Modern Banking Services with Traditional Values Slade's Ferry Bancorp Annual Report 1999 Slade's Ferry Bancorp, originally incorporated as Weetamoe Bancorp in June of 1989 under the laws of the Commonwealth of Massachusetts, is a one bank holding company which owns and controls 100% of the assets of Slade's Ferry Trust Company and its subsidiaries. The primary business of Bancorp is the ongoing business of Slade's Ferry Trust Company, a state chartered trust company incorporated in Massachusetts in 1959. The Trust Company is a member of the Federal Deposit Insurance Corporation and serves as a retail bank. Slade's Ferry provides multiple deposit products and a wide range of financial services, including consumer installment loans, residential and commercial mortgages; as well as other forms of commercial lending. It serves a broad customer base derived from southeastern Massachusetts and nearby Rhode Island, currently operating twelve strategically located retail facilities and multiple ATM's in the towns of Fairhaven, Somerset, Swansea and Seekonk, and the cities of Fall River and New Bedford, MA. An Equal Opportunity/Affirmative Action Employer (M/F/D/V), Slade's Ferry Trust Company employed a total of 137 full-time and 48 part-time employees as of December 31, 1999. The Bank keeps convenient business hours, including Saturdays. The Bank actively competes with a variety of other financial institutions - major banks, bank holding companies and credit unions - for deposits, loans and additional forms of business by offering competitive rates. The Bank adheres to an established philosophy of providing professional, highly personal service throughout its marketplace. Corporate offices are located at 100 Slade's Ferry Avenue, Somerset, MA. To Our Shareholders: As the fireworks and worldwide celebrations of the new millennium began, Slade's Ferry Bancorp closed out the most profitable year of its existence. Net income for the year ended December 31, 1999, increased by 14.7% or $493,446, reaching $3,856,488 compared to $3,363,042 for the year ended 1998. Diluted earnings per share were $1.05 compared to $.94 in 1998, an increase of $.11 or 11.7%. These record earnings were accompanied by a 33% increase in quarterly dividends to you, the shareholders, from $.06 per share in the first quarter of 1999 to $.08 per share for the remaining quarters of the year. In addition, an extra cash dividend was paid in December, 1999, of $.08 per share. Our balance sheet reflects steady growth, with assets at year end 1999 at $358.1 million, an increase of $17.7 million or 5.2% above 1998. Loan demand was strong throughout the year, particularly in the commercial sector, showing an increase of $23.8 million or 10.9% when compared to 1998. More importantly, but less noticeable, was the dramatic reduction in nonperforming assets from $4.7 million in 1998 to $2.4 million by year end 1999. This improvement is the result of a much-improved economy, as well as our continuing efforts to assist customers that have experienced difficult financial periods. Deposit levels increased to $316.4 million at year end 1999, when compared to $303.8 million at the end of 1998. This increase occurred predominately in the time deposit category, due to the Bank's market-leading rates on certificates of deposit during the last quarter of 1999. In an effort to improve on market penetration and our delivery system, we opened a newly refurbished branch on South Main Street in Fall River in early January, 1999. By year end, this branch had grown to $4,000,000. In late March, 1999, our newest branch on Ashley Boulevard in New Bedford was opened and has since steadily grown to $5,700,000 by year end. This branch offers us the opportunity to expand our visibility in the New Bedford market area. Both branches are a great addition to our branch network and, we feel, will enhance our future growth and profitability. In July, we established a loan production office in Warwick, Rhode Island, which is the source of many new small business customers and provides a means to expand in this marketplace. We are very pleased with the opportunities this office has afforded us during 1999. During the early part of 1999, a Real Estate Investment Trust (the Slade's Ferry Preferred Capital Corporation) was formed which has allowed us to use certain state tax planning strategies to reduce our overall tax liability and enhance our earnings. Some of these tax savings were used to form the Slade's Ferry Charitable Foundation. The Slade's Ferry Charitable Foundation was established with Fidelity Investments to help us better manage our resources and serve our expanding community. This fund allows the bank to carefully control the disbursement of charitable funds without incurring administrative costs and expenses. Since our inception, Slade's Ferry Bank has carried on a proud, quiet tradition of community-based charitable giving. As we have grown, so too have the number and size of the requests we receive. While small donations will continue to be handled directly from the Main Office, our larger contributions, still directed by Slade's Ferry, will now be dispersed through this newly established Foundation. As the end of the year approached, we focused our attention on the changeover to Y2K, which came and went virtually unnoticed by our customers. The only disappointment for 1999 was the performance of community bank stocks versus the rest of the market. Over the last two years, bank stocks (Nasdaq Bank Index) are down 21.54%, while the S & P 500 stocks are up 43.80%. Although banks are enjoying their most profitable period in years, community banks are seeing the stock price decline due to liquidity concerns and small volumes of shares traded. We expect an improvement in the performance of community bank stocks, as many are presently undervalued, but we do not expect a large run-up in price as we saw in early 1998. The new millennium is off to a great start! With solid earnings, continued growth and a commitment to you, the shareholders, to provide value and reward for your continued support, we thank you. Sincerely, /s/ James D. Carey James D. Carey Executive Vice President, Bancorp President, Chief Executive Officer, Slade's Ferry Bank January 28, 2000 A Progressive Future Founded on a Proud Past PRESERVING THE VALUES OF OUR PAST - Slade's Ferry Bank is the proud owner of an authentically restored 1925 Model T Ford. Our neighbors and friends will frequently see this vehicle participating in various community events we support including Fall River Celebrates America and New Bedford's Summerfest. As we ride proudly into this next millennium, this Model T symbolizes our commitment to traditional values and the spirit of the past . . . a time when quality craftsmanship and an uncompromising commitment to excellence were focused on one single-minded consideration: the satisfaction of the customer. As we turn the page on the 20th century and enter the Third Millennium, we at Slade's Ferry Bank are absolutely confident that we can meet and exceed your ever-changing banking needs. Simply because today's tools and technologies are constantly changing doesn't mean that our commitment to personal service has to change, too. In the years ahead, computers will keep getting smarter. Businesses will keep moving faster. And Slade's Ferry Bank will continue to make it our business to offer you the best, most modern banking services available anywhere - while maintaining our commitment to personal service and old world values - because some things should never change. We believe that technology is merely a tool that enables us to achieve our first priority: serving every banking need of every banking customer. So we'll continue to work towards delivering a full array of banking services. And we'll deliver these services with a personal touch that assures you're banking with people who care about you and understand your needs. A computer will never look you in the eye, shake your hand and reassure you that it shares your values and cares about your business. Slade's Ferry bankers will. This is the foundation of our proud tradition. A Year of Branching Out and Building for Tomorrow What is an investment but a decision you make today based on what you believe you will need tomorrow? In 1999, Slade's Ferry Bank made several forward-thinking investments - each one a purposeful step toward ensuring we continue to meet and exceed the needs of all our customers throughout Southeastern Massachusetts and, now, Rhode Island. We opened two new branches - one on South Main Street in Fall River and one on Ashley Boulevard in New Bedford - each staffed with friendly, knowledgeable Slade's Ferry professionals eager to help our customers get what they want and need. Also in 1999, we opened our first Commercial Loan Production Office in Rhode Island - further solidifying our leadership position in regional business banking. This Office functions as part of the Slade's Ferry Loan Company - and serves to extend the reach of our unique banker-to-business relationships. It's all part of a practical, manageable strategy aimed at meeting - and exceeding - all the needs of all our customers - past, present and future. Our Commitment to Keeping the Right Balance Your personal and business finances are extremely important to you. And to us. We know it is critical for you to find your perfect balance between risk and reward, short-term and long-term gain, and your lifestyle today versus your dreams for tomorrow. As we enter the unprecedented new millennium, finding - and keeping - the right balance is vital in all facets of your financial life. So, while we work diligently on your behalf to outpace the pace of change - we will never lose sight of the qualities that make us so very different from other banking institutions. We're big enough to help you build your business yet small enough to care about your passbook savings account. We're experienced and understand the meaning of genuine customer service yet we're innovative enough to offer you the most modern banking conveniences. We understand where you're coming from - because that's where we're from, too. Here at Slade's Ferry Bank, our commitment to you is that we will always pursue the perfect balance for you - because the balance of our success rests on the balance of your satisfaction. We are proud to be your bank -yesterday, today and into the new millennium. Financial Table of Contents Selected Financial Data 6 Management's Discussion and Analysis 7 Results of Operations 7 Financial Condition 10 Independent Auditors' Report 17 Consolidated Balance Sheets 18 Consolidated Statements of Income 19 Consolidated Statements of Changes in Stockholders' Equity 20 Consolidated Statements of Cash Flows 21 Notes to Consolidated Financial Statements 23 Board of Directors and Officers 40 Market for Registrant's Common Equity and Related Stockholder Matters Market Information The Company's common stock is listed in the NASDAQ Small Cap Market under the symbol SFBC. The following table sets forth the range of high and low bids as reported for the NASDAQ Small Cap Market by quarters for the two- year period ended December 31, 1999. 1999 1998 - --------------------------------------------------- High Low High Low - --------------------------------------------------- 1st Quarter $14.70 $13.25 $17.00 $15.50 2nd Quarter 13.50 12.25 19.13 17.50 3rd Quarter 12.13 10.00 18.75 16.38 4th Quarter 11.88 10.00 15.88 13.00 =================================================== Dividends - History and Policy The Company, since its inception in 1990 and prior thereto the Bank, has consistently paid dividends to stockholders since 1961. The Company paid a quarterly cash dividend of $.06 per share in the first quarter of 1999 and then increased the cash dividends to $.08 per share for the remaining quarters. In addition, an extra cash dividend was paid in December 1999 of $.08 per share for a total of $.36(1) per share paid in 1999. In January 1998, the Company issued a 5% stock dividend on the Company's common stock, resulting in a distribution of 161,698 shares. The Company also paid two quarterly cash dividends of $.05 per share and then increased its dividend to $.06 per share for the third and fourth quarter in 1998. In addition, an extra cash dividend of $.06 per share was paid in December 1998 for a total of $.27(1) per share paid in 1998. The declaration of cash dividends is dependent on a number of factors, including regulatory limitations, and the Bank's operating results and financial condition. The stockholders of the Company will be entitled to dividends only when, and if, declared by the Company's Board of Directors out of funds legally available. Under the Massachusetts Business Corporation Law, a dividend may not be declared if the corporation is insolvent or if the declaration of the dividend would render the corporation insolvent. Furthermore, the directors may be liable for the authorization of a dividend if such dividend is in violation of the Articles of Organization, or if the corporation is then or is thereby rendered insolvent. The Company will be considered insolvent when it is unable to pay debts as they fall due in the usual course of business, or when its liabilities are in excess of the reasonable market value of assets held. Chapter 172 Section 28 of the Massachusetts Statutes on Bank and Banking provides that a bank's Board of Directors may, subject to the restriction contained in the section, declare and pay dividends on capital stock out of net profits from time to time and to such extent as they deem advisable. However, under this provision, no cash dividend shall be paid unless, following the payment of such dividend, the capital stock and retained earnings account will be unimpaired. <F1> Reflects the effect of the 5% stock dividend issued on February 9, 2000. Selected Financial Data The following table sets forth selected financial data for the last five years. Year Ended December 31 - ------------------------------------------------------------------------------------------------------------------ (Dollars in Thousands Except Per Share Data) 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ EARNINGS DATA Interest Income $ 25,553 $ 24,306 $ 23,150 $ 19,495 $ 16,541 Interest Expense 10,754 10,711 10,412 9,078 7,764 Net Interest Income 14,799 13,595 12,738 10,417 8,777 Provision for Loan Losses 550 600 500 400 550 Noninterest Income 2,087 1,568 1,562 1,305 1,056 Noninterest Expense 10,557 8,984 9,033 7,380 6,632 Income Before Income Taxes 5,779 5,579 4,767 3,942 2,651 Applicable Income Taxes 1,923 2,216 1,921 1,564 1,005 Net Income 3,856 3,363 2,846 2,378 1,646 PER SHARE DATA(1) Net Income-Basic $ 1.06 $ 0.940 $ 0.850 $ 0.772 $ 0.589 Net Income-Diluted(2) $ 1.05 $ 0.940 $ 0.850 $ -- $ -- Cash Dividends $ 0.358 $ 0.265 $ 0.230 $ 0.216 $ 0.156 Book Value (at end of period) $ 8.567 $ 8.200 $ 7.746 $ 6.693 $ 6.382 Avg. Shs. Outstanding 3,476,451 3,402,218 3,184,857 2,903,131 2,875,162 Shares Outstanding Year End 3,520,409 3,446,413 3,236,713 2,789,142 2,617,181 BALANCE SHEET DATA Assets $ 358,121 $ 340,355 $ 301,571 $ 291,342 $ 233,422 Loans 242,049 218,230 213,736 198,986 151,094 Unearned Discount 594 691 690 643 527 Allowance for Loan Losses 3,766 3,569 3,694 3,354 2,498 Loans, Net 237,669 213,938 209,310 194,935 148,069 Goodwill 2,627 2,854 3,081 3,307 -- Investments 81,806 79,978 58,668 57,732 58,757 Deposits 316,431 303,786 271,322 267,791 214,221 Stockholders' Equity 31,664 29,707 26,436 19,847 17,827 FINANCIAL RATIOS Net Yield on Interest Earning Assets(3) 4.71% 4.70% 4.66% 4.44% 4.36% Net Interest Spread(3) 3.99 3.91 3.88 3.72 3.72 Net Income as a Percentage of Average Assets 1.11 1.06 0.96 0.94 0.75 Average Equity 12.56 11.98 12.27 12.69 9.99 Dividend Payout Ratio 34.36 28.54 27.57 27.95 29.03 Average Equity to Average Assets 8.85 8.86 7.79 7.40 7.55 - -------------------- <F1> Earnings per share are computed based on the average number of shares of common stock outstanding during the year. On February 24, 1995, the Company declared a 5% stock dividend mailed to stockholders on March 1, 1995 and on March 13, 1995, the Company announced a 3 for 2 stock split mailed to stockholders on April 18, 1995. On January 8, 1996, the Company declared a 5% stock dividend mailed to stockholders on January 31, 1996. On January 12, 1998, the Company declared a 5% stock dividend mailed to stockholders on February 11, 1998. Per share data has been restated to reflect the effect of the stock splits and the stock dividends, including the 5% stock dividend issued on February 9, 2000. <F2> There were no stock options outstanding in years prior to 1997. <F3> Calculated on a fully taxable equivalent basis. Slade's Ferry Bancorp Management's Discussion and Analysis The purpose of Management's Discussion and Analysis is to focus on certain significant factors which have affected the Company's operating results and financial condition, and to provide stockholders a more comprehensive review of the figures contained in the financial data of this report. 1999 Highlights * In 1999, Slade's Ferry Bancorp recorded net income of $3,856,488 or $1.05 per share on a diluted basis compared to $3,363,042 or $.94 per share on a diluted basis in 1998. This represents an increase of $493,446 or 14.67% in net income and $.11 or 11.70% per share on a diluted basis between 1999 and 1998. * Return on average equity for 1999 was 12.56%, up by 0.58% when compared to 11.98% reported in 1998. Return on average assets for 1999 was 1.11% up by .05% when compared to 1.06% reported in 1998. * Book value of the Company's common stock increased to $8.57 in 1999 from $8.20 reported in 1998, and $7.75 reported in 1997. * The Company increased its cash dividend during the second quarter from $.06 per share to $.08 per share, and paid an extra cash dividend in December 1999 to reflect total dividend payments of $.38 per share, up by $.10 per share when compared to $.28 per share paid in 1998. * The Bank opened two branch banking facilities in 1999: 1601 South Main Street, Fall River, Massachusetts 833 Ashley Boulevard, New Bedford, Massachusetts * Certain state tax planning strategies were implemented in 1999 through the formation of the Slade's Ferry Preferred Capital Corporation, a Real Estate Investment Trust, as a subsidiary of the Bank. * A loan production office was established in Rhode Island, known as the Slade's Ferry Loan Company, located at 188 Airport Road, Warwick, Rhode Island. The office provides the opportunity to solicit commercial and consumer borrowers in the Rhode Island area. * A charitable gift fund known as the Slade's Ferry Charitable Foundation was established with Fidelity Investments, Boston, Massachusetts, to act as the administrator. This provides the Bank control over its governance without incurring administrative tasks and expense associated with a charitable fund. Income earned remains with the fund and charity disbursements are solely governed by Slade's Ferry Bank. Results of Operations Net interest income, which is the difference between interest and dividend income earned on earning-assets and interest expense paid on interest- bearing liabilities, is the dominant contributor to net income. Increases or decreases in interest rates affect the yields earned on loans and investments and rates paid on deposits and other borrowings. On a fully taxable basis, net interest income was $15.0 Million in 1999, $13.8 Million in 1998 and $12.9 Million in 1997. The increase in net interest income in 1999 is primarily a result of growth in average earning assets of 8.84% from prior years. Growth in earning assets is due to a general increase in business volumes. The average earning assets produced an 8.08% yield, down when compared to 8.35% in 1998 and 8.43% in 1997. The downturn in yields is due to a lower prime rate environment that occurred in late 1998 as new loans were booked and some existing loans were repriced or rewritten at lower rates. The loan portfolio, which generally produces higher yields than the investment portfolio, represents 66.12% of average assets in 1999, compared to 67.5% in 1998, and 69.06% in 1997. Cost of funds decreased to 4.09% in 1999 primarily due to the lowering of rates paid on other time deposits, which is the largest component of interestbearing liabilities. Cost of funds in 1998 was 4.44% and 4.55% in 1997. During 1999 the average balances in interest-bearing liabilities increased to $262.7 Million, compared to $241.4 Million in 1998 and $229.1 Million in 1997. The net interest spread, which represents the difference between the weighted average yield on interest-bearing assets and the weighted average cost of interest-bearing liabilities increased to 3.99% in 1999 from 3.91% in 1998 and 3.88% reported in 1997. Net yield on earning assets, which represents net interest income as a percentage of average earning assets increased slightly to 4.71% from 4.70% in 1998 and 4.66% in 1997. The Provision to the Allowance for Loan Losses in 1999 decreased to $550,000 compared to $600,000 recorded in 1998. The provision in 1997 was $500,000. The decrease in the provision for 1999 was based upon management's desire to maintain an appropriate ratio of the Allowance for Loan Losses to outstanding loans while recognizing the growth in the loan portfolio, the amount of charge-offs that occurred in 1999, and the level of non accrual loans compared to prior years. Total Other Income for 1999 increased by $518,432 or 33.06% to $2,086,544 from $1,568,112 recorded in 1998. Service charges on deposit accounts decreased slightly in 1999 to $618,303 when compared to $634,129 in 1998 and $654,749 in 1997. These decreases are due to small business checking accounts converting from a higher fee based account structure to a lower fee structure in lieu of receiving canceled checks. This procedure, in turn, reduces postage expense since monthly statements are mailed to the small business entity without the canceled checks. During 1999, $3.2 Million of investment securities in the Available-for-Sale category were sold at a loss of $25,026. This was a strategic move to provide additional liquidity needed to fund loan growth. In addition, due to favorable market conditions, the Bank also sold various marketable corporate equities totaling $1.4 Million throughout the year to realize gains on sales of $691,924 resulting in a total net pre-tax gain of $666,898. Pre-tax gains on sales of securities in 1998 were $382,370 and $313,844 in 1997. The line item Other Income represents income earned on safe deposit box rentals, checkbook printing revenue, recoveries on previously recorded losses relating to check fraud, exchange and commission fees, and other miscellaneous income. The increase in this category, when compared to 1998 and 1997, is primarily due to overall business growth, but also reflects recognition of income associated with the director's life insurance program adopted in 1998. Through the demutualization of the insurance carrier that provides a portion of the director's life insurance, shares of the company were issued which resulted in additional income of $163,901. In addition, an increase of $27,080 was also recorded as miscellaneous income due to increases in the cash surrender values of the policies. Total Other Expense increased by $1,572,388 to $10,556,569, up by 17.50% when compared to $8,984,181 recorded in 1998. Salaries and Employees Benefits, which is the largest component of Other Expense, increased by $299,985 to $5,780,176, up from $5,480,191 recorded in 1998. In 1997 Salaries and Employees Benefits were $5,317,620. The increase is associated with general wage adjustments and increased cost in employees benefits. Occupancy and Equipment Expense combined totaled $1,358,415 in 1999, up by $103,785 when compared to $1,254,630 reported in 1998. The increase is primarily attributable to the costs related to the new branch offices opened in early 1999. Combined Occupancy and Equipment Expense in 1997 totaled $1,285,867. Gains and Losses on Sales of Other Real Estate Owned is a result of sales of real estate acquired through the foreclosure process. In 1999, the Bank realized losses in this category totaling $29,069 compared to a gain recognized in 1998 of $54,590 and losses in 1997 amounting to $42,457. Writedown on Other Real Estate Owned occurs when Bank held property is adjusted to the current appraised value, if the appraisal is less than the amount carried by the Bank. Further adjustments are made, if necessary, should future appraisals warrant them. In 1999, the Bank incurred a writedown of $57,024 compared to no writedown in 1998 and a $67,480 charge in 1997. The following table sets forth the components of the line item Other Expense. 1999 1998 1997 - ---------------------------------------------------------------------------- Amortization of Goodwill $ 226,800 $ 226,800 $ 226,800 Advertising and Public Relations 465,271 405,737 400,502 Communications 317,993 290,253 269,239 Professional Fees & Other Services 729,263 571,952 536,710 Other Real Estate Owned Expense 161,632 46,426 49,670 Committee Fees 169,650 109,900 104,455 Other Various Expense 971,385 391,185 349,281 - ---------------------------------------------------------------------------- Other Expense Total $3,041,994 $2,042,253 $1,936,657 - ---------------------------------------------------------------------------- In 1999, Other Expense increased by $999,741 to $3,041,994 when compared to $2,042,253 reported in 1998. In 1997, the Bank reported $1,936,657 for this category. Increases in the line item Other Expense are generally associated with normal business growth, however, in 1999 Professional Fees and Other Services includes charges totaling $178,000 consisting of legal and professional costs in establishing the Slade's Ferry Preferred Capital Corporation, the Slade's Ferry Loan Company and costs relating to the Y2K preparedness. Other Real Estate Owned Expense are costs associated with the maintenance and selling of properties acquired through foreclosure. In 1999, the Bank incurred additional clean-up and repair costs at these properties to improve their marketability. The increase in Committee Fees reflects a general adjustment made in January 1999 to the director's fee structure for attendance at meetings. The line item Other Various Expenses includes a one-time charge of $277,643 set aside to cover a court judgement resulting from the civil suit brought on by a former employee of the National Bank of Fairhaven, and a $150,000 payment to the Slade's Ferry Charitable Foundation for future charitable donations. Income tax for 1999 decreased to $1,922,757, down by $293,403 or 13.24% from $2,216,160 reported in 1998. Federal Income Tax for 1999 totaled $1,880,068 compared to $1,665,551 reported in 1998. The increase in Federal Income Tax was attributed to an increase in pre-tax earnings. Whereas State Income Tax for 1999 amounted to $42,689, significantly less than the $550,609 in taxes paid in 1998 due to the establishment of a Real Estate Investment Trust (REIT). The REIT, named the Slade's Ferry Preferred Capital Corporation, enabled the Bank to utilize certain state tax savings strategies. In 1997, Federal and State Income Tax expenses totaled $1,920,741 of which $1,391,553 was Federal Income Tax and $529,188 was State Income Tax. The Company's net earnings were $3,856,488, $3,363,042 and $2,845,990 for 1999, 1998, and 1997 respectively. Unaudited Quarterly Financial Summary - --------------------------------------------------------------------------------- (Dollars in Thousands) March 31 June 30 September 30 December 31 - --------------------------------------------------------------------------------- 1999: Revenues $6,682 $6,791 $7,170 $6,996 Operating Income 1,409 1,501 1,552 1,319 Net Income 873 922 1,112(1) 949(1) Earnings per share - Diluted $ 0.24 $ 0.25 $ 0.30 $ 0.26 Earnings per share - Basic $ 0.25 $ 0.25 $ 0.30 $ 0.26 1998: Revenues $6,217 $6,500 $6,749 $6,409 Operating Income 1,236 1,426 1,655 1,262 Net Income 745 864 1,000 754 Earnings per share - Diluted $ 0.21 $ 0.24 $ 0.28 $ 0.21 Earnings per share - Basic $ 0.21 $ 0.24 $ 0.28 $ 0.21 - -------------------- <F1> Reflects effect of decrease in state tax attributed to the establishment of a real estate investment trust in July 1999. The aggregate effect of the tax savings resulted in additional net income of $312,000 for the year 1999. Distribution of Assets, Liabilities, and Stockholders' Equity; Interest Rates and Interest Differential The following table sets forth the Company's average assets, liabilities, and stockholders' equity, interest income earned and interest paid, average rates earned and paid, and the net interest margin for the periods ending December 31, 1999, December 31, 1998, and December 31, 1997. Averages are daily averages. - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Average Interest(1) Avg. Average Interest(1) Avg. Average Interest (1) Avg. (Dollars in Thousands) Balance Inc/Exp Int. Rate Balance Inc/Exp Int. Rate Balance Inc/Exp Int. Rate - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS: Earning Assets(2) Commercial Loans $ 47,386 $ 4,218 8.90% $ 42,244 $ 3,953 9.36% $ 36,195 $ 3,466 9.58% Commercial Real Estate 136,648 12,876 9.42 118,939 11,630 9.78 110,093 10,740 9.76 Residential Real Estate 37,523 2,778 7.40 45,781 3,520 7.69 52,894 4,116 7.78 Consumer Loans 7,678 657 8.56 6,767 652 9.63 6,503 659 10.13 - ----------------------------------------------------------------------------------------------------------------------------------- Total Loans 229,235 20,529 8.96 213,731 19,755 9.24 205,685 18,981 9.23 Federal Funds Sold 5,563 259 4.66 12,214 630 5.16 11,309 607 5.37 U.S. Treasury/Govern- ment Agencies 68,523 4,114 6.00 54,842 3,366 6.14 49,682 3,099 6.24 States & Political Subdivisions 11,505 748 6.50 9,763 649 6.65 6,948 477 6.87 Mutual Funds 71 3 4.23 209 14 6.70 301 15 4.98 Marketable Equity Securities 3,470 78 2.25 2,761 105 3.80 2,518 120 4.77 Other Investments 1,102 71 6.44 6 0 0.00 126 8 6.35 - ----------------------------------------------------------------------------------------------------------------------------------- Total Earning Assets 319,469 $25,802 8.08% 293,526 $24,519 8.35% 276,569 $23,307 8.43% =================================================================================================================================== Allowance for Loan Losses (3,814) (3,602) (3,474) Unearned Income (640) (715) (665) Cash and Due From Banks 14,320 12,186 11,366 Other Assets 17,371 15,376 14,022 - ----------------------------------------------------------------------------------------------------------------------------------- Total Assets $346,706 $316,771 $297,818 =================================================================================================================================== LIABILITIES & STOCKHOLDERS' EQUITY: Savings $ 48,442 $ 1,022 2.11% $ 43,885 $ 1,075 2.45% $ 42,642 $ 1,067 2.50% NOW's 38,404 994 2.59 38,764 1,196 3.09 37,739 1,202 3.19 Money Market Accounts 12,188 215 1.76 13,777 273 1.98 14,116 281 1.99 CD's > $100M 26,857 1,325 4.93 22,945 1,266 5.52 23,162 1,256 5.42 Other Time Deposits 130,393 6,778 5.20 119,118 6,700 5.62 109,278 6,460 5.91 Other Borrowings 6,413 420 6.55 2,933 201 6.85 2,114 146 6.91 - ----------------------------------------------------------------------------------------------------------------------------------- Total Interest-bearing Liabilities 262,697 $10,754 4.09% 241,422 $10,711 4.44% 229,051 $10,412 4.55% =================================================================================================================================== Demand Deposits 52,261 46,217 43,724 Other Liabilities 1,057 1,063 1,847 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 316,015 288,702 274,622 - ----------------------------------------------------------------------------------------------------------------------------------- Common Stock 35 34 30 Paid-in Capital 22,646 21,448 16,899 Retained Earnings 8,492 6,395 6,308 Net Unrealized Gain (Loss) on Available- for-Sale Securities (482) 192 (41) - ----------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 30,691 28,069 23,196 - ----------------------------------------------------------------------------------------------------------------------------------- Total Liabilities & Stockholders' Equity $346,706 $316,771 $297,818 =================================================================================================================================== Net Interest Income $15,048 $13,808 $12,895 =================================================================================================================================== Net Interest Spread 3.99% 3.91% 3.88% =================================================================================================================================== Net Yield on Earning Assets 4.71% 4.70% 4.66% =================================================================================================================================== - -------------------- <F1> On a fully taxable equivalent basis based on tax rate of 34%. Interest income on investments and net interest income includes a fully taxable equivalent adjustment of $249,000 in 1999, $212,000 in 1998, and $157,000 in 1997. (2) Average balance includes non-accruing loans. The effect of including such loans is to reduce the average rate earned on the Company's loans. Financial Condition Loans Loan demand remained constant throughout 1999 resulting in a 10.9% increase from year end 1998. The loan portfolio expanded by $23.8 Million to $242.0 Million when compared to $218.2 Million reported at December 31, 1998. The largest segment of the loan portfolio is commercial real estate loans which represents 52.86% of total loans. These loans are collateralized by various types of commercial properties without any predominate type of property nor concentration of credit in any one industry. The properties consist of apartment complexes, medical centers, strip malls, factories with multiple tenants, and retail office units located in the Bank's market area extending throughout Southeastern Massachusetts and nearby cities and towns in Rhode Island. Commercial real estate loans generally have a higher degree of credit risk than residential real estate loans because they are predominately dependant on the success of the business. The Bank adheres to a credit criteria policy that strives to maintain the quality of the loan portfolio. The process of granting a commercial loan consists of an independent analysis of the financial condition of the borrower and the business entity by the Bank's credit analysis division. In turn, the borrowing request is further evaluated by Executive Management and all loans in excess of $100,000 are submitted to the Executive Committee of the Board of Directors for final approval before the loan is granted. Periodically, during the life of the loan, analysis of financial statements of the business is performed to determine if there are any weaknesses or negative trends developing, and if so, contact with the borrower is made to ascertain the cause and what remedial action is planned. The second largest component in the loan portfolio is residential real estate which accounts for 21.62% of the loan portfolio and comprises of mortgages on one to four family properties. Credit is granted based on income to debt ratio, a satisfactory credit report and the appraised value of the property. The Bank also provides a "minimum down-payment" program to encourage home ownership for first-time home buyers. This enables prospective homeowners the opportunity to purchase a home without having to save over an extended period of time for the normally required 20% down payment. Other types of loans total 25.52% of the portfolio and are comprised of commercial loans which are generally short term loans to finance business inventory, consumer credit installment loans, automobile financing and credit card loans. Investments The investment portfolio represents the second largest component of the Company's assets and consists of securities in the Available-for-Sale category and securities in the Held-to-Maturity category. The designation of which category the security is to be classified as is determined at the time of the purchase of the investment instrument. Securities in the Available- for-Sale category are securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. These securities may be sold in response to interest rate changes, liquidity needs or other factors. Any unrecognized gains or losses, net of taxes, is reflected in Stockholders' Equity as a separate component. The Available-for-Sale category at December 31, 1999 had net unrecognized losses, net of taxes of $1,150,594 of which $1,220,284 in unrecognized losses are attributed to securities of U.S. Treasury, other U.S. Government corporations and agencies, and mortgage-backed securities, and $69,690 in unrecognized gains are attributable to marketable equity securities. Securities of U.S. Treasury, U.S. Government corporations and agencies, and mortgage-backed securities have little or no credit risk, other than being sensitive to changes in interest rates; and if held-to-maturity, these securities will mature at par. The Company amortizes premiums and accretes discounts over the life of the security. Marketable equity securities, however, have a greater risk as they are subject to rapid market fluctuations. These securities are constantly monitored and evaluated to determine their suitability for sale or retention in the portfolio. Management minimizes its risk by limiting the total amount invested into marketable equity securities to 5% of the total investment portfolio. At December 31, 1999, the amount invested in marketable equity securities was 4.7% of the total investment portfolio distributed over various business sectors. The Held-to-Maturity category consists predominately of securities of U.S. Treasury, U.S. Government corporation and agencies, and securities issued by states of the United States and political subdivisions of states. The Company has the positive intent and ability to hold these securities to maturity. In managing the Held-to-Maturity portfolio, the Company seeks to maximize its return and maintain consistency to meet short and long term liquidity forecasts by purchasing securities with maturities laddered within a short-term period of 1-3 years, a mid-term period of 3-5 years, and some securities extending out to 10 years. The Company does not purchase investments with off-balance sheet characteristics, such as swaps, options, futures, and other hedging activities that are called derivatives. The main objective of the investment policy is to provide adequate liquidity to meet reasonable declines in deposits and any anticipated increases in the loan portfolio, to provide safety of principal and interest, to generate earnings adequate to provide a stable income and to fit within the overall asset/liability management objectives of the Company. Deposits and other Liabilities Deposit levels remained relatively flat during the first nine months in 1999 increasing significantly in the fourth quarter as the Bank increased paying rates on term certificates of deposit. In addition to attracting new depositors by the offering of competitive rates, the opening of two new branch facilities attributed to an increase in the Bank's customer base. Certificates of deposit (term deposits) is the largest component of deposits extending out to a maximum of three years. The Bank is a member of the Federal Home Loan Bank (FHLB) and borrows funds secured by residential mortgage loans and other assets. This borrowing mechanism enables the Bank to match-fund loans to commercial borrowers who meet certain credit and deposit requirements. At December 31, 1999, the Bank had $6.8 Million of loans match-funded with FHLB. Year 2000 Compliance In 1998 an assessment of the computer systems and all other technology functions was made, and a plan was established to assure that all systems at year end 1999 would properly interpret the calendar year digits for Year 2000, including ongoing operations and calculations. Through a series of tests and implementations of changes during the past two years, the Company was Y2K ready, and the conversion to Year 2000 posed no problems, glitches or delays. In addition, the Company is not aware of any of its commercial borrowers, whose businesses had a dependency on computers, incurring any business interruptions associated with the Year 2000 event. Asset/Liability Management and Interest Rate Risk The Company's Asset-Liability Management Committee, comprised of the Bank's Executive Management team, monitors and evaluates the interest rate sensitivity of the Company's assets and liabilities. Management's objective is to reduce and control the volatility of its net interest margin by managing the relationship of interest-earning assets and interest-bearing liabilities. In order to manage this relationship, the committee utilizes a GAP report prepared on a monthly basis which indicates the differences or gap between interest-earning assets and interest-bearing liabilities in various maturity or repricing time periods. This, in conjunction with certain assumptions, and other related factors, such as anticipated changes in interest rates and projected cash flows from loans, investments and deposits, provides management a means of evaluating interest rate risk. Management also considers that certain assets and liabilities react differently to changes in interest rates. Some assets may have rate caps of prepayment fees attached to the instrument, and some liabilities have early withdrawal penalties. A positive gap results when more assets than liabilities are expected to reprice within a certain time frame, and a negative gap reflects an excess of liabilities repricing in that period. A positive gap would tend to increase net interest income when rates are rising and decrease net interest income when rates are falling. A negative gap position would tend to produce the opposite effect. At December 31, 1999, for the period from 0 days to 2 years, the Company has a cumulative negative gap position of $25.2 Million. This equates to a percentage of total assets of 7.03% which is within the specific target for interest rate sensitivity established by the Company. The negative gap occurs as a result of the amount of deposits that are subject to repricing during this time period. In addition to the GAP report, the Company also uses an analysis to measure the exposure of net interest income to changes in interest rates over a relatively short (i.e., 12 months) time frame. The analysis projects future interest income and interest expense from the Company's interest-earning assets and interest-bearing liabilities. Depending on the GAP position, the Company's policy limit on interest rate risk specifies that if interest rates were to change immediately up or down 200 basis points, estimated net interest income for the next twelve months would not decline by more than ten percent. The following table reflects the Company's estimated exposure as a percentage and the dollar impact of estimated net interest income for the next twelve months, assuming an immediate change in interest rates: Estimated Exposure as a Percentage of Rate Change Net Interest Income (Basis Points) December 31, 1999 Dollar Impact - ---------------------------------------------------------------------- +200 (1.90%) $(280,000) -200 .52% $ 77,000 The model used to monitor earnings-at-risk provides management a measurement tool to assess the effect of changes in interest rates on the Company's current and future earnings. The 10% limit established by the Company provides an internal tolerance level to control interest rate risk exposure. Interest Rate - Sensitivity Gaps Repricing Period at December 31, 1999 - ---------------------------------------------------------------------------------------------------------------- Within 1-2 2-3 3-5 Over 5 (Dollars in Thousands) 1 Year Years Years Years Years Total - ---------------------------------------------------------------------------------------------------------------- Interest-Earning Assets:(1) Federal Funds Sold $ 5,000 $ -- $ -- $ -- $ -- $ 5,000 Investment Securities 10,797 7,726 4,679 21,327 39,194 83,723 Residential Mortgages 21,345 8,135 6,476 1,418 14,221 51,595 Commercial Mortgages 76,841 12,075 19,127 9,566 14,807 132,416 Other Loans 46,202 3,358 4,132 2,477 92 56,261 - ---------------------------------------------------------------------------------------------------------------- Total Earning Assets $160,185 $ 31,294 $34,414 $34,788 $68,314 $328,995 - ---------------------------------------------------------------------------------------------------------------- Interest-Bearing Liabilities: NOW Checking and Savings Deposits $ 35,253 $ 9,922 $ 9,922 $26,455 $ -- $ 81,552 Money Market Deposits 3,415 2,042 2,042 5,443 -- 12,942 Term Deposits 141,262 23,499 4,961 -- -- 169,722 Borrowed Funds -- -- -- -- 6,757 6,757 Other Interest-Bearing Liabilities 1,248 -- -- -- -- 1,248 - ---------------------------------------------------------------------------------------------------------------- Total Interest-Bearing Liabilities $181,178 $ 35,463 $16,925 $31,898 $ 6,757 $272,221 - ---------------------------------------------------------------------------------------------------------------- Net Interest Sensitivity Gap $(20,993) $ (4,169) $17,489 $ 2,890 $61,557 $ 56,774 Cumulative Gap $(20,993) $(25,162) $(7,673) $(4,783) $56,774 $ -- Cumulative Gap as a Percent of Total Assets 5.86% 7.03% 2.14% 1.34% 15.85% -- ================================================================================================================ - -------------------- <F1> Nonaccrual loans amounting to $1.8 Million have been eliminated from the loan balances. Nonperforming Assets Year Ended December 31 - --------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Nonaccrual loans $ 1,777 $ 3,331 $4,597 $4,352 $2,695 Loans 90 days or more past due and still accruing 248 317 147 112 23 Real estate acquired by foreclosure or substantively repossessed 353 1,026 159 308 633 - --------------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 2,378 $ 4,674 $4,903 $4,772 $3,351 =========================================================================================================================== Restructured debt performing in accordance with amended terms, not included above $ 518 $ 867 $1,265 $ 819 $ 459 =========================================================================================================================== Percentage of nonaccrual loans to total loans 0.73% 1.53% 2.15% 2.19% 1.78% Percentage of nonaccrual loans, restructured loans, and real estate acquired by foreclosure or substantively repossessed to total assets 0.74% 1.54% 2.00% 1.88% 1.62% Percentage of allowance for loan losses to nonaccrual loans 211.92% 107.15% 80.36% 77.07% 92.69% The Company considers nonaccrual loans, loans past due 90 days or more but still accruing, restructured loans not performing in accordance with amended terms, and real estate acquired through foreclosure as nonperforming assets. Nonperforming assets as a total decreased to $2.4 Million at year end 1999 from $4.7 Million reported at year end 1998. Nonaccrual loans is the largest component of nonperforming assets, and at December 31, 1999, this category decreased to $1.8 Million from $3.3 Million reported at end of previous year. The Company places a loan on nonaccrual status when, in the opinion of management, the collectability of the principals and interest becomes doubtful. Generally, when a commercial loan, commercial real estate loan or a residential real estate loan becomes past due 90 days or more, the Company discontinues the accrual of interest and reverses previously accrued interest. The loan remains in the nonaccrual status until the loan is current and six months of payments are made. Then it is reclassified as an accruing loan. If it is determined that the collectibility of the loan no longer exists, the loan is charged-off to the Allowance for Loan Losses, or if applicable, any real estate collateralizing the loan is acquired through foreclosure and categorized as Other Real Estate Owned. Loans 90 days or more past due but still accruing decreased to $248,000 from $317,000 reported at year end 1998. Management continues to accrue on these loans due to the excess values of collateral securing these loans compared to their outstanding balances. Real estate acquired by foreclosure or substantively repossessed decreased to $353,000 at December 31, 1999 compared to $1,026,000 reported at end of the prior year. This amount represents two separate parcels of real estate. The percentage of nonaccrual loans to total loans decreased substantially from prior years due to the reduction of loans in the nonaccrual category and the growth of the loan portfolio. In addition, the percentage of nonaccrual loans, restructured loans and real estate acquired by foreclosure to total assets also decreased as a result of increased asset levels. The $518,000 of restructured loans represent several borrowers where original loan terms were amended and are current in their payments under the amended terms. Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" applies to all loans except large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, loans measured at fair value or at a lower of cost or fair value, leases, and debt securities as defined in Statement 115. Statement 114 requires that impaired loans be valued at the present value of expected future cash flows discounted at the loan's effective interest rate or as a practical expedient, at the loan's observable market value of the collateral if the loan is collateral dependent. Smaller-balance homogeneous loans are considered by the Company to include consumer installment loans and credit card loans. At December 31, 1999, there were $2,601,608 of loans which the Company has determined to be impaired, of which $1,019,110 has a related allowance for credit losses of $421,330 and $1,582,498 has no related allowance for credit losses. Management is not aware of any other loans that pose a potential credit risk or where the loans are current but the borrowers are experiencing financial difficulty. Allowance for Loan Losses The table below illustrates the changes in the Allowance for Loan Losses for the periods indicated. Year Ended December 31 - --------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------- Balance at January 1 $ 3,569 $ 3,694 $ 3,354 $ 2,498 $ 2,306 - --------------------------------------------------------------------------------------------------------------- Charge-offs: Commercial (221) (0) (40) (144) (184) Real estate construction (0) (0) (0) (0) (0) Real estate mortgage (23) (716) (147) (136) (79) Installment/Consumer (158) (76) (68) (159) (134) - --------------------------------------------------------------------------------------------------------------- (402) (792) (255) (439) (397) - --------------------------------------------------------------------------------------------------------------- Recoveries: Commercial 11 8 41 59 1 Real estate construction 0 0 0 0 0 Real estate mortgage 24 43 16 333 16 Installment/Consumer 14 16 38 47 22 - --------------------------------------------------------------------------------------------------------------- 49 67 95 439 39 - --------------------------------------------------------------------------------------------------------------- Net charge-offs (353) (725) (160) (0) (358) - --------------------------------------------------------------------------------------------------------------- Additions charged to operations 550 600 500 400 550 Allowance attributable to acquisition 0 0 0 456 0 - --------------------------------------------------------------------------------------------------------------- Balance at end of period $ 3,766 $ 3,569 $ 3,694 $ 3,354 $ 2,498 =============================================================================================================== Allowance for Loan Losses as a percent of year end loans 1.56% 1.64% 1.73% 1.69% 1.65% Ratio of net charge-offs to average loans outstanding 0.15% 0.34% 0.08% 0.00% 0.25% The Allowance for Loan Losses is available to absorb losses on loans deemed by management as uncollectible. In assessing the adequacy of the level of the allowance, management considers the status of nonaccrual loans and specific borrower situations, the current and anticipated economic climate of the area, including national credit trends and the historical credit experiences within the region. Additions to the allowance are provided by charges to earnings and recoveries on previously charged-off loans. Deductions from the Allowance are transacted as a charge-off when a loan is deemed uncollectible. The Allowance for Loan Losses as a percentage of outstanding loans at December 31, 1999, was 1.56% compared to 1.64% reported at year end 1998. The ratios at years ending 1997, 1996, and 1995 were 1.73%, 1.69% and 1.65% respectively. The decrease in the ratio of the Allowance for Loan Losses as a percentage of outstanding loans for 1999, when compared to prior years, is determined by management as adequate, due to the significant reduction in loans classified as nonaccrual at year end 1999. In 1999, the Company provided $550,000 to the Allowance and recovered $48,798 from previously charged-off loans. Loans charged-off during 1999 totaled $402,208 resulting in net charge-offs of $353,410. Net charge-offs for prior years were $724,583, $160,446, -0-, and $358,085 for 1998, 1997, 1996 and 1995 respectively. In addition to management's assessment of the Allowance for Loan Losses, the Allowance is also evaluated by regulatory agencies and independent accountants as part of their examination and audit procedures. Liquidity Liquidity represents the ability of the Bank to meet its funding requirements. In assessing the appropriate level of liquidity, the Bank considers deposit levels, lending requirements and investment maturities in light of prevailing economic conditions. Through this assessment, the Bank manages its liquidity level to optimize earnings and respond to fluctuations in customer borrowing needs. The Company's principle sources of funds are customer deposits, loan amortization, loan payoffs, and the maturities of investment securities. Through these sources, funds are provided for customer withdrawals from deposit accounts, loan origination, draw-downs on loan commitments, acquisitions of investment securities, and other normal business activities. Investors' capital also provides a source of funding. The largest source of funds is provided by depositors. The largest component of the Company's deposit base is term certificates which extend out to a maximum of three years. The Company does not participate in brokered deposits. Deposits are obtained from consumers and commercial customers within the Bank's community reinvestment area, being Bristol County, Massachusetts and several abutting towns in Rhode Island. The Company also has the ability to borrow funds for liquidity purposes from correspondent banks, the Federal Home Loan Bank, as well as the Federal Reserve Bank of Boston by pledging various investment securities as collateral. Tax payments made by our customers which are owed to the Federal Reserve Bank's Treasury Tax and Loan account are classified as Other Borrowed Funds. Excess available funds are invested on a daily basis into Federal Funds Sold. An appropriate level of Federal Funds Sold is maintained to meet loan commitments, anticipated loan growth and deposit forecasts. Funds exceeding this level are then used to purchase investment securities that are suitable in yields and maturities for the investment portfolio. Liquidity in 1999 was primarily provided by the maturity and sales of securities totaling $27.5 Million, a net increase in deposits of $12.6 Million, and advances from the Federal Home Loan Bank of $2.4 Million. These were offset by an increase in loans of $24.1 Million, purchases of securities of $30.9 Million, and capital expenditures of $1.1 Million. Other factors affecting liquidity included cash provided by operating activities and financing activities as indicated in the cash flow statements. Capital As of December 31, 1999, the Company had total capital of $31,664,246. This represents an increase of $1,956,861 from $29,707,385 reported on December 31, 1998. The increase in capital was a combination of several factors. Additions consisted of twelve months earnings of $3,856,488 and transactions originating through the Dividend Reinvestment Program whereby 18,619.019 shares were issued for cash contributions of $223,068 and 55,376.513 shares were issued for $639,898 in lieu of cash dividend payments. These additions were offset by dividends paid of $1,324,918. Also affecting capital is the line item Accumulated other comprehensive income (loss) which reflects net unrealized gains or losses, net of taxes, on securities classified as Available-for-Sale and the minimum pension liability adjustment. On December 31, 1998, the Available-for-Sale portfolio had unrealized gains, net of taxes, of $364,944, and on December 31, 1999, as a result of current market values, the portfolio reflects unrealized losses, net of taxes of $1,150,594. There was a decrease in the minimum pension liability adjustment of $80,885, net of taxes, recorded December 31, 1998 to $3,024 as of December 31, 1999. 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 minimum requirements, the Company and the Bank's Capital ratios meet the criteria of the "well capitalized" category established by the federal banking agencies as of December 31, 1999. The following table illustrates the capital position of Slade's Ferry Bancorp and Slade's Ferry Trust Company for years ending December 31, 1999 and 1998. Slade's Ferry Bancorp 1999 1998 - ------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------- Total Capital (to Risk Weighted Assets) $ 33,475 12.98% $ 29,647 12.80% Minimum required 20,625 8.00 18,536 8.00 Excess 12,850 4.98 11,111 4.80 Tier 1 Capital (to Risk Weighted Assets) 30,246 11.73 26,569 11.47 Minimum required 10,312 4.00 9,268 4.00 Excess 19,934 7.73 17,301 7.47 Risk Adjusted Assets, net of goodwill, nonqualifying intangibles, excess allowance and excess deferred tax assets 257,852 231,700 Tier 1 Capital (Leverage Ratio) 30,246 8.60 26,569 8.12 Minimum required 14,060 4.00 13,081 4.00 Excess 16,186 4.60 13,488 4.12 Quarterly average total assets, net of goodwill, nonqualifying intangibles and excess deferred tax assets 351,698 327,025 Slade's Ferry Trust Company 1999 1998 - ------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------------------- Total Capital (to Risk Weighted Assets) $ 29,979 11.67% $ 27,034 11.69% Minimum required 20,548 8.00 18,500 8.00 Excess 9,431 3.67 8,534 3.69 Tier 1 Capital (to Risk Weighted Assets) 26,762 10.42 23,961 10.36 Minimum required 10,274 4.00 9,250 4.00 Excess 16,488 6.42 14,711 6.36 Risk Adjusted Assets, net of goodwill, nonqualifying intangibles, excess allowance and excess deferred tax assets 256,833 231,250 Tier 1 Capital (Leverage Ratio) 26,762 7.68 23,961 7.38 Minimum required 13,936 4.00 12,989 4.00 Excess 12,826 3.68 10,972 3.38 Quarterly average total assets, net of goodwill, nonqualifying intangibles and excess deferred tax assets 348,464 324,725 Slade's Ferry Bancorp and Subsidiary CERTIFIED PUBLIC ACCOUNTANTS Shatswell, MacLeod & Company, P.C. 83 PINE STREET WEST PEABODY, MASSACHUSETTS 01960-3635 Telephone (978) 535-0206 Facsimile (978) 535-9908 The Board of Directors and Stockholders Slade's Ferry Bancorp Somerset, Massachusetts INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated balance sheets of Slade's Ferry Bancorp and Subsidiary as of December 31, 1999 and 1998 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Slade's Ferry Bancorp and Subsidiary as of December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ Shatswell, MacLeod & Company, P.C. SHATSWELL, MacLEOD & COMPANY, P.C. West Peabody, Massachusetts January 14, 2000 Consolidated Balance Sheets | December 31, 1999 and 1998 1999 1998 - ----------------------------------------------------------------------------------------------------------------- Assets Cash and due from banks $ 16,061,445 $ 15,686,520 Money market mutual funds 47,521 42,517 Federal funds sold 5,000,000 14,500,000 - ----------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 21,108,966 30,229,037 Investments in available-for-sale securities (at fair value) 61,303,505 58,156,775 Investments in held-to-maturity securities (fair values of $19,259,657 as of December 31, 1999 and $21,282,941 as of December 31, 1998) 19,488,603 20,921,254 Federal Home Loan Bank stock 1,013,400 899,900 Loans, net 237,668,852 213,938,277 Premises and equipment 7,062,906 6,687,271 Goodwill 2,626,968 2,853,768 Other real estate owned 353,095 1,026,095 Accrued interest receivable 1,942,751 1,598,282 Cash surrender value of life insurance 1,629,225 1,613,517 Other assets 3,922,306 2,430,544 - ----------------------------------------------------------------------------------------------------------------- Total assets $358,120,577 $340,354,720 ================================================================================================================= Liabilities and Stockholders' Equity Deposits: Noninterest-bearing $ 52,215,433 $ 48,281,278 Interest-bearing 264,215,754 255,504,587 - ----------------------------------------------------------------------------------------------------------------- Total deposits 316,431,187 303,785,865 - ----------------------------------------------------------------------------------------------------------------- Note Payable 847,990 Advances from Federal Home Loan Bank 6,756,767 4,475,454 Other borrowed funds 1,248,461 42,329 Other liabilities 1,966,916 1,495,697 - ----------------------------------------------------------------------------------------------------------------- Total liabilities 326,403,331 310,647,335 - ----------------------------------------------------------------------------------------------------------------- Preferred stockholders' equity in a subsidiary company 53,000 - ----------------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock, par value $.01 per share; authorized 5,000,000 shares; issued and outstanding 3,520,409.4 shares in 1999 and 3,446,413.8 shares in 1998 35,204 34,464 Paid-in capital 23,147,447 22,285,220 Retained earnings 9,635,213 7,103,642 Accumulated other comprehensive income (loss) (1,153,618) 284,059 - ----------------------------------------------------------------------------------------------------------------- Total stockholders' equity 31,664,246 29,707,385 - ----------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $358,120,577 $340,354,720 ================================================================================================================= The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Income | years ended December 31, 1999, 1998 and 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------- Interest and dividend income: Interest and fees on loans $20,529,165 $19,754,777 $18,981,050 Interest and dividends on securities: Taxable 4,265,404 3,491,490 3,251,526 Tax-exempt 499,384 424,661 302,616 Other interest 258,948 635,688 615,267 - ------------------------------------------------------------------------------------------------------------------- Total interest and dividend income 25,552,901 24,306,616 23,150,459 - ------------------------------------------------------------------------------------------------------------------- Interest expense: Interest on deposits 10,333,314 10,509,873 10,266,135 Interest on Federal Home Loan Bank advances 303,341 72,213 1,555 Interest on other borrowed funds 116,976 129,259 52,318 Interest on notes payable 92,470 - ------------------------------------------------------------------------------------------------------------------- Total interest expense 10,753,631 10,711,345 10,412,478 - ------------------------------------------------------------------------------------------------------------------- Net interest and dividend income 14,799,270 13,595,271 12,737,981 Provision for loan losses 550,000 600,000 500,000 - ------------------------------------------------------------------------------------------------------------------- Net interest and dividend income after provision for loan losses 14,249,270 12,995,271 12,237,981 - ------------------------------------------------------------------------------------------------------------------- Other income: Service charges on deposit accounts 618,303 634,129 654,749 Overdraft service charges 269,508 247,835 247,330 Gain on sales of available-for-sale securities, net 666,898 382,370 313,844 Other income 531,835 303,778 346,334 - ------------------------------------------------------------------------------------------------------------------- Total other income 2,086,544 1,568,112 1,562,257 - ------------------------------------------------------------------------------------------------------------------- Other expense: Salaries and employee benefits 5,780,176 5,480,191 5,317,620 Occupancy expense 795,705 684,112 715,094 Equipment expense 562,710 570,518 570,773 Stationery and supplies 255,665 229,344 311,546 FDIC deposit insurance premium 34,226 32,353 71,880 (Gain) loss on sales of other real estate owned, net 29,069 (54,590) 42,457 Writedown of other real estate owned 57,024 67,480 Other expense 3,041,994 2,042,253 1,936,657 - ------------------------------------------------------------------------------------------------------------------- Total other expense 10,556,569 8,984,181 9,033,507 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes 5,779,245 5,579,202 4,766,731 Income taxes 1,922,757 2,216,160 1,920,741 - ------------------------------------------------------------------------------------------------------------------- Net income $ 3,856,488 $ 3,363,042 $ 2,845,990 =================================================================================================================== Earnings per common share $ 1.06 $ .94 $ .85 =================================================================================================================== Earnings per common share assuming dilution $ 1.05 $ .94 $ .85 =================================================================================================================== The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Changes in Stockholders' Equity | years ended December 31, 1999, 1998 and 1997 Accumulated Other Common Paid-in Retained Comprehensive Stock Capital Earnings Income (Loss) Total - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $27,891 $14,607,299 $ 5,214,763 $ (2,628) $19,847,325 Comprehensive income: Net income 2,845,990 Net change in unrealized holding loss on available- for-sale securities, net of tax effect of $103,844 151,915 Comprehensive income 2,997,905 Issuance of common stock from dividend reinvestment plan 308 351,141 351,449 Stock issuance relating to optional cash contribution plan 138 158,017 158,155 Net proceeds from stock offering 4,030 3,862,141 3,866,171 Dividends declared ($.23 per share) (784,579) (784,579) - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 32,367 18,978,598 7,276,174 149,287 26,436,426 Comprehensive income: Net income 3,363,042 Other comprehensive income 134,772 Comprehensive income 3,497,814 Issuance of 5% common stock dividend 1,617 2,566,147 (2,575,881) (8,117) Issuance of common stock from dividend reinvestment plan 304 472,938 473,242 Stock issuance relating to optional cash contribution plan 134 215,790 215,924 Stock options exercised 42 37,772 37,814 Tax benefit from exercise of stock options 13,975 13,975 Dividends declared ($.27 per share) (959,693) (959,693) - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 34,464 22,285,220 7,103,642 284,059 29,707,385 Comprehensive income: Net income 3,856,488 Other comprehensive income (1,437,677) Comprehensive income 2,418,811 Issuance of common stock from dividend reinvestment plan 554 639,344 639,898 Stock issuance relating to optional cash contribution plan 186 222,883 223,069 Dividends declared ($.36 per share) (1,324,917) (1,324,917) - -------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 $35,204 $23,147,447 $ 9,635,213 $(1,153,618) $31,664,246 ================================================================================================================================ Other comprehensive income and reclassification disclosure for the years ended December 31: 1999 1998 - ------------------------------------------------------------------------------------------- Unrealized gains (losses) on securities Net unrealized gain (loss) on available-for-sale securities $(1,827,534) $ 731,683 Reclassification adjustment for realized gains in net income (666,898) (382,370) - ------------------------------------------------------------------------------------------- (2,494,432) 349,313 Income tax (expense) benefit 978,894 (133,656) - ------------------------------------------------------------------------------------------- (1,515,538) 215,657 - ------------------------------------------------------------------------------------------- Minimum pension liability adjustment 141,705 (146,825) Income tax (expense) benefit (63,844) 65,940 - ------------------------------------------------------------------------------------------- 77,861 (80,885) - ------------------------------------------------------------------------------------------- Other comprehensive income (loss), net of tax $(1,437,677) $ 134,772 =========================================================================================== Accumulated other comprehensive income (loss) consists of the following as of December 31: 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------- Net unrealized gains (losses) on available-for-sale securities, net of taxes $(1,150,594) $ 364,944 $149,287 Minimum pension liability adjustment, net of taxes (3,024) (80,885) - ----------------------------------------------------------------------------------------------------------------------- Accumulated other comprehensive income (loss) $(1,153,618) $ 284,059 $149,287 ======================================================================================================================= The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Cash Flows | years ended December 31, 1999, 1998 and 1997 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 3,856,488 $ 3,363,042 $ 2,845,990 Adjustments to reconcile net income to net cash provided by operating activities: Accretion, net of amortization of securities (35,079) (96,783) (220,167) Receipt of shares of stock from demutualized insurance company (163,901) Gain on sales of available-for-sale securities, net (666,898) (382,370) (313,844) Change in unearned income (96,745) 1,080 47,142 Provision for loan losses 550,000 600,000 500,000 Depreciation and amortization 692,397 668,354 653,344 Gain on sale of fixed assets (2,700) (4,000) (Gain) loss on sales of other real estate owned, net 29,069 (54,590) 42,457 Writedown of other real estate owned 57,024 67,480 (Increase) decrease in cash surrender value of life insurance policies (15,708) 11,483 Amortization of goodwill 226,800 226,800 226,800 Accretion, net of amortization of fair market value adjustments (7,140) (5,718) (5,718) (Increase) decrease in other assets (4,132) 19,892 345,234 Increase in prepaid expenses (200,106) (7,401) (78,662) (Increase) decrease in interest receivable (344,469) 198,185 57,316 Increase (decrease) in other liabilities (3,482) (221,286) 29 Increase in accrued expenses 394,978 192,315 60,838 Increase (decrease) in interest payable 5,697 (13,901) (12,184) Deferred tax (benefit) expense 11,331 204,267 (90,885) Increase (decrease) in taxes payable (248,502) (189,796) 184,331 Minority interest in subsidiary 53,000 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 4,090,622 4,510,873 4,305,501 - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Net decrease in interest bearing time deposits with other banks 106,688 42,910 Purchases of available-for-sale securities (22,923,708) (50,678,610) (18,762,051) Proceeds from sales of available-for-sale securities 5,728,160 1,098,937 1,171,136 Proceeds from maturities of available-for-sale securities 12,335,599 32,210,430 14,605,076 Purchases of held-to-maturity securities (7,946,052) (13,283,524) (14,714,192) Proceeds from maturities of held-to-maturity securities 9,463,368 10,094,867 17,142,658 Purchases of Federal Home Loan Bank stock (113,500) (9,300) Net increase in loans (24,102,273) (6,234,254) (15,258,154) Recoveries of loans previously charged off 48,798 67,724 94,405 Capital expenditures (1,061,630) (1,630,689) (394,602) Proceeds from sales of fixed assets 2,700 4,000 Proceeds from sales of other real estate owned 467,952 136,281 291,293 Investment in life insurance policies (1,625,000) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (28,103,286) (29,743,750) (15,777,521) - ---------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase (decrease) in demand deposits, NOW and savings accounts (2,250,591) 9,687,926 (1,230) Net increase in time deposits 14,893,663 22,772,689 3,529,471 Payment on notes payable (850,000) (100,000) (100,000) Advances from Federal Home Loan Bank 2,381,000 4,071,600 430,000 Payments on Federal Home Loan Bank advances (99,687) (26,146) Net increase (decrease) in other borrowed funds 1,206,132 (1,157,671) Proceeds from issuance of common stock 862,967 726,980 4,438,376 Cost of stock issuance (62,601) Fractional shares paid in cash (8,117) Dividends paid (1,250,891) (914,943) (734,073) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 14,892,593 35,052,318 7,499,943 - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (9,120,071) 9,819,441 (3,972,077) Cash and cash equivalents at beginning of year 30,229,037 20,409,596 24,381,673 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 21,108,966 $ 30,229,037 $ 20,409,596 ================================================================================================================================== Supplemental disclosures: Loans transferred to other real estate owned $ 218,045 $ 1,107,063 $ 446,612 Loans originating from the sales of other real estate owned 337,000 158,650 193,600 Interest paid 10,747,934 10,725,246 10,424,662 Income taxes paid 2,159,928 2,201,689 1,827,295 ================================================================================================================================== The accompanying notes are an integral part of these consolidated financial statements. Notes to Consolidated Financial Statements | years ended December 31, 1999, 1998 and 1997 Note 1 | Nature of Operations Slade's Ferry Bancorp (Company) is a Massachusetts corporation that was organized in 1990 to become the holding company of Slade's Ferry Trust Company (Bank). The Company's primary activity is to act as the holding company for the Bank. The Bank is a state chartered bank, which was incorporated in 1959 and is headquartered in Somerset, Massachusetts. The Bank operates its business from twelve banking offices located in Massachusetts and a loan company in Rhode Island. The Bank is engaged principally in the business of attracting deposits from the general public and investing those deposits in residential and commercial real estate loans, and in commercial, consumer and small business loans. Note 2 | Accounting Policies The accounting and reporting policies of the Company and its subsidiary conform to generally accepted accounting principles and predominant practices within the banking industry. The consolidated financial statements were prepared using the accrual basis of accounting. The significant accounting policies are summarized below to assist the reader in better understanding the consolidated financial statements and other data contained herein. Pervasiveness of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. Basis of Presentation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank and the Bank's wholly-owned subsidiaries, Slade's Ferry Realty Trust, Slade's Ferry Securities Corporation, Slade's Ferry Loan Company and Slade's Ferry Preferred Capital Corporation. Slade's Ferry Realty Trust was formed to hold ownership of real estate, Slade's Ferry Securities Corporation was formed to hold securities for tax benefits in Massachusetts, Slade's Ferry Loan Company provides the opportunity to solicit commercial and consumer borrowers in the Rhode Island area and Slade's Ferry Preferred Capital Corporation, a real estate investment trust, was formed to hold real estate mortgage loans, reducing applicable state taxes. All significant intercompany accounts and transactions have been eliminated in the consolidation. Cash and Cash Equivalents: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, cash items, due from banks, federal funds sold and money market mutual funds. Cash and due from banks as of December 31, 1999 includes $5,168,000 which is subject to withdrawals and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank. Securities: Investments in debt securities are adjusted for amortization of premiums and accretion of discounts. Gains or losses on sales of investment securities are computed on a specific identification basis. The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-sale, or trading. This security classification may be modified after acquisition only under certain specified conditions. In general, securities may be classified as held-to- maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale. * Held-to-maturity securities are measured at amortized cost in the balance sheet. Unrealized holding gains and losses are not included in earnings or in a separate component of capital. They are merely disclosed in the notes to the consolidated financial statements. * Available-for-sale securities are carried at fair value on the balance sheet. Unrealized holding gains and losses are not included in earnings, but are reported as a net amount (less expected tax) in a separate component of capital until realized. * Trading securities are carried at fair value on the balance sheet. Unrealized holding gains and losses for trading securities are included in earnings. Loans: Loans receivable that management has the intent and ability to hold until maturity or payoff are reported at their outstanding principal balances reduced by amounts due to borrowers on unadvanced loans, by any charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Interest on loans is recognized on a simple interest basis. Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount amortized as an adjustment of the related loan's yield. The Company is amortizing these amounts over the contractual life of the related loans. Cash receipts of interest income on impaired loans is credited to principal to the extent necessary to eliminate doubt as to the collectibility of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered. Allowance for Loan Losses: The allowance is increased by provisions charged to current operations and is decreased by loan losses, net of recoveries. The provision for loan losses is based on management's evaluation of current and anticipated economic conditions, changes in the character and size of the loan portfolio, and other indicators. The Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company measures impaired loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. The Company considers for impairment all loans, except large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value or at the lower of cost or fair value, leases, and convertible or nonconvertible debentures and bonds and other debt securities. The Company considers its residential real estate loans and consumer loans that are not individually significant to be large groups of smaller balance homogeneous loans. Factors considered by management in determining impairment include payment status, net worth and collateral value. An insignificant payment delay or an insignificant shortfall in payment does not in itself result in the review of a loan for impairment. The Company reviews its loans for impairment on a loan-by-loan basis. The Company does not apply impairment to aggregations of loans that have risk characteristics in common with other impaired loans. Interest on a loan is not generally accrued when the loan becomes ninety or more days overdue. The Company may place a loan on nonaccrual status but not classify it as impaired, if (i) it is probable that the Company will collect all amounts due in accordance with the contractual terms of the loan or (ii) the loan is an individually insignificant residential mortgage loan or consumer loan. Impaired loans are charged-off when management believes that the collectibility of the loan's principal is remote. Substantially all of the Company's loans that have been identified as impaired have been measured by the fair value of existing collateral. Premises and Equipment: Premises and equipment are stated at cost, less accumulated depreciation and amortization. Cost and related allowances for depreciation and amortization of premises and equipment retired or otherwise disposed of are removed from the respective accounts with any gain or loss included in income or expense. Depreciation and amortization are calculated principally on the straight- line method over the estimated useful lives of the assets. Goodwill: Goodwill arising from the acquisition of Fairbank, Inc. is reported net of accumulated amortization. Goodwill is being amortized on a straight-line basis over a period of fifteen years. Other Real Estate Owned and In-Substance Foreclosures: Other real estate owned includes properties acquired through foreclosure and properties classified as in-substance foreclosures in accordance with Financial Accounting Standards Board Statement No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructuring." These properties are carried at the lower of cost or estimated fair value less estimated cost to sell. Any writedown from cost to estimated fair value required at the time of foreclosure or classification as in-substance foreclosure is charged to the allowance for loan losses. Expenses incurred in connection with maintaining these assets, subsequent writedowns and gains or losses recognized upon sale are included in other expense. In accordance with Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan," the Company classifies loans as in-substance repossessed or foreclosed if the Company receives physical possession of the debtor's assets regardless of whether formal foreclosure proceedings take place. Income Taxes: The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. Fair Value of Financial Instruments: Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Company disclose estimated fair value for its financial instruments. Fair value methods and assumptions used by the Company in estimating its fair value disclosures are as follows: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Securities (including mortgage-backed securities): Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value. Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Federal Home Loan Bank Advances: Fair values for Federal Home Loan Bank advances are estimated using a discounted cash flow technique that applies interest rates currently being offered on advances to a schedule of aggregated expected monthly maturities on Federal Home Loan Bank advances. Note payable and other borrowed funds: Fair values for the note payable and other borrowed funds are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar borrowings. Off-balance sheet instruments: The fair value of commitments to originate loans is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and the unadvanced portion of loans, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date. Earnings per Share: Statement of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings per Share" is effective for periods ending after December 15, 1997. SFAS No. 128 simplifies the standards of computing earnings per share (EPS) previously found in APB Opinion No. 15. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. The Company has computed and presented EPS for the years ended December 31, 1999 and 1998 in accordance with SFAS No. 128. EPS as so computed does not differ materially from EPS that would have resulted if APB Opinion No. 15 had been applied. EPS so restated does not differ materially from EPS previously presented. Stock Based Compensation: Prior to 1997, the Company did not make stock-based compensation awards. In 1997, the Company began making such awards and had the option, under SFAS No. 123, of accounting for stock-based compensation using the intrinsic value approach in APB No. 25 and the fair value method introduced in SFAS No. 123. The Company elected to use the APB No. 25 method. Entities electing to follow the provisions of APB No. 25 must make pro forma disclosure of net income and earnings per share, as if the fair value method of accounting defined in SFAS No. 123 had been applied. The Company has made the pro forma disclosures required by SFAS No. 123. Note 3 | Investments in Securities Debt and equity securities have been classified in the consolidated balance sheets according to management's intent. The carrying amount of securities and their approximate fair values are as follows as of December 31: Gross Gross Amortized Unrealized Unrealized Cost Basis Holding Gains Holding Losses Fair Value - ----------------------------------------------------------------------------------------------------------------------------------- Available-for-sale securities: December 31, 1999: Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies $41,801,374 $ $1,482,728 $40,318,646 Mortgage-backed securities 16,939,459 521,322 16,418,137 Corporate debt securities 719,562 26,421 693,141 Marketable equity securities 3,807,944 504,966 391,808 3,921,102 - ----------------------------------------------------------------------------------------------------------------------------------- 63,268,339 504,966 2,422,279 61,351,026 - ----------------------------------------------------------------------------------------------------------------------------------- Money market mutual funds included in cash and cash equivalents (47,521) (47,521) - ----------------------------------------------------------------------------------------------------------------------------------- $63,220,818 $504,966 $2,422,279 $61,303,505 ================================================================================================================================== December 31, 1998: Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies $42,943,720 $201,405 $ 54,380 $43,090,745 Mortgage-backed securities 12,537,845 62,497 22,877 12,577,465 Asset-backed securities 222,479 1,021 223,500 Marketable equity securities 1,918,129 550,951 161,498 2,307,582 - ----------------------------------------------------------------------------------------------------------------------------------- 57,622,173 815,874 238,755 58,199,292 - ----------------------------------------------------------------------------------------------------------------------------------- Money market mutual funds included in cash and cash equivalents (42,517) (42,517) - ----------------------------------------------------------------------------------------------------------------------------------- $57,579,656 $815,874 $ 238,755 $58,156,775 ================================================================================================================================== Held-to-maturity securities: December 31, 1999: Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies $ 7,974,457 $ 9,535 $ 27,468 $ 7,956,524 Debt securities issued by states of the United States and political subdivisions of the states 11,439,417 9,151 220,349 11,228,219 Mortgage-backed securities 73,729 185 73,914 Other debt securities 1,000 1,000 - ----------------------------------------------------------------------------------------------------------------------------------- $19,488,603 $ 18,871 $ 247,817 $19,259,657 ================================================================================================================================== December 31, 1998: Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies $ 8,810,623 $116,949 $ 12 $ 8,927,560 Debt securities issued by states of the United States and political subdivisions of the states 11,996,833 256,936 13,334 12,240,435 Mortgage-backed securities 113,798 1,148 114,946 - ----------------------------------------------------------------------------------------------------------------------------------- $20,921,254 $375,033 $ 13,346 $21,282,941 ================================================================================================================================== The scheduled maturities of held-to-maturity securities and available-for- sale securities (other than equity securities) were as follows as of December 31, 1999: Held-to-maturity securities: Available-for-sale securities: - ---------------------------------------------------------------------------------------------------------------------------------- Amortized Cost Basis Fair Value Amortized Cost Basis Fair Value Debt securities other than mortgage-backed securities: Due within one year $ 5,093,570 $ 5,084,967 $ 500,000 $ 497,344 Due after one year through five years 8,677,368 8,639,916 23,368,138 22,709,703 Due after five years through ten years 4,939,743 4,798,037 18,652,798 17,804,740 Due after ten years 704,193 662,823 Mortgage-backed securities 73,729 73,914 16,939,459 16,418,137 - ---------------------------------------------------------------------------------------------------------------------------------- $19,488,603 $19,259,657 $59,460,395 $57,429,924 ================================================================================================================================== During 1999, proceeds from sales of available-for-sale securities amounted to $5,728,160. Gross realized gains and gross realized losses on those sales amounted to $739,508 and $72,610, respectively. During 1998, proceeds from sales of available-for-sale securities amounted to $1,098,937. Gross realized gains on those sales amounted to $382,370. There were no gross realized losses during the period. During 1997, proceeds from sales of available-for-sale securities amounted to $1,171,136. Gross realized gains and gross realized losses on those sales amounted to $315,281 and $1,437, respectively. There were no securities of issuers whose aggregate carrying amount exceeded 10% of stockholders' equity as of December 31, 1999. Total carrying amounts of $5,363,090 and $6,139,687 of debt securities were pledged to secure treasury tax and loan, trust department and public funds on deposit and the loan from Fleet National Bank as of December 31, 1999 and 1998, respectively. Note 4 | Loans Loans consisted of the following as of December 31: 1999 1998 - -------------------------------------------------------------------------------- Commercial, financial and agricultural $ 47,258,002 $ 43,776,923 Real estate - construction and land development 5,014,490 3,773,286 Real estate - residential 52,329,665 51,219,684 Real estate - commercial 127,938,107 112,912,865 Consumer 9,392,990 6,476,963 Obligations of states and political subdivisions 2,700 Other 115,803 67,616 - -------------------------------------------------------------------------------- 242,049,057 218,230,037 Allowance for loan losses (3,765,872) (3,569,282) Unearned income (594,383) (691,128) Unamortized adjustment to fair value (19,950) (31,350) - -------------------------------------------------------------------------------- Net loans, carrying amount $237,668,852 $213,938,277 ================================================================================ Certain directors and executive officers of the Company and companies in which they have significant ownership interest were customers of the Bank during 1999. Total loans to such persons and their companies amounted to $4,458,616 as of December 31, 1999. During the year ended December 31, 1999, $5,005,775 of advances were made and repayments totaled $4,246,098. Changes in the allowance for loan losses were as follows for the years ended December 31: 1999 1998 1997 - ------------------------------------------------------------------------------------ Balance at beginning of period $3,569,282 $3,693,865 $3,354,311 Loans charged off (402,208) (792,307) (254,851) Provision for loan losses 550,000 600,000 500,000 Recoveries of loans previously charged off 48,798 67,724 94,405 - ------------------------------------------------------------------------------------ Balance at end of period $3,765,872 $3,569,282 $3,693,865 ==================================================================================== Information about loans that meet the definition of an impaired loan in Statement of Financial Accounting Standards No. 114 is as follows as of December 31: 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ Recorded Related Recorded Related Investment Allowance Investment Allowance In Impaired For Credit In Impaired For Credit Loans Losses Loans Losses Loans for which there is a related allowance for credit losses $1,019,110 $421,330 $1,284,340 $324,887 Loans for which there is no related allowance for credit losses 1,582,498 3,875,975 - ------------------------------------------------------------------------------------------------------------------------ Totals $2,601,608 $421,330 $5,160,315 $324,887 ======================================================================================================================= Average recorded investment in impaired loans during the year ended December 31 $3,829,850 $5,773,697 ======================================================================================================================== Related amount of interest income recognized during the time, in the year ended December 31, that the loans were impaired Total recognized $ 244,313 $ 97,448 ======================================================================================================================== Amount recognized using a cash-basis method of accounting $ 0 $ 0 ======================================================================================================================== Note 5 | Premises and Equipment The following is a summary of premises and equipment as of December 31: 1999 1998 -------------------------- Land $ 1,805,368 $ 1,760,948 Buildings 6,656,205 6,102,599 Furniture and equipment 3,821,608 3,405,848 Leasehold improvements 381,235 378,172 - ----------------------------------------------------------------------- 12,664,416 11,647,567 Accumulated depreciation and amortization (5,601,510) (4,960,296) - ----------------------------------------------------------------------- $ 7,062,906 $ 6,687,271 ======================================================================= Note 6 | Deposits The aggregate amount of time deposit accounts in denomination of $100,000 or more as of December 31, 1999 and 1998 was $28,531,891 and $26,007,313, respectively. For time deposits as of December 31, 1999, the scheduled maturities for each of the following three years ended December 31, are: 2000 $141,261,432 2001 23,499,727 2002 4,961,116 -------------------------------- $169,722,275 ================================ Note 7 | other borrowed funds Other borrowed funds consist of treasury tax and loan deposits and generally are repaid within one to 120 days from the transaction date. Note 8 | note payable Note payable consisted of the following as of December 31, 1998: Note payable by the Bank to Fleet National Bank. The note payable was assumed by the Bank in the acquisition of Fairbank, Inc. Minimum quarterly principal payments of $25,000 were payable on the last business day of each calendar quarter. The interest rate on the loan was 3 month LIBOR plus 1.2% floating, which was swapped to yield a 9.01% fixed rate. This note was paid in full in 1999. Note 9 | Advances from Federal Home Loan Bank of Boston Advances consist of funds borrowed from the Federal Home Loan Bank of Boston (FHLB). Maturities of advances from the FHLB for the five fiscal years ending after December 31, 1999 and thereafter are summarized as follows: Interest Rate Range Amount - ------------------------------------------------------------- 2000 5.89% - 6.26% $ 130,897 2001 5.89% - 6.26% 139,872 2002 5.89% - 6.26% 150,653 2003 5.89% - 6.26% 159,238 2004 5.89% - 6.26% 169,624 Thereafter 5.66% - 6.26% 6,006,483 - ------------------------------------------------------------- $ 6,756,767 ============================================================= Amortizing advances are being repaid in equal monthly payments and are being amortized from the date of the advance to the maturity date on a direct reduction basis. Advances are secured by the Company's stock in that institution, its residential real estate mortgage portfolio and the remaining U.S. government and agencies obligation not otherwise pledged. Note 10 | Income Taxes The components of income tax expense are as follows for the years ended December 31: 1999 1998 1997 - ------------------------------------------------------------------ Current: Federal $1,917,807 $1,544,874 $1,463,401 State 57,463 467,019 548,225 - ------------------------------------------------------------------ 1,975,270 2,011,893 2,011,626 - ------------------------------------------------------------------ Deferred: Federal (37,739) 120,677 (71,848) State (14,774) 83,590 (19,037) - ------------------------------------------------------------------ (52,513) 204,267 (90,885) - ------------------------------------------------------------------ Total income tax expense $1,922,757 $2,216,160 $1,920,741 ================================================================== The reasons for the differences between the statutory federal income tax rates and the effective tax rates are summarized as follows for the years ended December 31: 1999 1998 1997 % of Income % of Income % of Income - ---------------------------------------------------------------------------------------- Federal income tax at statutory rate 34.0% 34.0% 34.0% Increase (decrease) in tax resulting from: Tax-exempt income (3.0) (2.9) (2.2) Dividends received deduction (.3) (.2) Unallowable expenses .8 .7 .5 Amortization of goodwill 1.3 1.4 1.6 State tax, net of federal tax benefit .5 6.5 6.6 - ---------------------------------------------------------------------------------------- Effective tax rates 33.3% 39.7% 40.3% ======================================================================================== The Company had gross deferred tax assets and gross deferred tax liabilities as follows as of December 31: 1999 1998 - ------------------------------------------------------------------------------------------ Deferred tax assets: Operating loss carryover $ $ 4,884 Allowance for loan losses 1,408,110 1,226,287 Deferred loan fees 189,109 224,960 Interest on non-performing loans 124,655 225,480 Accrued employee benefits 287,594 220,626 Minimum pension liability adjustment 2,096 65,940 Deferred lawsuit loss 113,640 Net unrealized holding loss on available-for-sale securities 766,719 Other adjustments 10,323 17,573 - ------------------------------------------------------------------------------------------ Gross deferred tax assets 2,902,246 1,985,750 - ------------------------------------------------------------------------------------------ Deferred tax liabilities: Accelerated depreciation (248,762) (242,049) Prepaid pensions (156,388) (68,269) Discount accretion (1,282) (2,091) Deferred gain on stock conversion (67,085) Net unrealized holding gain on available-for-sale securities (212,175) - ------------------------------------------------------------------------------------------ Gross deferred tax liabilities (473,517) (524,584) - ------------------------------------------------------------------------------------------ Net deferred tax assets $2,428,729 $1,461,166 ========================================================================================== Deferred tax assets as of December 31, 1999 and 1998 have not been reduced by a valuation allowance because management believes that it is more likely than not that the full amount of deferred tax assets will be realized. Note 11 | Employee Benefits The Company has a defined benefit pension plan (plan) covering substantially all of its full time employees who meet certain eligibility requirements. Employees are eligible under the plan upon attaining age 21 and completing one year of service. The benefits paid are based on 1.5% of total salary plus .5% of compensation in excess of integration level per year of service. The integration level is the first $750 of monthly compensation. The accrued benefit is based on years of service. On January 1, 1998 the Bank suspended the plan so that employees no longer earn additional defined benefits for future service. The following tables set forth information about the plan as of December 31 and the years then ended: 1999 1998 - ---------------------------------------------------------------------------------------------------- Change in projected benefit obligation: Benefit obligation at beginning of year $1,610,715 $1,424,299 Service cost 3,150 Interest cost 97,807 148,243 Change in assumptions 307,199 Actuarial loss (gain) (28,173) 193,463 Benefits paid (265,437) (82,847) Effect of plan curtailment (382,792) - ---------------------------------------------------------------------------------------------------- Benefit obligation at end of year 1,414,912 1,610,715 - ---------------------------------------------------------------------------------------------------- Change in plan assets: Plan assets at estimated fair value at beginning of year 1,363,836 1,131,394 Actual return on plan assets 66,170 159,422 Expense paid from plan assets (35,805) Employer contribution 140,000 191,672 Benefits paid (265,437) (82,847) - ---------------------------------------------------------------------------------------------------- Fair value of plan assets at end of year 1,304,569 1,363,836 - ---------------------------------------------------------------------------------------------------- Funded status (110,343) (246,879) Unrecognized net actuarial loss 387,200 404,042 Unrecognized prior service cost (5,163) (18,339) Unamortized net obligation existing at date of adoption of SFAS No. 87 110,386 118,393 - ---------------------------------------------------------------------------------------------------- Net amount recognized $ 382,080 $ 257,217 - ---------------------------------------------------------------------------------------------------- Amounts recognized in the balance sheet consist of: Prepaid benefit cost $ 382,080 $ 257,217 Accrued benefit liability (110,343) (246,879) Intangible asset 105,223 100,054 Accumulated other comprehensive loss 5,120 146,825 - ---------------------------------------------------------------------------------------------------- Net amount recognized $ 382,080 $ 257,217 ==================================================================================================== The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0% for 1999, 7.0% for 1998 and 8.5% for 1997. The weighted-average expected long-term rate of return on assets was 7.0% for 1999, 7.0% for 1998 and 8.5% for 1997. Components of net periodic benefit cost: 1999 1998 1997 -------------------------------- Service cost $ $ 3,150 $ 97,214 Interest cost on benefit obligation 97,807 148,243 104,822 Expected return on assets (88,652) (90,331) (83,382) Amortization of net transition obligation 8,007 8,007 8,007 Amortization of prior service cost (13,176) (13,176) (27,002) Recognized actuarial loss 11,151 29,913 52,188 - ----------------------------------------------------------------------------- Net periodic benefit cost $ 15,137 $ 85,806 $151,847 ============================================================================= Securities of the Company included in plan assets as of December 31, 1999 and 1998 consist of 3,553 shares of Slade's Ferry Bancorp stock. The Company has a 401K plan for eligible employees who attain age 21 and complete one year of service. The Company contributes a discretionary amount to be allocated to eligible participants. Current contributions vest fully after seven years of continuous service. The amount that may be deferred by the employees is limited by the amount that will not cause the plan to exceed IRS limitations. Contributions made by the Company charged to employee benefit expense amounted to $11,000, $9,750 and $9,500 for the years ended December 31, 1999, 1998 and 1997, respectively. The Company adopted a profit-sharing plan, ("Plan") effective October 1, 1998. The Company contributes amounts to the plan at the Company's discretion. Cost recognized by the Company for the profit-sharing plan amounted to $111,750 and $80,000 for the years ended December 31, 1999 and 1998, respectively. Note 12 | Commitments and Contingent Liabilities The Company is obligated under certain agreements issued during the normal course of business which are not reflected in the accompanying consolidated financial statements. The Company is obligated under various lease agreements covering branch offices and equipment. These agreements are considered to be operating leases. The total minimum rental due in future periods under these agreements is as follows as of December 31, 1999: 2000 $116,547 2001 109,271 2002 95,689 2003 79,915 2004 30,315 Thereafter 20,000 - --------------------------------------------- Total minimum lease payments $451,737 ============================================= Certain leases contain provisions for escalation of minimum lease payments contingent upon increases in real estate taxes and percentage increases in the consumer price index. The total rental expense amounted to $123,234 for 1999, $114,848 for 1998 and $90,210 for 1997. Note 13 | Financial Instruments The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, standby letters of credit and unadvanced funds on loans. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include secured interests in mortgages, accounts receivable, inventory, property, plant and equipment and income- producing properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Of the total standby letters of credit outstanding as of December 31, 1999, $165,994 are secured by deposits at the Bank. The estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, are as follows as of December 31: 1999 1998 ------------------------------------------------------------------ Carrying Amount Fair Value Carrying Amount Fair Value Financial assets: Cash and cash equivalents $ 21,108,966 $ 21,108,966 $ 30,229,037 $ 30,229,037 Available-for-sale securities 61,303,505 61,303,505 58,156,775 58,156,775 Held-to-maturity securities 19,488,603 19,259,657 20,921,254 21,282,941 Federal Home Loan Bank stock 1,013,400 1,013,400 899,900 899,900 Loans 237,668,852 237,451,000 213,938,277 214,366,000 Accrued interest receivable 1,942,751 1,942,751 1,598,282 1,598,282 Financial liabilities: Deposits 316,431,187 316,703,000 303,785,865 304,672,000 Note payable 847,990 847,990 Advances from FHLB 6,756,767 6,177,000 4,475,454 4,558,000 Other borrowed funds 1,248,461 1,248,461 42,329 42,329 The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheet under the indicated captions. Accounting policies related to financial instruments are described in Note 2. The notional amounts of financial instrument liabilities with off-balance sheet credit risk are as follows as of December 31: 1999 1998 - ------------------------------------------------------------------------------------------------ Commitments to originate loans $ 5,589,878 $ 5,379,456 Standby letters of credit 2,050,559 2,307,880 Unadvanced portions of loans: Consumer loans (including credit card loans and student loans) 1,863,018 2,924,220 Commercial real estate loans 278,350 145,251 Home equity loans 1,090,765 1,235,275 Commercial loans 18,138,350 15,273,024 Construction loans 6,395,276 6,428,943 - ------------------------------------------------------------------------------------------------ $35,406,196 $33,694,049 ================================================================================================ There is no material difference between the notional amounts and the estimated fair values of the off-balance sheet liabilities. The Company has no derivative financial instruments subject to the provisions of SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" other than the interest rate swap described in Note 8. Note 14 | Significant Group Concentrations of Credit Risk Most of the Bank's business activity is with customers located within the state. There are no concentrations of credit to borrowers that have similar economic characteristics. The majority of the Bank's loan portfolio is comprised of loans collateralized by real estate located in the state of Massachusetts. Note 15 | Earnings Per Share (EPS) Earnings per share were calculated using the weighted average number of shares outstanding. The weighted average number of shares outstanding includes the effect of a 5% stock dividend payable February 9, 2000. Earnings per common share and dividends per share as previously reported in the 1998 financial statements has been reduced to reflect the issuance of the 5% stock dividend payable on February 9, 2000 as follows: EPS in 1998 was reduced by $.05 and EPS in 1997 was reduced by $.04. Dividends per share was reduced by $.01 for both 1998 and 1997. Reconciliation of the numerators and the denominators of the basic and diluted per share computations for net income are as follows: Income Shares Per-Share (Numerator) (Denominator) Amount - ---------------------------------------------------------------------------------------------------------------- Year ended December 31, 1999 Basic EPS Net income and income available to common stockholders $3,856,488 3,650,275 $1.06 Effect of dilutive securities, options 8,336 - ---------------------------------------------------------------------------------------------------------------- Diluted EPS Income available to common stockholders and assumed conversions $3,856,488 3,658,611 $1.05 ================================================================================================================ Year ended December 31, 1998 Basic EPS Net income and income available to common stockholders $3,363,042 3,572,329 $ .94 Effect of dilutive securities, options 14,707 - ---------------------------------------------------------------------------------------------------------------- Diluted EPS Income available to common stockholders and assumed conversions $3,363,042 3,587,036 $ .94 ================================================================================================================ Year ended December 31, 1997 Basic EPS Net income and income available to common stockholders $2,845,990 3,344,100 $ .85 Effect of dilutive securities, options 5,491 - ---------------------------------------------------------------------------------------------------------------- Diluted EPS Income available to common stockholders and assumed conversion $2,845,990 3,349,591 $ .85 ================================================================================================================ Note 16 | Regulatory Matters The Company and its subsidiary the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Their capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1999, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1999, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Company's and the Bank's actual capital amounts and ratios are also presented in the table. To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions: - ---------------------------------------------------------------------------------------------------------- (Dollar amounts in thousands) Amount Ratio Amount Ratio Amount Ratio - ---------------------------------------------------------------------------------------------------------- As of December 31, 1999: Total Capital (to Risk Weighted Assets): Consolidated $33,475 12.98% $20,625 >=8.0% N/A Slade's Ferry Trust Company 29,979 11.67 20,548 >=8.0 $25,685 >=10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated 30,246 11.73 10,312 >=4.0 N/A Slade's Ferry Trust Company 26,762 10.42 10,274 >=4.0 15,411 >= 6.0 Tier 1 Capital (to Average Assets): Consolidated 30,246 8.60 14,060 >=4.0 N/A Slade's Ferry Trust Company 26,762 7.68 13,936 >=4.0 17,420 >= 5.0 As of December 31, 1998: Total Capital (to Risk Weighted Assets): Consolidated $29,647 12.80% $18,536 >=8.0% N/A Slade's Ferry Trust Company 27,034 11.69 18,500 >=8.0 $23,124 >=10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated 26,569 11.47 9,268 >=4.0 N/A Slade's Ferry Trust Company 23,961 10.36 9,250 >=4.0 13,875 >= 6.0 Tier 1 Capital (to Average Assets): Consolidated 26,569 8.12 13,081 >=4.0 N/A Slade's Ferry Trust Company 23,961 7.38 12,989 >=4.0 16,236 >= 5.0 The declaration of cash dividends is dependent on a number of factors, including regulatory limitations, and the Company's operating results and financial condition. The stockholders of the Company will be entitled to dividends only when, and if, declared by the Company's Board of Directors out of funds legally available therefore. Under the Massachusetts Business Corporation Law, a dividend may not be declared if the corporation is insolvent or if the declaration of the dividend would render the corporation insolvent. The declaration of future dividends, whether by the Board of Directors of the Company or the Bank, will be subject to favorable operating results, financial conditions, tax considerations, and other factors. As of December 31, 1999 the Company would be restricted from declaring dividends in an amount greater than $31,664,246 as such declaration would render the corporation insolvent. As of December 31, 1999 the Bank would be restricted from declaring dividends in an amount greater than approximately $9,431,000 as such declaration would decrease capital below the Bank's required minimum level of regulatory capital. Note 17 | Stock Option Plan At December 31, 1999 the Company has a stock option plan (Plan). The Plan is divided into two separate equity incentive programs, a Discretionary Grant Program and an Automatic Grant Program. The maximum number of shares of common stock issuable over the term of the Plan may not exceed 262,500 shares and the maximum aggregate number of shares issuable under both programs in any plan year may not exceed 52,500 shares. Unless sooner terminated by the Board, the Plan will in all events terminate on March 11, 2006. Under the Discretionary Grant Program, key employees, including officers, may be granted incentive stock options to purchase shares of common stock. The option exercise price per share may not be less than one hundred percent of the fair market value of common stock at grant date and generally become exercisable in periodic installments over the optionee's period of service. Two types of stock appreciation rights are authorized for issuance: (1) tandem rights, which require the option holder to elect between the exercise of the underlying option for shares of common stock and the surrender of such option for appreciation distribution and (2) limited rights, which are automatically exercised upon the occurance of a hostile takeover. Eligibility for participation in the Automatic Grant Program is limited to non-employee directors of the Company or its subsidiary. Under the Automatic Grant Program a nonstatutory option for 2,000 shares of common stock shall be granted each plan year to eligible directors. The exercise price per sharewill be equal to one hundred percent of the fair market value per share of common stock at grant date and each option will have a maximum five year term. Each option under the Automatic Grant Program will be immediately vested. The Company applies APB Opinion 25 and related Interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its stock option plan. Had compensation cost for the Company's stock-based compensation plan been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below for the years ended December 31: 1999 1998 1997 - ------------------------------------------------------------------------------------------ Net income As reported $3,856,488 $3,363,042 $2,845,990 Pro forma $3,790,009 $3,298,016 $2,807,466 Basic earnings per share As reported $ 1.06 $ .94 $ .85 Pro forma $ 1.04 $ .92 $ .84 Diluted earnings per share As reported $ 1.05 $ .94 $ .85 Pro forma $ 1.04 $ .92 $ .84 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the years ended December 31, 1999, 1998 and 1997: dividend yield of 2 percent; expected volatility of 32 percent in 1999 and 13 percent in 1998 and 1997; risk-free interest rate of 5.2 percent in 1999, 5.7 percent in 1998 and 6.7 percent in 1997; and expected lives of 4 years. A summary of the status of the Company's stock option plan as of December 31 and changes during the years then ending are presented below: 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- Weighted-Average Weighted-Average Weighted-Average Options Shares Exercise Price Shares Exercise Price Shares Exercise Price - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 60,550 $13.21 32,550 $ 8.90 0 Granted 39,000 13.50 32,250 17.00 32,550 $8.90 Exercised 0 (4,250) 8.90 0 Forfeited (1,500) 17.00 0 0 - ----------------------------------------------------------------------------------------------------------------------------- Outstanding at end of year 98,050 $13.27 60,550 $13.21 32,550 $8.90 ============================================================================================================================= Options exercisable at year-end 98,050 60,550 32,550 Weighted-average fair value of options granted during the year $ 3.71 $ 2.78 $ 1.65 The following table summarizes information about fixed stock options outstanding at December 31, 1999: Options Outstanding and Exercisable --------------------------------------------------------------------- Weighted-Average Number Remaining Weighted-Average Exercise Price Outstanding Contractual Life Exercise Price --------------------------------------------------------------------- $ 8.90 28,300 2.4 years $ 8.90 17.00 30,750 3.4 years 17.00 13.50 39,000 4.4 years 13.50 --------------------------------------------------------------------- 98,050 3.5 years $13.27 =========================================================================== Note 18 | Minority Interest for Subsidiary In 1999 the Bank formed a subsidiary, Slade's Ferry Preferred Capital Corporation (SFPCC) which issued to the Bank 1,000 shares of SFPCC common stock. No other shares of SFPCC common stock have been issued. SFPCC also issued to the Bank 1,000 shares of SFPCC 8% Cumulative Non-Convertible Preferred Stock (the "Preferred Stock"). No other shares of SFPCC preferred stock have been issued. Minority interest in subsidiary consists of 106 shares, at a stated value of $500 per share, of the preferred stock owned by the Bank. These shares were issued in 1999 to directors and employees of the Bank. All voting rights of SFPCC vest exclusively with its common stockholder, the Bank. The preferred stock has a liquidation value of $500 per share. The holders of the preferred stock are entitled to receive dividends, when, as and if declared by the Board of Directors of the SFPCC. Such dividends declared accumulate and are paid on such date as determined by the Board of Directors of the Bank. Note 19 | Reclassification Certain amounts in the prior year have been reclassified to be consistent with the current year's statement presentation. Note 20 | Parent Company Only Condensed Financial Statements The following condensed financial statements are for Slade's Ferry Bancorp (Parent Company Only) and should be read in conjunction with the consolidated financial statements of Slade's Ferry Bancorp and Subsidiary. Condensed Financial Statements Balance Sheets December 31, 1999 1998 -------------------------- Assets Cash $ 671,676 $ 489,437 Money market mutual fund 5,425 - ----------------------------------------------------------------------------------------------------------------- Cash and cash equivalents 677,101 489,437 Investments in available-for-sale securities (at fair value) 2,498,219 1,949,984 Investments in held-to-maturity securities (fair value of $494,244 as of December 31, 1999 and $295,873 as of December 31,1998) 495,221 295,763 Investment in subsidiary, Slade's Ferry Trust Company 28,199,195 27,098,674 Premises and equipment 17,808 22,355 Accrued interest receivable 26,285 28,357 Other assets 37,391 38,003 - ----------------------------------------------------------------------------------------------------------------- Total assets $31,951,220 $29,922,573 ================================================================================================================= Liabilities and Stockholders' Equity Other liabilities $ 286,974 $ 215,188 - ----------------------------------------------------------------------------------------------------------------- Total liabilities 286,974 215,188 - ----------------------------------------------------------------------------------------------------------------- Stockholders' equity: Common stock, par value $.01 per share; authorized 5,000,000 shares; issued and outstanding 3,520,409.4 shares in 1999 and 3,446,413.8 shares in 1998 35,204 34,464 Paid-in capital 23,147,447 22,285,220 Retained earnings 9,635,213 7,103,642 Accumulated other comprehensive income (loss) (1,153,618) 284,059 - ----------------------------------------------------------------------------------------------------------------- Total stockholders' equity 31,664,246 29,707,385 - ----------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $31,951,220 $29,922,573 ================================================================================================================= Statements of Income and comprehensive income Years Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Dividends from subsidiary $1,310,000 $ 950,000 $ 475,000 Interest and dividends on securities: Taxable 137,867 111,127 40,199 Other interest income 5,718 6,111 4,267 Management fee income from subsidiary 443,664 432,002 438,479 Other income 4,000 - ------------------------------------------------------------------------------------------------------------------------- Total income 1,897,249 1,499,240 961,945 - ------------------------------------------------------------------------------------------------------------------------- Salaries and employee benefits 393,666 376,940 333,410 Equipment expense 4,547 379 4,449 Loss on sale of available-for-sale security 647 Other expense 161,396 146,641 124,676 - ------------------------------------------------------------------------------------------------------------------------- Total expense 560,256 523,960 462,535 - ------------------------------------------------------------------------------------------------------------------------- Income before income taxes and equity in undistributed net income of subsidiary 1,336,993 975,280 499,410 Income taxes 11,407 20,384 16,754 - ------------------------------------------------------------------------------------------------------------------------- Income before equity in undistributed net income of subsidiary 1,325,586 954,896 482,656 Equity in undistributed net income of subsidiary 2,530,902 2,408,146 2,363,334 - ------------------------------------------------------------------------------------------------------------------------- Net income $3,856,488 $3,363,042 $2,845,990 ========================================================================================================================= Slade's Ferry Bancorp - Parent Company Only Statements of Cash Flows | years ended December 31, 1999, 1998 and 1997 1999 1998 1997 - -------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net Income $ 3,856,488 $ 3,363,042 $ 2,845,990 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net income of subsidiary (2,530,902) (2,408,146) (2,363,334) Accretion, net of amortization of securities (8,529) (8,159) (34,220) Loss on sales of available-for-sale securities 647 Depreciation and amortization 4,547 379 4,448 Increase (decrease) in taxes payable (5,000) 12,686 5,007 Increase (decrease) in accrued expenses (140) 2,888 775 (Increase) decrease in prepaid expenses 1,019 4,748 (13,223) Increase (decrease) in interest receivable 2,072 (22,380) (5,977) (Increase) decrease in other assets 8,155 (7,450) 13,639 Increase (decrease) in other liabilities (600) (7,750) 6,988 Net cash provided by operating activities 1,327,757 929,858 460,093 Cash flows from investing activities: Purchases of held-to-maturity securities (814,768) (590,583) (2,613,316) Proceeds from maturities of held-to-maturity securities 624,466 550,000 2,400,000 Purchases of available-for-sale securities (1,939,353) (2,850,461) (1,449,649) Proceeds from maturities of available-for-sale securities 950,000 2,350,000 Proceeds from sales of available-for-sale securities 427,486 Additional investment in subsidiary bank (2,300,000) Capital expenditures (22,734) Net cash used in investing activities (752,169) (563,778) (3,962,965) Cash flows from financing activities: Net proceeds from issuance of common stock 862,967 726,980 4,375,775 Dividends paid (1,250,891) (914,943) (734,073) Fractional shares paid in cash (8,117) Net cash provided by (used in) financing activities (387,924) (196,080) 3,641,702 Net increase in cash and cash equivalents 187,664 170,000 138,830 Cash and cash equivalents at beginning of year 489,437 319,437 180,607 Cash and cash equivalents at end of year $ 677,101 $ 489,437 $ 319,437 Supplemental disclosure: Income taxes paid $ 16,407 $ 7,698 $ 11,747 The Parent Company Only Statements of Changes in Stockholders' Equity are identical to the Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1999, 1998 and 1997, and therefore are not reprinted here. Slade's Ferry Bancorp and Subsidiary Board of Directors Officers Sandra Curtis Slade's Ferry Bancorp- Slade's Ferry Bancorp Compliance Review Officer Slade's Ferry Trust Company --------------------- - --------------------------- Donald T. Corrigan Luisa DiManno Thomas B. Almy Chairman of the Board Assistant Treasurer Architect Kenneth R. Rezendes William E. Diskin James D. Carey President Vice President Executive Vice President of Bancorp Chief Executive Officer President of Bank Joseph J. Ganem Chief Executive Officer of Bank James D. Carey Vice President Executive Vice President Peter G. Collias, Esquire Joseph Gesualdo Clerk/Secretary of Bancorp and Bank Ralph S. Borges Vice President Treasurer Donald T. Corrigan Russell F. Godin Chairman of the Board of Bancorp Executive Management Vice President Chairman of the Board of Bank Slade's Ferry Trust Company --------------------------- Elaine M. Guillemette Melvyn A. Holland James D. Carey Assistant Vice President Managing Partner President Rosenfield, Holland & Raymon PC Chief Executive Officer Raymond C. Harris Certified Public Accountants Vice President Ralph S. Borges William Q. MacLean, Jr. Executive Vice President/Treasurer Robert C. Howard Jr. Vice President Vice President Cornish & Co. Inc. Insurance Susan R. Hajder Senior Vice President Charlotte C. Nadeau Francis A. Macomber Assistant Vice President President - LeComtes All Star Dairy Inc. Charlene J. Jarest Vice President Cecelia M. Machado Vice President Majed Mouded MD Carol A. Martin Physician Senior Vice President Jeannine M. Paliotti Vice President Shaun O'Hearn, Sr. Manuel J. Tavares President - Bolger & O'Hearn Inc. Senior Vice President Janice R. Partridge Vice President Lawrence J. Oliveira DDS Officers Orthodontist Slade's Ferry Trust Company Fatima M. Rapoza --------------------------- Assistant Vice President Peter Paskowski James H. Amidon Past President of Bank Vice President Michelle Rivera Assistant Treasurer Kenneth R. Rezendes Isola A. Anctil President/CEO of Bancorp Assistant Vice President Joanne Sandner President - K.R. Rezendes, Inc. Assistant Clerk/Secretary Assistant Treasurer William J. Sullivan Cherie Ashton Deborah A. Silvia President - Sullivan Funeral Homes Assistant Vice President Assistant Treasurer Charles Veloza Maria C. Barbosa Eduardo F. Sousa President - Charlie's Oil Co., Inc. Vice President Assistant Treasurer David F. Westgate Edward Bernardo Jr. Nancy E. Stokes President Vice President Vice President Quequechan Management Corp. Catherine Blakey Mary M. Sullivan Honorary Directors Assistant Vice President Vice President - ------------------ Bernard T. Shuman Noelia M. Brum Doreen Teixeira Past President/Treasurer Assistant Treasurer Assistant Treasurer Priscilla Dress Corp. Michelle Caron Richard Van Blarcom Assistant Treasurer Vice President Peter G. Collias Corporate Secretary Corporate Headquarters General Counsels Shareholder Services Slade's Ferry Bancorp Atty. Peter G. Collias Slade's Ferry Bancorp 100 Slade's Ferry Avenue 84 North Main Street 100 Slade's Ferry Avenue Somerset, Massachusetts 02726 Fall River, Massachusetts 02720 Somerset, Massachusetts 02726 Tel. (508) 675-2121 Tel. (508) 675-7894 Tel. (508) 675-2121 Fax (508) 675-1751 Thomas H. Tucker, Esq. Annual Meeting 459 Washington St., Suite 27 The Annual Meeting of Stockholders BRANCH LOCATIONS Duxbury, MA 02332 of Slade's Ferry Bancorp will be Tel. (781) 934-8200 held at 7:30 p.m. on April 10, 2000 Fairhaven, MA at the Venus de Milo Restaurant, 75 Huttleston Avenue Independent Certified 75 GAR Highway Public Accountants Swansea, Massachusetts. Fall River, MA Shatswell MacLeod & Company PC 249 Linden Street Certified Public Accountants Dividend Reinvestment Plan 855 Brayton Avenue 83 Pine Street The Plan provides for: 1601 South Main Street West Peabody, Massachusetts 01960 * Reinvestment of all of the Tel. (978) 535-0206 dividends New Bedford, MA * Voluntary cash contributions 838 Pleasant Street Form 10-KSB of up to $5,000 annually, 833 Ashley Boulevard A copy of the Annual Report on minimum $100. Form 10-K for Slade's Ferry * No service fees or Seekonk, MA Bancorp as filed with the commissions 1400 Fall River Avenue (Rte.6) Securities and Exchange Commission will be forwarded Information may be obtained by Somerset, MA without charge to any stockholder contacting Shareholder Services 100 Slade's Ferry Avenue upon written request to: at (508) 675-2121 2722 County Street Somerset High School Ralph S. Borges, Treasurer Stock Trading Slade's Ferry Bancorp The common stock of Slade's Swansea, MA 100 Slade's Ferry Avenue Ferry Bancorp is listed on the Swansea Mall Somerset, MA 02726 NASDAQ Small Cap Market 2388 G.A.R. Highway under the symbol SFBC. Loan Production Office Slade's Ferry Loan Co. 188 Airport Road Warwick, RI 02889 401-732-3222 Design: MediaConcepts Corporation, Assonet, MA Slade's Ferry Bancorp Corporate Headquarters 100 Slade's Ferry Avenue, Somerset, MA 02726 Tel. (508) 675-2121 Fax (508) 675-1751