UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 2000
Commission file number 000-23904
SLADE'S FERRY BANCORP
- ---------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3061936
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
100 Slade's Ferry Avenue 02726
Somerset, Massachusetts
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(Address of principal executive offices) (Zip Code)
(508)675-2121
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(Registrant's telephone number, including area code)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date:
Common stock ($.01 par value) 3,757,158.053 shares as of
September 30, 2000.
PART I
ITEM 1
Financial Statements
SLADE'S FERRY BANCORP
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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September 30, 2000 December 31, 1999
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ASSETS:
Cash and due from banks $ 11,307,608 $ 16,061,445
Money market mutual funds 153,996 47,521
Federal funds sold 2,200,000 5,000,000
---------------------------------
Cash and Cash Equivalents 13,661,604 21,108,966
Investment securities(1) 19,301,758 19,488,603
Securities available for sale(2) 65,076,402 61,303,505
Federal Home Loan Bank stock 1,013,400 1,013,400
Loans, net 249,621,625 237,668,852
Premises and equipment 6,860,994 7,062,906
Other real estate owned 0 353,095
Accrued interest receivable 2,493,053 1,942,751
Goodwill 2,456,868 2,626,968
Cash surrender value of life insurance 6,747,103 1,629,225
Other assets 4,110,927 3,922,306
---------------------------------
TOTAL ASSETS $371,343,734 $358,120,577
=================================
LIABILITIES & STOCKHOLDERS' EQUITY:
Deposits $322,516,904 $316,431,187
Advances from Federal Home Loan Bank 11,659,913 6,756,767
Other borrowed funds 1,207,543 1,248,461
Other liabilities 1,710,497 1,966,916
---------------------------------
TOTAL LIABILITIES 337,094,857 326,403,331
---------------------------------
Preferred stockholders' equity in a
Subsidiary company 53,000 53,000
---------------------------------
STOCKHOLDERS' EQUITY:
Common stock 37,572 35,204
Paid in capital 25,577,501 23,147,447
Retained earnings 9,608,144 9,635,213
Accumulated other comprehensive loss (1,027,340) (1,153,618)
---------------------------------
TOTAL STOCKHOLDERS' EQUITY 34,195,877 31,664,246
---------------------------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $371,343,734 $358,120,577
=================================
<FN>
<F1> Investment securities are to be held to maturity and have a fair
market value of $19,183,725 as of September 30, 2000 and $19,259,657
as of December 31, 1999
<F2> Securities classified as Available for Sale are stated at fair value
with any unrealized gains or losses reflected as an adjustment in
Stockholders' Equity, net of tax.
</FN>
CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
(UNAUDITED)
9 MONTHS ENDING SEPTEMBER 30,
2000 1999
----------------------------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $16,540,347 $15,280,331
Interest and dividends on investments 3,844,402 3,577,587
Other interest 342,774 220,159
Total interest and dividend income 20,727,523 19,078,077
----------------------------
INTEREST EXPENSE:
Interest on deposits 8,724,284 7,719,587
Interest on borrowed funds 569,263 293,576
----------------------------
Total interest expense 9,293,547 8,013,163
----------------------------
Net interest and dividend income 11,433,976 11,064,914
PROVISION FOR LOAN LOSSES 1,050,000 450,000
----------------------------
Net interest and dividend income after
provision for loan losses 10,383,976 10,614,914
OTHER INCOME:
Service charges on deposit accounts 608,523 668,775
Security gains, net 637 626,760
Other income 535,131 270,108
----------------------------
Total other income 1,144,291 1,565,643
----------------------------
OTHER EXPENSE:
Salaries and employee benefits 4,545,954 4,199,391
Occupancy expense 640,601 607,922
Equipment expense 420,158 411,880
Loss (gain) on sale of other real estate
owned (49,758) 28,030
Writedown of other real estate owned 0 57,024
Other expense 2,042,905 2,415,738
----------------------------
Total other expense 7,599,860 7,719,985
----------------------------
Income before income taxes 3,928,407 4,460,572
Income taxes 1,221,498 1,553,433
----------------------------
NET INCOME $ 2,706,909 $ 2,907,139
============================
Basic earnings per share $ 0.72 $ 0.80
============================
Diluted earnings per share $ 0.72 $ 0.80
============================
Basic average shares outstanding 3,734,132 3,645,130
============================
Diluted average shares outstanding 3,737,384 3,653,783
============================
Comprehensive Income(1) $ 2,833,187 $ 1,276,278
============================
<FN>
<F1> Calculated using the change in accumulated other comprehensive income
(loss) for the period and net income for the period.
</FN>
CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE
(UNAUDITED)
3 MONTHS ENDING SEPTEMBER 30,
2000 1999
----------------------------
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $ 5,753,721 $ 5,508,833
Interest and dividends on investments 1,277,669 1,189,095
Other interest 63,346 37,257
----------------------------
Total interest and dividend income 7,094,736 6,735,185
----------------------------
INTEREST EXPENSE:
Interest on deposits 2,984,307 2,530,682
Interest on borrowed funds 195,514 104,903
----------------------------
Total interest expense 3,179,821 2,635,585
----------------------------
Net interest and dividend income 3,914,915 4,099,600
PROVISION FOR LOAN LOSSES 0 150,000
----------------------------
Net interest an dividend income
after provision for loan losses 3,914,915 3,949,600
----------------------------
OTHER INCOME:
Service charges on deposit accounts 198,751 211,969
Security gains, net 5,394 134,571
Other income 168,038 88,618
----------------------------
Total other income 372,183 435,158
----------------------------
OTHER EXPENSE:
Salaries and employee benefits 1,517,652 1,453,795
Occupancy expense 205,106 201,628
Equipment expense 142,237 136,884
Other expense 691,906 1,040,893
----------------------------
Total other expense 2,556,901 2,833,200
----------------------------
Income before income taxes 1,730,197 1,551,558
Income taxes 543,131 439,134
----------------------------
NET INCOME $ 1,187,066 $ 1,112,424
============================
Basic earnings per share $ 0.32 $ 0.30
============================
Diluted earnings per share $ 0.32 $ 0.30
============================
Basic average shares outstanding 3,752,795 3,659,941
============================
Diluted average shares outstanding 3,755,836 3,666,244
============================
Comprehensive Income (1) $ 1,506,188 $ 687,855
============================
<FN>
<F1> Calculated using the change in accumulated other comprehensive income
(loss) for the period and net income for the period.
</FN>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(Unaudited)
Reconciliation of net income to net cash
provided by operating activities: 2000 1999
------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,706,909 $ 2,907,139
Adjustments to reconcile net income to
net cash provided by operating activities:
Accretion, net of amortization of fair market
value adjustments (8,550) (6,539)
Amortization of goodwill 170,100 170,100
Depreciation and amortization 522,279 509,471
Security gains, net (637) (626,760)
Provision for loan losses 1,050,000 450,000
Increase (decrease) in taxes payable (154,108) 296,356
Increase in interest receivable (550,302) (527,209)
Increase (decrease) in interest payable 13,584 (3,047)
Increase (decrease) in accrued expenses (322,356) 874,982
(Increase) decrease in prepaid expenses (52,799) 147,284
Accretion of investment securities, net of
amortization (30,723) (64,482)
Amortization of securities available for sale, net
of accretion 27,689 50,707
Loss (gain) on sale of other real estate owned (49,758) 28,030
Writedown of other real estate owned 0 57,024
Change in unearned income (78,032) (113,900)
Increase in other assets (272,314) (1,010,558)
Increase in other liabilities 52,353 393,973
------------------------------
Net cash provided by operating activities 3,023,335 3,532,571
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (8,945,231) (22,723,481)
Investment in life insurance policy (4,918,838) 0
Maturities of securities available for sale 3,230,040 11,059,943
Sales of securities available for sale 2,133,080 5,551,676
Proceeds from sales of other real estate owned 143,853 362,990
Proceeds from maturities of investment securities 5,535,235 7,057,804
Purchases of investment securities (5,317,668) (5,432,093)
Net increase in loans (12,813,371) (18,295,203)
Capital expenditures (320,366) (879,172)
Purchases of Federal Home Loan Bank Stock 0 (113,500)
Recoveries of previously charged-off loans 156,180 45,924
------------------------------
Net cash used in investing activities (21,117,086) (23,365,112)
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30
(Unaudited)
(Continued)
2000 1999
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock 597,819 542,689
Net increase in demand deposits, NOW, money
market and savings accounts 9,166,219 396,249
Net decrease in time deposits (3,080,502) (28,299)
Net increase (decrease) in short-term borrowing (40,918) 1,173,198
Increase in federal funds purchased 0 4,000,000
Dividends paid (899,375) (764,196)
Advances (payments) on Federal Home Loan Bank, net 4,903,146 (72,004)
Increase (decrease) in notes payable 0 (72,990)
------------------------------
Net cash provided by financing activities 10,646,389 5,174,647
------------------------------
Net decrease in cash and cash equivalents (7,447,362) (14,657,894)
Cash and cash equivalents at beginning of period 21,108,966 30,229,037
------------------------------
Cash and cash equivalents at end of period $ 13,661,604 $ 15,571,143
==============================
SUPPLEMENTAL DISCLOSURES:
Loans originating from sales of Other Real
Estate Owned $ 259,000 $ 237,000
Interest paid $ 9,279,963 $ 8,016,210
Income taxes paid $ 1,375,606 $ 1,257,077
Loans transferred to Other Real Estate Owned $ 0 $ 218,045
SLADE'S FERRY BANCORP AND SUBSIDIARY, SLADE'S FERRY TRUST COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2000
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and,
accordingly, do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial
statements. In the opinion of the management of Slade's Ferry Bancorp, all
adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the nine
months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000.
Note B - Accounting Policies
- ----------------------------
The accounting principles followed by Slade's Ferry Bancorp and subsidiary
and the methods of applying these principles which materially affect the
determination of financial position, results of operations, or changes in
financial position are consistent with those used at year end 1999.
The consolidated financial statements of Slade's Ferry Bancorp include its
wholly-owned subsidiary, Slade's Ferry Trust Company, and its subsidiaries,
Slade's Ferry Realty Trust, Slade's Ferry Securities Corporation, Slade's
Ferry Loan Company, and Slade's Ferry Preferred Capital Corporation. All
significant intercompany balances have been eliminated.
Note C - Impact of New Accounting Standard
- ------------------------------------------
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". Statement No. 133, as amended by SFAS
No. 138, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. The Statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. In
management's opinion, SFAS No. 133 when adopted, will not have a material
effect on the Company's consolidated financial statements.
ITEM 2
Management's Discussion and Analysis
- ------------------------------------
Financial Condition
- -------------------
At September 30, 2000 the Company had total assets of $371.3 Million
compared to $358.1 Million reported as of December 31, 1999. This increase
is predominately attributed to an increase in deposit levels of $6.1
Million during the first nine months of 2000. With this increased source of
funds, net loans increased by $11.9 Million, excess liquidity temporarily
invested in Federal Funds increased by $2.8 Million, and the Bank purchased
$4.9 Million of single premium paid-up life insurance policies for its
President and Vice Presidents. The combined investment portfolio increased
by $3.6 Million, which mainly originated through a borrowing transaction of
$5.0 Million with the Federal Home Loan Bank.
Loan demand continued to be prominent in the region particularly in the
small business sector. A favorable economy and an active business
development program attributed to the loan growth.
Deposits increased by $6.1 Million at September 30, 2000 to $322.5 Million
when compared to $316.4 Million reported at year end 1999. Growth in
deposits was due to general business conditions in addition to an increase
in Municipal deposits due to real estate tax collections. The two branches
opened in early 1999 continued to generate new deposit account activity,
and the Bank also continued to offer competitive interest rates on
certificate of deposit accounts to attract new deposits as well as retain
existing accounts.
In April 2000, the Bank purchased $4.9 Million of single premium paid-up
life insurance policies on the lives of its President and Vice Presidents.
The Bank is the owner of the policies and will carry the cash surrender
value of the policies as an asset and record the monthly increases in cash
value as income. This "Bank Owned Life Insurance" (BOLI) will provide a
split dollar death benefit for the executives and the Bank.
The investment portfolio represents the second largest component of the
Company's assets and consists of securities in the Available for Sale
category and securities in the Held to Maturity category. The designation
of which category the security is to be classified as is determined at the
time of the purchase of the investment instrument.
The Held to Maturity category consists predominately of securities of the
U.S. Treasury, U.S. Government corporations 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.
At September 30, 2000 securities classified as Available for Sale had net
unrealized losses of $1,024,316 net of tax effect as a result of current
market conditions and the recent increases in the prime rate. Besides the
utilization of proceeds obtained through the sale of these securities to
meet loan demand, securities may also be sold from time to time to improve
interest rate risk by reinvesting the proceeds from their sales into higher
yielding investments. Management, through the Asset-Liability Committee
(ALCO), constantly manages interest rate risk to minimize any exposure to
rising or decreasing interest rates. Despite current market conditions,
investment securities, when held to maturity, will mature at par value.
Investment Securities are securities that the Company will hold to maturity
and are carried at amortized cost on the balance sheet, and are summarized
as follows as of September 30, 2000.
Gross Gross
Amortized Unrealized Unrealized
(Dollars in Thousands) Cost Basis Holding Gains Holding Losses Fair Value
- ---------------------------------------------------------------------------------------------------
Debt securities issued by the U. S.
Treasury and other U. S.
Government corporations and
Agencies $ 7,143 $ 10 $ 16 $ 7,137
Debt securities issued by states of
the United States and political
subdivisions of the states 12,097 22 134 11,985
Mortgage-backed securities 61 0 0 61
Other debt securities 1 0 0 1
- -------------------------------------------------------------------------------------------------
$19,302 $ 32 $ 150 $19,184
=================================================================================================
Investments in Available for Sale securities are carried at fair value on
the balance sheet and are summarized as follows as of September 30, 2000.
Gross Gross
Amortized Unrealized Unrealized
(Dollars in Thousands) Cost Basis Holding Gains Holding Losses Fair Value
- ---------------------------------------------------------------------------------------------------
Debt securities issued by the U. S.
Treasury and other U. S.
Government corporations and
Agencies $40,927 $ 13 $1,306 $39,634
Corporate Bonds 715 0 17 698
Marketable Equities 4,199 714 727 4,186
Mortgage-backed securities 20,935 27 404 20,558
Asset-backed securities 0 0 0 0
- -------------------------------------------------------------------------------------------------
$66,776 $754 $2,454 $65,076
=================================================================================================
Decrease to Stockholders' Equity as of September 30, 2000:
(In Whole Dollars)
Unrealized Net Loss on Available for Sale Securities $1,699,473
Less tax effect 675,157
----------
Net Unrealized Loss on Available for Sale Securities $1,024,316
==========
INFORMATION WITH RESPECT TO NONACCRUAL AND PAST DUE LOANS
AT SEPTEMBER 30, 2000 AND 1999 AND DECEMBER 31, 1999 AND 1998
At September 30 At December 31
- ---------------------------------------------------------------------------------------------
(Dollars in Thousands) 2000 1999 1999 1998
- ---------------------------------------------------------------------------------------------
Nonaccrual Loans $2,653 $2,322 $1,777 $3,331
Loans 90 days or more past due and still
accruing 3,392 171 248 317
Real estate acquired by foreclosure
or substantively repossessed 0 559 353 1,026
Percentage of nonaccrual loans to total loans 1.04% 0.98% 0.73% 1.53%
Percentage of nonaccrual loans and real estate
acquired by foreclosure or substantively
repossessed to total assets 0.71% .83% 0.59% 1.28%
Percentage of allowance for loan
losses to nonaccrual loans 176.50% 172.66% 211.92% 107.15%
The $2.7 Million in nonaccrual loans consists of $1.0 Million of real
estate mortgages and $1.7 Million attributed to commercial loans. Of the
total nonaccrual loans outstanding, there are no loans restructured as of
September 30, 2000.
The Company's nonperforming assets which consist of nonaccrual loans, loans
90 days or more past due and still accruing, and real estate acquired by
foreclosure or substantively repossessed, increased by $3.6 Million to $6.0
Million at September 30, 2000 from $2.4 Million reported on December 31,
1999. Nonaccrual loans, which is the largest component of nonperforming
assets, were up by $0.9 Million compared to year-end 1999. The increase was
a combination of loans totaling $1.8 Million that became nonaccrual during
the last nine months offset by $0.6 Million of payments on previously
classified nonaccrual loans, and $0.3 Million of loans charged off.
Included in the $1.8 Million of new nonaccrual loans is one commercial loan
for $1.3 Million. The collateral securing this loan currently has a
substantially greater value than the outstanding loan balance. Loans past
due 90 days or more but still accruing increased by $3.1 Million during
this nine month period. This increase is attributed to one commercial real
estate loan for $3.3 Million for which the collateral value is
substantially greater than the outstanding loan balance.
There was no real estate acquired through foreclosure or substantively
repossessed at September 30, 2000 compared to $353,095 at December 31,
1999.
The percentage of nonaccrual loans to total loans increased from .73%
reported at year end 1999 to 1.04% at September 30, 2000, primarily due to
the increase in the nonaccrual category.
INFORMATION WITH RESPECT TO NONACCRUAL LOANS
AT SEPTEMBER 30, 2000 AND 1999 AND DECEMBER 31, 1999 AND 1998
At September 30 At December 31
- ---------------------------------------------------------------------------------------------
(Dollars in Thousands) 2000 1999 1999 1998
- ---------------------------------------------------------------------------------------------
Nonaccrual Loans $2,653 $2,322 $1,777 $3,331
Interest income that would have been recorded
under original terms $ 173 $ 126 $ 146 $ 318
Interest income recorded during the period $ 12 $ 39 $ 37 $ 37
The Company stops accruing interest on a loan once it becomes past due 90
days or more unless there is adequate collateral and the financial
condition of the borrower is sufficient. When a loan is placed on a
nonaccrual status, all previously accrued but unpaid interest is reversed
and charged against current income. Interest is thereafter recognized only
when payments are received and the loan becomes current.
Loans in the nonaccrual category will remain until the possibility of
collection no longer exists; the loan is paid off or becomes current. When
a loan is determined to be uncollectible, it is then charged off against
the Allowance for Loan Losses.
Statement of Financial Accounting Standards No. 114 "Accounting by
Creditors for Impairment of a Loan" applies to all loans except large
groups of smaller-balance homogeneous loans that are collectively evaluated
for impairment, loans measured at fair value or at a lower of cost or fair
value, leases, and debt securities as defined in Statement 115. Statement
114 requires that impaired loans be valued at the present value of expected
future cash flows discounted at the loan's effective interest rate or as a
practical expedient, at the loan's observable market value of the
collateral if the loan is collateral dependent. Smaller-balance homogeneous
loans are considered by the Company to include consumer installment loans
and credit card loans.
Included in the $2,652,663 in nonaccrual loans are $2,630,796 which the
Company has determined to be impaired, for which $400,021 have a related
allowance for credit losses of $132,017 and $2,230,775 have 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.
There were no other loans classified for regulatory purposes at September
30, 2000 that management reasonably expects will materially impact future
operating results, liquidity or capital resources.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Nine Months Years Ended
Ended September 30 December 31
- --------------------------------------------------------------------------------
(Dollars in Thousands) 2000 1999 1999 1998
- --------------------------------------------------------------------------------
Balance at January 1 $3,766 $3,569 $3,569 $3,694
- --------------------------------------------------------------------------------
Charge-offs:
Commercial (134) (35) (221) (0)
Real estate - construction (0) (0) (0) (0)
Real estate - mortgage (23) (0) (23) (716)
Installment/consumer (134) (20) (158) (76)
- --------------------------------------------------------------------------------
(291) (55) (402) (792)
- --------------------------------------------------------------------------------
Recoveries:
Commercial 47 9 11 8
Real estate - construction 0 0 0 0
Real estate - mortgage 87 23 24 43
Installment/consumer 23 14 14 16
- --------------------------------------------------------------------------------
157 46 49 67
- --------------------------------------------------------------------------------
Net Charge-offs (134) (9) (353) (725)
- --------------------------------------------------------------------------------
Additions charged to operations 1,050 450 550 600
- --------------------------------------------------------------------------------
Balance at end of period $4,682 $4,010 $3,766 $3,569
================================================================================
Ratio of net charge-offs to
average loans outstanding (0.054%) (0.004%) (0.15%) (0.340%)
The Allowance for Loan Losses at September 30, 2000 was $4,681,938,
compared to $3,765,872 at year-end 1999. The Allowance for Loan Losses as a
percentage of outstanding loans increased by 0.28% during the nine month
period to 1.84% from 1.56% reported at year end 1999. The Bank provided
$550,000 in 1999, $600,000 in 1998, and $1,050,000 as of September 30, 2000
to the Allowance for Loan Losses. Loans charged off were $402,000 in 1999,
$792,000 in 1998, and $291,000 as of September 30, 2000. Recoveries on
loans previously charged off were $49,000 in 1999, $67,000 in 1998 and
$157,000 as of September 30, 2000. During the second quarter of 2000,
management recognized an increase in loss potential due to increased credit
risk on our commercial real estate loans. This increased risk is primarily
due to a rising interest rate environment, putting pressure on cash flows
of our commercial borrowers. Due to this added risk and an increase in the
demand for these types of loans, management reviewed and changed the
methodology and guidelines used to analyze the adequacy of loan loss
reserves. After recalculating the adequate level of reserves using these
new guidelines, management elected to provide an additional $750,000 to the
reserve to provide an appropriate level to sufficiently absorb any
unanticipated loan losses. The level of the Allowance for Loan Losses is
evaluated by management and encompasses several factors, which include but
are not limited to, recent trends in the nonperforming loans, the adequacy
of the assets which collateralize the nonperforming loans, current economic
conditions in the market area, and various other external and internal
factors.
This table shows an allocation of the allowance for loan losses as of the
end of each of the periods indicated.
September 30, 2000 December 31, 1999 December 31, 1998
- ------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
- ------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Domestic:
Commercial $1,854(1) 19.33% $1,356(1) 19.52% $1,249(1) 20.06%
Real estate - Construction 66 3.14 34 2.07 27 1.73
Real estate - mortgage 2,178(2) 72.66 1,924(2) 74.48 1,964(2) 75.21
Consumer(3) 584(4) 4.87 452(4) 3.93 329(4) 3.00
- ---------------------------------------------------------------------------------------------------------
$4,682 100.00% $3,766 100.00% $3,569 100.00%
=========================================================================================================
<FN>
<F1> Includes amounts specifically reserved for impaired loans of $169,949
as of September 30, 2000, $234,205 as of December 31, 1999 and
$128,207 as of December 31, 1998 as required by Financial Accounting
Standard No. 114, Accounting for Impairment of Loans.
<F2> Includes amounts specifically reserved for impaired loans of $70,194
as of September 30, 2000, $147,884 as of December 31, 1999 and
$187,554 as of December 31, 1998 as required by Financial Accounting
Standard No. 114, Accounting for Impairment of Loans.
<F3> Includes consumer, obligations of states and political subdivisions
and other.
<F4> Includes amounts specifically reserved for impaired loans of $15,409
as of September 30, 2000, $39,241 as of December 31, 1999, and $9,126
as of December 31, 1998, as required by Financial Accounting Standard
No. 114, Accounting for Impairment of Loans.
</FN>
The loan portfolio's largest segment of loans is commercial real estate
loans, which represent 58.5% of gross loans. Residential real estate
represents 14.2% of gross loans. The Company requires a loan to value ratio
of 80% in both commercial and residential mortgages. These mortgages are
secured by real properties which have a readily ascertainable appraised
value.
Generally, commercial real estate loans have a higher degree of credit risk
than residential real estate loans because they depend primarily on the
success of the business. When granting these loans, the Company evaluates
the financial statements of the borrower(s), the location of the real
estate, the quality of management, and general economic and competitive
conditions. When granting a residential mortgage, the Company reviews the
borrower(s)' repayment history on past debts, and assesses the borrower(s)'
ability to meet existing obligations and payments on the proposed loans.
Commercial loans consist of loans predominantly collateralized by
inventory, furniture and fixtures, and accounts receivable. In assessing
the collateral for this type of loan, management applies a 40% liquidation
value to inventories, 25% to furniture, fixtures and equipment; and 60% to
accounts receivable. Commercial loans represent 19.3% of the loan
portfolio.
Consumer loans are generally unsecured credits and represent 4.9% of the
total loan portfolio. These loans have a higher degree of risk then
residential mortgage loans. The underlying collateral of a secured consumer
loan tends to depreciate in value. Consumer loans are typically made based
on the borrower's ability to repay the loan through continued financial
stability. The Company endeavors to minimize risk by reviewing the
borrower's repayment history on past debts, and assessing the borrower's
ability to meet existing obligations on the proposed loans.
The allocation of the Allowance for Loan Losses is based on management's
judgement of potential losses in the respective portfolios. While
management has allocated reserves to various portfolio segments, the
Allowance is general in nature and is available for the portfolio in its
entirety.
Results of Operations
- ---------------------
The largest source of the Company's earnings is net interest and dividend
income, which is the difference between interest income earned on loans and
investments and interest expense paid on deposits and borrowed funds. Net
interest and dividend income for the nine months ending September 30, 2000
increased by $369,062 to $11,433,976 when compared to $11,064,914 recorded
during the same period in 1999. Total interest and dividend income
increased by $1,649,446 due to a larger loan base, expansion of the
investment portfolio, and higher interest yields earned as a result of the
Federal Reserve Bank's decision to increase short-term rates in an attempt
to tighten credit, slow down the economy and control inflationary
pressures. This was offset by an increase in interest expense of $1,280,384
as a result of higher deposit levels being serviced during the last nine
month period compared to the same period in the previous year, along with
an increase in borrowings from the Federal Home Loan Bank, and higher
interest rates paid on time deposits.
The Provision for Loan Losses is a charge against earnings and funds the
Allowance for Loan Losses. It is management's desire to maintain an
appropriate ratio of the Allowance for Loan Losses to total outstanding
loans. The Bank's provision during the nine month period ending September
30, 2000 was $1,050,000, an increase of $600,000 from the same period in
the previous year. This increase is attributed to management's decision to
change the methodology and guidelines used in calculating the adequate
level of loan loss reserves for our loan portfolio. Increasing credit risk
due to a higher commercial real estate loan portfolio and a rising interest
rate environment is responsible for the review and change in the
methodology and guidelines. This additional provision will provide an
appropriate level of loan loss reserve to adequately absorb any
unanticipated losses from our loan portfolio.
Total Other Income decreased by $421,352 for the first nine months of 2000
when compared to the same period in 1999. Service charges on deposit
accounts decreased by $60,252 primarily due to a decrease in fees earned on
overdraft accounts and a lower amount of service charges being realized on
demand deposit accounts as a result of higher levels of compensating
balances carried in the business checking account category.
The Bank realized net gains on the sale of securities of $637 during the
first nine months of 2000 compared to net gains of $626,760 realized in the
same period in the prior year. During the first nine months of 1999,
management sold certain selected corporate equities due to favorable market
conditions. Corporate equity securities are monitored and evaluated to
determine their suitability for sale or retention in the portfolio on a
regular basis.
The line item Other Income increased by $265,023 and includes recognition
of an increase in the cash surrender value of life insurance policies
associated with both the Directors' Life Insurance and the Executive
Officers' Life Insurance Programs totaling $61,877 and $106,200
respectively, $59,000 of prior years expense accrual that did not
materialize, and other miscellaneous income earned due to general business
conditions.
Total Other Expense for the first nine months in 2000 was down by $120,125
to $7,599,860 when compared to $7,719,985 recorded during the same period
in 1999. Salaries and employee benefits, which is the largest component of
Other Expense, increased by $346,563 which is attributed to staff
additions, salary adjustments and general wage increases. Occupancy and
equipment expense combined increased slightly by $40,957. The Bank incurred
gains totaling $49,758 on sales of real estate acquired through foreclosure
compared to losses of $28,030 realized during the same period in the
previous year. Also, as of September 30, 2000 there were no expenses
associated with the writedown of other real estate owned (OREO) to reflect
current fair market values of properties. During the same period in the
prior year, $57,024 was expensed.
The following table sets forth the components of the line item Other
Expense. This table reflects a decrease of $348,987 to $691,906 from
$1,040,893 for the three month period ending September 30, 2000 and a
decrease of $372,833 to $2,042,905 from $2,415,738 for the nine month
period ending September 30, 2000 when compared to September 30, 1999.
Three Months Nine Months
- ----------------------------------------------------------------------------------------------------
(Dollars in Thousands) 2000 1999 Variance 2000 1999 Variance
- ----------------------------------------------------------------------------------------------------
Amortization of Goodwill $ 57 $ 57 $ 0 $ 170 $ 170 $ 0
Advertising & Public Relations 130 91 39 358 339 19
Stationery & Supplies 62 76 (14) 221 232 (11)
Communications 74 75 (1) 233 237 (4)
Professional fees & Other
Services 88 190 (102) 270 287 (17)
Other Real Estate Owned 0 20 (20) 38 154 (116)
Other Miscellaneous Expenses 281 532 (251) 753 997 (244)
- -------------------------------------------------------------------------------------------------
Other Expense $692 $1,041 $(349) $2,043 $2,416 $(373)
=================================================================================================
Advertising and Public Relations expense increased by $19,039 for nine
months ending September 30, 2000 when compared to 1999. Stationery and
Supplies slightly decreased by $11,461. Professional Fees and Other
Services decreased by $16,521 during the nine month period ending September
30, 2000 when compared to the same period in 1999. Other Real Estate Owned
decreased substantially by $116,390 due to expenditures in 1999 associated
with the acquisition and maintenance of real estate acquired by
foreclosure. As of September 30, 2000, all previous OREO properties have
been sold. Other Miscellaneous Expenses decreased by $243,966. During the
third quarter of 1999, the company recorded an estimated expense of
$300,000 as an accrued liability due to the civil suit brought against the
Bank by a former employee of the National Bank of Fairhaven for wrongful
termination. There was no such expense in 2000.
Income before income taxes, totaled $3,928,407 at September 30, 2000, down
by $532,165 when compared to $4,460,572 reported on September 30, 1999.
Applicable taxes decreased by $331,935 to $1,221,498 when compared to
$1,553,433 reported in the prior year. The decrease is due to reduced
earnings and the reduced State income tax resulting from by the
establishment of a real estate investment trust (Slade's Ferry Preferred
Capital Corporation) in July 1999.
Net income of $2,706,909 reflects a decrease of 6.9% when compared to
earnings of $2,907,139 reported at September 30, 1999. This decrease is
primarily attributed to the aforementioned $600,000 increase in the loan
loss provision when compared to the nine months ending September 30, 1999.
This increase resulted in an after tax decrease in income of $396,000.
Diluted earnings per share were $0.72 for nine months ending September 30,
2000 compared to $0.80 for the same period in 1999.
The results of operation for the third quarter in 2000 indicates that the
net interest and dividend income decreased by $184,685 to $3,914,915 from
$4,099,600 earned during the same period in the previous year. The
Provision for Loan Losses decreased by $150,000 to $-0- compared to
$150,000 for the same three month period in the previous year. Total Other
Income decreased by $62,975 primarily due to a decrease in security gains
during the third quarter of 2000. Due to favorable market conditions during
the same quarter in 1999, equity securities were sold realizing a gain of
$134,571. The line item Other Income increased by $79,420 due to
recognition of increased cash surrender value in life insurance associated
with both the Directors' Life Insurance Program and Executive Officers'
Life Insurance Program. Services charges on deposit accounts decreased
slightly by $13,218.
Total Other Expense decreased by $276,299. Salaries and benefits increased
by $63,857 which includes increases due to staff additions, salary
adjustments, and general wage increases due to performance evaluations.
Occupancy and equipment expense combined increased by $8,831.
For the three months ending September 30, 2000, other expense decreased by
$348,987 to $691,906 from $1,040,893 reported for the prior year. The
increase in Advertising and Public Relations of $38,603 was attributed to
the combination of television advertisements, direct residential mailings
to the Greater New Bedford market area, and print advertising. There was a
decrease of $13,934 in Stationery & Supplies expense, and Communications
also decreased slightly by $647. Professional fees decreased by $101,747
when compared to the third quarter of 1999. There was a reduction of
$100,000 in consultant fees attributed to the formation of the real estate
investment trust in 1999 and a decrease in legal fees of $26,500. The legal
expense for 1999 included fees incurred as a result of the above-mentioned
civil suit. These reductions were offset by an increase of $41,000 in
collection and repossession expenses. Expenses associated with the
acquisition and maintenance of real estate acquired by foreclosure totaled
$20,000 during the third quarter of 1999; no similar expenses were recorded
in the same quarter of 2000. Other Miscellaneous Expense decreased by
$251,262. During the third quarter of 1999, the Company recorded the
$300,000 expense related to the above-mentioned civil suit. There was no
such expense in 2000. Offsetting this were contributions to the Slade's
Ferry Charitable Foundation totaling $20,000, an increase in the Federal
Deposit Insurance Corporation assessment of $8,000, and an increase in
Board of Directors' fees of $13,000 occurring during the third quarter of
2000.
Income before taxes for the third quarter in 2000 increased by $178,639 to
$1,730,197 from $1,551,558 reported for the same period in the prior year.
Applicable taxes also increased by $103,997 to $543,131 when compared to
$439,134 reported in the third quarter in 1999.
Net income for the three month period ending September 30, 2000 was
$1,187,066, or an increase of 6.7%, when compared to $1,112,424 earned in
the third quarter in 1999. Diluted earnings per share were $0.32 compared
to $0.30 per share for the same period in 1999.
Liquidity
- ---------
The Company's principal sources of funds are customer deposits, loan
amortization, loan payoffs, and the maturities of investment securities.
Through these sources, funds are provided for customer withdrawals from
their deposit accounts, loan originations, draw-downs on loan commitments,
acquisition of investment securities and other normal business activities.
Investors' capital also provides a source of funding.
The largest source of funds is provided by depositors. The largest
component of the Company's deposit base is reflected in the Time Deposit
category. The Company does not participate in brokered deposits. Deposits
are obtained from consumers and commercial customers within the Bank's
community reinvestment area, consisting of Bristol County, Massachusetts
and several abutting towns in Rhode Island.
The Company also has the ability to borrow funds to meet short-term
liquidity needs from correspondent banks, the Federal Home Loan Bank, and
the Federal Reserve Bank of Boston by pledging qualified investment
securities as collateral. During the first nine months of 2000, the Bank
did not borrow any short-term funds to meet current liquidity needs.
However, in January 2000, the Bank borrowed $5.0 Million from the Federal
Home Loan Bank for the specific purpose of purchasing a $5.0 Million high
quality mortgage-backed security in order to further enhance interest
earnings. During the first nine months of 1999, the Company borrowed for
fourteen days an average of $4.3 Million per day. In addition to the
borrowed funds from the Federal Home Loan Bank as of September 30, 2000,
the Bank had outstanding advances totaling $6.7 Million from the Federal
Home Loan Bank representing the match funding loan program that is
available to qualified borrowers. As of December 1999, these advances
totaled $6.8 Million. Tax payments collected by the Bank for our customers,
under the Treasury Tax and Loan Program, and owed to the U.S. Treasury are
classified as other short-term borrowed funds.
Excess available funds are invested on a daily basis as Federal Funds Sold
and can be withdrawn daily. The Bank attempts through its cash management
strategies to maintain a minimum level of Federal Funds Sold to further
enhance its 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.
At September 30, 2000, the Bank's liquidity ratio stood at 28.2% as
compared to 29.1% at December 31, 1999. The liquidity ratio is determined
by dividing the Bank's short-term assets (cash and due from banks, interest
bearing deposits due from other banks, securities, and federal funds sold)
by the Bank's total deposits. Management believes the Bank's liquidity to
be adequate to meet the current and presently foreseeable needs of the
Bank.
The comparison of cash flows for nine months ending September 30, 2000 and
1999 shows a decrease in net cash provided by operating activities of $0.5
Million. There was an increase in net interest and dividend income of $0.4
Million, an increase in service charges and other income of $0.2 Million,
offset by increases in cash paid to suppliers of $1.3 Million and taxes
paid of $0.1 Million.
Cash flows from investing activities show a net decrease in cash used in
investing activities of $2.2 Million when compared to 1999. Purchases of
securities decreased by $13.9 Million offset by a decrease in maturities
and sales of $12.8 Million for a net decrease of $1.1 Million in cash used
in investing activities. There was a decrease in cash used in loan activity
of $5.5 Million, proceeds from sales of Other Real Estate Owned decreased
by $0.2 Million and capital expenditures decreased by $0.5 Million. These
were offset by the aforementioned purchase of Bank Owned Life insurance for
$4.9 Million.
Cash flows provided by financing activities increased by $5.5 Million when
compared to the first nine months of 1999. There was a net increase in cash
provided by demand deposits, NOW, money market and savings accounts of $8.8
Million and an increase in Federal Home Loan Bank borrowings of $4.9
Million as mentioned previously. These were offset by decreases in time
deposits of $3.0 Million, short-term borrowings of $1.2 Million and federal
funds purchased of $4.0 Million.
Capital
- -------
As of September 30, 2000, the Company had total capital of $34,195,877.
This represents an increase of $2,531,631 from $31,664,246 reported on
December 31, 1999. The increase in capital was a combination of several
factors. Additions consisted of nine months earnings of $2,706,909,
transactions originating through the Dividend Reinvestment Program whereby
14,492.553 shares were issued for cash contributions of $139,531 and
43,858.167 shares were issued for $444,262 in lieu of cash dividend
payments and stock options exercised amounting to $14,026. These additions
were offset by dividends paid of $897,350 and cash dividends paid in lieu
of fractional shares of $2,025 as a result of the 5% stock dividend issued
February, 2000.
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, 1999 the Available-for-Sale portfolio
had unrealized losses, net of taxes, of $1,150,594, and on September 30,
2000, as a result of current market values, the portfolio reflects
unrealized losses, net of taxes, of $1,024,316. There was no change in the
minimum pension liability adjustment of $3,024, net of taxes, recorded
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.
At September 30, 2000 the actual Risk Based Capital of the Bank was
$28,672,000 for Tier 1 Capital, exceeding the minimum requirements of
$11,019,960 by $17,652,040. Total Capital of $32,178,000 exceeded the
minimum requirements of $22,039,920 by $10,138,080 and Leverage Capital of
$28,672,000 exceeded the minimum requirements of $14,588,440 by
$14,083,560. In addition to the "minimum" capital requirements, "well
capitalized" standards have also been established by the Federal Banking
Regulators.
As shown by the table below which illustrates the capital ratios of the
Company and the Bank on September 30, 2000 and at December 31, 1999, the
Company and the Bank met the "well-capitalized" standards as of the dates
indicated.
Well September 30, 2000 December 31, 1999
Capitalized ------------------ ------------------
Requirement Bancorp Bank Bancorp Bank
- -------------------------------------------------------------------------------------
Total Capital (to Risk
Weighted Assets) 10% 13.09% 11.68% 12.98% 11.67%
Tier I Capital (to Risk
Weighted Assets) 6% 11.84% 10.41% 11.73% 10.42%
Leverage Capital (to
Average Assets) 5% 8.90% 7.86% 8.60% 7.68%
ITEM 3
Quantitative and Qualitative Disclosure of Market Risk
- ------------------------------------------------------
Interest Rate Risk
- ------------------
Volatility in interest rates requires the Company to manage interest rate
risk that arises from the differences in the timing of repricing of assets
and liabilities. The Company considers interest rate risk, the exposure of
earnings to adverse movements in interest rates, to be a significant market
risk as it could potentially have an effect on the Company's financial
condition and results of operation.
The Company's Asset-Liability Management Committee, comprised of the Bank's
Executive Management team, has the responsibility of managing interest rate
risk, and monitoring and adjusting the difference between interest-
sensitive assets and interest-sensitive liabilities ("GAP" position) within
various time periods.
Management's objective is to reduce and control the volatility of its net
interest margin by managing the relationship of interest-earning assets and
interest-bearing liabilities. In order to manage this relationship, the
committee utilizes a GAP report prepared on a monthly basis. The GAP report
indicates the differences or gap between interest-earning assets and
interest-bearing liabilities in various maturity or repricing time periods.
This, in conjunction with certain assumptions, and other related factors,
such as anticipated changes in interest rates and projected cash flows from
loans, investments and deposits, provides management a means of evaluating
interest rate risk.
In addition to the GAP report, the Company also uses an analysis to measure
the exposure of net interest income to changes in interest rates over a
relatively short (i.e., 12 months) time frame. The analysis projects future
interest income and expenses from the Company's earning assets and
interest-bearing liabilities. Depending on the GAP position, the Company's
policy limit on interest rate risk specifies that if interest rates were to
change immediately up or down 200 basis points, estimated net interest
income for the next twelve months should not decline by more than ten
percent.
The following table reflects the Company's estimated exposure as a
percentage of estimated net interest income for the next twelve months,
assuming an immediate change in interest rates:
Estimated Exposure as a
Rate Change Percentage of Net Interest Income
(Basis Points) September 30, 2000
- ---------------------------------------------------------------------------
+200 (4.05%)
-200 1.97%
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.
PART II
OTHER INFORMATION
ITEM 6
Exhibits and Reports on Form 8-K
(a) Exhibits: See exhibit index
(b) Reports on Form 8-K: None
EXHIBIT INDEX
Exhibit No. Description Page
3.1 Articles of Incorporation of Slade's Ferry Bancorp
as amended (1)
3.2 By-laws of Slade's Ferry Bancorp as amended (2)
10.1 Agreement and Plan of Merger by and between Slade's
Ferry (formerly Weetamoe) Bancorp and Fairbank, Inc. (3)
10.2 Slade's Ferry (formerly Weetamoe) Bancorp 1996
Stock Option Plan (as amended) (3)
10.3 Noncompetition Agreement between Slade's Ferry
Trust Company and Edward S. Machado (A substantially
identical contract exists with Peter Paskowski) (4)
10.4 Supplemental Executive Retirement Agreement
between Slade's Ferry (formerly Weetamoe) Bancorp
and Donald T. Corrigan (5)
10.5 Supplemental Executive Retirement Agreement
between Slade's Ferry (formerly Weetamoe) Bancorp
and James D. Carey (2)
10.6 Supplemental Executive Retirement Agreement between
Slade's Ferry (formerly Weetamoe) Bancorp and
Manuel J. Tavares (2)
10.7 Swansea Mall Lease (4)
10.8 Form of Director Supplemental Retirement Program
Director Agreement, Exhibit I thereto (Slade's
Ferry Trust Company Director Supplemental
Retirement Program Plan) and Endorsement Method
Split Dollar Plan Agreement thereunder for
Thomas B. Almy. (Similar forms of agreement
entered into between Slade's Ferry Trust Company
and the other directors) (6)
10.9 Form of Directors' Paid-up Insurance Policy for
Thomas B. Almy (part of the Director Supplemental
Retirement Program). (Similar forms of policy
entered into by Company for other directors). (7)
10.10 Form of Officers' Paid-up Endorsement Method
Split Dollar Plan Agreement and Insurance Policies
for Janice Partridge (Similar forms of policies
entered into by Company for its President and other
Vice Presidents) (8)
27 Financial Data Schedule
(1) Incorporated by reference to the Registrant's Registration Statement
on Form SB-2 filed with the Commission on April 14, 1997.
(2) Incorporated by reference to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1996
(3) Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended June 30, 1999.
(4) Incorporated by reference to the Registrant's Registration Statement
on Form S-4 File No. 33-32131.
(5) Incorporated by reference to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1994.
(6) Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended March 31, 1999.
(7) Incorporated by reference to the Registrant's Form 10-QSB for the
quarter ended June 30, 1998.
(8) Incorporated by reference to the Registrant's Form 10-Q for the
quarter ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SLADE'S FERRY BANCORP
----------------------------------
(Registrant)
11/10/2000 /s/ Kenneth R. Rezendes
- ----------------------------- ----------------------------------
(Date) (Signature) Kenneth R. Rezendes
President/CEO
11/10/2000 /s/ James D. Carey
- ----------------------------- ----------------------------------
(Date) (Signature) James D. Carey
Executive Vice President
11/10/2000 /s/ Edward Bernardo Jr.
- ----------------------------- ----------------------------------
(Date) (Signature) Edward Bernardo Jr.
Vice President/Treasurer
Chief Financial Officer