UNITED STATES
SECURITIES AND EXCHANGE COMMISION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
----- THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2005
-----------------
Commission file number 000-23904
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SLADE'S FERRY BANCORP.
(Exact name of registrant as specified in its character)
Massachusetts 04-3061936
- --------------------------------- ----------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
100 Slade's Ferry Avenue
Somerset, Massachusetts 02726
- ---------------------------------------- ----------------------
(Address of principal executive offices) (Zip code)
(508)-675-2121
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------------ -----------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
------------ -----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common stock ($0.01 par value) 4,123,781 shares as of July 31, 2005.
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TABLE OF CONTENTS
Part I
ITEM 1 - Consolidated Financial Statements of Slade's Ferry Bancorp. and
Subsidiary 2
Consolidated Balance Sheets - June 30, 2005 and December 31,
2004 (Unaudited)
Consolidated Statements of Income - Six months ended June 30,
2005 and 2004 (Unaudited)
Consolidated Statements of Income - Three months ended June 30,
2005 and 2004 (Unaudited)
Consolidated Statement of Changes in Stockholder's Equity -
Six Months Ended June 30, 2005 (Unaudited)
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2005 and 2004 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
ITEM 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk 28
ITEM 4 - Controls and Procedures 30
Part II
ITEM 1 - Legal Proceedings 31
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds 31
ITEM 3 - Defaults upon Senior Securities 31
ITEM 4 - Submission of Matters to a Vote of Security Holders 31
ITEM 5 - Other Information 31
ITEM 6 - Exhibits 32
1
PART I
ITEM 1
FINANCIAL STATEMENTS
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousands) June 30, 2005 December 31, 2004
- -------------------------------------------------------------------------------------------------------
<s> <c> <c>
Assets
- ------
Cash and due from banks $ 20,073 $ 15,984
Interest-bearing deposits with other banks 512 410
Federal Home Loan Bank overnight deposit - 5,000
Federal funds sold 5,100 13,800
-------- --------
Cash and cash equivalents 25,685 35,194
Interest-bearing time deposits with other bank 100 100
Investments in available-for-sale securities (at fair value) 95,334 83,882
Investments in held-to-maturity securities (fair value of $33,545
as of June 30, 2005 and $38,112 as of December 31, 2004) 33,404 37,773
Federal Home Loan Bank stock 5,905 4,650
Loans, net of allowance for loan losses of $4,223
at June 30, 2005 and $4,101 at December 31, 2004 391,303 362,265
Premises and equipment 6,164 5,527
Goodwill 2,173 2,173
Accrued interest receivable 2,183 1,969
Cash surrender value of life insurance 11,674 11,548
Deferred taxes 1,493 1,180
Other assets 2,378 3,137
-------- --------
Total assets $577,796 $549,398
======== ========
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing $ 77,593 $ 80,232
Interest-bearing 329,045 319,673
-------- --------
Total deposits 406,638 399,905
Federal Home Loan Bank advances 110,078 90,286
Subordinated debentures 10,310 10,310
Other liabilities 2,808 2,296
-------- --------
Total liabilities 529,834 502,797
Stockholders' equity:
Common stock, par value $0.01 per share; authorized 10,000,000
shares; issued and outstanding 4,115,200 shares on June 30, 2005
and 4,068,423 shares on December 31, 2004 41 41
Paid-in capital 30,703 29,976
Retained earnings 17,669 16,459
Accumulated other comprehensive income (loss) (451) 125
-------- --------
Total stockholders' equity 47,962 46,601
-------- --------
Total liabilities and stockholders' equity $577,796 $549,398
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended June 30,
(Dollars in Thousands, except per share data) 2005 2004
---------- ----------
<s> <c> <c>
Interest and dividend income:
Interest and fees on loans $ 10,993 $ 9,867
Interest and dividends on securities 2,605 1,207
Interest on federal funds sold 157 161
Other interest 11 2
---------- ----------
Total interest and dividend income 13,766 11,237
---------- ----------
Interest expense:
Interest on deposits 2,616 2,447
Interest on Federal Home Loan Bank advances 1,985 1,173
Interest on subordinated debentures 291 118
---------- ----------
Total interest expense 4,892 3,738
---------- ----------
Net interest and dividend income 8,874 7,499
Provision for loan losses 65 376
---------- ----------
Net interest and dividend income, after
provision for loan losses 8,809 7,123
---------- ----------
Noninterest income:
Service charges on deposit accounts 191 272
Overdraft service charges 229 255
Gain on sales of assets 51 -
Gain on sales and calls of available-for-sale securities, net 17 39
Increase in cash surrender value of life insurance policies 258 258
Other income 363 339
---------- ----------
Total noninterest income 1,109 1,163
---------- ----------
Noninterest expense:
Salaries and employee benefits 4,095 4,082
Occupancy expense 451 420
Equipment expense 358 280
Professional fees 614 477
Marketing expense 328 198
Other expense 1,091 976
---------- ----------
Total noninterest expense 6,937 6,433
---------- ----------
Income before income taxes 2,981 1,853
Income taxes 1,033 643
---------- ----------
Net income $ 1,948 $ 1,210
========== ==========
Earnings per common share - basic $ 0.48 $ 0.30
========== ==========
Earnings per common share - diluted $ 0.47 $ 0.30
========== ==========
Average common shares outstanding - basic 4,094,939 4,028,706
========== ==========
Average common shares outstanding - diluted 4,123,796 4,077,206
========== ==========
Dividends declared per share $ 0.18 $ 0.18
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30,
---------------------------
(Dollars in Thousands, except per share data) 2005 2004
---------- ----------
<s> <c> <c>
Interest and dividend income:
Interest and fees on loans $ 5,727 $ 4,975
Interest and dividends on securities 1,283 678
Interest on federal funds sold 92 104
Other interest 7 -
---------- ----------
Total interest and dividend income 7,109 5,757
---------- ----------
Interest expense:
Interest on deposits 1,457 1,325
Interest on Federal Home Loan Bank advances 1,074 578
Interest on subordinated debentures 155 102
---------- ----------
Total interest expense 2,686 2,005
---------- ----------
Net interest and dividend income 4,423 3,752
Provision for loan losses 15 130
---------- ----------
Net interest and dividend income after
provision for loan losses 4,408 3,622
---------- ----------
Noninterest income:
Service charges on deposit accounts 93 127
Overdraft service charges 119 132
Gain on sales of assets 11 -
Gain on sales and calls of available-for-sale securities, net 15 4
Increase in cash surrender value of life insurance policies 111 120
Other income 191 217
---------- ----------
Total noninterest income 540 600
---------- ----------
Noninterest expense:
Salaries and employee benefits 2,120 2,011
Occupancy expense 212 189
Equipment expense 188 133
Professional fees 307 250
Marketing expense 229 141
Other expense 566 496
---------- ----------
Total noninterest expense 3,622 3,220
---------- ----------
Income before income taxes 1,326 1,002
Income taxes 478 377
---------- ----------
Net income $ 848 $ 625
========== ==========
Earnings per common share - basic $ 0.21 $ 0.15
========== ==========
Earnings per common share - diluted $ 0.21 $ 0.15
========== ==========
Average common shares outstanding - basic 4,112,969 4,044,758
========== ==========
Average common shares outstanding - diluted 4,132,712 4,088,168
========== ==========
Dividends declared per share $ 0.09 $ 0.09
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2005 AND DECEMBER 31, 2004
(Unaudited)
Accumulated
Other
Common Paid-in Retained Comprehensive
(Dollars in Thousands, except per share data) Stock Capital Earnings Income (Loss) Total
- -----------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c>
Balance, December 31, 2004 $41 $29,976 $16,459 $ 125 $46,601
Comprehensive income:
Net income - - 1,948 - 1,948
Other comprehensive (loss) - - - (576) (576)
-------
Comprehensive income 1,372
-------
Issuance of common stock from dividend
reinvestment plan - 296 - - 296
Stock issuance relating to optional
cash contribution plan - 20 - - 20
Stock options exercised - 316 - - 316
Tax benefit of stock options exercised - 95 - - 95
Dividends declared ($.18 per share) - - (738) - (738)
----------------------------------------------------
Balance, June 30, 2005 $41 $30,703 $17,669 $(451) $47,962
====================================================
The accompanying notes are an integral part of these consolidated financial
statements.
5
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
(Dollars in Thousands) 2005 2004
- --------------------------------------------------------------------------------------------
<s> <c> <c>
Cash flows from operating activities:
Net income $ 1,948 $ 1,210
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization, net of accretion of securities 152 72
Gain on sales and calls of available-for-sale securities, net (17) (39)
Change in unearned income 40 128
Provision for loan losses 65 376
Deferred tax expense 127 (26)
Depreciation and amortization 392 320
Gain on sales of assets 51 -
Increase in cash surrender value of life insurance policies (246) (258)
(Increase) decrease in other assets 146 (619)
Increase in accrued interest receivable (214) (333)
Increase in other liabilities 512 179
-------- --------
Net cash provided by operating activities 2,854 1,010
-------- --------
Cash flows from investing activities:
Decrease in interest bearing time deposits with other banks - 100
Purchases of available-for-sale securities (20,769) (38,643)
Proceeds from sales of available-for-sale securities 1,826 -
Proceeds from maturities of available-for-sale securities 6,548 9,241
Purchases of held-to-maturity securities - -
Proceeds from maturities of held-to-maturity securities 4,256 1,777
Purchases of Federal Home Loan Bank stock (1,255) (105)
Loan originations and principal collections, net (29,200) (27,610)
Recoveries of loans previously charged off 57 69
Capital expenditures (1,046) (202)
Proceeds from sale of property and equipment 28 -
Proceeds from sale of investment real estate 653
Investment in life insurance policies - (135)
Redemption of life insurance policy 120 -
-------- --------
Net cash used in investing activities (38,782) (55,508)
-------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
6
SLADE'S FERRY BANCORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Continued)
Six Months Ended June 30,
(Dollars in Thousands) 2005 2004
- --------------------------------------------------------------------------------------------
<s> <c> <c>
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts 3,426 52,809
Net increase in time deposits 3,307 25,738
Short-term advances from Federal Home Loan Bank - (3,824)
Long-term advances from Federal Home Loan Bank 20,000 -
Payments on Federal Home Loan Bank long-term advances (208) (169)
Proceeds from issuance of common stock 316 380
Stock options exercised 316 532
Retirement of shares of common stock - (32)
Dividends paid (738) (722)
Proceeds from issuance of subordinated debentures - 10,310
-------- --------
Net cash provided by financing activities 26,419 85,022
-------- --------
Net increase (decrease) in cash and cash equivalents (9,509) 30,524
Cash and cash equivalents at beginning of period 35,194 22,706
-------- --------
Cash and cash equivalents at end of period $ 25,685 $ 53,230
======== ========
Supplemental disclosures:
Interest paid $ 4,772 $ 3,700
Income taxes paid $ 883 $ 629
The accompanying notes are an integral part of these consolidated financial
statements.
7
SLADE'S FERRY BANCORP. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2005
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America ("GAAP") for interim financial information and the
instructions to Form 10-Q and, accordingly, do not include all of the
information and footnotes required by GAAP for complete financial
statements. In the opinion of the management of Slade's Ferry Bancorp. (the
"Company"), all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 2005 are not necessarily
indicative of the results that may be expected for the year ending December
31, 2005.
The year-end consolidated financial data was derived from audited financial
statements, but does not include all disclosures required by GAAP. This
form 10-Q should be read in conjunction with the Company's Annual Report
filed on Form 10-K/A for the year ended December 31, 2004.
Note B - Accounting Policies
- ----------------------------
The accounting principles followed by Slade's Ferry Bancorp. and subsidiary
and the methods of applying these principles which materially affect the
determination of financial position, results of operations, or changes in
financial position are consistent with those used for the year ended
December 31, 2004.
The consolidated financial statements of Slade's Ferry Bancorp. include its
wholly-owned subsidiary, Slade's Ferry Trust Company, and its subsidiaries,
Slade's Ferry Realty Trust, Slade's Ferry Securities Corporation, Slade's
Ferry Securities Corporation II and Slade's Ferry Loan Company. Slade's
Ferry Loan Company was dissolved in May 2005. All significant intercompany
balances have been eliminated.
Slade's Ferry Statutory Trust I, a subsidiary of the Company, was formed to
sell capital securities to the public through a third party trust pool. In
accordance with Financial Accounting Standards Board ("FASB") Interpretation
No. 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"), the
subsidiary has not been included in the consolidated financial statements.
Note C - Stock Based Compensation
- ---------------------------------
The Company has a stock-based employee compensation plan. The Company
accounts for the plan under the recognition and measurement principles of
Accounting Principle Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees," and related Interpretations. No stock-based employee
compensation cost is reflected in net income (except for appreciation from
options surrendered), as all options granted under this plan had an exercise
price equal to the market value of the underlying common stock on the date
of grant.
8
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") Statement No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation.
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in Thousands, except per share data) 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Net income, as reported $ 848 $ 625 $1,948 $1,210
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects 26 88 63 88
----------------------------------------------
Pro forma net income $ 822 $ 537 $1,885 $1,122
==============================================
Earnings per share:
Basic - as reported $0.21 $0.15 $ 0.48 $ 0.30
Basic - pro forma $0.20 $0.13 $ 0.46 $ 0.28
Diluted - as reported $0.21 $0.15 $ 0.47 $ 0.30
Diluted - pro forma $0.20 $0.13 $ 0.46 $ 0.27
Note D - Pension Benefits
- -------------------------
The following summarizes the net periodic benefit cost for the periods
presented:
Six Months Ended June 30, Three Months Ended June 30,
Dollars in Thousands 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Interest cost $ 43 $ 53 $ 21 $ 26
Expected return on plan assets (74) (54) (37) (27)
Settlement charge - 58 - 1
Recognized net actuarial loss 17 21 9 11
---- ---- ---- ----
Net periodic benefit cost (income) $(14) $ 78 $ (7) $ 11
==== ==== ==== ====
The Company previously disclosed in its consolidated financial statements
for the year ended December 31, 2004 that it expects to make no
contributions to the plan in 2005.
Note E - Impact of New Accounting Standards
- -------------------------------------------
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS 123R"). This Statement revises FASB Statement No. 123,
"Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and its related implementation
guidance. SFAS 123R requires that the cost resulting from all share-based
payment transactions be recognized in the financial statements. It
establishes fair value as the measurement objective in accounting for share-
based payment arrangements and requires all entities to apply a fair-value
based measurement method in accounting for share-based payment transactions
with employees except for equity instruments held by employee share
ownership plans. This Statement was originally to be effective for the
Company as of the beginning of the first interim or annual reporting period
that begins after June 15, 2005. On April 14, 2005, the Securities and
9
Exchange Commission adopted a rule which allows companies to adopt SFAS 123R
at the beginning of their next fiscal year. Accordingly, the Company will
adopt SFAS 123R effective January 1, 2006. The Company does not believe the
adoption of this Statement will have a material impact on the Company's
financial position or results of operations.
10
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Slade's Ferry Bancorp, a Massachusetts corporation, is a bank holding
company headquartered in Somerset, Massachusetts with consolidated assets of
$577.8 million, consolidated net loans and leases of $391.3 million,
consolidated deposits of $406.6 million and consolidated shareholders'
equity of $48.0 million as of June 30, 2005. We conduct our business
principally through our wholly-owned subsidiary, Slade's Ferry Trust Company
(referred to herein as the "Bank"), a Massachusetts-chartered trust company.
Our common stock is quoted on the Nasdaq Small Cap Market under the symbol
"SFBC."
Forward-looking Statements
- --------------------------
This Form 10-Q contains certain forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, including
statements regarding the strength of the company's capital and asset
quality. Such statements may be identified by words such as "believes,"
"will," "expects," "project," "may," "could," "developments," "strategic,"
"launching," "opportunities," "anticipates," "estimates," "intends,"
"plans," "targets" and similar expressions. These statements are based upon
the current beliefs and expectations of Slade's Ferry Bancorp's management
and are subject to significant risks and uncertainties. Actual results may
differ materially from those set forth in the forward-looking statements as
a result of numerous factors.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations expressed in
our forward-looking statements:
(1) enactment of adverse government regulation;
(2) competitive pressures among depository and other financial
institutions may increase significantly and have an effect on
pricing, spending, third-party relationships and revenues;
(3) the strength of the United States economy in general and
specifically the strength of the New England economies may be
different than expected, resulting in, among other things, a
deterioration in overall credit quality and borrowers' ability
to service and repay loans, or a reduced demand for credit,
including the resultant effect on the Bank's loan portfolio,
levels of charge-offs and non-performing loans and allowance for
loan losses;
(4) changes in the interest rate environment may reduce interest
margins and adversely impact net interest income; and
(5) changes in assumptions used in making such forward-looking
statements.
Should one or more of these risks materialize or should underlying beliefs
or assumptions prove incorrect, Slade's Ferry Bancorp's actual results could
differ materially from those discussed.
All subsequent written and oral forward-looking statements attributable to
Slade's Ferry Bancorp or any person acting on its behalf are expressly
qualified in their entirety by the cautionary statements set forth above.
Slade's Ferry Bancorp does not intend or undertake any obligation to update
any forward-looking statement to reflect circumstances or events that occur
after the date the forward-looking statements are made.
As used throughout this report, the terms "we," "our," "us," or the "Bank"
or the "Company" refer to Slade's Ferry Bancorp and its consolidated
subsidiaries.
11
Critical Accounting Policies
- ----------------------------
Our significant accounting policies are incorporated by reference from Note
3 to our Consolidated Financial Statements filed within Form 10-K/A for the
year ended December 31, 2004. In preparing financial information,
management is required to make significant judgements, estimates, and
assumptions that impact the reported amounts of certain assets, liabilities,
revenues and expenses. The accounting principles we follow and the methods
of applying these principles conform to accounting principles generally
accepted in the United States, and general banking practices. We consider
the following to be our critical accounting policies: allowance for loan
losses; goodwill and other intangible assets other than temporary impairment
of investments; and deferred taxes.
Allowance for loan losses. The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon our periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
Other than temporary impairment. We record a writedown impairment charge
when we believe an investment experiences a decrease in value that is other
than temporary. In making a decision whether an investment is permanently
impaired, we review current and forecasted information about the underlying
investment that is available, applicable industry data, and analyst reports.
When an investment is deemed to be permanently impaired, it is written down
to current fair market value. Future adverse changes in economic and market
conditions, deterioration in credit quality, and continued poor financial
results of underlying investments or other factors could result in further
losses that may not be reflected in an investment's current book value that
could result in future writedown charges due to impairment.
Deferred tax estimates. We use the asset and liability method for
accounting for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax attributable to differences
between the financial statement carrying amounts of assets and liabilities
and their respective tax basis. We also assess the probability that
deferred tax assets will be recovered from future taxable income, and
establish a valuation allowance for any assets determined not likely to be
recovered. Our management exercises judgement in evaluating the amount and
timing of recognition of the resulting deferred tax assets and liabilities,
including projections of future taxable income. These judgements are
estimates and assumptions and are reviewed on a continuing basis.
Comparison of Financial Condition at June 30, 2005 and December 31, 2004
- ------------------------------------------------------------------------
General
- -------
Total assets increased by $28.4 million, or 5.2%, from $549.4 million at
December 31, 2004 to $577.8 million at June 30, 2005. The increase mainly
is the result of growth in the loan portfolio, which increased by $29.0
million or 8.0%, from $362.3 million (net of allowance for loan losses) to
$391.3 million. The total investment securities portfolio increased from
$126.4 million at December 31, 2004 to $134.7 million at June 30, 2005. The
increase in loans and the investment portfolio was partially offset by a
decrease in cash and cash equivalents of $9.5 million. During the same time
period, deposits increased by $6.7 million, or 1.7%, from
12
$399.9 million to $406.6 million, while advances from the Federal Home Loan
Bank of Boston (the "FHLB") increased by $19.8 million or 21.9%. The growth
in deposits and the additional FHLB advances were used to fund our loan
growth during the year.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents decreased by $9.5 million, from $35.2 million
reported at year-end 2004 to $25.7 million at June 30, 2005. The decrease
is the result of our election to invest excess cash into the bond portfolio.
We believe that there are opportunities to enhance income using the bond
portfolio, while remaining within our interest rate risk guidelines.
Accordingly, we selectively invested additional cash into the bond
portfolio.
Investment Portfolio
- --------------------
Total investments, excluding Federal Home Loan Bank stock, increased by $7.1
million from $121.7 million reported at December 31, 2004 to $128.7 million
at June 30, 2005, an increase of 5.8%. The main objective of the investment
portfolio is to provide adequate liquidity to meet reasonable declines in
deposits and any anticipated increases in the loan portfolio, to provide
safety of principal and interest, to generate earnings adequate to provide a
stable income, and to fit within our overall asset/liability management
objectives. We do not purchase free standing derivative instruments, such
as sweeps, options or futures.
We utilize both a "held-to-maturity" portfolio and an "available-for-sale"
portfolio, as defined in Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities", to
manage investments. Our investment policy requires Board approval before a
trading account can be established. The held-to-maturity portfolio was
originally established for holding high-yielding municipal securities.
During 2004, certain mortgage-backed securities designated as collateral for
FHLB advances were also designated as held-to-maturity. Management has the
ability and intent to hold these securities to their contractual maturity.
We primarily utilize U.S. Government agency securities and agency-insured
mortgage-backed securities as investment vehicles. High-quality corporate
bonds and municipal securities are purchased when an exceptional opportunity
to enhance investment yields arises. Purchases of these investments are
limited to securities that carry a rating of "Baa1" (Moody's) or "BBB+"
(Standard and Poor's), in order to control credit risk within the investment
portfolio. Among other investment criteria, it is management's goal to
maintain a total bond portfolio duration of less than five years. At June
30, 2005, the portfolio duration was estimated at 2.75 years.
The following table presents the amortized cost, unrealized gains and
losses, and fair value of our portfolio of Investment Securities Held-to-
Maturity at June 30, 2005:
Amortized Gross Unrealized Gross Unrealized
(Dollars in Thousands) Cost Basis Gains Losses Fair Value
- -------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Debt securities issued by states of
the United States and political
subdivisions of the states $ 7,704 $208 $ 7 $ 7,905
Federal agency mortgage-backed securities 25,700 35 95 25,640
-------------------------------------------------------------
Total $33,404 $243 $102 $33,545
=============================================================
Securities in the Available-for-Sale portfolio are securities that we intend
to hold for an indefinite period of time, but not necessarily to maturity.
These securities may be sold in response to interest rate changes, liquidity
needs or other factors. Any unrealized gain or loss, net of taxes, for the
Available-for-Sale securities is reflected in stockholders' equity.
13
The Available-for-Sale portfolio consists primarily of Federal agency
obligations, agency-insured mortgage-backed securities, and high-quality
corporate bonds. We also have a portfolio of common and preferred
marketable equity securities. The equity securities carry a greater level
of risk as they are subject to market fluctuations. These securities are
constantly monitored and evaluated to determine their suitability for sale,
retention in the portfolio, or possible write-downs due to impairment
issues. We minimize risk by limiting the total amount invested in
marketable equity securities. At June 30, 2005, the amount invested in
marketable equity securities was 3.5% of the total market value of the
investment portfolio distributed over various industry sectors.
The following table presents the amortized cost, unrealized gains and
losses, and fair value of our portfolio of Investment Securities Available-
for-Sale at June 30, 2005:
Amortized Gross Unrealized Gross Unrealized
(Dollars in Thousands) Cost Basis Gains Losses Fair Value
- -------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Debt securities issued by the U.S.
Treasury and other U.S. Government
corporations and agencies $51,926 $ 23 $ 444 $51,505
Federal agency mortgage-backed securities 29,562 199 129 29,632
Corporate debt securities 9,810 54 272 9,592
Mutual funds 1,215 17 - 1,232
Marketable equity securities 3,521 124 272 3,373
-------------------------------------------------------------
Total $96,034 $417 $1,118 $95,334
=============================================================
Loans
- -----
The loan portfolio consists of loans originated primarily in our market
area. There are no foreign loans outstanding. The interest rates we charge
on loans are affected principally by the demand for such loans, the supply
of money available for lending purposes and the rates offered by its
competitors. Total net loans increased from 65.9% of total assets at
December 31, 2004, to 67.7% of total assets at June 30, 2005.
Commercial real estate loans represent 52.6% of gross loans. Residential
real estate, including home equity loans, represents 33.2% of gross loans.
We require a loan-to-value ratio of 80% in both commercial and residential
mortgages. These mortgages are secured by real properties which have a
readily ascertainable appraised value. Home equity loans are generally
revolving lines of credit and are typically secured by second mortgages on
one-to-four family owner-occupied properties.
Generally, commercial real estate loans have a higher degree of credit risk
than residential real estate loans because they depend primarily on unit
supply and demand and various conditions. When granting these loans, we
evaluate the financial condition of the borrower(s), the location of the
real estate, the quality of management, and general economic and competitive
conditions. When granting a residential mortgage, we review the borrower's
repayment history on past debt, and assess the borrower's ability to meet
existing obligations and payments on the proposed loan. Real estate
construction loans comprise both residential and commercial construction
loans throughout our market area.
14
Commercial loans consist of loans predominantly collateralized by inventory,
furniture and fixtures, and accounts receivable. In assessing the
collateral for this type of loan, we apply a 50% liquidation value to
inventories; 25% to furniture, fixtures and equipment; and 70% to accounts
receivable less than 90 days of invoice date. Commercial loans represent
7.7% of the loan portfolio as of June 30, 2005.
Consumer loans are both secured and unsecured borrowings and, at June 30,
2005 represent only .60% of our total loan portfolio. These loans have a
higher degree of risk than residential mortgage loans. The underlying
collateral of a secured consumer loan tends to depreciate in value. Consumer
loans are typically made based on the borrower's ability to repay the loan
through continued financial stability. We endeavor to minimize risk by
reviewing the borrower's repayment history on past debts, and assessing the
borrower's ability to meet existing obligations on the proposed loan.
The following table shows the amount of loans by category at June 30, 2005
and December 31, 2004.
Percentage
(Dollars in Thousands) June 30, 2005 December 31, 2004 Increase/(Decrease)
- ------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c>
Commercial, financial and agricultural $ 30,278 $ 26,606 13.80%
Real estate - construction and land development 23,709 24,240 -2.19%
Real estate - residential 110,154 97,496 12.98%
Real estate - commercial 208,127 192,822 7.94%
Home equity lines of credit 21,418 23,131 -7.41%
Consumer 2,319 2,510 -7.61%
-----------------------------------------------
Total loans 396,005 366,805 7.96%
Allowance for loan losses (4,223) (4,101) 2.97%
Unearned income (479) (439) 9.11%
-----------------------------------------------
Net loans, carrying amount $391,303 $362,265 8.02%
===============================================
The increases in the loan portfolio are the result of the normal origination
process. We have been successful in both retention of existing loans and
the origination of new loans, particularly commercial and commercial real
estate loans.
The following table presents information with respect to nonaccrual and past
due loans during the periods indicated.
Information With Respect to Nonaccrual and Past Due Loans
at June 30, 2005 and December 31, 2004
(Dollars in Thousands) At June 30, 2005 At December 31, 2004
- -----------------------------------------------------------------------------------------------------------------
<s> <c> <c>
Non-accrual loans $ 364 $ 506
Interest income that would have been recorded during the
period under original terms 34 67
Interest income recorded during period 17 44
Loans 90 days or more past due and still accruing real estate
acquired by foreclosure or substantively repossessed 166 -
Percentage of non-accrual loans to total gross loans 0.09% 0.01%
Percentage of non-accrual loans, restructered loans, and real estate
acquired by foreclosure or substantively repossessed to total assets 0.06% 0.13%
Percentage of allowance for loan losses to non-accrual loans 1160.20% 810.47%
15
The $364,000 in non-accrual loans as of June 30, 2005 consists of $362,000
of real estate mortgages and $2,000 attributed to commercial loans. There
were no restructured loans included in nonaccrual loans for the first six
months of 2005.
We stop accruing interest on a loan once it becomes past due 90 days unless
there is adequate collateral and the financial condition of the borrower is
sufficient. When a loan is placed on nonaccrual status, all previously
accrued but unpaid interest is reversed and charged against current income.
Interest is thereafter recognized only when payments are received and the
loan is no longer past due.
Loans in the nonaccrual category will remain in that category until the
possibility of collection no longer exists, the loan is paid off, or the
loan becomes current. When a loan is determined to be uncollectible, it is
then charged off against the allowance for loan losses.
Statement of Financial Accounting Standards No. 114 "Accounting by Creditors
for Impairment of a Loan" ("SFAS No. 114") applies to all loans except large
groups of smaller-balance homogeneous loans that are collectively evaluated
for impairment, loans measured at fair value or at the lower of cost or fair
value. SFAS No. 114 requires that impaired loans be valued at the present
value of expected future cash flows discounted at the loan's effective
interest rate or as a practical expedient, at the market value of the
collateral if the loan is collateral dependent. Large groups of smaller
balance homogeneous loans are collectively evaluated for impairment.
Accordingly, we do not separately identify individual consumer and
residential loans for impairment disclosures. A loan is considered impaired
when, based on current information and events, it is probable that we will
be unable to collect the scheduled payments of principle or interest when
due according to the contractual terms of the loan agreement. At June 30,
2005 there were $56,400 of loans which we have determined to be impaired,
with a related allowance for credit losses of $2,800.
Analysis of Allowance for Loan Losses
The table below illustrates the changes in the Allowance for Loan Losses for
the periods indicated.
Six months ended June 30,
(Dollars in Thousands) 2005 2004
- ------------------------------------------------------------
<s> <c> <c>
Balance at beginning of period $4,101 $4,154
Charge-offs:
Commercial - -
Real estate - Construction - -
Real estate - Mortgage - -
Installment/Consumer - (4)
------------------
Total charge-offs - (4)
------------------
Recoveries:
Commercial 32 36
Real estate - Construction - -
Real estate - Mortgage 15 24
Installment/Consumer 10 9
------------------
Total recoveries 57 69
------------------
Net Charge-offs 57 65
Provision charged to operations 65 376
------------------
Balance at end of period $4,223 $4,595
==================
Allowance for Loan Losses
as a percent of loans 1.08% 1.27%
Ratio of net charge-offs to
average loans outstanding 0.00% 0.00%
16
We maintain an allowance for possible losses that are inherent in the loan
portfolio. The allowance for loan losses is increased by provisions charged
to operations based on the estimated loan loss exposure inherent in the
portfolio. Management uses a methodology to systematically measure the
amount of estimated loan loss exposure inherent in the portfolio for
purposes of establishing a sufficient allowance for loan losses. The
methodology includes three elements: an analysis of individual loans deemed
to be impaired in accordance with the terms of Statement of Financial
Accounting Standard No. 114, "Accounting by Creditors for Impairment of a
Loan", general loss allocations for various loan types based on loss
experience factors and other qualitative factors, and an unallocated
allowance which is maintained based on management's assessment of many
factors including the risk characteristics of the portfolio, concentrations
of credit, economic conditions that may effect borrowers' ability to pay,
and trends in loan delinquencies and charge-offs. Realized losses, net of
recoveries, are charged directly to the allowance. While management uses the
currently available information in establishing the allowance for loan
losses, adjustments to the allowance may be necessary if future economic
conditions differ from the assumptions used in making the evaluation. In
addition, various regulatory agencies, as an integral part of their
examination process, periodically review our allowance for loan losses.
Due to stronger underwriting guidelines, and the sale of loans previously
deemed non-performing, the overall credit risk profile of the loan
portfolio has improved, allowing a lesser provision for loan losses in
2005. As a result, the allowance for loan losses remained relatively
constant, increasing from $4,101,000, or 1.11% of total gross loans at
December 31, 2004 to $4,223,000, or 1.07% of total gross loans at June 30,
2005. After thorough review and analysis of the adequacy of the loan loss
allowance, we recorded a provision for loan losses of $65,000 for the six
months ended June 30, 2005, compared to a provision of $376,000 for the six
months ended June 30, 2004. The decreased provision is primarily the result
of the enhanced credit quality achieved with the actions taken in 2004.
Management believes that the Allowance for Loan Losses of $4,223,000 at June
30, 2005 is adequate to cover potential losses in the loan portfolio, based
on current information available to management.
This table shows an allocation of the allowance for loan losses as of the
end of each of the periods indicated.
June 30, 2005 December 31, 2004
----------------------------- -----------------------------
Percent of Loans Percent of Loans
in Each Category in Each Category
(Dollars in Thousands) Amount to Total Loans Amount to Total Loans
- -------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c>
Commercial (4) $ 514(1) 7.65% $ 743(1) 7.26%
Real estate Construction 268 5.99% 236 6.62%
Real estate - residential 448 27.82% 421 32.87%
Real estate - commercial 2,944 57.96% 2,568 52.57%
Consumer (2) 49(3) 0.58% 133(3) 0.68%
---------------------------------------------------------
$4,223 100.00% $4,101 100.00%
=========================================================
<FN>
- --------------------
<F1> Includes amounts specifically reserved for impaired loans of $0 at
June 30, 2005, and $271,000 at December 31, 2004 as required by
Financial Accounting Standard No. 114, "Accounting for Impairment of
Loans."
<F2> Includes consumer and other loans.
<F3> Includes amounts specifically reserved for impaired loans of $0 at
June 30, 2005 and $76,000 at December 31, 2004 as required by
Financial Accounting Standard No. 114, "Accounting for Impairment of
Loans."
<F4> Includes commercial, financial, agricultural and nonprofit loans.
</FN>
Deposits
- --------
Total deposits at June 30, 2005 were $406.6 million, an increase of $6.7
million, or 1.7%, when compared to
17
total deposits of $399.9 million at December 31, 2004. The following table
presents deposits by category for various deposit types at June 30, 2005 and
December 31, 2004.
Percentage
(Dollars in Thousands) June 30, 2005 December 31,2004 Increase/(Decrease)
--------------------------------------------------------
<s> <c> <c> <c>
Demand deposits $ 77,953 $ 80,232 (2.84)%
NOW 48,386 42,881 12.84%
Savings 97,429 89,809 8.48%
Money market 30,788 38,518 (20.07)%
Certificates of deposit 152,082 148,465 2.44%
----------------------------------------------
$406,638 $399,905 1.68%
==============================================
We had approximately $30 million in premium-rate certificates of deposit
that matured in January 2005. We elected not to price the renewals at a
premium; consequently, approximately $15 million of these certificates ran
off in the first quarter of 2005. Additional premium-rate certificates were
offered, and our Coastal Savings account, which pays a market-based interest
rate and is designed to fill the needs of high-balance customers, was
promoted in order to fund a portion of the loan growth experienced in the
second quarter of 2005. The increase in savings deposits is primarily the
result of increased promotion of the Coastal Savings account.
Federal Home Loan Bank Advances
- -------------------------------
Advances from the Federal Home Loan Bank totaled $110.1 million at June 30,
2005, as compared to $90.3 million at December 31, 2004, an increase of
$19.8 million or 21.9%. These incremental borrowings funded the growth in
the loan portfolio, particularly in the first quarter of 2005. There was no
change in the balance of our subordinated debentures or underlying trust
preferred securities.
Comparison of Results of Operations for the Six Months Ended June 30, 2005
- --------------------------------------------------------------------------
and 2004
- --------
General
- -------
Net income increased from $1.2 million or $0.30 per share, basic and
diluted, for the six months ended June 30, 2004 to $1.9 million or $0.48 per
share, basic and $0.47 per share, diluted, for the six months ended June 30,
2005, an increase in net income of 59.2%. Net interest income increased by
$1.4 million or 19.1%, from $7.5 million to $8.9 million when comparing the
six months ended June 30, 2005 and 2004. This increase is primarily the
result of our continued asset growth and the deployment of deposit funds
garnered in early 2004 into loans and investment securities. Over the same
period, the provision for loan losses decreased from $376,000 to $65,000, as
enhanced loan quality has enabled us to reduce the levels of provisions
taken. Non-interest income decreased by $54,000 while non-interest expenses
increased by $504,000 or 7.8%, from $6.4 million for the six months ended
June 30, 2004 to $6.9 million for the six months ended June 30, 2005.
Interest Income
- ---------------
Our operating performance is dependent on net interest and dividend income,
the difference between interest
18
income earned on loans and investments and interest expense paid on deposits
and borrowed funds. The level of net interest income is significantly
impacted by several factors such as economic conditions, interest rates,
asset/liability management, and strategic planning.
Total interest and dividend income increased by $2.6 million or 22.5%, from
$11.2 million for the six months ended June 30, 2004 to $13.8 million for
the six months ended June 30, 2005. This increase is the result of increases
in the levels of both loans and investment securities. Interest and fees on
loans increased from $9.9 million for the six months ended June 30, 2004 to
$11.0 million for the three months ended June 30, 2005, an increase of
11.4%. The increase is the result of portfolio growth, as well as the effect
of increasing market rates. Indicative of the increase in market rates, the
average yield on loans increased from 5.66% for the six months ended June 30
2004 to 5.76% for the six months ended June 30, 2005. As a result of the
portfolio growth experienced in late 2004 and 2005, interest and dividends
on investment securities increased by $1.4 million, from $1.2 million to
$2.6 million, for the six months ended June 30, 2004 compared to 2005. All
other interest increased by $5,000. The yield on earning assets increased
from 4.93% for the six months ended June 30, 2004 to 5.30% for the six
months ended June 30, 2005, due principally to market interest rate
increases and purchases of investment securities with higher yields.
Interest Expense
- ----------------
Total interest expense increased by $1.2 million or 30.9%, from $3.7 million
for the six months ended June 30, 2004 to $4.9 million for the six months
ended June 30, 2005. The increase is the result of our overall growth
during late 2004 and 2005, as well as increases in market interest rates.
Indicative of changes in interest rates, the weighted average cost of
interest-earning funds was 2.28% for the six months ended June 30, 2005,
compared with 2.00% for the six months ended June 30, 2004.
Interest expense on deposits increased by $169,000, from $2.4 million for
the six months ended June 30, 2004 to $2.6 million for the six months ended
June 20, 2005. The competition for deposits in our market area is becoming
more intense. Accordingly, we have increased certain interest rates in
response to increases in market interest rates and corresponding increases
in deposit interest rates offered by our competition, in order to continue
to fund loan growth. As a result of these rate increases, the weighted
average cost of deposits increased from 1.59% for the six months ended June
30, 2004 to 1.66% for the six months ended June 30, 2005.
Interest on FHLB advances increased from $1.2 million for the six months
ended June 30, 2004 to $2.0 million for the six months ended June 30, 2005,
an increase of $812,000 or 69.2%. Management took advantage of low interest
rates from the FHLB to fund a leverage strategy in September 2004 and loan
growth during early 2005. Indicative of these low rates, the average rate
paid on FHLB advances decreased from 4.14% for the six months ended June 30,
2004 to 3.83% for the six months ended June 30, 2005.
Interest on subordinated debentures increased from $118,000 for the six
months ended June 30, 2004 to $291,000 for the six months ended June 30,
2005. The increase is the result of a full six months' interest being
accrued on the subordinated debentures in 2005, whereas the debentures were
issued in March of 2004. Additionally, the interest rate on the debentures
is variable, resetting quarterly at the three-month LIBOR rate plus 279
basis points. Accordingly, the interest cost of the subordinated debentures
increased from 3.99% for the six months ended June 30, 2004 to 5.69% for the
six months ended June 30, 2005.
19
The following table sets forth our average assets, liabilities, and
stockholders' equity; interest income earned and interest paid; average
rates earned and paid; and net interest spread and the net interest margin
for the six months ended June 30, 2005, and 2004. Average balances reported
are daily averages.
Six Months Ended June 30,
2005 2004
------------------------------------- -------------------------------------
Average Interest Average Average Interest Average
(Dollars in Thousands) Balance Income/Expense Rate Balance Income/Expense Rate
- ---------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
Assets:
Interest-earning assets
Commercial loans $ 30,272 $ 907 6.04% $ 33,636 $ 860 5.14%
Commercial real estate 220,402 6,561 6.00% 202,033 6,138 6.11%
Residential real estate 131,579 3,457 5.30% 111,045 2,766 5.01%
Consumer loans 2,312 68 5.93% 3,752 103 5.52%
---------------------------------------------------------------------------
Total loans 384,565 10,993 5.76% 350,466 9,867 5.66%
Federal funds sold 12,606 157 2.51% 42,610 161 0.76%
Taxable debt securities 106,927 2,234 4.21% 48,446 913 3.79%
Tax-exempt debt securities 8,127 176 4.37% 10,142 218 4.32%
Marketable equity securities 4,809 83 3.48% 3,692 46 2.51%
FHLB stock 5,485 112 4.12% 3,027 32 2.13%
Other investments 775 11 2.86% 278 1 0.72%
---------------------------------------------------------------------------
Total interest-earning assets 523,294 13,766 5.30% 458,661 11,238 4.93%
------- -------
Allowance for loan losses (4,163) (4,381)
Unearned income (401) (426)
Cash and due from banks 18,311 22,234
Other assets 25,575 23,887
-------- --------
Total assets $562,616 $499,975
======== ========
Liabilities & Stockholders' equity:
Savings accounts $ 91,619 $ 468 1.03% $ 83,324 $ 374 0.90%
NOW accounts 48,242 231 0.97% 40,821 153 0.75%
Money market accounts 37,311 218 1.18% 34,467 256 1.49%
Time deposits 141,333 1,699 2.42% 153,729 1,665 2.18%
FHLB advances 104,460 1,985 3.83% 56,949 1,173 4.14%
Subordinated debt 10,310 291 5.69% 5,948 118 3.99%
---------------------------------------------------------------------------
Total interest-bearing
liabilities 433,275 4,892 2.28% 375,238 3,739 2.00%
------- -------
Demand deposits 79,334 78,701
Other liabilities 2,594 2,730
-------- --------
Total liabilities 515,203 456,669
Stockholders' equity 47,413 43,306
-------- --------
Total liabilities &
stockholders' equity 562,616 499,975
======== ========
Net interest income $ 8,874 $ 7,499
======= =======
Net interest spread 3.03% 2.92%
Net interest margin 3.42% 3.29%
20
The following table presents the changes in components of net interest
income for the six months ended June 30, 2005 and 2004, which are the result
of changes in interest rates and the changes that are the result of changes
in volume of the underlying asset or liability. Changes that are
attributable to changes in both rate and volume have been allocated equally
to rate and volume.
Net Interest Income - Changes Due to Volume and Rate
Six Months Ended June 30,
2005 vs. 2004
Increase / (Decrease)
Total Due to Due to
(Dollars in Thousands) Change Volume Rate
<s> <c> <c> <c>
Commercial loans $ 47 $ (93) $ 140
Commercial real estate 423 552 (129)
Residential real estate 691 525 166
Consumer loans (35) (41) 6
Federal funds sold (4) (244) 240
Taxable debt securities 1,321 1,162 159
Tax-exempt securities (42) (43) 1
Marketable equity securities 37 17 20
FHLB stock 80 38 42
Other investments 10 4 6
---------------------------
Total Interest Income 2,528 1,877 651
---------------------------
Savings accounts 94 40 54
NOW accounts 78 32 46
Money market accounts (38) 19 (57)
Time deposits 34 (142) 176
FHLB advances 812 941 (129)
Subordinated debt 173 105 68
---------------------------
Total Interest Expense 1,153 995 158
---------------------------
Net Interest Income $1,375 $ 882 $ 493
===========================
21
Provision for Loan Losses
- -------------------------
The provision for loan losses is a charge against earnings that increases
the allowance for loan losses. The allowance for loan losses is maintained
at a level that is deemed adequate to absorb losses inherent within the loan
portfolio. In determining the appropriate level of the allowance for loan
losses, management takes into consideration past and anticipated loss
experience, prevailing economic conditions, evaluations of underlying
collateral, and the volume of the loan portfolio and balance of
nonperforming and classified loans. The allowance for loan losses is
assessed on a monthly basis.
The provision during the six months ended June 30, 2005 was $65,000,
compared to $376,000 for the six months ended June 30, 2004. We reduced the
level of the provision because of a higher level of residential real estate
loan originations, which require a lower overall provision level, and
because of the overall enhancement in credit quality achieved through
tighter underwriting standards, the previously-mentioned sales of loans and
a 96% reduction in the level of impaired loans from $1.7 million at June 30,
2004 to $56,000 at June 30, 2005.
Non-Interest Income
- -------------------
Total non-interest income decreased by $54,000 or 4.6% from $1.2 million for
the six months ended June 30, 2004 to $1.1 million for the six months ending
June 30, 2005. Service charges on deposit accounts decreased from $272,000
for the six months ended June 30, 2004 to $191,000 for the six months ended
June 30, 2005. This decrease is the result of the proliferation of free
checking accounts. In response to competitive pressure, we offered and
promoted free checking accounts and realized a significant shift of accounts
into this product, resulting in the decrease in fee income. We also realized
a decrease in overdraft fees of $26,000 when comparing the two periods.
In March 2005, we realized a $40,000 gain on the sale of a building that
formerly housed a branch office and in May 2005, two bank-owned vehicles
were sold at a gain of $11,000. Gains on sales of securities decreased from
$39,000 for the six months ended June 30, 2004 to $17,000 for the six months
ended June 30, 2005. The gains realized in both periods relate to sales of
marketable equity securities held in the available-for-sale portfolio.
Increases in cash surrender values of bank-owned life insurance policies
remained constant at $258,000 when comparing the six months ended June 30,
2005, and June 30, 2004. Other income increased from $339,000 for the six
months ended June 30, 2004 to $363,000 for the six months ended June 30,
2005, an increase of 7.1%. This increase is the result of increased volume
of ATM and debit card use totaling $27,000, and increases in various
customer service fees.
Non-Interest Expense
- --------------------
Total non-interest expense increased from $6.4 million recorded for the six
months ended June 30, 2004, to $6.9 million reported for the six months
ended June 30, 2005, an increase of 7.8%. Salaries and employee benefits
remained relatively constant, increasing by $13,000, when comparing the six
months ended June 30, 2005 and 2004. The increase was attributable to an
increase in staff offset by a change in the defined benefit pension plan
and FAS 91 not taken in the prior year.
Occupancy expense totaled $451,000 for the six months ended June 30, 2005,
compared to $420,000 for the six months ended June 30, 2004, an increase of
7.4%. Cost savings realized from closing branches in 2004 have been offset
by costs associated with opening the new Assonet Branch in March 2005.
Additionally, during the second quarter of 2005 we outsourced our facilities
maintenance. The fees associated with facilities maintenance are charged to
occupancy expense. Going forward we expect to realize savings in salaries
and employee benefits costs, which will offset the fees paid in facilities
management fees.
22
Equipment expenses increased over the same period from $280,000 to $358,000,
or 27.9% because of management's initiative to modernize the teller and
platform systems. We believe that the investment in equipment and software
will ultimately result in more efficient customer service and savings in
personnel costs.
Marketing expenses attributed to production and media costs, print
advertising, and other direct marketing increased by $130,000, or 65.7%, to
$328,000 for the six months ended June 30, 2005, from $198,000 for six
months ended June 30, 2004. As we continue to launch new deposit products
and services, such as the Coastal Savings account and the Bank at Work
Program, we expect marketing costs to rise. Professional fees increased
from $477,000 for the six months ended June 30, 2004 to $614,000 for the six
months ended June 30, 2005, an increase of 28.7%. The increase is the
result of accounting and consulting costs associated with our restatement of
certain financial statements and related information totaling $65,000
incurred during May and June 2005, as well as costs incurred to comply with
the provisions of section 404 of the Sarbanes-Oxley Act of 2002. We
anticipate that professional fees will continue to increase throughout 2005,
in order to bring us into compliance with The Sarbanes-Oxley Act.
Additionally, legal collection costs increased by $17,000, when comparing
the six months ended June 30, 2005 and 2004.
All other expenses increased by $115,000 when comparing the six months ended
June 30, 2005 and 2004. This increase is primarily attributable to software
maintenance and increased purchases of stationery and supplies related to
the conversion of teller and platform computer systems throughout the Bank.
The conversion required an initial purchase of supplies needed to support
the hardware installed in the conversion.
The expenses for stationary and supplies increased by $24,000, from $44,000
for the six months ended June 30, 2004 to $68,000 for the six months ended
June 30, 2005. The increase was the result of purchases of supplies
required for the teller and platform automation equipment.
Income before taxes increased from $1.9 million for the six months ended
June 30, 2004, to $3.0 million for the six months ended June 30, 2005, an
increase of $1.1 million, or 60.9%. Applicable income taxes totaled $1.0
million for the six months ended June 30, 2005, reflecting an effective tax
rate of 34.7%, compared to income taxes of $643,000 for the six months ended
June 30, 2004, reflecting an effective tax rate of 34.7%.
Comparison of Results of Operations for the Three Months Ended June 30, 2005
- ----------------------------------------------------------------------------
and 2004
- --------
General
- -------
Net income increased from $625,000 or $0.15 per share, basic and diluted,
for the three months ended June 30, 2004 to $848,000 or $0.21 per share,
basic and diluted, for the three months ended June 30, 2005, an increase of
35.7%. Net interest income increased by $671,000 or 17.9%, from $3.8
million to $4.4 million when comparing the three months ended June 30, 2005
and 2004. This increase is primarily the result of our asset growth during
2004 and early 2005, and the deployment of deposit funds garnered in early
2004 into loans and investment securities. Over the same period, the
provision for loan losses decreased from $130,000 to $15,000, primarily the
result of enhanced loan quality. Non-interest income decreased from
$600,000 for the three months ended June 30, 2004 to $540,000 for the three
months ended June 30, 2005, while non-interest expenses increased from $3.2
million to $3.6 million for the same time period.
23
Interest Income
- ---------------
Total interest and dividend income increased from $5.8 million for the three
months ended June 30, 2004 to $7.1 million for the three months ended June
30, 2005, an increase of $1.4 million or 23.5%. This increase is the
result of increases in the levels of both loans and investment securities.
Interest on loans increased from $5.0 million for the three months ended
June 30, 2004 to $5.7 million for the three months ended June 30, 2005, an
increase of $752,000 or 15.1%. During the same time, interest and dividends
on investment securities increased by $605,000 or 89.2%, from $678,000 to
$1.3 million. Deposit growth not used to fund loans was invested into bonds
or mortgage-backed securities in order to enhance net interest income until
such time as the funds could be lent. All other interest decreased by
$5,000.
Interest Expense
- ----------------
Total interest expense increased by $681,000 or 34.0%, from $2.0 million for
the three months ended June 30, 2004 to $2.7 million for the three months
ended June 30, 2005. This increase was due primarily to additional interest
on FHLB borrowings, as borrowings funded certain loan originations and
securities purchases in late 2004 and 2005. Interest on deposits increased
by $132,000 or 10.0% when comparing the quarters ended June 30, 2005 and
2004. The increase may be attributed both to growth in deposit levels and
increases in the interest rates offered on certain products. In response to
competitive pressures and the rising rate environment, certificate of
deposit rates and certain money-market deposits have been raised. Interest
expense associated with subordinated debentures increased by $53,000, the
result of increased market interest rates. The debentures carry an
adjustable rate of interest tied to the three month LIBOR rate.
24
The following table sets forth our average assets, liabilities, and
stockholders' equity; interest income earned and interest paid; average
rates earned and paid; and net interest spread and the net interest margin
for the three months ended June 30, 2005, and 2004. Average balances
reported are daily averages.
Three Months Ended June 30,
2005 2004
------------------------------------- -------------------------------------
Average Interest Average Average Interest Average
(Dollars in Thousands) Balance Income/Expense Rate Balance Income/Expense Rate
- --------------------------------------------------------------------------------------------------------------------------------
<s> <c> <c> <c> <c> <c> <c>
Assets:
Interest-earning assets
Commercial loans $ 32,019 $ 491 6.15% $ 34,125 $ 444 5.23%
Commercial real estate 224,863 3,414 6.09% 201,423 3,089 6.17%
Residential real estate 134,281 1,786 5.33% 118,535 1,394 4.73%
Consumer loans 2,225 36 6.49% 3,566 48 5.41%
----------------------------------- -----------------------------------
Total loans 393,388 5,727 5.84% 357,649 4,975 5.59%
Federal funds sold 13,051 92 2.83% 54,236 104 0.77%
Taxable debt securities 107,093 1,113 4.17% 53,729 532 3.98%
Tax-exempt debt securities 7,787 84 4.33% 9,806 106 4.35%
Marketable equity securities 4,653 23 1.98% 3,791 24 2.55%
FHLB stock 5,905 63 4.28% 3,030 16 2.12%
Other investments 799 7 3.51% 362 - 0.00%
----------------------------------- -----------------------------------
Total interest-earning assets 532,676 7,109 5.35% 482,603 5,757 4.80%
------ ------
Allowance for loan losses (4,205) (4,457)
Unearned income (486) (570)
Cash and due from banks 18,115 19,003
Other assets 25,057 24,491
-------- --------
Total assets $571,157 $521,070
======== ========
Liabilities & Stockholders' equity:
Savings accounts $ 93,492 $ 264 1.13% $ 90,096 $ 228 1.02%
NOW accounts 26,789 151 2.26% 43,468 87 0.80%
Money market accounts 56,829 99 0.70% 37,645 138 1.47%
Time deposits 144,393 943 2.62% 160,586 872 2.18%
FHLB advances 110,118 1,074 3.91% 55,152 578 4.22%
Subordinated debt 10,310 155 6.03% 5,948 102 6.90%
----------------------------------- -----------------------------------
Total interest-bearing liabilities 441,931 2,686 2.44% 392,895 2,005 2.05%
------ ------
Demand deposits 79,401 77,471
Other liabilities 2,388 3,103
-------- --------
Total liabilities 523,720 473,469
Stockholders' equity 47,437 47,601
-------- --------
Total liabilities & stockholders' equity 571,157 521,071
======== ========
Net interest income $4,423 $3,752
====== ======
Net interest spread 2.92% 2.75%
Net interest margin 3.33% 3.12%
25
The following table presents the changes in components of net interest
income for the three months ended June 30, 2005 and 2004, which are the
result of changes in interest rates and the changes that are the result of
changes in volume of the underlying asset or liability. Changes that are
attributable to changes in both rate and volume have been allocated equally
to rate and volume.
Net Interest Income - Changes Due to Volume and Rate
Three Months Ended June 30,
2005 vs. 2004
Increase / (Decrease)
Total Due to Due to
(Dollars in Thousands) Change Volume Rate
-----------------------------------------------------------
<s> <c> <c> <c>
Commercial loans $ 47 $ (30) $ 77
Commercial real estate 325 358 (33)
Residential real estate 392 197 195
Consumer loans (12) (20) 8
Federal funds sold (12) (185) 173
Taxable debt securities 581 542 39
Tax-exempt securities (22) (22) -
Marketable equity securities (1) 5 (6)
FHLB stock 47 23 24
Other investments 7 2 5
--------------------------
Total Interest Income 1,352 870 482
--------------------------
Savings accounts 36 9 27
NOW accounts 64 (64) 128
Money market accounts (39) 52 (91)
Time deposits 71 (97) 168
FHLB advances 496 556 (60)
Subordinated debt 53 70 (17)
--------------------------
Total Interest Expense 681 526 155
--------------------------
Net Interest Income $ 671 $ 344 $ 327
==========================
26
Provision for Loan Losses
- -------------------------
Management assesses the allowance for loan losses on a monthly basis. A
provision was made during the second quarter of 2005 and 2004 to adequately
absorb any credit risk remaining in the portfolio. The Company's provision
during the three months ended June 30, 2005 was $15,000, compared to
$130,000 for the three months ended June 30, 2004. Due to the changes in
the composition of the loan portfolio, stronger underwriting guidelines, and
the sale of loans previously deemed non-performing, the overall credit risk
profile of the loan portfolio has improved, allowing a lesser provision for
loan losses in 2005.
Non-Interest Income
- -------------------
Total non-interest income decreased by $60,000 or 10.2% from $600,000 for
the three months ended June 30, 2004 to $540,000 for the three months ending
June 30, 2005. Service charges on deposit accounts decreased from $127,000
for the three months ended June 30, 2004 to $93,000 for the three months
ended June 30, 2005, a decrease of $34,000 or 26.8%. This decrease is the
result of the proliferation of free checking accounts. In response to
competitive pressure, we offered and promoted free checking accounts and
realized a significant shift of accounts into this product, resulting in the
decrease in fee income. We also realized a decrease in overdraft fees of
$13,000 when comparing the two quarters. In May, we realized gains of
$11,000 on the sale of a bank-owned motor vehicles and $15,000 on sales of
available-for-sale securities. The securities gains realized during the
three months ended June 30, 2005 and 2004 were the result of sales of
marketable equity securities. Cash surrender values of bank-owned life
insurance policies decreased by $9,000 or 7.5% from of $120,000 for the
three months ended June 30, 2004 to $111,000 for the three months ended June
30, 2005.
Other income decreased modestly from $217,000 for the three months ended
June 30, 2004 to $191,000 for the three months ended June 30, 2005, the
result of a temporary decrease in sales in our investment sales department.
This decrease was partially offset by increased ATM and debit card fees.
Non-Interest Expenses
- ---------------------
Total non-interest expense increased from $3.2 million recorded for the
three months ended June 30, 2004, to $3.6 million reported for the three
months ended June 30, 2005, an increase of $402,000 or 12.5%. Salaries and
employee benefits increased by $109,000, or 5.4%, from $2.0 million for the
three months ended June 30, 2004, to $2.1 million for the three months ended
June 30, 2005. The increase was attributable to severance agreements
payable to certain former Bank employees totaling $76,000 and general salary
increases due to increased staffing as a result of the new branch and annual
performance reviews.
Occupancy expense totaled $212,000 for the three months ended June 30, 2005,
compared to $189,000 for the three months ended June 30, 2004. Cost savings
realized from closing branches in 2004 have been offset by costs associated
with opening the new Assonet Branch in March 2005. Additionally, as the
facilities maintenance function has been outsourced, occupancy costs have
risen. This expense will be offset in future periods by savings in salaries
and employee benefits. Equipment expenses increased over the same period
from $133,000 to $188,000, or 41.4% because of management's initiative to
modernize the teller and platform systems. We believe that the investment
in equipment and software will ultimately result in more efficient customer
service and savings in personnel costs.
Professional fees increased from $250,000 for the three months ended June
30, 2004 to $307,000 for the three months ended June 30, 2005, an increase
22.8%. The increase is the result of increased accounting and consulting
costs associated with the Company's restatement of prior year financial
statements due to pension plan accounting errors. We anticipate that
professional fees will continue to increase throughout 2005, in order to
bring us into compliance with The Sarbanes-Oxley Act.
Marketing expenses attributed to production and media costs, print
advertising, and other direct marketing increased from $141,000 for the
three months ended June 30, 2004 to $229,000 for the three months ended June
30, 2005, an increase of $88,000 or 62.4%. As we continue to launch new
deposit products and services, such as the Coastal Savings account and Bank
at Work Program, we expect marketing costs to rise.
Other expenses increased by $70,000 from $496,000 for the three months ended
June 30, 2004 to $566,000 for the three months ended June 30, 2005, an
increase of 14.1%. This increase is primarily attributable to increased
purchases of stationery and supplies related to the conversion of teller and
platform computer systems throughout the Bank. The conversion required an
initial purchase of supplies needed to support the hardware installed in the
conversion. The new systems are designed to make both the account opening
process and transaction processing more efficient. We believe that the
efficiencies created by converting these systems will ultimately lead to
improved customer service and lower operating costs. Additionally,
transaction-based costs associated with our internet banking service, debit
card and ATM's increased, all the result of increased levels of usage.
Income before taxes increased from $1.0 million for the three months ended
June 30, 2004, to $1.3 million for the three months ended June 30, 2005, an
increase of $324,000, or 32.3%. Applicable income taxes totaled $478,000
for the three months ended June 30 2005, reflecting an effective tax rate of
36.0%, compared to income taxes of $377,000 for the three months ended June
30, 2004, reflecting an effective tax rate of 37.6%.
27
Liquidity
- ---------
Our principal sources of funds are customer deposits, amortization and
payoff of existing loan principal, and sales or maturities of various
investment securities. The Bank is a voluntary member of the Federal Home
Loan Bank of Boston (the "FHLB") and as such, may take advantage of the
FHLB's borrowing programs to enhance liquidity and leverage its favorable
capital position. We may also draw on lines of credit at the FHLB or the
Federal Reserve Board (the "FRB"), and enter into repurchase or reverse
repurchase agreements with authorized brokers. These various sources of
liquidity are used to fund withdrawals, new loans, and investments.
We seek to promote deposit growth while controlling cost of funds. Sales-
oriented programs to attract new depositors and the cross-selling of various
products to its existing customer base are currently in place. Management
reviews, on an ongoing basis, possible new products, with particular
attention to products and services, which will aid in retaining our base of
lower-costing deposits. Total deposits increased by $6.7 million, or 1.7%
during the six months ended June 30, 2005.
We have also used borrowed funds as a source of liquidity. At June 30, 2005,
the Bank's outstanding borrowings from the FHLB were $110.2 million. We
have the capacity to borrow in excess of an additional $54 million at the
FHLB.
Maturities and sales of investment securities provide us with significant
liquidity. Our policy of purchasing shorter-term debt securities reduces
market risk in the bond portfolio while providing significant cash flow. For
the six months ended June 30, 2005, cash flow from maturities and principal
payments on securities were $10.8 million, proceeds from sales of securities
totaled $1.8 million, compared to maturities of securities of $11.0 million,
and proceeds from sales of securities of $0 for the six months ended June
30, 2004. Cash flow not invested into loans was reinvested into the
securities portfolio. Purchases of securities for the six months ended June
30, 2005 totaled $20.8 million as compared to $38.6 million at June 30,
2004.
Indicative of the short-term nature of the portfolio, the overall investment
portfolio duration was 2.75 years. Maturities in the bond portfolio are
staggered in order to provide a steady source of liquidity. Additionally, a
significant portion of the portfolio is invested into mortgage backed
securities. These longer term investments have monthly principal payments
which enhance liquidity.
Amortization and pay-offs of the loan portfolio also provide us with
significant liquidity. Traditionally, amortization and pay-offs are
reinvested into loans. Loan originations for the six months ended June 30,
2005 totaled $63.3 million. Excess liquidity is invested into the
securities portfolio or into federal funds sold and overnight investments at
the FHLB.
Commitments to originate loans at June 30, 2005 were $20.5 million,
excluding unadvanced construction funds totaling $7.1 million, unadvanced
commercial lines of credit totaling $14.6 million, unadvanced commercial
real estate loans totaling $1.8 million and unadvanced home equity lines
totaling $16.1 million. Management believes that adequate liquidity is
available to fund loan commitments utilizing deposits, loan amortization,
maturities of securities, or borrowings.
Capital
- -------
At June 30, 2005, our total stockholders' equity was $48.0 million an
increase of $1.4 million from $46.6 million at December 31, 2004. The
increase in capital was a combination of several factors. Additions
consisted of 2005 net income of $1.9 million, transactions originating
through the Dividend Reinvestment Program whereby 1,075 shares were issued
for optional cash contributions of $20,000 and 15,702 shares were
28
issued for $296,019 in lieu of cash dividend payments. There were also
stock options exercised resulting in the issuance of common stock totaling
$411,000, including a tax benefit. These additions were offset by dividends
declared of $738,000 and comprehensive loss of $576,000 .
Under the requirements for Risk Based and Leverage Capital of the federal
banking agencies, a minimum level of capital will vary among banks based on
safety and soundness of operations. Risk Based Capital ratios are
calculated with reference to risk-weighted assets, which include both on and
off balance sheet exposure.
In addition to meeting the required levels, Slade's Ferry Bancorp's and the
Bank's capital ratios meet the criteria of the well-capitalized category
established by the federal banking agencies as of June 30, 2005 and at
December 31, 2004. The Tier I Capital leverage ratio and Tier I Capital to
risk weighted assets ratio for Slade's Ferry Bancorp are 10.03% and 14.51%,
respectively, for the six months ended June 30, 2005. Slade's Ferry
Bancorp's Tier I Capital leverage ratio and Tier I Capital to risk weighted
assets ratio for the year ended December 31, 2004 are 10.21% and 14.71%,
respectively. The Tier I Capital leverage ratio and Tier I Capital to risk
weighted assets ratio for Slade's Ferry Trust Company are 8.49% and 12.30%,
respectively, for the six months ended June 30, 2005. Slade's Ferry Trust
Company's Tier I Capital leverage ratio and Tier I Capital to risk weighted
assets ratio for the year ended December 31, 2004 are 8.67% and 12.56%,
respectively.
Off-Balance Sheet Arrangements
- ------------------------------
We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
29
ITEM 3
QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We consider interest rate risk to be a significant market risk as it could
potentially have an effect on our financial condition and results of
operation. The definition of interest rate risk is the exposure of our
earnings to adverse movements in interest rates, arising from the
differences in the timing of repricing of assets and liabilities; the
differences in the various pricing indices inherent in our assets and
liabilities; and the effects of overt and embedded options in our assets and
liabilities. Our Asset/Liability Committee, comprised of the executive
management, is responsible for managing and monitoring interest rate risk,
and reviewing with the Board of Directors, at least quarterly, the interest
rate risk positions, the impact changes in interest rates would have on net
interest income, and the maintenance of interest rate risk exposure within
approved guidelines.
The potentially volatile nature of market interest rates requires us to
manage interest rate risk on an active and dynamic basis. Our objective is
to reduce and control the volatility of its net interest income to within
tolerance levels established by the Board of Directors, by managing the
relationship of interest-earning assets and interest-bearing liabilities.
In order to manage this relationship, the Asset/Liability Committee utilizes
an income simulation model to measure the net interest income at risk under
differing interest rate scenarios. Additionally, the Committee uses
Economic Value of Equity ("EVE") analysis to measure the effects of changing
interest rates on the market values of rate-sensitive assets and
liabilities, taken as a whole. The Board of Directors and management
believe that static measures of timing differences, such as "gap analysis",
do not accurately assess the levels of interest rate risk inherent in our
balance sheet. Gap analysis does not reflect the effects of overt and
embedded options on net interest income, given a shift in interest rates,
nor does it take into account basis risk, the risk arising from using
various different indices on which to base pricing decisions.
The income simulation model currently utilizes a 300 basis point increase in
interest rates and a 200 basis point decrease in rates. Due to the existing
low interest rate environment in effect with the average Federal Funds
overnight trading at approximately 3.00% at June 30, 2005, the simulation
model only reduces rates downward by 200 basis points. The interest rate
movements used assume an instant and parallel change in interest rates and
no implementation of any strategic plans are made in response to the change
in rates. Prepayment speeds for loans are based on median dealer forecasts
for each interest rate scenario.
Our Board of Directors has established a risk limit of a 5.00% change in net
interest income for each 100 number basis point shift in market interest
rates. The limit established by the Board provides an internal tolerance
level to control interest rate risk. We are within our policy-mandated risk
limit for net interest income at risk.
30
The following table reflects our estimated exposure as a percentage of net
interest income and the dollar impact for the next twelve months, assuming
an immediate change in interest rates set forth below:
Estimated Exposure as a Percentage
Rate Change of Net Interest Income
(Basis Points) June 30, 2005
---------------------------------------------------------
<c> <c>
+300 (6.61%)
-200 (4.36%)
Additionally we use the model to estimate the effects of changes in interest
rates on our EVE. EVE represents our theoretical market value, given the
rate shocks applied in the model. The Board of Directors has established a
risk limit for EVE which provides that the EVE will not fall below 6.00%,
the FDIC's minimum capital level to be classified as "well capitalized". We
are within our risk limit for EVE.
The following table presents the changes in EVE given rate shocks.
Rate Change Estimated Exposure as a Percentage of Change from
(Basis Points) Net Interest Income Flat Rates
----------------------------------------------------------------------
<s> <c> <c>
FLAT 13.20% N/A
+300 11.37% (1.83%)
-200 11.41% (1.79%)
31
ITEM 4
CONTROLS AND PROCEDURES
As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), the Company's management conducted an
evaluation with the participation of the Company's Chief Executive Officer
and Chief Financial Officer, regarding the effectiveness of the Company's
disclosure controls and procedures, as of the end of the last fiscal
quarter. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures were effective as of June 30, 2005 to ensure that information
required to be disclosed by the Company in the reports it files or submits
under the Exchange Act is (i) recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange
Commission's rules and forms and (ii) accumulated and communicated to the
Company's management, including its principal executive and financial
officers, as appropriate to allow timely decisions regarding required
disclosure. We intend to continue to review and document our disclosure
controls and procedures, including our internal controls and procedures for
financial reporting, and we may from time to time make changes to the
disclosure controls and procedures to enhance their effectiveness and to
ensure that our systems evolve with our business. In designing and
evaluating the Company's disclosure controls and procedures, the Company and
its management recognize that any controls and procedures, no matter how
well designed and operated, can provide only a reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating and implementing possible
controls and procedures.
In light of the Company's restatement of prior period financial statements
due to reporting errors relating to the Company's defined benefit pension
plan, the Company has enhanced internal reviews of actuarial calculations
and related financial reporting requirements related to its defined benefit
plan.
32
PART II
OTHER INFORMATION
ITEM 1
LEGAL PROCEEDINGS
None.
ITEM 2
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the six months ended June 30, 2005, the Company did not repurchase
any of its common stock. The Company currently does not have a stock
repurchase program in place.
ITEM 3
DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's Shareholders was held on May 11, 2005
with the following matter being voted upon and with the indicated results:
Proposal One - Election of Directors for terms expiring in 2008
Votes
--------------------------------------------------------
Nominee For Withheld
--------------------------------------------------------
<s> <c> <c>
Anthony F. Cordeiro 3,035,019 40,846
Lawrence J. Oliveira, DDS 3,039,788 36,077
Kenneth R. Rezendes, Sr. 3,038,647 37,218
ITEM 5
OTHER INFORMATION
(a) Election of Directors
On August 10, 2005, the following individuals were appointed to the
Registrant's Board of Directors:
Scott W. Costa. Mr. Costa has been the Treasurer and co-owner of Bufftree
Building Co., Inc., a general contracting company in New Bedford,
Massachusetts since 1993. He is expected to be a rotating member of the
Executive Committee of the Registrant's Board of Directors.
33
Joan Parkos Moran. Ms. Moran has been the Chairperson and Chief Executive
Officer of Alga Plastics Company, a Cranston, Rhode Island-based
manufacturer of protective plastic solutions for the medical, electronics
and consumer industries, since 2002. She was its President and Chief
Operating Officer from 1998 to 2002. She is expected to be a member of
Compensation Committee of the Registrant's Board of Directors and a rotating
member of its Executive Committee.
Jean F. MacCormack. Ms. MacCormack has been the Chancellor of the
University of Massachusetts Dartmouth since September 1999. She is expected
to be a rotating member of the Executive Committee of the Registrant's Board
of Directors.
Carl Ribeiro. Mr. Ribeiro has been President of Carlson Southcoast Corp., a
food service distributor in New Bedford, Massachusetts, since 1979. He is
expected to be a member of the Audit Committee of the Registrant's Board of
Directors and a rotating member of its Executive Committee.
ITEM 6
EXHIBITS
Exhibits: See exhibit index.
34
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SLADE'S FERRY BANCORP.
------------------------------------
(Registrant)
August 15, 2005 /s/ Mary Lynn D. Lenz
- -------------------- ------------------------------------
(Date) (Signature) Mary Lynn D. Lenz
President/Chief Executive Officer
August 15, 2005 /s/ Deborah A. McLaughlin
- -------------------- ------------------------------------
(Date) (Signature) Deborah A. McLaughlin
Executive Vice President
Chief Operating Officer/
Chief Financial Officer
35
EXHIBIT INDEX
Exhibit No. Description Item
- ----------------------- ----
3.1 Amended and Restated Articles of Incorporation of Slade's Ferry
Bancorp. (1)
3.2 Amended and Restated Bylaws of Slade's Ferry Bancorp. (2)
3.3 Articles of Amendment to the Amended and Restated Articles of
Incorporation of Slade's Ferry Bank (3)
10.1 Slade's Ferry Bancorp. 1996 Stock Option Plan, as amended (4)
10.2 Supplemental Executive Retirement Agreement between Slade's
Ferry Bancorp. and Manuel J. Tavares (5)
10.3 Form of Director Supplemental Retirement Program Director
Agreement, Exhibit 1 thereto (Slade's Ferry Trust Company
Director Supplemental Retirement Program Plan) and Endorsement
Method Split Dollar Plan Agreement thereunder. (6)
10.4 Form of Directors' Paid-up Insurance Policy (part of the
Director Supplemental Retirement Program). (7)
10.5 Supplemental Executive Retirement Agreement between Slade's
Ferry Bancorp. and Mary Lynn D. Lenz (8)
10.6 Employment Agreement between Slade's Ferry Bancorp. and Mary
Lynn D. Lenz (9)
10.7 Employment Agreement between Slade's Ferry Bancorp. and Deborah
A. McLaughlin (10)
10.8 Employment Agreement between Slade's Ferry Bancorp. and
Manuel J. Tavares (11)
10.9 Form Change of Control Agreement (12)
10.10 Severance Pay Plan (13)
10.11 Slade's Ferry Bancorp 2004 Equity Incentive Plan (14)
11.1 Statement Regarding Computation of Per Share Earnings
14.1 Code of Ethics (15)
31.1 Rule 13a-14(a)/15d-14(a) Certification of the CEO
31.2 Rule 13a-14(a)/15d-14(a) Certification of the CFO
32.1 Section 1350 Certification of the CEO
32.2 Section 1350 Certification of the CFO
<FN>
- --------------------
<F1> Incorporated by reference to the Registrant's Registration Statement
on Form SB-2 filed with the Commission on April 14, 1997.
<F2> Incorporated by reference to the Registrant's Form 10-Q filed with the
Commission on May 12, 2005.
<F3> Incorporated by reference to the Registrant's Form 8-K filed with the
Commission on December 21, 2004.
<F4> Incorporated by reference to the Registrant's Form 10-Q/A for the
quarter ended June 30, 1999.
<F5> Incorporated by reference to the Registrant's Form 10-K/ASB for the
fiscal year ended December 31, 1996.
<F6> Incorporated by reference to Exhibit 10 to the Registrant's
Form 10-Q/A for the quarter ended March 31, 1999.
<F7> Incorporated by reference to Exhibit 10 to the Registrant's
Form 10-Q/ASB for the quarter ended June 30, 1998.
36
<F8> Incorporated by reference to Exhibit 10.10 to the Registrant's
Form 10-Q/A for the quarter ended March 31, 2003.
<F9> Incorporated by reference to Exhibit 10.11 to the Registrant's
Form 10-Q/A for the quarter ended June 30, 2004.
<F10> Incorporated by reference to Exhibit 10.7 to the Registrant's
Form 10-Q/A for the quarter ended September 30, 2004.
<F11> Incorporated by reference to Exhibit 10.8 to the Registrant's
Form 10-Q/A for the quarter ended September 30, 2004.
<F12> Incorporated by reference to the Registrant's Form 8-K filed with the
Commission on January 13, 2005.
<F13> Incorporated by reference to the Registrant's Form 8-K filed with the
Commission on January 14, 2005.
<F14> Incorporated by reference to Appendix C to the Registrant's Proxy
Statement filed on April 9, 2004
<F15> Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 2003.
</FN>
37