
$4,176 100.00% $4,101 100.00%
====== ====== ====== ======
--------------------
Includes amounts specifically reserved for impaired loans of $0 at
March 31, 2005, and $270,722 at December 31, 2004 as required by
Financial Accounting Standard No. 114, "Accounting for Impairment of
Loans."
Includes consumer and other loans.
Includes amounts specifically reserved for impaired loans of $0 at
March 31, 2005 and $76,194 at December 31, 2004 as required by
Financial Accounting Standard No. 114, "Accounting for Impairment of
Loans."
Includes commercial, financial, agricultural and nonprofit loans.
Commercial real estate loans represent 41.2% of gross loans. Residential
real estate, including home equity loans, represents 45.7% of gross loans.
We require a loan-to-value ratio of 80% in both commercial and residential
mortgages. These mortgages are secured by real properties which have a
readily ascertainable appraised value. Home equity loans are generally
revolving lines of credit and are typically secured by second mortgages on
one-to-four family owner-occupied properties.
15
Generally, commercial real estate loans have a higher degree of credit risk
than residential real estate loans because they depend primarily on unit
supply and demand and various conditions. When granting these loans, we
evaluate the financial condition of the borrower(s), the location of the
real estate, the quality of management, and general economic and competitive
conditions. When granting a residential mortgage, we review the borrower's
repayment history on past debts, and assess the borrower's ability to meet
existing obligations and payments on the proposed loans. Real estate
construction loans comprise both residential and commercial construction
loans throughout our market area.
Commercial loans consist of loans predominantly collateralized by inventory,
furniture and fixtures, and accounts receivable. In assessing the collateral
for this type of loan, we apply a 50% liquidation value to inventories; 25%
to furniture, fixtures and equipment; and 70% to accounts receivable less
than 90 days of invoice date. Commercial loans represent 9.4% of the loan
portfolio as of March 31, 2005.
Consumer loans are both secured and unsecured borrowings and, at March 31,
2005 and 2004, represents only 1.2% of our total loan portfolio. These loans
have a higher degree of risk than residential mortgage loans. The underlying
collateral of a secured consumer loan tends to depreciate in value. Consumer
loans are typically made based on the borrower's ability to repay the loan
through continued financial stability. 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 loans.
Deposits
--------
Total deposits at March 31, 2005 were $385.5 million, a decrease of $14.4
million, or 3.6%, when compared to total deposits of $399.9 million at
December 31, 2004. The following table presents deposits by category for
various deposit types at March 31, 2005 and December 31, 2004.
Percentage
(Dollars in Thousands) March 31, 2005 December 31,2004 Increase/(Decrease)
---------------------------------------------------------
Demand deposits $ 76,602 $ 80,232 (4.52)%
NOW 44,955 42,881 4.84%
Savings 93,356 89,809 3.95%
Money market 37,167 38,518 (3.51)%
Certificates of deposit 133,458 148,465 (10.11)%
-------- -------- ------
$385,538 $399,905 (3.59)%
======== ======== ======
We had approximately $30 million in premium-rate certificates of deposit
that matured in January 2005. We elected not to price the renewals at a
premium; consequently, approximately $15 million of these certificates ran
off. The increase in savings deposits is primarily the result of the
increased promotion of the Coastal Savings account, which pays a market-
based interest rate, designed to fill the needs of high-balance customers.
Federal Home Loan Bank Advances
-------------------------------
Advances from the Federal Home Loan Bank totaled $110.2 million at March 31,
2005, as compared to $90.3 million at December 31, 2004, an increase of
$19.9 million or 22.0%. These incremental borrowings funded the growth in
the loan portfolio as internal liquidity funded the certificate of deposit
run-off. There was no change in the balance of our subordinated debentures
or underlying trust preferred securities.
16
Comparison of Results of Operations at March 31, 2005 and 2004
--------------------------------------------------------------
General
-------
Net income increased from $646,000 or $0.16 per share, basic and diluted,
for the three months ended March 31, 2004 to $1.1 million or $0.26 per
share, basic and diluted, for the three months ended March 31, 2005, an
increase in net income of 64.9%. Net interest income increased by $704,000
or 18.8%, from $3.7 million to $4.5 million when comparing the three months
ended March 31, 2005 and 2004. This increase is primarily the result of our
asset growth during 2004, and the deployment of deposit funds garnered in
early 2004 into loans and investment securities. Over the same period, the
provision for loan losses decreased from $246,000 to $50,000 primarily the
result of enhanced loan quality. Non-interest income remained stable,
increasing by $4,000 while non-interest expenses increased by $263,000 or
8.5%, from $3.1 million for the three months ended March 31, 2004 to $3.4
million for the three months ended March 31, 2005.
Interest Income
---------------
Our operating performance is dependent on net interest and dividend income,
the difference between interest income earned on loans and investments and
interest expense paid on deposits and borrowed funds. The level of net
interest income is significantly impacted by several factors such as
economic conditions, interest rates, asset/liability management, and
strategic planning.
Total interest and dividend income increased by $1.2 million or 21.5%, from
$5.5 million for the three months ended March 31, 2004 to $6.6 million for
the three months ended March 31, 2005. This increase is the result of
increases in the levels of both loans and investment securities. Interest on
loans increased from $4.9 million for the three months ended March 31, 2004
to $5.3 million for the three months ended March 31, 2005, an increase of
7.6%. During the same time, interest and dividends on investment securities
increased by $792,000, from $529,000 to $1.3 million. All other interest
increased by $11,000. The yield on earning assets decreased from 5.78% for
the three months ended March 31, 2004 to 5.71% for the three months ended
March 31, 2005, due principally to commercial and commercial real estate
loans that were originated in mid-2004 at low interest rates, in an effort
to gain additional market share.
Interest Expense
----------------
Total interest expense increased by $473,000, from $1.7 million for the
three months ended March 31, 2004 to $2.2 million for the three months ended
March 31, 2005. This increase was due to additional interest on FHLB
borrowings and interest expense associated with subordinated debentures
entered into during March of 2004. The net interest margin increased by four
basis points from 3.48% for the three months ended March 31, 2004 to 3.52%
for the three months ended March 31, 2005.
17
The following table sets forth our average assets, liabilities, and
stockholders' equity, interest income earned and interest paid, average
rates earned and paid, net interest spread and the net interest margin for
the three months ended March 31, 2005, and 2004. Average balances reported
are daily averages.
Three Months Ended March 31,
2005 2004
------------------------------------ ------------------------------------
Average Interest Average Average Interest Average
(Dollars in Thousands) Balance Income/Expense Rate Balance Income/Expense Rate
------------------------------------------------------------------------------------------------------------------------
Assets:
Interest-earning assets
Commercial loans $ 28,506 $ 417 5.93% $ 33,149 $ 416 5.05%
Commercial real estate 214,475 3,138 5.93% 196,883 3,049 6.23%
Residential real estate 128,848 1,678 5.28% 109,317 1,372 5.05%
Consumer loans 2,397 33 5.58% 3,934 55 5.62%
--------------------------------------------------------------------------
Total loans 374,226 5,266 5.71% 343,283 4,892 5.73%
Federal funds sold 12,157 65 2.17% 30,985 58 0.74%
Taxable debt securities 106,754 1,135 4.31% 41,923 382 3.67%
Tax-exempt debt securities 8,472 91 4.36% 10,478 111 4.26%
Marketable equity securities 4,949 46 3.77% 3,593 21 2.35%
FHLB stock 5,060 50 4.01% 3,024 15 2.00%
Other investments 766 4 2.12% 195 1 2.06%
--------------------------------------------------------------------------
Total interest-earning assets 512,384 6,657 5.27% 433,481 5,480 5.08%
Allowance for loan losses (4,176) (4,304)
Unearned income (387) (388)
Cash and due from banks 16,537 19,632
Other assets 27,256 23,655
-------- --------
Total assets $551,614 $472,076
======== ========
Liabilities & Stockholders' equity:
Savings accounts $ 89,722 $ 205 0.93% $ 77,282 $ 147 0.77%
NOW accounts 47,316 81 0.69% 37,522 65 0.70%
Money market accounts 41,187 119 1.17% 31,290 118 1.52%
Time deposits 138,238 754 2.21% 146,634 792 2.17%
FHLB advances 98,738 911 3.74% 58,746 595 4.07%
Subordinated debt 10,310 136 5.35% 1,586 16 4.06%
--------------------------------------------------------------------------
Total interest-bearing liabilities 425,511 2,206 2.10% 353,060 1,733 1.97%
Demand deposits 77,285 73,525
Other liabilities 2,376 1,679
-------- --------
Total liabilities 505,172 428,264
Stockholders' equity 46,442 43,812
-------- --------
Total liabilities &
stockholders' equity $551,614 $472,076
======== ========
Net interest income $4,451 $3,747
====== ======
Net interest spread 3.17% 3.11%
Net interest margin 3.52% 3.48%
18
The following table presents the changes in components of net interest
income for the three months ending March 31, 2005 and 2004, which are the
result of changes in interest rates and the changes that are the result of
changes in volume of the underlying asset or liability. Changes that are
attributable to changes in both rate and volume have been allocated equally
to rate and volume.
Net Interest Income - Changes Due to Volume and Rate
Three Months ended March 31,
2005 vs. 2004
Increase / (Decrease)
Total Due to Due to
(Dollars in Thousands) Change Volume Rate
---------------------- ----------------------------
Commercial loans $ 1 $ (63) $ 64
Commercial real estate 89 265 (176)
Residential real estate 306 251 55
Consumer loans (22) (21) (1)
Federal funds sold 8 (68) 76
Taxable debt securities 752 637 115
Tax-exempt securities (20) (22) 2
Marketable equity securities 25 10 15
FHLB stock 35 15 20
Other investments 3 3 -
---------------------------
Total Interest Income 1,177 1,007 170
---------------------------
Savings accounts 58 25 33
NOW accounts 16 17 (1)
Money market accounts 1 32 (31)
Time deposits (38) (49) 11
FHLB advances 316 383 (67)
Subordinated debt 120 101 19
---------------------------
Total Interest Expense 473 509 (36)
---------------------------
Net Interest Income $ 704 $ 499 $ 205
===========================
Provision for Loan Losses
-------------------------
The provision for loan losses is a charge against earnings that increases
the allowance for loan losses. The allowance for loan losses is maintained
at a level that is deemed adequate to absorb losses inherent within the loan
portfolio. In determining the appropriate level of the allowance for loan
losses, management takes into consideration past and anticipated loss
experience, prevailing economic conditions, evaluations of underlying
collateral, and the volume of the loan portfolio and balance of
nonperforming and classified loans. The allowance for loan losses is
assessed on a monthly basis. A provision was made during the first quarter
of 2005 and 2004 to adequately absorb any credit risk in the portfolio.
The provision during the three months ended March 31, 2005 was $50,000,
compared to $246,000 for the three months ended March 31, 2004. We reduced
the level of the provision because of a higher level of
19
residential real estate loan originations, which require a lower overall
provision level, and because of the overall enhancement in credit quality
achieved through tighter underwriting standards, the previously-mentioned
sales of loans and a 96% reduction in the level of impaired loans from $1.7
million at March 31, 2004 to $64,300 at March 31, 2005.
Non-Interest Income
-------------------
Total non-interest income remained relatively stable, increasing by $5,000
or 0.9% from $564,000 for the three months ended March 31, 2004 to $569,000
for the three months ending March 31, 2005. Service charges on deposit
accounts decreased from $145,000 for the three months ended March 31, 2004
to $98,000 for the three months ended March 31, 2005. This decrease is the
result of the proliferation of free checking accounts. In response to
competitive pressure, we offered and promoted free checking accounts and
realized a significant shift of accounts into this product, resulting in the
decrease in fee income. We also realized a decrease in overdraft fees of
$13,000 when comparing the two quarters. In March, we realized a $40,000
gain on the sale of a building that formerly housed a branch office. This
gain was partially offset by a reduction in the levels of gains realized on
sales of available-for-sale securities totaling $33,000. The gains realized
during the three months ended March 31, 2005 and 2004 were the result of
sales of marketable equity securities. Cash surrender values of bank-owned
life insurance policies increased to $147,000 for the three months ended
March 31, 2005, compared with $138,000 for the three months ended March 31,
2004.
Non-Interest Expense
--------------------
Other income increased from $122,000 for the three months ended March 31,
2004 to $172,000 for the three months ended March 31, 2005, an increase of
41.0%. This increase is the result of increased ATM and debit card use, and
increases in commissions realized from the sales of non-deposit investment
products.
Total non-interest expense increased from $3.1 million recorded for the
three months ended March 31, 2004, to $3.4 million reported for the three
months ended March 31, 2005, an increase of 8.5%. Salaries and employee
benefits increased by $65,000, or 3.3%, from $1.9 million for the three
months ended March 31, 2004, to $2.0 million for the three months ended
March 31, 2005. The increase was attributable to general salary increases
due to annual performance reviews, and annual bonuses.
Occupancy expense totaled $239,000 for the three months ended March 31,
2005, compared to $231,000 for the three months ended March 31, 2004. Cost
savings realized from closing branches in 2004 have been offset by costs
associated with opening the new Assonet Branch in March 2005. Equipment
expenses increased over the same period from $147,000 to $170,000, or 15.6%
because of management's initiative to modernize the teller and platform
systems. We believe that the investment in equipment and software will
ultimately result in more efficient customer service and savings in
personnel costs. The expenses for stationary and supplies increased by
$24,000, from $44,000 for the three months ended March 31, 2004 to $68,000
for the three months ended March 31, 2005. The increase was the result of
purchases of supplies required for the teller and platform automation
equipment.
Professional fees increased from $227,000 for the three months ended March
31, 2004 to $307,000 for the three months ended March 31, 2005, an increase
of 35.2%. The increase is the result of increased accounting and consulting
costs associated with complying with the provisions of section 404 of the
Sarbanes-Oxley Act of 2002. We anticipate that professional fees will
continue to increase throughout 2005, in order to bring the Company into
compliance with The Sarbanes-Oxley Act. Additionally, legal collection costs
increased by $17,000. Costs associated with marketing consultants have also
increased.
20
Marketing expenses attributed to production and media costs, print
advertising, and other direct marketing increased by $42,000, or 73.6%, to
$99,000 for the three months ended March 31, 2005, from $57,000 for the same
period in 2004. As we continue to launch new deposit products and services,
such as the Coastal Savings account and bank at work program, we expect
marketing costs to rise.
Other expenses increased by $45,000 from $480,000 for the three months ended
March 31, 2004 to $525,000 for the three months ended March 31, 2005, an
increase of 9.3%. This increase is primarily attributable to increased
purchases of stationery and supplies related to the conversion of teller and
platform computer systems throughout the Bank. The conversion required an
initial purchase of supplies needed to support the hardware installed in the
conversion. The new systems are designed to make both the account opening
process and transaction processing more efficient. We believe that the
efficiencies created by converting these systems will ultimately lead to
improved customer service and lower operating costs.
Income before taxes increased from $954,000 for the three months ended March
31, 2004, to $1.6 million for the three months ended March 31, 2005, an
increase of $643,000, or 67.4%. Applicable income taxes totaled $532,000 for
the three months ended March 31, 2005, reflecting an effective tax rate of
33.3%, compared to income taxes of $308,000 for the three months ended March
31, 2004, reflecting an effective tax rate of 32.4%.
Liquidity
---------
Our principal sources of funds are customer deposits, amortization and
payoff of existing loan principal, and sales 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. We may also 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.
We seek to promote deposit growth while controlling cost of funds. Sales-
oriented programs to attract new depositors and the cross-selling of various
products to its existing customer base are currently in place. Management
reviews, on an ongoing basis, possible new products, with particular
attention to products and services, which will aid in retaining our base of
lower-costing deposits.
Maturities and sales of investment securities provide us with significant
liquidity. Our policy of purchasing shorter-term debt securities reduces
market risk in the bond portfolio while providing significant cash flow. For
the three months ended March 31, 2005, cash flow from maturities of
securities was $3.4 million, proceeds from sales of securities totaled $0.9
million, compared to maturities of securities of $6.9 million, and proceeds
from sales of securities of $0 for the three months ended March 31, 2004.
Purchases of securities for the three months ended March 31, 2005 totaled
$0.8 million as compared to $0.9 million at March 31, 2004.
Amortization and pay-offs of the loan portfolio also provide us with
significant liquidity. Traditionally, amortization and pay-offs are
reinvested into loans. Excess liquidity is invested in federal funds sold
and overnight investments at the FHLB.
We have also used borrowed funds as a source of liquidity. At March 31,
2005, the Bank's outstanding borrowings from the FHLB were $110.2 million.
We have the capacity to borrow in excess of $54 million additional at the
FHLB.
Loan originations for the three months ended March 31, 2005 totaled $29.8
million. Commitments to originate loans at March 31, 2005 were $20.5
million, excluding unadvanced construction funds totaling $9.6 million,
21
unadvanced commercial lines of credit totaling, $14.9 million and unadvanced
home equity lines totaling $17.8 million. Management believes that adequate
liquidity is available to fund loan commitments utilizing deposits, loan
amortization, maturities of securities, or borrowings.
Capital
-------
At March 31, 2005, our total stockholders' equity was $47.5 million an
increase of $561,000 from $47.0 million. The increase in capital was a
combination of several factors. Additions consisted of 2005 net income of
$1.1 million, transactions originating through the Dividend Reinvestment
Program whereby 613 shares were issued for optional cash contributions of
$12,000 and 7,297 shares were issued for $142,447 in lieu of cash dividend
payments. There were also stock options exercised resulting in the issuance
of common stock totaling $196,000, including a tax benefit. These additions
were offset by dividends declared of $368,000 and comprehensive loss of
$541,000.
Under the requirements for Risk Based and Leverage Capital of the federal
banking agencies, a minimum level of capital will vary among banks based on
safety and soundness of operations. Risk Based Capital ratios are calculated
with reference to risk-weighted assets, which include both on and off
balance sheet exposure.
In addition to meeting the required levels, Slade's Ferry Bancorp's and the
Bank's capital ratios meet the criteria of the well-capitalized category
established by the federal banking agencies as of March 31, 2005 and at
December 31, 2004. The Tier I Capital leverage ratio and Tier I Capital to
risk weighted assets ratio for Slade's Ferry Bancorp are 8.44% and 11.99%,
respectively, for the three months ended March 31, 2005. Slade's Ferry
Bancorp's Tier I Capital leverage ratio and Tier I Capital to risk weighted
assets ratio for the year ended December 31, 2004 are 10.29% and 14.82%,
respectively. The Tier I Capital leverage ratio and Tier I Capital to risk
weighted assets ratio for Slade's Ferry Trust Company are 8.74% and 12.49%,
respectively, for the three months ended March 31, 2005. Slade's Ferry Trust
Company's Tier I Capital leverage ratio and Tier I Capital to risk weighted
assets ratio for the year ended December 31, 2004 are 8.75% and 12.67%,
respectively.
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 is material to investors.
22
ITEM 3
QUANITATIVE 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 its 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 300 basis point increase in
interest rates and a 150 basis point decrease in rates. Due to the existing
low interest rate environment in effect with the average Federal Funds
overnight trading at approximately 2.75% at March 31, 2005, the simulation
model only reduces rates downward by 150 basis points. The interest rate
movements used assume an instant and parallel change in interest rates and
no implementation of any strategic plans are made in response to the change
in rates. Prepayment speeds for loans are based on median dealer forecasts
for each interest rate scenario.
Our Board of Directors has established a risk limit of a 5.00% change in net
interest income for each 100 number basis point shift in market interest
rates. The limit established by the Board provides an internal tolerance
level to control interest rate risk. We are within our policy-mandated risk
limit for net interest income at risk.
23
The following table reflects our estimated exposure as a percentage of net
interest income and the dollar impact for the next twelve months, assuming
an immediate change in interest rates set forth below:
Estimated Exposure as a Percentage
Rate Change of Net Interest Income
(Basis Points) March 31, 2005
------------------------------------------------------
+300 (6.04%)
-150 0.26%
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 Estimated Exposure as a Percentage of Change from
(Basis Points) Net Interest Income Flat Rates
------------------------------------------------------------------------
FLAT 14.00% N/A
+300 12.30% (1.70%)
-150 13.28% (0.72%)
24
ITEM 4
CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company's management conducted an
evaluation with the participation of the Company's Chief Executive Officer
and Chief Financial Officer, regarding the effectiveness of the Company's
disclosure controls and procedures, as of the end of the last fiscal
quarter. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of March 31, 2005 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 and financial
officers, as appropriate to allow timely decisions regarding required
disclosure. We intend to continue to review and document our disclosure
controls and procedures, including our internal controls and procedures for
financial reporting, and we may from time to time make changes to the
disclosure controls and procedures to enhance their effectiveness and to
ensure that our systems evolve with our business. In designing and
evaluating the Company's disclosure controls and procedures, the Company and
its management recognize that any controls and procedures, no matter how
well designed and operated, can provide only a reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating and implementing possible
controls and procedures.
There has been no change in the Company's internal control over financial
reporting identified in connection with the evaluation that occurred during
the Company's last fiscal quarter that has materially affected, or that is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
25
PART II
OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
None.
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2005, the Company did not repurchase
any of its common stock. The Company currently does not have a stock
repurchase program in place.
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5
OTHER INFORMATION
Amendment to Bylaws
On May 11, 2005, our Board of Directors voted to amend Section 8 of Article
III of our Bylaws to provide that honorary directors are appointed for one-
year terms with review and consideration of one-year renewals. Previously,
the Bylaws provided that honorary directors were appointed for life subject
to removal by the Board.
Change of Control Agreements
Effective May 11, 2005, Slade's Ferry Bancorp and Slade's Ferry Trust
Company jointly entered into Change of Control Agreements with employees
Anthony L. Weatherford and Anna Demetrius Iatridis.
Generally, the agreements provides that the Bank may terminate the
employment of any employee covered by the agreement, with or without cause,
at any time prior to a "change of control" or "pending change of control"
(as each such term is defined in the agreement) without obligation for
severance benefits. However, upon the occurrence of a "change of control" or
"pending change of control", the employee will receive severance benefits if
his or her employment is terminated without cause or the employee resigns
with good reason. The
26
severance benefits would generally be equal to the value of the cash
compensation and fringe benefits that the employee would have received if he
or she had continued working for one additional year. The term of the
agreement is perpetual until one year after the date on which the Bank
notifies the employee of its intention to terminate the agreement (the
"Initial Expiration Date") or, if later, the first anniversary of the latest
"change of control" or "pending change of control" that occurs before the
Initial Expiration Date.
ITEM 6
EXHIBITS
Exhibits: See exhibit index.
27
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SLADE'S FERRY BANCORP.
----------------------------------------
(Registrant)
May 12, 2005 /s/ Mary Lynn D. Lenz
-------------- ----------------------------------------
(Date) (Signature) Mary Lynn D. Lenz
President/Chief Executive Officer
May 12, 2005 /s/ Deborah A. McLaughlin
-------------- ----------------------------------------
(Date) (Signature) Deborah A. McLaughlin
Chief Operating Officer/
Chief Financial Officer
28
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.
3.3 Articles of Amendment to the Amended and Restated (2)
Articles of Incorporation of Slade's Ferry Bank
10.1 Slade's Ferry Bancorp. 1996 Stock Option Plan, as amended (3)
10.2 Supplemental Executive Retirement Agreement between (4)
Slade's Ferry Bancorp. and Manuel J. Tavares
10.3 Form of Director Supplemental Retirement Program Director (5)
Agreement, 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 (6)
Director Supplemental Retirement Program).
10.5 Supplemental Executive Retirement Agreement between (7)
Slade's Ferry Bancorp. and Mary Lynn D. Lenz
10.6 Employment Agreement between Slade's Ferry Bancorp. (8)
and Mary Lynn D. Lenz
10.7 Employment Agreement between Slade's Ferry Bancorp. and (9)
Deborah A. McLaughlin
10.8 Employment Agreement between Slade's Ferry Bancorp. and (10)
Manuel J. Tavares
10.9 Form Change of Control Agreement (11)
10.10 Severance Pay Plan (12)
10.11 Slade's Ferry Bancorp 2004 Equity Incentive Plan (13)
11.1 Statement Regarding Computation of Per Share Earnings
14.1 Code of Ethics (14)
31.1 Rule 13a-14(a)/15d-14(a) Certification of the CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of the CFO
32.1 Section 1350 Certification of the CEO
32.2 Section 1350 Certification of the CFO
--------------------
Incorporated by reference to the Registrant's Registration Statement
on Form SB-2 filed with the Commission on April 14, 1997.
Incorporated by reference to the Registrant's Form 8-K filed with the
Commission on December 21, 2004.
Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended June 30, 1999.
Incorporated by reference to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1996.
Incorporated by reference to Exhibit 10 to the Registrant's Form 10-Q
for the quarter ended March 31, 1999.
Incorporated by reference to Exhibit 10 to the Registrant's Form
10-QSB for the quarter ended June 30, 1998.
Incorporated by reference to Exhibit 10.10 to the Registrant's Form
10-Q for the quarter ended March 31, 2003.
29
Incorporated by reference to Exhibit 10.11 to the Registrant's Form
10-Q for the quarter ended June 30, 2004.
Incorporated by reference to Exhibit 10.7 to the Registrant's Form
10-Q for the quarter ended September 30, 2004.
Incorporated by reference to Exhibit 10.8 to the Registrant's Form
10-Q for the quarter ended September 30, 2004.
Incorporated by reference to the Registrant's Form 8-K filed with the
Commission on January 13, 2005.
Incorporated by reference to the Registrant's Form 8-K filed with the
Commission on January 14, 2005.
Incorporated by reference to Appendix C to the Registrant's Proxy
Statement filed on April 9, 2004
Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 2004.
30