ANNUAL REPORT 1998 Description of Business - ----------------------- Slade's Ferry Bancorp, originally incorporated as Weetamoe Bancorp in June of 1989 under the laws of the Commonwealth of Massachusetts, is a one bank holding company which owns and controls 100% of the assets of Slade's Ferry Trust Company and its subsidiaries. The primary business of Bancorp is the ongoing business of Slade's Ferry Trust Company, a state chartered trust company incorporated in Massachusetts in 1959. The Trust Company is a member of the Federal Deposit Insurance Corporation and serves as a retail bank. Slade's Ferry provides multiple deposit products and a wide range of financial services, including consumer installment loans, residential and commercial mortgages; as well as other forms of commercial lending. It serves a broad customer base derived from southeastern Massachusetts and nearby Rhode Island, currently operating twelve strategically located retail facilities and multiple ATM's in the towns of Fairhaven, Somerset, Swansea and Seekonk, and the cities of Fall River and New Bedford, MA. An Equal Opportunity/Affirmative Action Employer (M/F/D/V), Slade's Ferry Trust Company employed a total of 136 full-time and 54 part-time employees as of December 31, 1998. The Bank keeps convenient business hours, including Saturdays. The Bank actively competes with a variety of other financial institutions - major banks, bank holding companies and credit unions - for deposits, loans and additional forms of business by offering competitive rates. The Bank adheres to an established philosophy of providing professional, highly personal service throughout its marketplace. Corporate offices are located at 100 Slade's Ferry Avenue, Somerset, MA. SHAREHOLDERS LETTER As we bring this century to a close and finalize our preparation for the new millenium, the accomplishments of 1998 will serve as a springboard for our future success in the new century. Our assets grew from $302 Million at year-end 1997 to $340 Million or 12.6% by year-end 1998. Our growth in new business came primarily from two marketplaces, the Rhode Island border towns and the Greater New Bedford area. Our investment in the New Bedford market in 1996 is now paying the dividends projected when we acquired the National Bank of Fairhaven. Profits rose dramatically from $2,845,990 at year-end 1997 to $3,363,042 or 18.2% by year-end 1998. The increased earnings were fueled by two sources: the highest interest margin on investable funds we have enjoyed in over twenty years, and the gains of $382,370 that we were able to realize from our stock portfolio. During the fourth quarter of 1998, we saw multiple reductions in interest rates, which have already greatly reduced our margins and put pressure on our earning projections for 1999. The return on average assets rose to 1.06% from .96% in 1997, while the earnings per share on a fully diluted basis rose $.09 from $.89 to $.98. During 1998, our stock price rode the crest of the market, as did most stocks, reaching a high of $19.13 per share and settling consistently at year-end at approximately $14.00 per share. Early in the year, we issued a 5% stock dividend, followed at mid year with an increase in cash dividends to $.06 per share, as well as an extra cash dividend at year end. During the summer, we purchased land on Ashley Boulevard in New Bedford and commenced construction of a new branch facility to be operational during the first quarter of 1999. We also purchased the former BankBoston banking facility on South Main Street in Fall River and completed extensive renovations by year-end. The newly refurbished branch opened in January of 1999 and promises to be one of the fastest growing and busiest branches in the years to come. The addition of these two branches will fill in gaps in our market service area, and makes Slade's Ferry Bank convenient to thousands more new and existing customers. In addition of these two branches will fill in gaps in our market service area, and makes Slade's Ferry Bank convenient to thousands more new and existing customers. In addition, during the year, we committed substantial resources to addressing all of the issues affecting us with the upcoming transition into the Year 2000 (Y2K). We assessed all of our computer system concerns to identify problems or replacement needs. We have systematically replaced, upgraded, tested and continue to test all our systems to assure our customers that the transition into the Year 2000 will be made without any interruption to our servicing abilities. We are extremely confident that your bank and the industry have sufficiently addressed the Y2K concerns to enter the new millenium prepared to continue the levels of service you have come to expect. 1999 will mark the fortieth anniversary of Slade's Ferry Bank, which started from humble beginnings back in 1959. Because of your faith in us and our focus on personalized customer service, we have grown to be a well-respected, well-capitalized financial organization with continued bright prospects for the future. The addition of two new branches to our delivery system, our growth in 1998 and our Y2K preparations will propel us into the new century with solid financial footings, exciting growth potential, and increased ability to provide value and reward for your investment in our bank. We look to the new millenium with great excitement and anticipation. Sincerely, James D. Carey Executive Vice President, Bancorp President, Chief Executive Officer, Slade's Ferry Bank January 29, 1999 SLADE'S FERRY BANCORP SELECTED FINANCIAL DATA The following table sets forth selected financial data for the last five years. Year Ended December 31 - -------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except per Share Data) 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------- EARNINGS DATA Interest Income $ 24,306 $ 23,150 $ 19,495 $ 16,541 $ 13,546 Interest Expense 10,711 10,412 9,078 7,764 4,944 Net Interest Income 13,595 12,738 10,417 8,777 8,602 Provision for Loan Losses 600 500 400 550 645 Noninterest Income 1,568 1,562 1,305 1,056 1,099 Noninterest Expense 8,984 9,033 7,380 6,632 6,701 Income Before Income Taxes 5,579 4,767 3,942 2,651 2,355 Applicable Income Taxes 2,216 1,921 1,564 1,005 888 Net Income 3,363 2,846 2,378 1,646 1,467 PER SHARE DATA (1) Net Income-Basic $ 0.99 $ 0.894 $ 0.819 $ 0.572 $ 0.540 Net Income-Diluted(2) $ 0.98 $ 0.892 $ -- $ -- $ -- Cash Dividends $ 0.28 $ 0.246 $ 0.229 $ 0.166 $ 0.151 Book Value (at end of period) $ 8.62 $ 8.168 $ 7.116 $ 6.811 9.023 Avg. Shs. Outstanding 3,402,218 3,184,857 2,903,131 2,875,162 2,717,207 Shares Outstanding Year End 3,446,413 3,236,713 2,789,142 2,617,181 1,645,492 BALANCE SHEET DATA Assets $ 340,355 $ 301,571 $ 291,342 $ 233,422 $ 193,909 Loans 218,230 213,736 198,986 151,094 136,191 Unearned Discount 691 690 643 527 403 Allowance for Loan Losses 3,569 3,694 3,354 2,498 2,306 Loans, Net 213,938 209,310 194,935 148,069 133,482 Goodwill 2,854 3,081 3,307 -- -- Investments 80,020 58,668 57,732 58,757 43,537 Deposits 303,786 271,322 267,791 214,221 177,315 Stockholders' Equity 29,707 26,436 19,847 17,827 14,848 FINANCIAL RATIOS Net Yield on Interest Earning Assets (3) 4.70% 4.66% 4.44% 4.36% 4.78% Net Interest Spread (3) 3.91 3.88 3.72 3.72 4.33 Net Income as a Percentage of Average Assets 1.06 0.96 0.94 0.75 0.75 Average Equity 11.98 12.27 12.69 9.99 9.71 Dividend Payout Ratio 28.54 27.57 27.95 29.03 27.93 Average Equity to Average Assets 8.86 7.79 7.40 7.55 7.71 - -------------------- <F1> Earnings per share are computed based on the average number of shares of common stock outstanding during the year. On January 19, 1994, the Company declared a 5% stock dividend mailed to stockholders on February 1, 1994. On February 24, 1995, the Company declared a 5% stock dividend mailed to stockholders on March 1, 1995 and on March 13, 1995, the Company announced a 3 for 2 stock split mailed to stockholders on April 18, 1995. On January 8, 1996, the Company declared a 5% stock dividend mailed to stockholders on January 31, 1996. On January 12, 1998, the Company declared 5% stock dividend mailed to stockholders on February 11, 1998. Per share data has been restated to reflect the effect of the stock splits and the stock dividends. <F2> There were no stock options outstanding in years prior to 1997. <F3> Calculated on a fully taxable equivalent basis. SLADE'S FERRY BANCORP Market for Registrant's Common Equity and Related Stockholder Matters Market Information - ------------------ On January 7, 1998, the Company's common stock became listed in the NASDAQ Small Cap Market under the symbol SFBC. Prior thereto, the Company's common stock was listed in the "pink sheets" of the over-the-counter market. The following table sets forth the range of high and low bids as reported for NASDAQ Small Cap Market by quarters for 1998, and high and low bid quotations as reported in the "pink sheets" by quarters for 1997. 1998 1997(1) ------------------------------------ High Low High Low ------------------------------------ 1st Quarter $17.00 $15.50 $ 9.75 $ 8.25 2nd Quarter 19.13 17.50 10.50 8.88 3rd Quarter 18.75 16.38 13.00 9.50 4th Quarter 15.88 13.00 16.63 13.13 <F1> These quotations reflect interdealer prices, without mark-up, mark- down, or commission and may not necessarily represent actual transactions. Dividends - History and Policy - ------------------------------ The Company, since its inception in 1990 and prior thereto the Bank, has consistently paid dividends to the stockholders since 1961. In January 1998, the Company issued a 5% stock dividend on the Company's common stock, resulting in a distribution of 161,698 shares. The Company also paid two quarterly cash dividends of $.05 per share and then increased its dividend to $.06 per share for the third and fourth quarter in 1998. In addition, an extra cash dividend of $.06 per share was paid in December 1998 for a total of $.28 per share paid in 1998. In 1997, the Company paid quarterly cash dividends of $.05 per share, plus an extra cash dividend of $.05 per share, for a total of $.25 per share before the effect of the 5% stock dividend issued in 1998. The declaration of cash dividends is dependent on a number of factors, including regulatory limitations, and the Bank's operating results and financial condition. The stockholders of the Company will be entitled to dividends only when, and if, declared by the Company's Board of Directors out of funds legally available. Under the Massachusetts Business Corporation Law, a dividend may not be declared if the corporation is insolvent or if the declaration of the dividend would render the corporation insolvent. Furthermore, the directors may be liable for authorization of a dividend if such dividend is in violation of the Articles of Organization, or if the corporation is then or is thereby rendered insolvent. The Company will be considered insolvent when it is unable to pay debts as they fall due in the usual course of business, or when its liabilities are in excess of the reasonable market value of assets held. Chapter 172 Section 28 of the Massachusetts Statutes on Bank and Banking provides that a bank's Board of Directors may, subject to the restriction contained in the section, declare and pay dividends on capital stock out of net profits from time to time and to such extent as they deem advisable. However, under this provision, no cash dividend shall be paid unless, following the payment of such dividend, the capital stock and retained earnings account will be unimpaired. Management's Discussion and Analysis - ------------------------------------ The purpose of Management's Discussion and Analysis is to focus on certain significant factors which have affected the Company's operating results and financial condition, and to provide stockholders a more comprehensive review of the figures contained in the financial data of this report. Overview: * In 1998, Slade's Ferry Bancorp recorded net income of $3,363,042 or $0.98 per share on a diluted basis compared to $2,845,990 or $0.89 per share on a diluted basis in 1997. This represents an increase of $517,052 or 18.2% in net income and $.09 or 10.11% per share on a diluted basis between 1998 and 1997. * Return on average assets increased to 1.06% in 1998 from .96% in 1997 and .94% in 1996. Return on average equity for 1998, 1997 and 1996 was 11.98%, 12.27%, and 12.69% respectively. * Book value of the Company's common stock increased to $8.62 in 1998 from $8.17 reported in 1997, and $7.12 reported in 1996. * The Company in February 1998 issued a 5% stock dividend to its stockholders of common stock, and the cash dividend for the year totaled $.28 per share, up from $.246 per share in 1997 and $.229 per share in 1996. * Assets at December 31, 1998 increased by $38.8 Million or 12.9% to $340.4 Million when compared to $301.6 Million in assets at December 31, 1997. Net loans increased by 2.2% during 1998. Deposit levels were up by 12.0% at December 31, 1998 when compared to 1997. * Two new branch banking facilities are being added to the branch network and are scheduled to open in early 1999. Results of Operations - --------------------- Net interest income, which is the difference between interest and dividend income earned on earning assets and interest expense paid on interest- bearing liabilities, is the dominate contributor to net income. Increases or decreases in interest rates affect the yields earned on loans and investments and the rates paid on deposits and other borrowings. On a fully taxable basis, net interest income was $13.8 Million in 1998, $12.9 Million in 1997, and $10.6 Million in 1996. The increase in net interest income in 1998 when compared to 1997 is primarily a result of growth in average earning assets of 6.13% from the prior year. Growth in earning assets is due to general increases in business volumes. The average earning assets produced a 8.35% yield, down slightly when compared to 8.43% in 1997. In 1996 the yield on earning assets was 8.25%. The loan portfolio, which generally produces higher yields than other earning assets represents 67.5% of average assets in 1998 compared to 69% in 1997 and 67.3% in 1996. Cost of funds decreased to 4.44% in 1998 primarily due to the lowering of rates paid on Other Time Deposits which is the largest component of interest-bearing liabilities. Cost of funds in 1997 was 4.55% and 4.53% in 1996. During 1998 the average balances in interest-bearing liabilities increased to $241.4 Million compared to $229.1 Million in 1997 and $200.5 Million in 1996. The net interest spread, which represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities increased to 3.91% in 1998 from 3.88% reported in 1997 and 3.72% in 1996. Net yield on earning assets, which represents net interest income as a percent of average earning assets, increased to 4.70% from 4.66% in 1997 and 4.44% in 1996. The Provision to the Allowance for Loan Losses in 1998 was increased to $600,000 compared to $500,000 in 1997 and $400,000 in 1996. This increase to the provision was based upon management's desire to maintain an appropriate ratio of the Allowance for Loan Losses to outstanding loans while recognizing the growth in the loan portfolio and the amount of charge offs that occurred in 1998 compared to prior years. Total Other Income in 1998 increased slightly to $1,568,112 compared to $1,562,257 reported in 1997. In 1996, Total Other Income was $1,305,497 which reflected only four months of merger-related income associated with the acquisition of the National Bank of Fairhaven that took place in late August 1996. Service charges on deposit accounts and overdrafts which are the largest component of Other Income decreased slightly to $881,964 in 1998 compared to $902,079 and $849,425 reported in 1997 and 1996 respectively. As a result of favorable market conditions, various marketable equity securities were sold throughout 1998 whereby gains were realized totaling $382,370. The Company realized gains in the security portfolio in 1997 totaling $313,844 and $112,631 in 1996. Total Other Expense for 1998 decreased by $49,326 to $8,984,181 from $9,033,507 reported in 1997. Salaries and Employees Benefits which is the largest component of Other Expenses increased by $162,571 due to general wage adjustments and increased costs associated with employees medical insurance and retirement plan. In 1997 the Company incurred an increase of $989,218 in Salaries and Employees Benefits when compared to 1996 which was attributable to a full year associated with the retention of officers and employees of the National Bank of Fairhaven acquired by Slade's Ferry Bank in late August 1996. Personnel costs associated with these new employees were expensed for twelve months in 1997 compared to four months in 1996. The increase in Salaries and Employees Benefits in 1998 was offset by the combination of a decrease in Occupancy Expense and Equipment Expense totaling $31,237, and a decrease of $97,047 created by a Gain on Sale of Other Real Estate Owned (OREO) totaling $54,590 in 1998 as opposed to a loss of $42,457 realized in 1997. In 1996 the Bank incurred a loss of $21,008 on sale of OREO properties. In 1998 the Bank did not incur any expense associated with the writedown of values on Other Real Estate Owned, while in 1997, writedowns totaled $67,480 and $30,000 in 1996. Federal Deposit Insurance Corporation (FDIC) deposit insurance premiums in 1998 were $32,353 compared to $71,880 in 1997 and $6,278 in 1996. In 1997, under federal legislation enacted in 1996, FDIC Bank Insurance Fund deposits were assessed to finance the annual interest costs on government bonds issued to assist in recapitalizing certain thrift institutions in prior years. The resulting increase is reflected in 1997 and 1998 premiums. Stationery and Supplies expense in 1998 decreased to $229,344 from costs of $311,546 in 1997 and $243,653 in 1996. In 1997 the Bank incurred additional costs due to the need to stock the Fairhaven and New Bedford Massachusetts branches which were acquired through the merger acquisition. The following table sets forth the components of the line item Other Expense, which reflects an increase of $105,596 to $2,042,253 in 1998 compared to $1,936,657 in 1997. In 1996 Other Expense was $1,678,873. Expense items in 1996 reflect four months attributed to the acquisition of the National Bank of Fairhaven compared to twelve full months in 1997 and 1998. 1998 1997 1996 - ---------------------------------------------------------------------------- Amortization of Goodwill $ 226,800 $ 226,800 $ 98,000 Advertising and Public Relations 405,737 400,502 337,947 Communications 290,253 269,239 257,575 Professional Fees & Other Services 571,952 536,710 499,448 Other Various Expenses 547,511 503,406 485,903 - ---------------------------------------------------------------------------- Total Other Expense $2,042,253 $1,936,657 $1,678,873 ============================================================================ The increases noted above are attributed to normal business growth. Income taxes in 1998 increased to $2,216,160 up by $295,419 when compared to $1,920,741 in 1997, and up by $652,159 when compared to $1,564,001 in 1996. DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The following table sets forth the Company's average assets, liabilities, and stockholders' equity, interest income earned and interest paid, average rates earned and paid, and the net interest margin for the periods ending December 31, 1998, December 31, 1997, and December 31, 1996. Averages are daily averages. 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Average Interest(1) Avg. Int. Average Interest(1) Avg. Int. Average Interest(1) Avg. Int. (Dollars in Thousands) Balance Inc/Exp Rate Balance Inc/Exp Rate Balance Inc/Exp Rate - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS: Earning Assets (2) Commercial Loans $ 42,244 $ 3,953 9.36% $ 36,195 $ 3,466 9.58% $ 23,440 $ 2,191 9.35% Commercial Real Estate 118,939 11,630 9.78 110,093 10,740 9.76 90,576 9,035 9.98 Residential Real Estate 45,781 3,520 7.69 52,894 4,116 7.78 50,486 3,788 7.50 Consumer Loans 6,767 652 9.63 6,503 659 10.13 6,094 613 10.06 - -------------------------------------------------------------------------------------------------------------------------------- Total Loans 213,731 19,755 9.24 205,685 18,981 9.23 170,596 15,627 9.16 Federal Funds Sold 12,214 630 5.16 11,309 607 5.37 14,994 783 5.22 U.S. Treas/Govt Agencies 54,842 3,366 6.14 49,682 3,099 6.24 43,871 2,715 6.19 States & Political Subdivisions 9,763 649 6.65 6,948 477 6.87 5,959 400 6.71 Mutual Funds 209 14 6.70 301 15 4.98 241 13 5.39 Marketable Equity Securities 2,761 105 3.80 2,518 120 4.77 1,946 75 3.85 Other Investments 6 0 0.00 126 8 6.35 197 15 7.61 - -------------------------------------------------------------------------------------------------------------------------------- Total Earning Assets 293,526 $24,519 8.35% 276,569 $23,307 8.43% 237,804 $19,628 8.25% - -------------------------------------------------------------------------------------------------------------------------------- Allowance for Loan Losses (3,602) (3,474) (2,958) Unearned Income (715) (665) (597) Cash and Due From Banks 12,186 11,366 9,565 Other Assets 15,376 14,022 9,489 - -------------------------------------------------------------------------------------------------------------------------------- Total Assets $316,771 $297,818 $253,303 ================================================================================================================================ LIABILITIES & STOCKHOLDERS' EQUITY: Savings $ 43,885 $ 1,075 2.45% $ 42,642 $ 1,067 2.50% $ 40,246 $ 1,006 2.50% NOW's 38,764 1,196 3.09 37,739 1,202 3.19 28,788 858 2.98 Money Market Accounts 13,777 273 1.98 14,116 281 1.99 13,326 270 2.03 CD's > $100M 22,945 1,266 5.52 23,162 1,256 5.42 18,813 1,104 5.87 Other Time Deposits 119,118 6,700 5.62 109,278 6,460 5.91 97,957 5,754 5.87 Other Borrowings 2,933 201 6.85 2,114 146 6.91 1,374 86 6.26 - -------------------------------------------------------------------------------------------------------------------------------- Total Interest-bearing Liabilities 241,422 $10,711 4.44% 229,051 $10,412 4.55% 200,504 $ 9,078 4.53% - -------------------------------------------------------------------------------------------------------------------------------- Demand Deposits 46,217 43,724 33,572 Other Liabilities 1,063 1,847 493 - -------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 288,702 274,622 234,569 - -------------------------------------------------------------------------------------------------------------------------------- Common Stock 34 30 28 Paid-in Capital 21,448 16,899 14,393 Retained Earnings 6,395 6,308 4,486 Net Unrealized Gain (Loss) on Available- for-Sale Securities 192 (41) (173) - -------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 28,069 23,196 18,734 - -------------------------------------------------------------------------------------------------------------------------------- Total Liabilities & Stockholders' Equity $316,771 $297,818 $253,303 ================================================================================================================================ Net Interest Income $13,808 $12,895 $10,550 ================================================================================================================================ Net Interest Spread 3.91% 3.88% 3.72% ================================================================================================================================ Net Yield on Earning Assets 4.70% 4.66% 4.44% ================================================================================================================================ - -------------------- <F1> On a fully taxable equivalent basis based on tax rate of 34%. Interest income on investments and net interest income includes a fully taxable equivalent adjustment of $212,000 in 1998, $157,000 in 1997 and $133,000 in 1996. <F2> Average balance includes non-accruing loans. The effect of including such loans is to reduce the average rate earned on the Company's loans. FINANCIAL CONDITION Loans - ----- The loan portfolio increased by $4.5 Million to $218.2 Million at the end of 1998 when compared to $213.7 Million reported at the end of 1997, notwithstanding principal pay-downs averaging $2.5 Million per month. Paydowns reflect the normal monthly amortization occurring under the original terms of the loans. In addition, throughout 1998, a very competitive rate environment existed among lending entities along with some lowering of credit underwriting standards. The Bank, while offering competitive rates, however, has not lessened any of its credit criteria and strives to maintain the quality of the loan portfolio. The Bank manages its credit granting programs for commercial loans through an internal credit department that performs an independent analysis of the financial condition of the borrower and the business entity. In turn, the borrowing request is further evaluated by Executive Management and submitted to the Executive Committee of the Board of Directors for final approval before the loan is granted. The largest segment of the loan portfolio is commercial real estate loans which represent 52% of total loans. These loans are collateralized by various types of commercial properties located within the Bank's market area extending throughout southeastern Massachusetts and abutting cities and towns in Rhode Island. There is no predominate type of property nor concentration of credit in any one industry. The properties consist of apartment complexes, medical centers, strip malls, factories with multiple tenants, and retail office units. Commercial real estate loans generally have a higher degree of credit risk than residential real estate loans because they are predominately dependent on the success of the business. Analysis of financial statements of the business is performed periodically and if it is determined that there are any weaknesses developing in the business or any negative trends occurring, contact with the borrower is made to determine the cause and what remedial action is planned. Residential real estate, another large component of loans which accounts for 23% of the loan portfolio, is comprised of mortgages on one to four family residential properties. Credit is granted based on income to debt ratio, a satisfactory credit report and the appraised value of the property. The Bank also provides a "minimum down-payment" program to encourage home ownership for first time home buyers. This enables prospective homeowners the opportunity to purchase a home without having to save over an extended period of time, the normally required 20% down payment. Other types of loans total 25% of the portfolio and are comprised of commercial loans, which are generally short term loans to finance business inventory, consumer credit installment loans, automobile financing and credit card loans. Deposits - -------- Deposit levels increased substantially in 1998 to $303.8 Million, up by $32.5 Million when compared to $271.3 Million reported at the end of 1997. The most significant increase occurred in the time deposit category. Time deposits is the largest component of deposits. Growth in deposits occurred through a practical customer service philosophy complimented by competitive interest rates and fees. This approach contributed to the overall expansion of the Bank's customer base. Deposits are the Bank's largest source of funding. The Bank is a member of the Federal Home Loan Bank, (FHLB) and borrows funds secured by residential mortgage loans and other assets. This borrowing mechanism enables the Bank to match-fund loans to commercial borrowers that meet certain credit and deposit requirements. At December 31, 1998, the Bank had $4.5 Million of loans match-funded with FHLB. Interest Rate Risk - ------------------ The Company's Asset-Liability Management Committee, comprised of the Bank's Executive Management team, monitors and evaluates the interest rate sensitivity of the Company's assets and liabilities. The committee utilizes a GAP report which indicates the differences or gap between interest-earning assets and interest-bearing liabilities in various maturity time periods. This, in conjunction with certain assumptions and other related factors, such as anticipated changes in interest rates and anticipated cash flows from loans, investments and deposits, provides a means of evaluating interest rate risk. Management also considers that certain assets and liabilities react differently to changes in interest rates. Some assets may have rate caps or prepayment fees attached to the instrument, and some liabilities have early withdrawal penalties. A positive gap results when more assets than liabilities are expected to reprice within a certain time frame and a negative gap reflects an excess of liabilities repricing in that period. A positive gap would tend to increase net interest income when rates are rising and decrease net interest income when rates are falling. A negative gap position would tend to produce the opposite effect. At December 31, 1998 the analysis of the GAP report indicates that there is an excess of $0.7 Million in assets subject to repricing in the 0 to 2 year category. This equates to a percentage of total assets of 0.19%. Management believes that this is an ideal situation recognizing that most of the liabilities will be repriced in relatively the same time frame as assets, thereby having a minimal impact on interest rate risk. In addition to the gap analysis used to evaluate the Bank's interest rate risk exposure, the Bank utilizes a model to monitor earnings-at-risk. This model provides management a measurement tool to assess the effect of changes in interest rates on the Bank's current and future earnings. A specific risk limit with respect to the Bank's potential loss of net interest income due to rising or declining interest rates has been established. This limit provides management an internal tolerance level to control interest rate risk exposure and is monitored on a quarterly basis. INTEREST RATE - SENSITIVITY GAPS Repricing Period at December 31, 1998 Within 1-2 2-3 3-5 Over 5 (Dollars in Thousands) 1 Year Years Years Years Years Total - -------------------------------------------------------------------------------------------------------- Interest Earning Assets(1) Federal Funds Sold $ 14,500 $ -- $ -- $ -- $ -- $ 14,500 Investment Securities 10,030 6,956 5,906 18,969 37,583 79,444 Residential Mortgages 19,985 9,698 7,226 1,612 11,664 50,185 Commercial Mortgages 74,560 15,023 12,376 5,072 3,916 110,947 Other Loans 44,108 3,607 2,706 2,733 613 53,767 ---------------------------------------------------------------- Total Earning Assets $163,183 $35,284 $28,214 $28,386 $53,776 $308,843 ---------------------------------------------------------------- Interest Bearing Liabilities: NOW Checking and Savings Deposits $ 39,766 $10,388 $10,388 $27,700 $ -- $ 88,242 Money Market Deposits 3,730 1,865 1,865 4,977 -- 12,437 Term Deposits 122,341 18,836 13,649 -- -- 154,826 Borrowed Funds 848 -- -- -- 4,475 5,323 Other Interest-bearing Liabilities 42 -- -- -- -- 42 ---------------------------------------------------------------- Total Interest-bearing Liabilities $166,727 $31,089 $25,902 $32,677 $ 4,475 $260,870 ---------------------------------------------------------------- Net Interest Sensitivity Gap $ (3,544) $ 4,195 $ 2,312 $(4,291) $49,301 $ 47,973 Cumulative Gap $ (3,544) $ 651 $ 2,963 $(1,328) $47,973 $ -- Cumulative Gap as a Percent of Total Assets 1.04% 0.19% 0.87% 0.39% 14.10% -- ================================================================ - -------------------- <F1> Nonaccrual loans amounting to $3.3 Million have been eliminated from the loan balances. Investments - ----------- The investment portfolio represents the second largest component of the Company's assets and consists of securities in the Available-for-Sale category and securities in the Held-to-Maturity category. The designation of which category the security is to be classified as is determined at the time of the purchase of the investment instrument. Securities in the Available-for-Sale category are securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. These securities may be sold in response to interest rate changes, liquidity needs or other factors. Any unrecognized gains or losses, net of taxes, is reflected in Stockholders Equity as a separate component. Securities in the Available-for-Sale category consist predominately of securities of U.S. Treasury and other U.S. Government corporations and agencies, mortgage- backed securities, and marketable equity securities. Securities of U.S. Treasury and U.S. Government corporations and agencies have little or no credit risk, other than being sensitive to changes in interest rates; and if held to maturity, these securities will mature at par. The Company amortizes premiums and accretes discounts over the life of the security unless it is a callable bond, in which case the premium or discount is amortized or accreted to the call date. Marketable equity securities, however, have a greater risk as they are subject to rapid market fluctuations. These securities are constantly monitored and evaluated to determine their suitability for sale or retention in the portfolio. Management minimizes its risk by limiting the total amount invested into marketable equity securities to 5% of the total investment portfolio. At December 31, 1998, the amount invested in marketable equity securities was 2.5% of the total investment portfolio distributed over various business sectors. The Held-to-Maturity category consists predominately of securities of U.S. Treasury, U.S. Government corporations and agencies, and securities issued by states of the United States and political subdivisions of states. The Company has the positive intent and ability to hold these securities to maturity. In managing the Held-to-Maturity portfolio the Company seeks to maximize its return and maintain consistency to meet short and long term liquidity forecasts by purchasing securities with maturities laddered within a short term period of 1-3 years, a mid term period of 3-5 years and some securities extending out to 10 years. The Company does not purchase investments with off-balance sheet characteristics, such as swaps, options, futures and other hedging activities that are called derivatives. The main objective of the investment policy is to provide adequate liquidity to meet reasonable declines in deposits and any anticipated increases in the loan portfolio, to provide safety of principal and interest, to generate earnings adequate to provide a stable income, and to fit within the overall asset/liability management of the objectives of the Company. Nonperforming Assets - -------------------- The Company considers nonaccrual loans, loans past due 90 days or more but still accruing, restructured loans not performing in accordance with amended terms, and real estate acquired through foreclosure as nonperforming assets. Nonperforming assets as a total decreased to $4.7 Million at year end 1998, from $4.9 Million reported at year end 1997. Nonaccrual loans is the largest component of nonperforming assets, and at December 31, 1998, this category decreased to $3.3 Million from $4.6 Million reported at the end of the previous year. The Company places a loan on nonaccrual status, when, in the opinion of management, the collectability of the principal and interest becomes doubtful. Generally, when a commercial loan, commercial real estate loan or a residential real estate loan becomes past due 90 days or more, the Company discontinues the accrual of interest and reverses previously accrued interest. The loan remains in the nonaccrual status until the loan is current and six months of payments are made. Then it is reclassified as an accruing loan. If it is determined that the collectibility of the loan no longer exists, the loan is charged off to the Allowance for Loan Losses, or if applicable, any real estate collateralizing the loan is acquired through foreclosure, and categorized as Other Real Estate Owned. Loans 90 days or more past due but still accruing increased to $317,000 from $147,000 reported at year end 1997. Management continues to accrue on these loans due to the excess values of collateral securing these loans compared to their outstanding balances. Real estate acquired by foreclosure or substantively repossessed increased to $1,026,000 at December 31, 1998 compared to $159,000 reported at the end of the prior year. This amount represents five separate pieces of property. The Bank currently has one purchase and sales agreement on hand which is targeted for an early 1999 sale. The percentage of nonaccrual loans to total loans decreased substantially from prior years due to the reduction in the nonaccrual category and the growth of the loan portfolio. In addition, the percentage of nonaccrual loans, restructured loans and real estate acquired by foreclosure to total assets also decreased as a result of increased asset levels. The $867,000 of restructured loans represent several borrowers whose original loan terms were amended and are current in their payments under the amended terms. Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" applies to all loans except large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, loans measured at fair value or at a lower of cost or fair value, leases, and debt securities as defined in Statement 115. Statement 114 requires that impaired loans be valued at the present value of expected future cash flows discounted at the loan's effective interest rate or as a practical expedient, at the loan's observable market value of the collateral if the loan is collateral dependent. Smaller-balance homogeneous loans are considered by the Company to include consumer installment loans and credit card loans. At December 31, 1998, there were $5.2 Million of loans which the Company has determined to be impaired, of which $1.3 Million has a related allowance for credit losses of $0.3 Million and $3.9 Million has no related allowance for credit losses. Nonperforming Assets - -------------------- December 31 - ------------------------------------------------------------------------------------------- (Dollars in Thousands) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------- Nonaccrual loans $3,331 $4,597 $4,352 $2,695 $3,238 Loans 90 days or more past due and still accruing 317 147 112 23 204 Real estate acquired by foreclosure or substantively repossessed 1,026 159 308 633 888 - ------------------------------------------------------------------------------------------- Total nonperforming assets $4,674 $4,903 $4,772 $3,351 $4,330 - ------------------------------------------------------------------------------------------- Restructured debt performing in accordance with amended terms, not included above $ 867 $1,265 $ 819 $ 459 $ 139 - ------------------------------------------------------------------------------------------- Percentage of nonaccrual loans to total loans 1.53% 2.15% 2.19% 1.78% 2.38% Percentage of nonaccrual loans, restructured loans, and real estate acquired by foreclosure or substantively repossessed to total assets 1.54% 2.00% 1.88% 1.62% 2.30% Percentage of allowance for loan losses to nonaccrual loans 107.15% 80.36% 77.07% 92.69% 71.22% Management is not aware of any other loans that pose a potential credit risk or where the loans are current but the borrowers are experiencing financial difficulty. Allowance for Loan Losses - ------------------------- The Allowance for Loan Losses is available to absorb losses on loans deemed by management as uncollectible. In assessing the adequacy of the level of the allowance, management considers the status of nonaccrual loans and specific borrower situations, the current and anticipated economic climate of the area including national credit trends and the historical credit experiences within the region. Additions to the Allowance are provided by charges to earnings and recoveries on previously charged- off loans. Deductions from the Allowance are transacted as a charge off when a loan is deemed uncollectible. The Allowance for Loan Losses as a percentage of outstanding loans at December 31, 1998 was 1.64% compared to 1.73% reported at year end 1997. The ratios at years ending 1996, 1995 and 1994 were 1.69%, 1.65% and 1.70% respectively. In 1998 the Company provided $600,000 to the allowance and recovered $67,724 from previously charged off loans. Loans charged off during 1998 totaled $792,307. This resulted in net charge-offs of $724,583. Net charge-offs for prior years were $160,446, - -0-, $358,085, and $293,003 for 1997, 1996, 1995 and 1994 respectively. In addition to management's assessment of the Allowance for Loan Losses, the allowance is also evaluated by regulatory agencies and independent accountants as part of their examination and audit procedures. The table below illustrates the changes in the Allowance for Loan Losses for the periods indicated. December 31 - ---------------------------------------------------------------------------------------- (Dollars In Thousands) 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------- Balance at January 1 $3,694 $3,354 $2,498 $2,306 $1,954 Charge Offs: Commercial (0) (40) (144) (184) (22) Real estate construction (0) (0) (0) (0) (0) Real estate mortgage (716) (147) (136) (79) (246) Installment/Consumer (76) (68) (159) (134) (93) ---------------------------------------------- (792) (255) (439) (397) (361) ---------------------------------------------- Recoveries: Commercial 8 41 59 1 51 Real estate construction 0 0 0 0 0 Real estate mortgage 43 16 333 16 2 Installment/Consumer 16 38 47 22 15 ---------------------------------------------- 67 95 439 39 68 ---------------------------------------------- Net charge offs (725) (160) (0) (358) (293) ---------------------------------------------- Additions charged to operations 600 500 400 550 645 Allowance attributable to acquisition 0 0 456 0 0 ---------------------------------------------- Balance at end of period $3,569 $3,694 $3,354 $2,498 $2,306 ============================================== Allowance for Loan Losses as a percent of year end loans 1.64% 1.73% 1.69% 1.65% 1.70% Ratio of net charge offs to average loans outstanding 0.34% 0.08% 0.00% 0.25% 0.23% Liquidity - --------- Liquidity represents the ability of the Bank to meet its funding requirements. In assessing the appropriate level of liquidity, the Bank considers deposit levels, lending requirements and investment maturities in light of prevailing economic conditions. Through this assessment, the Bank manages its liquidity level to optimize earnings and respond to fluctuations in customer borrowing needs. The Company's principal sources of funds are customer deposits, loan amortization, loan payoffs, and the maturities of investment securities. Through these sources, funds are provided for customer withdrawals from deposit accounts, loan origination, draw-downs on loan commitments, acquisitions of investment securities and other normal business activities. Investors' capital also provides a source of funding. The largest source of funds is provided by depositors. The largest component of the Company's deposit base is term certificates which extend out to a maximum of three years. The Company does not participate in brokered deposits. Deposits are obtained from consumers and commercial customers within the Bank's community reinvestment area, being Bristol County, Massachusetts and several abutting towns in Rhode Island. The Company also has the ability to borrow funds for liquidity purposes from correspondent banks, the Federal Home Loan Bank, as well as the Federal Reserve Bank of Boston by pledging various investment securities as collateral. Tax payments made by our customers which are owed to the Federal Reserve Bank Treasury Tax and Loan account are classified as Other Borrowed Funds. Note Payable represents a note due to Fleet Bank. The note is attributable to Fairbank, Inc. and was assumed at the time of the merger. It has a final maturity in November, 1999. Due to the applicable prepayment fees, it is advantageous for the Bank to continue with the applicable terms of the note. Advances from the Federal Home Loan Bank represents the match funding program that is available to qualified borrowers. Excess available funds are invested on a daily basis into Federal Funds Sold. An appropriate level of Federal Funds Sold is maintained to meet loan commitments, anticipated loan growth and deposit forecasts. Funds exceeding this level are then used to purchase investment securities that are suitable in yields and maturities for the investment portfolio. Liquidity in 1998 was primarily provided by the maturity and sales of securities totaling $43.5 Million, and the increase in deposits of $32.5 Million. This was offset by the purchases of additional securities of $64.0 Million and the net increase in loans totaling $6.2 Million. Other events that affected liquidity were advances from the Federal Home Loan Bank of $4.1 Million, investment in life insurance policies of $1.6 Million, capital expenditures of $1.6 Million, and other factors including cash provided by operating and financing activities as indicated in the cash flow statements. Capital - ------- At December 31, 1998, the Company had total capital of $29,707,385, up by $3,270,959 from $26,436,426 reported at year end 1997. The increase consists primarily of net earnings totaling $3,363,042 offset by cash dividends of $959,693 and $8,117 paid for fractional shares resulting from the 5% stock dividend issued in February 1998. Other additions to capital consisted of $215,924 of optional cash contributions, $473,242 of dividend reinvestment associated with the Dividend Reinvestment Program and proceeds from exercised stock options of $51,789. Also affecting capital is the net increase in other comprehensive income which consists of the net increase in unrealized Available-for-Sale securities from December 31, 1997 to December 31, 1998 of $215,657, net of taxes, and the minimum pension liability adjustment of $80,885, net of taxes, for a total of $134,772. Under the requirements for Risk-Based and Leverage Capital of the federal banking agencies, a minimum level capital will vary among banks based on safety and soundness of operations. Risk-Based Capital ratios are calculated with reference to risk-weighted assets, which include both on and off balance sheet exposure. In addition to meeting the minimum requirements, the Company and the Bank's capital ratios meet the criteria for the "well capitalized" category established by the federal banking agencies at December 31, 1998. The following table illustrates the capital position of Slade's Ferry Bancorp and Slade's Ferry Trust Company for years ending December 31, 1998 and 1997. Slade's Ferry Bancorp 1998 1997 - ------------------------------------------------------------------------------------ (Dollars in Thousands) Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------ Total Capital (to Risk Weighted Assets) $ 29,647 12.80% $ 25,907 12.04% Minimum required 18,536 8.00 17,210 8.00 Excess 11,111 4.80 8,697 4.04 Tier I Capital (to Risk Weighted Assets) 26,569 11.47% 23,206 10.74 Minimum required 9,268 4.00 8,645 4.00 Excess 17,301 7.47 14,561 6.74 Risk Adjusted Assets, net of goodwill, nonqualifying intangibles, excess allowance and excess deferred tax assets $231,700 $215,174 Tier I Capital (Leverage Ratio) $ 26,569 8.12% $ 23,206 7.79% Minimum required 13,081 4.00 11,910 4.00 Excess 13,488 4.12 11,296 3.79 Quarterly average total assets, net of goodwill, nonqualifying intangibles and excess deferred tax assets $327,025 $297,895 Slade's Ferry Trust Company 1998 1997 - ------------------------------------------------------------------------------------ (Dollars in Thousands) Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------ Total Capital (to Risk Weighted Assets) $ 27,034 11.69% $ 24,022 11.18% Minimum required 18,500 8.00 17,183 8.00 Excess 8,534 3.69 6,839 3.18 Tier I Capital (to Risk Weighted Assets) 23,961 10.36 21,325 9.88 Minimum required 9,250 4.00 8,631 4.00 Excess 14,711 6.36 12,694 5.88 Risk Adjusted Assets, net of goodwill, nonqualifying intangibles, excess allowance and excess deferred tax assets $231,250 $214,865 Tier I Capital (Leverage Ratio) $ 23,961 7.38% $ 21,325 7.18% Minimum required 12,989 4.00 11,876 4.00 Excess 10,972 3.38 9,449 3.18 Quarterly average total assets, net of goodwill, nonqualifying intangibles and excess deferred tax assets $324,725 $296,900 Year 2000 Compliance - -------------------- The approaching Year 2000 presents companies in all industries with a myriad of challenges including the ongoing operation of their data systems to check proper interpretation of calendar year digits and resulting calculations. To meet these challenges, the Company has completed an assessment of Year 2000 issues, developed a plan to resolve these issues, and commenced the implementation of changes and testing required to achieve compliance. The Company is on schedule to complete changes and testing of essential systems by March 31, 1999 utilizing both internal and external resources. Essential systems have been identified as the applications for processing depositors' and borrowers' accounts, stockholder information, origination and receiving of electronic charges and credits (ACH) items, general ledger processing and the PC network system, including the teller system. The first two phases of a four phase testing schedule have been completed and verified. The remaining phases three and four have been installed and are currently in the process of final testing and verification. The final phase of testing on the Federal Reserve Bank's fedline system, which provides the Company the ability to perform various operations including originating and receiving ACH items, performing wire transfers and purchasing securities, was completed and verified in December 1998. The necessary upgrade to the teller system has been installed and is being tested with final verification by February 1999. The ATM renovation and testing is in process and due for completion by June 1999. Key vendors and customers have been identified and contacted to determine any vulnerability the Company may have due to the failure of these parties to remedy their own Year 2000 issues. The above mentioned testing has been performed using the resources of the key vendors and the Company's own internal resources. To the extent that key vendors, customers or other general suppliers, not affiliated with the Company, such as communications and electric suppliers, are unsuccessful in properly addressing the Year 2000 issue, the Company could possibly be negatively impacted. Although the Company does not anticipate any system to be non-compliant, should a problem arise with a key vendor, customer or general supplier, the Company is finalizing a contingency plan to deal with these issues. It is impossible at this time to determine what effect this could have on the Company's operations, liquidity and financial condition. The total cost of the Year 2000 project is estimated at $40,000 to $50,000. These costs are not expected to be material to the Company's operations, liquidity and financial condition. These estimated costs are based upon management's best estimates which have been derived from numerous assumptions of future events which include the availability of certain resources, third party modification plans and other factors. However, there is no guarantee that these estimates will hold true and actual results could differ from those anticipated. The Company has incurred Year 2000 related expenses of $5,300 during 1998. The Federal Deposit Insurance Corporation (FDIC) has established Year 2000 standards for safety and soundness consistent with the Federal Financial Institutions Examination Council (FFIEC) guidance papers describing certain essential steps that each FDIC-supervised financial institution must take to become Year 2000 ready. There is ongoing regulatory oversight by the FDIC of all insured financial institution, including the Company, concerning Year 2000 compliance. Other Matters - ------------- The Bank is involved in a civil suit brought in Plymouth Superior Court by a former employee of the National Bank of Fairhaven, which primarily alleges a breach of contract. The original demand by the plaintiff was $550,000 to settle the case, which was lowered to $250,000 by the plaintiff in 1998. Discovery has been completed and the case is currently scheduled for trial on February 22, 1999. The Company believes there are meritorious defenses to the plaintiff's claim and it intends to vigorously defend the suit. The Company believes that the suit will not have a material adverse effect on the Company's financial condition, results of operation, or liquidity; and no reserves have been accrued to cover the potential liability. [LOGO of Shatswell, MacLeod & Company, P.C. The Board of Directors and Stockholders Slade's Ferry Bancorp Somerset, Massachusetts INDEPENDENT AUDITORS' REPORT ---------------------------- We have audited the accompanying consolidated balance sheets of Slade's Ferry Bancorp and Subsidiary as of December 31, 1998 and 1997 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Slade's Ferry Bancorp and Subsidiary as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Shatswell, MacLeod & Company, P.C. SHATSWELL, MacLEOD & COMPANY, P.C. West Peabody, Massachusetts January 15, 1999 SLADE'S FERRY BANCORP AND SUBSIDIARY ------------------------------------ CONSOLIDATED BALANCE SHEETS --------------------------- December 31, 1998 and 1997 -------------------------- ASSETS 1998 1997 - ------ ------------ ------------ Cash and due from banks $ 15,686,520 $ 13,323,501 Federal funds sold 14,500,000 7,000,000 ------------ ------------ Cash and cash equivalents 30,186,520 20,323,501 Interest bearing time deposits with other banks 106,688 Investments in available-for-sale securities (at fair value) 58,199,292 40,176,218 Investments in held-to-maturity securities (fair values of $21,282,941 as of December 31, 1998 and $17,748,500 as of December 31, 1997) 20,921,254 17,601,536 Federal Home Loan Bank stock 899,900 890,600 Loans, net 213,938,277 209,309,840 Premises and equipment 6,687,271 5,718,534 Goodwill 2,853,768 3,080,568 Other real estate owned 1,026,095 159,373 Accrued interest receivable 1,598,282 1,796,467 Cash surrender value of life insurance 1,613,517 Other assets 2,430,544 2,407,260 ------------ ------------ Total assets $340,354,720 $301,570,585 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Demand deposits $ 48,281,278 $ 44,228,157 Savings and NOW deposits 100,678,225 95,043,420 Time deposits 154,826,362 132,050,673 ------------ ------------ Total deposits 303,785,865 271,322,250 Note payable 847,990 945,308 Advances from Federal Home Loan Bank 4,475,454 430,000 Other borrowed funds 42,329 1,200,000 Due to brokers 255,000 Other liabilities 1,495,697 981,601 ------------ ------------ Total liabilities 310,647,335 275,134,159 ------------ ------------ Stockholders' equity: Common stock, par value $.01 per share; authorized 5,000,000 shares; issued and outstanding 3,446,413.8 in 1998 and 3,236,712.7 shares in 1997 34,464 32,367 Paid-in capital 22,285,220 18,978,598 Retained earnings 7,103,642 7,276,174 Accumulated other comprehensive income 284,059 149,287 ------------ ------------ Total stockholders' equity 29,707,385 26,436,426 ------------ ------------ Total liabilities and stockholder's equity $340,354,720 $301,570,585 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. SLADE'S FERRY BANCORP AND SUBSIDIARY ------------------------------------ CONSOLIDATED STATEMENTS OF INCOME --------------------------------- Years Ended December 31, 1998, 1997 and 1996 -------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Interest and dividend income: Interest and fees on loans $19,754,777 $18,981,050 $15,626,903 Interest and dividends on securities: Taxable 3,491,490 3,251,526 2,810,656 Tax-exempt 424,661 302,616 266,866 Other interest 635,688 615,267 790,506 ----------- ----------- ----------- Total interest and dividend income 24,306,616 23,150,459 19,494,931 ----------- ----------- ----------- Interest expense: Interest on deposits 10,509,873 10,266,135 8,992,244 Interest on Federal Home Loan Bank advances 72,213 1,555 Interest on other borrowed funds 129,259 52,318 59,688 Interest on notes payable 92,470 26,139 ----------- ----------- ----------- Total interest expense 10,711,345 10,412,478 9,078,071 ----------- ----------- ----------- Net interest and dividend income 13,595,271 12,737,981 10,416,860 Provision for loan losses 600,000 500,000 400,000 ----------- ----------- ----------- Net interest and dividend income after provision for loan losses 12,995,271 12,237,981 10,016,860 ----------- ----------- ----------- Other income: Service charges on deposit accounts 634,129 654,749 628,997 Overdraft service charges 247,835 247,330 220,428 Securities gains, net 382,370 313,844 112,631 Other income 303,778 346,334 343,441 ----------- ----------- ----------- Total other income 1,568,112 1,562,257 1,305,497 ----------- ----------- ----------- Other expense: Salaries and employee benefits 5,480,191 5,317,620 4,328,402 Occupancy expense 684,112 715,094 567,458 Equipment expense 570,518 570,773 504,489 Stationary and supplies 229,344 311,546 243,653 FDIC deposit insurance premium 32,353 71,880 6,278 (Gain) loss on sales of other real estate owned, net (54,590) 42,457 21,008 Writedown of other real estate owned 67,480 30,000 Other expense 2,042,253 1,936,657 1,678,873 ----------- ----------- ----------- Total other expense 8,984,181 9,033,507 7,380,161 ----------- ----------- ----------- Income before income taxes 5,579,202 4,766,731 3,942,196 Income taxes 2,216,160 1,920,741 1,564,001 ----------- ----------- ----------- Net income $ 3,363,042 $ 2,845,990 $ 2,378,195 =========== =========== =========== Earnings per common share $ .99 $ .89 $ .82 =========== =========== =========== Earnings per common share assuming dilution $ .98 $ .89 $ .82 =========== =========== =========== The accompanying notes are an integral part of these consolidated financial statements. SLADE'S FERRY BANCORP AND SUBSIDIARY ------------------------------------ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ---------------------------------------------------------- Years Ended December 31, 1998, 1997 and 1996 -------------------------------------------- Accumulated Other Comprehensive Common Paid-in Retained Income Stock Capital Earnings (Loss) Total ------ ------- -------- ------------- ----- Balance, December 31, 1995 $26,172 $13,136,923 $4,630,608 $ 33,022 $17,826,725 Comprehensive income: Net income 2,378,195 Net change in unrealized holding gain on available-for-sale securities, net of tax effect of $29,704 (35,650) Comprehensive income 2,342,545 Issuance of 5% common stock dividend 1,304 1,124,644 (1,129,308) (3,360) Issuance of common stock from dividend reinvestment plan 375 312,572 312,947 Stock issuance relating to optional cash contribution plan 40 33,160 33,200 Dividends declared ($.23 per share) (664,732) (664,732) ------- ----------- ---------- -------- ----------- Balance, December 31, 1996 27,891 14,607,299 5,214,763 (2,628) 9,847,325 Comprehensive income: Net income 2,845,990 Net change in unrealized holding loss on available-for-sale securities, net of tax effect of $103,844 151,915 Comprehensive income 2,997,905 Issuance of common stock from dividend reinvestment plan 308 351,141 351,449 Stock issuance relating to optional cash contribution plan 138 158,017 158,155 Net proceeds from stock offering 4,030 3,862,141 3,866,171 Dividends declared ($.24 per share) (784,579) (784,579) ------- ----------- ---------- -------- ----------- Balance, December 31, 1997 32,367 18,978,598 7,276,174 149,287 26,436,426 Comprehensive income: Net income 3,363,042 Total other comprehensive income 134,772 Comprehensive income 3,497,814 Issuance of 5% common stock dividend 1,617 2,566,147 (2,575,881) (8,117) Issuance of common stock from dividend reinvestment plan 304 472,938 473,242 Stock issuance relating to optional cash contribution plan 134 215,790 215,924 Stock options exercised 42 37,772 37,814 Tax benefit from exercise of stock options 13,975 13,975 Dividends declared ($.28 per share) (959,693) (959,693) ------- ----------- ---------- -------- ----------- Balance, December 31, 1998 $34,464 $22,285,220 $7,103,642 $284,059 $29,707,385 ======= =========== ========== ======== =========== Reclassification disclosure for the year ended December 31, 1998: Net unrealized gains on available-for-sale securities $731,683 Less reclassification adjustment for realized gains or losses in net income (382,370) -------- Other comprehensive income before income tax effect 349,313 Income tax expense (133,656) -------- $215,657 Minimum pension liability (146,825) Income tax benefit 65,940 -------- (80,885) -------- Total other comprehensive income, net of tax $134,772 ======== Accumulated other comprehensive income as of December 31, 1998 consists of net unrealized holding gains on available-for-sale securities, net of taxes of $364,944 less minimum pension liability adjustment of $80,885 net of taxes. Accumulated other comprehensive income as of December 31, 1997 and 1996 consists of net unrealized holding gains (losses) on available-for-sale securities, net of taxes. The accompanying notes are an integral part of these consolidated financial statements. SLADE'S FERRY BANCORP AND SUBSIDIARY ------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Years Ended December 31, 1998, 1997 and 1996 -------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 3,363,042 $ 2,845,990 $ 2,378,195 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of goodwill 226,800 226,800 98,000 Accretion, net of amortization of fair market value adjustments (5,718) (5,718) (1,429) Gain on sale of fixed assets (2,700) (4,000) (8,702) Securities gains, net (382,370) (313,844) (112,631) Depreciation and amortization 668,354 653,344 500,378 Provision for loan losses 600,000 500,000 400,000 Deferred tax (benefit) expense 204,267 (90,885) (92,207) Increase (decrease) in taxes payable (189,796) 184,331 (103,889) Decrease in interest receivable 198,185 57,316 384,435 Decrease in interest payable (13,901) (12,184) (49,768) Increase in accrued expenses 192,315 60,838 88,631 Increase in prepaid expenses (7,401) (78,662) (130,768) Increase (decrease) in other liabilities (221,286) 29 (139,617) (Increase) decrease in other assets 19,892 345,234 (322,275) Accretion, net of amortization of securities (96,783) (220,167) (430,515) Change in unearned income 1,080 47,142 115,825 (Gain) loss on sales of other real estate owned, net (54,590) 42,457 21,008 Writedown of other real estate owned 67,480 30,000 Decrease in cash surrender value of life insurance policies 11,483 ----------- ----------- ----------- Net cash provided by operating activities 4,510,873 4,305,501 2,624,671 ----------- ----------- ----------- Cash flows from investing activities: Investment in life insurance policies (1,625,000) Purchases of available-for-sale securities (50,687,039) (18,776,994) (10,128,087) Proceeds from sales of available-for-sale securities 1,098,937 1,171,136 661,644 Proceeds from maturities of available-for-sale securities 32,262,437 14,786,873 14,859,193 Purchases of held-to-maturity securities (13,283,524) (14,714,192) (16,141,095) Proceeds from maturities of held-to-maturity securities 10,094,867 17,142,658 19,514,788 Net (increase) decrease in interest bearing time deposits with other banks 106,688 42,910 (7,519) Purchases of Federal Home Loan Bank stock (9,300) (409,400) Redemption of Federal Home Loan Bank stock 93,600 Proceeds from sales of fixed assets 2,700 4,000 8,702 Proceeds from sales of other real estate owned 136,281 291,293 147,458 Net increase in loans (6,234,254) (15,258,154) (14,971,481) Cash and cash equivalents of $19,936,591 acquired in the purchase of Fairbank, Inc., less cash of $8,575,284 paid for the common stock of Fairbank, Inc. 11,361,307 Capital expenditures (1,630,689) (394,602) (1,085,521) Recoveries of loans previously charged off 67,724 94,405 439,788 ----------- ----------- ----------- Net cash provided by (used in) investing activities (29,700,172) (15,610,667) 4,343,377 ----------- ----------- ----------- Cash flows from financing activities: Fractional shares paid in cash (8,117) (3,360) Proceeds from issuance of common stock 726,980 4,438,376 346,147 Cost of stock issuance (62,601) Net increase (decrease) in demand deposits, NOW and savings accounts 9,687,926 (1,230) 1,912,803 Net increase (decrease) in time deposits 22,772,689 3,529,471 (3,191,933) Net increase (decrease) in other borrowed funds (1,157,671) 458,227 Advances from Federal Home Loan Bank 4,071,600 430,000 Dividends paid (914,943) (734,073) (658,165) Payments on Federal Home Loan Bank advances (26,146) Payment on notes payable (100,000) (100,000) (243,013) ----------- ----------- ----------- Net cash provided by (used in) financing activities 35,052,318 7,499,943 (1,379,294) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 9,863,019 (3,805,223) 5,588,754 Cash and cash equivalents at beginning of year 20,323,501 24,128,724 18,539,970 ----------- ----------- ----------- Cash and cash equivalents at end of year $30,186,520 $20,323,501 $24,128,724 =========== =========== =========== Supplemental disclosures: Loans transferred to other real estate owned $ 1,107,063 $ 446,612 $ 144,741 Loans originating from the sales of other real estate owned 158,650 193,600 435,000 Interest paid 10,725,246 10,424,662 9,127,839 Income taxes paid 2,201,689 1,827,295 1,760,097 In 1996 the Company purchased all of the common stock of Fairbank, Inc. for $8,575,284. In conjunction with the acquisition, liabilities were assumed as follows: Fair value of assets acquired $65,141,843 Cash paid for the common stock 8,575,284 ----------- Liabilities assumed $56,566,559 =========== The accompanying notes are an integral part of these consolidated financial statements. SLADE'S FERRY BANCORP AND SUBSIDIARY ------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 1998, 1997 and 1996 -------------------------------------------- NOTE 1 - NATURE OF OPERATIONS - ----------------------------- Slade's Ferry Bancorp (Company) (formerly known as Weetamoe Bancorp) is a Massachusetts corporation that was organized in 1990 to become the holding company of Slade's Ferry Trust Company (Bank). In December of 1996 the stockholders of the Company approved the change of the name of the Company to Slade's Ferry Bancorp effective January 1, 1997. The Company's primary activity is to act as the holding company for the Bank. The Bank is a state chartered bank, which was incorporated in 1959 and is headquartered in Somerset, Massachusetts. The Bank operates its business from ten banking offices located in Massachusetts. The Bank is engaged principally in the business of attracting deposits from the general public and investing those deposits in residential and real estate loans, and in commercial, consumer and small business loans. NOTE 2 - ACCOUNTING POLICIES - ---------------------------- The accounting and reporting policies of the Company and its subsidiary conform to generally accepted accounting principles and predominant practices within the banking industry. The consolidated financial statements were prepared using the accrual basis of accounting. The significant accounting policies are summarized below to assist the reader in better understanding the consolidated financial statements and other data contained herein. PERVASIVENESS OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank and the Bank's wholly-owned subsidiaries, Slade's Ferry Realty Trust and Slade's Ferry Securities Corporation. Slade's Ferry Realty Trust was formed to hold ownership of real estate and Slade's Ferry Securities Corporation was formed to hold securities for tax benefits in Massachusetts. All significant intercompany accounts and transactions have been eliminated in the consolidation. CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, cash items, due from banks and federal funds sold. Cash and due from banks as of December 31, 1998 includes $4,551,000 which is subject to withdrawals and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank. SECURITIES: Investments in debt securities are adjusted for amortization of premiums and accretion of discounts. Gains or losses on sales of investment securities are computed on a specific identification basis. The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-sale, or trading. This security classification may be modified after acquisition only under certain specified conditions. In general, securities may be classified as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale. -- Held-to-maturity securities are measured at amortized cost in the balance sheet. Unrealized holding gains and losses are not included in earnings or in a separate component of capital. They are merely disclosed in the notes to the consolidated financial statements. -- Available-for-sale securities are carried at fair value on the balance sheet. Unrealized holding gains and losses are not included in earnings, but are reported as a net amount (less expected tax) in a separate component of capital until realized. -- Trading securities are carried at fair value on the balance sheet. Unrealized holding gains and losses for trading securities are included in earnings. LOANS: Loans receivable that management has the intent and ability to hold until maturity or payoff are reported at their outstanding principal balances reduced by amounts due to borrowers on unadvanced loans, by any charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Interest on loans is recognized on a simple interest basis. Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount amortized as an adjustment of the related loan's yield. The Company is amortizing these amounts over the contractual life of the related loans. Cash receipts of interest income on impaired loans is credited to principal to the extent necessary to eliminate doubt as to the collectibility of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered. ALLOWANCE FOR LOAN LOSSES: The allowance is increased by provisions charged to current operations and is decreased by loan losses, net of recoveries. The provision for loan losses is based on management's evaluation of current and anticipated economic conditions, changes in the character and size of the loan portfolio, and other indicators. The Company considers a loan to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. The Company measures impaired loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. The Company considers for impairment all loans, except large groups of smaller balance homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value or at the lower of cost or fair value, leases, and convertible or nonconvertible debentures and bonds and other debt securities. The Company considers its residential real estate loans and consumer loans that are not individually significant to be large groups of smaller balance homogeneous loans. Factors considered by management in determining impairment include payment status, net worth and collateral value. An insignificant payment delay or an insignificant shortfall in payment does not in itself result in the review of a loan for impairment. The Company reviews its loans for impairment on a loan-by-loan basis. The Company does not apply impairment to aggregations of loans that have risk characteristics in common with other impaired loans. Interest on a loan is not generally accrued when the loan becomes ninety or more days overdue. The Company may place a loan on nonaccrual status but not classify it as impaired, if (i) it is probable that the Company will collect all amounts due in accordance with the contractual terms of the loan or (ii) the loan is an individually insignificant residential mortgage loan or consumer loan. Impaired loans are charged-off when management believes that the collectibility of the loan's principal is remote. Substantially all of the Company's loans that have been identified as impaired have been measured by the fair value of existing collateral. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less accumulated depreciation and amortization. Cost and related allowances for depreciation and amortization of premises and equipment retired or otherwise disposed of are removed from the respective accounts with any gain or loss included in income or expense. Depreciation and amortization are calculated principally on the straight-line method over the estimated useful lives of the assets. GOODWILL: Goodwill arising from the acquisition of Fairbank, Inc. is reported net of accumulated amortization. Goodwill is being amortized on a straight-line basis over a period of fifteen years. OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES: Other real estate owned includes properties acquired through foreclosure and properties classified as in-substance foreclosures in accordance with Financial Accounting Standards Board Statement No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructuring." These properties are carried at the lower of cost or estimated fair value less estimated cost to sell. Any writedown from cost to estimated fair value required at the time of foreclosure or classification as in-substance foreclosure is charged to the allowance for loan losses. Expenses incurred in connection with maintaining these assets, subsequent writedowns and gains or losses recognized upon sale are included in other expense. In accordance with Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan," the Company classifies loans as in-substance repossessed or foreclosed if the Company receives physical possession of the debtor's assets regardless of whether formal foreclosure proceedings take place. INCOME TAXES: The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. FAIR VALUES OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Company disclose estimated fair value for its financial instruments. Fair value methods and assumptions used by the Company in estimating its fair value disclosures are as follows: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Securities (including mortgage-backed securities): Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value. Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value. Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Federal Home Loan Bank Advances: Fair values for FHLB advances are estimated using a discounted cash flow technique that applies interest rates currently being offered on advances to a schedule of aggregated expected monthly maturities on FHLB advances. Note payable and other borrowed funds: Fair values for the note payable and other borrowed funds are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar borrowings. Off-balance sheet instruments: The fair value of commitments to originate loans is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and the unadvanced portion of loans, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date. EARNINGS PER SHARE: Statement of Financial Accounting Standards No. 128 (SFAS No. 128), "Earnings per Share" is effective for periods ending after December 15, 1997. SFAS No. 128 simplifies the standards of computing earnings per share (EPS) previously found in APB Opinion No. 15. It replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB Opinion No. 15. The Company has computed and presented EPS for the years ended December 31, 1998 and 1997 in accordance with SFAS No. 128. EPS as so computed does not differ materially from EPS that would have resulted if APB Opinion No. 15 had been applied. In accordance with SFAS No. 128 EPS data presented for the year ended December 31, 1996 has been restated. EPS so restated does not differ materially from EPS previously presented. STOCK BASED COMPENSATION: Prior to 1997, the Company did not make stock-based compensation awards. In 1997, the Company began making such awards and had the option, under SFAS No. 123, of accounting for stock-based compensation using the intrinsic value approach in APB No. 25 and the fair value method introduced in SFAS No. 123. The Company elected to use the APB No. 25 method. Entities electing to follow the provisions of APB No. 25 must make pro forma disclosure of net income and earnings per share, as if the fair value method of accounting defined in SFAS No. 123 had been applied. The Company has made the pro forma disclosures required by SFAS No. 123. NOTE 3 - ACQUISITION OF FAIRBANK, INC. - -------------------------------------- On August 23, 1996 the Company effected its acquisition of Fairbank, Inc., a Massachusetts corporation, and its wholly owned subsidiary, the National Bank of Fairhaven, through the Company's wholly owned subsidiary, Slade's Ferry Trust Company. The acquisition was accomplished by the payment by Slade's Ferry Trust Company of $8,575,284 in cash from its capital funds for all of the outstanding shares of the common stock of Fairbank, Inc. As a result of the acquisition, Fairbank, Inc. was dissolved, and the National Bank of Fairhaven was merged into Slade's Ferry Trust Company. The National Bank of Fairhaven's two banking offices in Fairhaven and New Bedford, Massachusetts have become branches of Slade's Ferry Trust Company. The acquisition has been accounted for as a purchase, and the results of operations of Fairbank, Inc. since the date of the acquisition are included in the consolidated financial statements. Goodwill reflected by the purchase accounting amounted to $3,405,368 and is being amortized over 15 years on a straight-line basis. The following summary, prepared on an unaudited pro forma basis presents the results of operations as though the Company and Fairbank, Inc. had been merged as of the beginning of the year ended December 31, 1996: Net interest income after provision for loan losses $12,077,046 Noninterest income 1,349,224 ----------- Total 13,426,270 Noninterest expense 9,251,100 ----------- Income before income taxes 4,175,170 Income taxes 1,543,200 ----------- Net income $ 2,631,970 =========== The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the entire year of 1996. In addition, they are not intended to be a projection of future results and do not reflect any effects that might be achieved from combined operations. NOTE 4 - SECURITIES - ------------------- Debt and equity securities have been classified in the consolidated balance sheets according to management's intent. The carrying amount of securities and their approximate fair values are as follows as of December 31: Gross Gross Amortized Unrealized Unrealized Cost Holding Holding Fair Basis Gains Losses Value ----------- ---------- ---------- ----------- Available-for-sale securities: December 31, 1998: Debt securities issued by the U.S. Treasury and Other U.S. government corporations and agencies $44,619,465 $211,625 $ 54,380 $44,776,710 Mortgage-backed securities 10,862,100 52,277 22,877 10,891,500 Asset-backed securities 222,479 1,021 223,500 Marketable equity securities 1,918,129 550,951 161,498 2,307,582 ----------- -------- -------- ----------- $57,622,173 $815,874 $238,755 $58,199,292 =========== ======== ======== =========== Available-for-sale securities: December 31, 1997: Debt securities issued by the U.S. Treasury and Other U.S. government corporations and agencies $30,401,644 $ 84,683 $ 91,311 $30,395,016 Mortgage-backed securities 7,747,509 23,504 19,934 7,751,079 Asset-backed securities 234,136 279 233,857 Marketable equity securities 1,565,123 301,666 70,523 1,796,266 ----------- -------- -------- ----------- $39,948,412 $409,853 $182,047 $40,176,218 =========== ======== ======== =========== Held-to-maturity securities: December 31, 1998: Debt securities issued by the U.S. Treasury and Other U.S. government corporations and agencies $ 8,810,623 $116,949 $ 12 $ 8,927,560 Debt securities issued by states of the United States and political subdivisions of the states 11,996,833 256,936 13,334 12,240,435 Mortgage-backed securities 113,798 1,148 114,946 ----------- -------- -------- ----------- $20,921,254 $375,033 $ 13,346 $21,282,941 =========== ======== ======== =========== December 31, 1997: Debt securities issued by the U.S. Treasury and Other U.S. government corporations and agencies $ 9,415,554 $ 55,276 $ 3,871 $ 9,466,959 Debt securities issued by states of the United States and political subdivisions of the states 7,975,728 106,237 13,079 8,068,886 Mortgage-backed securities 209,254 2,384 211,638 Other debt securities 1,000 17 1,017 ----------- -------- -------- ----------- $17,601,536 $163,914 $ 16,950 $17,748,500 =========== ======== ======== =========== The scheduled maturities of held-to-maturity securities and available-for- sale securities (other than equity securities) were as follows as of December 31, 1998: Held-to-maturity Available-for-sale securities: securities: -------------------------- ------------------------- Amortized Amortized Cost Fair Cost Fair Basis Value Basis Value ----------- ----------- ----------- ----------- Debt securities other than mortgage-backed and asset backed securities: Due within one year $ 7,068,393 $ 7,089,356 $ 499,698 $ 505,312 Due after one year through five years 7,493,403 7,683,856 23,174,886 23,248,457 Due after five years through ten years 5,914,397 6,062,008 20,944,881 21,022,941 Due after ten years 331,263 332,775 Mortgage-backed securities 113,798 114,946 10,862,100 10,891,500 Asset-backed securities 222,479 223,500 ----------- ----------- ----------- ----------- $20,921,254 $21,282,941 $55,704,044 $55,891,710 =========== =========== =========== =========== During 1998, proceeds from sales of available-for-sale securities amounted to $1,098,937. Gross realized gains on those sales amounted to $382,370. There were no gross realized losses during the period. During 1997, proceeds from sales of available-for-sale securities amounted to $1,171,136. Gross realized gains and gross realized losses on those sales amounted to $315,281 and $1,437, respectively. During 1996, proceeds from sales of available-for-sale securities amounted to $661,644. Gross realized gains and gross realized losses on those sales amounted to $117,911 and $5,280, respectively. There were no securities of issuers whose aggregate carrying amount exceeded 10% of stockholders' equity as of December 31, 1998. A total carrying amount of $6,139,687 of debt securities was pledged to secure treasury tax and loan, trust department and public funds on deposit and the loan from Fleet National Bank as of December 31, 1998. NOTE 5 - LOANS - -------------- Loans consisted of the following as of December 31: 1998 1997 ------------ ------------ Commercial, financial and agricultural $ 43,776,923 $ 36,640,703 Real estate - construction and land development 3,773,286 6,677,684 Real estate - residential 51,219,684 55,477,271 Real estate - commercial 112,912,865 108,007,972 Consumer 6,476,963 6,746,866 Obligations of states and political subdivisions 2,700 9,372 Other 67,616 176,635 ------------ ------------ 218,230,037 213,736,503 Allowance for loan losses (3,569,282) (3,693,865) Unearned income (691,128) (690,048) Unamortized adjustment to fair value (31,350) (42,750) ------------ ------------ Net loans, carrying amount $213,938,277 $209,309,840 ============ ============ Certain directors and executive officers of the Company and companies in which they have significant ownership interest were customers of the Bank during 1998. Total loans to such persons and their companies amounted to $3,878,974 as of December 31, 1998. During the year ended December 31, 1998, $2,902,306 of advances were made and repayments totaled $3,435,863. Changes in the allowance for loan losses were as follows for the years ended December 31: 1998 1997 1996 ---------- ---------- ---------- Balance at beginning of period $3,693,865 $3,354,311 $2,497,774 Loans charged off (792,307) (254,851) (439,229) Provision for loan losses 600,000 500,000 400,000 Recoveries of loans previously charged off 67,724 94,405 439,788 Transfer of Fairbank, Inc.'s allowance to Slade's Ferry Trust Company 455,978 ---------- ---------- ---------- Balance at end of period $3,569,282 $3,693,865 $3,354,311 ========== ========== ========== Information about loans that meet the definition of an impaired loan in Statement of Financial Accounting Standards No. 114 is as follows as of December 31: 1998 1997 ------------------------- ------------------------- Recorded Related Recorded Related Investment Allowance Investment Allowance In Impaired For Credit In Impaired For Credit Loans Losses Loans Losses ----------- ---------- ----------- ---------- Loans for which there is a related allowance for credit losses $1,284,340 $324,887 $1,776,557 $623,570 Loans for which there is no related allowance for credit losses 3,875,975 3,792,560 ---------- -------- ---------- -------- Totals $5,160,315 $324,887 $5,569,117 $623,570 ========== ======== ========== ======== Average recorded investment in impaired loans during the year ended December 31 $5,773,697 $6,173,640 ========== ========== Related amount of interest income recognized during the time, in the year ended December 31, that the loans were impaired Total recognized $ 97,448 $ 79,340 ========== ========== Amount recognized using a cash-basis method of accounting $ 0 $ 0 ========== ========== NOTE 6 - PREMISES AND EQUIPMENT - ------------------------------- The following is a summary of premises and equipment as of December 31: 1998 1997 ----------- ----------- Land $ 1,760,948 $ 1,145,368 Buildings 5,104,082 4,456,550 Furniture and equipment 3,405,848 3,050,179 Leasehold improvements 1,376,689 1,376,689 ----------- ----------- 11,647,567 10,028,786 Accumulated depreciation and amortization (4,960,296) (4,310,252) ----------- ----------- $ 6,687,271 $ 5,718,534 =========== =========== NOTE 7 - DEPOSITS - ----------------- The aggregate amount of time deposit accounts (including CDs), each with a minimum denomination of $100,000, was approximately $26,007,313 and $23,111,663 as of December 31, 1998 and 1997, respectively. For time deposits as of December 31, 1998, the aggregate amount of maturities for each of the following three years ended December 31, are: 1999 $122,343,417 2000 18,836,059 2001 13,649,136 Less: Unamortized adjustment to fair value (2,250) ------------ $154,826,362 ============ NOTE 8 - OTHER BORROWED FUNDS - ----------------------------- Other borrowed funds consist of treasury tax and loan deposits and generally are repaid within one to 120 days from the transaction date. NOTE 9 - NOTE PAYABLE - --------------------- Note payable consisted of the following as of December 31, 1998: Note payable by the Bank to Fleet National Bank. The note payable was assumed by the Bank in the acquisition of Fairbank, Inc. Minimum quarterly principal payments of $25,000 are payable on the last business day of each calendar quarter. The interest rate on the loan is 3 month LIBOR plus 1.2% floating, which has been swapped to yield a 9.01% fixed rate. Interest payments are due quarterly and the maturity of the loan is November 25, 1999. Collateral for the loan consists of U. S. Treasury or agency securities owned by the Bank. NOTE 10 - ADVANCES FROM FEDERAL HOME LOAN BANK OF BOSTON - -------------------------------------------------------- Advances consist of funds borrowed from the Federal Home Loan Bank of Boston (FHLB). Maturities of advances from the Federal Home Loan Bank of Boston for the five fiscal years ending after December 31, 1998 and thereafter are summarized as follows: INTEREST RATE RANGE AMOUNT ------------------- ------ 1999 5.89% - 6.15% $ 97,289 2000 5.89% - 6.15% 103,656 2001 5.89% - 6.15% 109,572 2002 5.89% - 6.15% 118,417 2003 5.89% - 6.15% 125,728 Thereafter 5.66% - 6.15% 3,920,792 ---------- $4,475,454 ========== Advances are secured by the Bank's stock in that institution, its residential real estate mortgage portfolio and the remaining U.S. government and agencies obligations not otherwise pledged. NOTE 11 - INCOME TAXES - ---------------------- The components of income tax expense are as follows for the years ended December 31: 1998 1997 1996 ---------- ---------- ---------- Current: Federal $1,544,874 $1,463,401 $1,204,212 State 467,019 548,225 451,996 ---------- ---------- ---------- 2,011,893 2,011,626 1,656,208 ---------- ---------- ---------- Deferred: Federal 120,677 (71,848) (51,722) State 83,590 (19,037) (40,485) ---------- ---------- ---------- 204,267 (90,885) (92,207) ---------- ---------- ---------- Total income tax expense $2,216,160 $1,920,741 $1,564,001 ========== ========== ========== The reasons for the differences between the statutory federal income tax rates and the effective tax rates are summarized as follows for the years ended December 31: 1998 1997 1996 ------ ------ ------- % of % of % of Income Income Income ------ ------ ------- Federal income tax at statutory rate 34.0% 34.0% 34.0% Increase (decrease) in tax resulting from: Tax-exempt income (2.9) (2.2) (2.3) Dividends received deduction (.2) (.3) Unallowable expenses .7 .5 .6 Amortization of goodwill 1.4 1.6 .8 State tax, net of federal tax benefit 6.5 6.6 6.9 ---- ---- ---- 39.7% 40.3% 39.7% ==== ==== ==== The Company had gross deferred tax assets and gross deferred tax liabilities as follows as of December 31: 1998 1997 ---------- ---------- Deferred tax assets: Operating loss carryover $ 4,884 $ 173,663 Allowance for loan losses 1,226,287 1,309,659 Deferred loan fees 224,960 256,635 Interest on non-performing loans 225,480 211,491 Accrued employee benefits 220,626 153,011 Other real estate owned valuation 985 Minimum pension liability adjustment 65,940 Other adjustments 17,573 3,317 ---------- ---------- Gross deferred tax assets 1,985,750 2,108,761 ---------- ---------- Deferred tax liabilities: Accelerated depreciation (242,049) (232,613) Prepaid pensions (68,269) (63,341) Discount accretion (2,091) (1,139) Net unrealized holding gain on available-for-sale securities (212,175) (78,520) ---------- ---------- Gross deferred tax liabilities (524,584) (375,613) ---------- ---------- Net deferred tax assets $1,461,166 $1,733,148 ========== ========== Deferred tax assets as of December 31, 1998 and 1997 have not been reduced by a valuation allowance because management believes that it is more likely than not that the full amount of deferred tax assets will be realized. As of December 31, 1998, the Company had approximately $14,000 in operating loss carryovers for tax purposes which expire in 2010. NOTE 12 - EMPLOYEE BENEFITS - --------------------------- The Company has a defined benefit pension plan (plan) covering substantially all of its full time employees who meet certain eligibility requirements. Employees are eligible under the plan upon attaining age 21 and completing one year of service. The benefits paid are based on 1.5% of total salary plus .5% of compensation in excess of integration level per year of service. The integration level is the first $750 of monthly compensation. The accrued benefit is based on years of service. As of December 31, 1998 the Bank has suspended the plan so that employees no longer earn additional defined benefits for future service. The following tables set forth information about the plan as of December 31 and the years then ended: 1998 1997 ---------- ---------- Change in projected benefit obligation: Benefit obligation at beginning of year $1,424,299 $ 875,433 Service cost 3,150 97,214 Interest cost 148,243 104,822 Change in assumptions 307,199 Actuarial loss 193,463 370,702 Benefits paid (82,847) (23,872) Effect of plan curtailment (382,792) ---------- ---------- Benefit obligation at end of year 1,610,715 1,424,299 ---------- ---------- Change in plan assets: Plan assets at estimated fair value at beginning of year 1,131,394 916,360 Actual return on plan assets 159,422 95,773 Expense paid from plan assets (35,805) (32,367) Employer contribution 191,672 175,500 Benefits paid (82,847) (23,872) ---------- ---------- Fair value of plan assets at end of year 1,363,836 1,131,394 ---------- ---------- Funded status (246,879) (292,905) Unrecognized net actuarial loss 404,042 656,570 Unrecognized prior service cost (18,339) (338,714) Unamortized net obligation existing at date of adoption of SFAS No. 87 118,393 126,400 ---------- ---------- Net amount recognized $ 257,217 $ 151,351 ========== ========== Amounts recognized in the balance sheet consist of: Prepaid benefit cost $ 257,217 $ 151,351 Accrued benefit liability (246,879) Intangible asset 100,054 Accumulated other comprehensive 146,825 ---------- ---------- Net amount recognized $ 257,217 $ 151,351 ========== ========== The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0% for 1998 and 8.5% for 1997 and 1996, respectively. The weighted-average expected long-term rate of return on assets was 7.0% for 1998, and 8.5% for 1997 and 1996, respectively. Components of net periodic benefit cost: 1998 1997 1996 -------- -------- ------- Service cost $ 3,150 $ 97,214 $92,434 Interest cost on benefit obligation 148,243 104,822 65,745 Expected return on assets (90,331) (83,382) (70,423) Amortization of net transition obligation 8,007 8,007 8,007 Amortization of prior service cost (13,176) (27,002) (27,022) Recognized actuarial loss 29,913 52,188 13,316 -------- -------- ------- Net periodic benefit cost $ 85,806 $151,847 $82,057 ======== ======== ======= Securities of the Company included in plan assets as of December 31, 1998 and 1997 consist of 3,553 and 3,385 shares, respectively, of Slade's Ferry Bancorp stock. The Company has a 401K plan for eligible employees who attain age 21 and complete one year of service. The Company contributes a discretionary amount to be allocated to eligible participants. Current contributions vest fully after seven years of continuous service. The amount that may be deferred by the employees is limited by the amount that will not cause the plan to exceed IRS limitations. Contributions made by the Company charged to employee benefit expense amounted to $9,750, $9,500 and $7,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The Company adopted a profit-sharing plan, ("Plan") effective October 1, 1998. The Company contributes amounts to the plan at the Company's discretion. Cost recognized by the Company for the profit-sharing plan amounted to $80,000 for the year ended December 31, 1998. NOTE 13 - COMMITMENTS AND CONTINGENT LIABILITIES - ------------------------------------------------ The Company is obligated under certain agreements issued during the normal course of business which are not reflected in the accompanying consolidated financial statements. The Company is obligated under various lease agreements covering branch offices and equipment. These agreements are considered to be operating leases. The total minimum rental due in future periods under these agreements is as follows as of December 31, 1998: 1999 $104,111 2000 99,875 2001 92,952 2002 87,354 2003 75,501 Thereafter 224,448 -------- Total minimum lease payments $684,241 ======== Certain leases contain provisions for escalation of minimum lease payments contingent upon increases in real estate taxes and percentage increases in the consumer price index. The total rental expense amounted to $114,848 for 1998, $90,210 for 1997 and $66,223 for 1996. NOTE 14 - FINANCIAL INSTRUMENTS - ------------------------------- The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, standby letters of credit and unadvanced funds on loans. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include secured interests in mortgages, accounts receivable, inventory, property, plant and equipment and income- producing properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Of the total standby letters of credit outstanding as of December 31, 1998, $199,880 are secured by deposits at the Bank. The estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, are as follows as of December 31: 1998 1997 ---------------------------- ---------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ ------------ ------------ Financial assets: Cash and cash equivalents $ 30,186,520 $ 30,186,520 $ 20,323,501 $ 20,323,501 Interest bearing time deposits with other banks 106,688 106,688 Available-for-sale securities 58,199,292 58,199,292 40,176,218 40,176,218 Held-to-maturity securities 20,921,254 21,282,941 17,601,536 17,748,500 Federal Home Loan Bank stock 899,900 899,900 890,600 890,600 Loans 213,938,277 214,366,000 209,309,840 209,036,000 Accrued interest receivable 1,598,282 1,598,282 1,796,467 1,796,467 Financial liabilities: Note payable 847,990 847,990 945,308 945,340 Other borrowed funds 42,329 42,329 1,200,000 1,200,000 Advances from Federal Home Loan Bank 4,475,454 4,558,000 430,000 396,000 Deposits 303,785,865 304,672,000 271,322,250 271,637,000 The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheet under the indicated captions. Accounting policies related to financial instruments are described in Note 2. The notional amounts of financial instrument liabilities with off-balance sheet credit risk are as follows as of December 31: 1998 1997 ----------- ----------- Commitments to originate loans $ 5,379,456 $10,148,013 Standby letters of credit 2,307,880 2,356,380 Unadvanced portions of loans: Consumer loans (including credit card loans and student loans) 2,924,220 3,396,496 Commercial real estate loans 145,251 851,935 Home equity loans 1,235,275 1,501,126 Commercial loans 15,273,024 14,182,074 Construction loans 6,428,943 2,768,196 ----------- ----------- $33,694,049 $35,204,220 =========== =========== There is no material difference between the notional amounts and the estimated fair values of the off-balance sheet liabilities. The Company has no derivative financial instruments subject to the provisions of SFAS No. 119 "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments" other than the interest rate swap described in Note 9. NOTE 15 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK - --------------------------------------------------------- Most of the Bank's business activity is with customers located within the state. There are no concentrations of credit to borrowers that have similar economic characteristics. The majority of the Bank's loan portfolio is comprised of loans collateralized by real estate located in the state of Massachusetts. NOTE 16 - EARNINGS PER SHARE (EPS) - ---------------------------------- Earnings per share were calculated using the weighted average number of shares outstanding. Earnings per share as previously stated has been reduced to reflect the issuance of a 5% stock dividend in February of 1998, as follows. EPS in 1997 was reduced by $.05 and EPS in 1996 was reduced by $.04. Dividends per share was reduced by $.01 for both 1997 and 1996. Reconciliation of the numerators and the denominators of the basic and diluted per share computations for net income are as follows: Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- Year ended December 31, 1998 Basic EPS Net income and income available to common stockholders $3,363,042 3,402,218 $.99 Effect of dilutive securities, options 14,007 ---------- --------- Diluted EPS Income available to common stockholders and assumed conversions $3,363,042 3,416,225 $.98 ========== ========= Year ended December 31, 1997 Basic EPS Net income and income available to common stockholders $2,845,990 3,184,857 $.89 Effect of dilutive securities, options 5,230 ---------- --------- Diluted EPS Income available to common stockholders and assumed conversions $2,845,990 3,190,087 $.89 ========== ========= Year ended December 31, 1996 Basic EPS Net income and income available to common stockholders $2,378,195 2,903,131 $.82 Effect of dilutive securities, options 0 ---------- --------- Diluted EPS Income available to common stockholders and assumed conversion $2,378,195 2,903,131 $.82 ========== ========= NOTE 17 - REGULATORY MATTERS - ---------------------------- The Company and its subsidiary the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Their capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1998, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Company's and the Bank's actual capital amounts and ratios are also presented in the table. To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions: ---------------- ------------------ ------------------ Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollar amounts in thousands) As of December 31, 1998: Total Capital (to Risk Weighted Assets): Consolidated $29,647 12.80% $18,536 >/=8.0% N/A Slade's Ferry Trust Company 27,034 11.69 18,500 >/=8.0 $23,124 >/=10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated 26,569 11.47 9,268 >/=4.0 N/A Slade's Ferry Trust Company 23,961 10.36 9,250 >/=4.0 13,875 >/= 6.0 Tier 1 Capital (to Average Assets): Consolidated 26,569 8.12 13,081 >/=4.0 N/A Slade's Ferry Trust Company 23,961 7.38 12,989 >/=4.0 16,236 >/= 5.0 As of December 31, 1997: Total Capital (to Risk Weighted Assets): Consolidated $25,907 12.04% $17,210 >/=8.0% N/A Slade's Ferry Trust Company 24,022 11.18 17,183 >/=8.0 $21,479 >/=10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated 23,206 10.74 8,645 >/=4.0 N/A Slade's Ferry Trust Company 21,325 9.88 8,631 >/=4.0 12,947 >/= 6.0 Tier 1 Capital (to Average Assets): Consolidated 23,206 7.79 11,910 >/=4.0 N/A Slade's Ferry Trust Company 21,325 7.18 11,876 >/=4.0 14,845 >/= 5.0 The declaration of cash dividends is dependent on a number of factors, including regulatory limitations, and the Company's operating results and financial condition. The stockholders of the Company will be entitled to dividends only when, and if, declared by the Company's Board of Directors out of funds legally available therefore. Under the Massachusetts Business Corporation Law, a dividend may not be declared if the corporation is insolvent or if the declaration of the dividend would render the corporation insolvent. The declaration of future dividends, whether by the Board of Directors of the Company or the Bank, will be subject to favorable operating results, financial conditions, tax considerations, and other factors. As of December 31, 1998 the Company would be restricted from declaring dividends in an amount greater than $29,707,385 as such declaration would render the corporation insolvent. As of December 31, 1998 the Bank would be restricted from declaring dividends in an amount greater than approximately $8,534,000 as such declaration would decrease capital below the Bank's required minimum level of regulatory capital. NOTE 18 - STOCK OPTION PLAN - --------------------------- At the 1996 annual meeting stockholders approved a 1996 stock option plan (Plan). No options were granted in 1996. A summary of the Plan is as follows. The Plan is divided into two separate equity incentive programs, a Discretionary Grant Program and an Automatic Grant Program. The maximum number of shares of common stock issuable over the term of the Plan may not exceed 262,500 shares and the maximum aggregate number of shares issuable under both programs in any plan year may not exceed 52,500 shares. Unless sooner terminated by the Board, the Plan will in all events terminate on March 11, 2006. Under the Discretionary Grant Program, key employees, including officers, may be granted incentive stock options to purchase shares of common stock. The option exercise price per share may not be less than one hundred percent of the fair market value of common stock at grant date and generally become exercisable in periodic installments over the optionee's period of service. Two types of stock appreciation rights are authorized for issuance: (1) tandem rights, which require the option holder to elect between the exercise of the underlying option for shares of common stock and the surrender of such option for appreciation distribution and (2) limited rights, which are automatically exercised upon the occurance of a hostile takeover. Eligibility for participation in the Automatic Grant Program is limited to non-employee directors of the Company or its subsidiary who have completed three full years of service as directors. Under the Automatic Grant Program a nonstatutory option for 2,000 shares of common stock shall be granted each plan year to eligible directors. The exercise price per share will be equal to one hundred percent of the fair market value per share of common stock at grant date and each option will have a maximum five year term. In 1998 the Board voted to amend the plan so that each option under the Automatic Grant Program will be immediately vested. The Company applies APB Opinion 25 and related Interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its stock option plan. Had compensation cost for the Company's stock-based compensation plan been determined based on the fair value at the grant dates for awards under those plans consistent with the method of FASB Statement 123, the Company's net income and earnings per share for the years ended December 31, 1998 and 1997 would have been reduced to the pro forma amounts indicated below: 1998 1997 ---------- ---------- Net income As reported $3,363,042 $2,845,990 Pro forma $3,298,016 $2,807,466 Basic earnings per share As reported $.99 $.89 Pro forma $.97 $.88 Diluted earnings per share As reported $.98 $.89 Pro forma $.97 $.88 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the years ended December 31, 1998 and 1997: dividend yield of 2 percent; expected volatility of 13 percent, risk-free interest rate of 5.7 percent and 6.7 percent, respectively; and expected lives of 4 years. A summary of the status of the Company's stock option plan as of December 31, 1998 and 1997 and changes during the years then ending are presented below: 1998 1997 -------------------------- -------------------------- Weighted-Average Weighted-Average Options Shares Exercise Price Shares Exercise Price - -------------------------------- ------ ---------------- ------ ---------------- Outstanding at beginning of year 32,550 $ 8.90 0 Granted 32,250 17.00 32,550 $8.90 Exercised (4,250) 8.90 0 Forfeited 0 0 ------ ------ Outstanding at end of year 60,550 13.21 32,550 $8.90 ====== ====== Options exercisable at year-end 60,550 32,550 Weighted-average fair value of options granted during the year $2.78 $1.65 The following table summarizes information about fixed stock options outstanding at December 31, 1998: Options Outstanding and Exercisable --------------------------------------------------------------------- Weighted-Average Number Remaining Weighted-Average Exercise Price Outstanding Contractual Life Exercise Price -------------- ----------- ---------------- ---------------- $ 8.90 28,300 3.7 years $ 8.90 17.00 32,250 4.7 years 17.00 13.21 60,550 4.2 years 13.21 Exercise prices and options outstanding have been adjusted to reflect the 5% stock dividend declared in February of 1998. NOTE 19 - LITIGATION - -------------------- The Bank is involved in a civil suit brought by a former employee of the National Bank of Fairhaven, which primarily alleges a breach of contract and other related claims. The demand by the plaintiff is $250,000 to settle the case. The case is presently scheduled for trial in February 1999. The Company estimates its potential liability to be less than $250,000 and it believes it has meritorious defenses to the claim. The Company believes that the suit will not have a material adverse effect on the Company's financial condition, results of operations or liquidity. NOTE 20 - RECLASSIFICATION - -------------------------- Certain amounts in the prior year have been reclassified to be consistent with the current year's statement presentation. NOTE 21 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS - ------------------------------------------------------------ The following condensed financial statements are for Slade's Ferry Bancorp (Parent Company Only) and should be read in conjunction with the consolidated financial statements of Slade's Ferry Bancorp and Subsidiary. SLADE'S FERRY BANCORP --------------------- (Parent Company Only) CONDENSED FINANCIAL STATEMENTS ------------------------------ Balance sheets December 31, 1998 1997 ----------- ----------- ASSETS - ------ Cash $ 489,437 $ 319,437 Investments in available-for-sale securities (at fair value) 1,949,984 1,446,722 Investments in held-to-maturity securities (fair value of $295,873 as of December 31, 1998 and $246,917 as of December 31, 1997) 295,763 247,465 Investment in subsidiary, Slade's Ferry Trust Company 27,098,674 24,557,163 Premises and equipment 22,355 Accrued interest receivable 28,357 5,977 Other assets 38,003 38,539 ----------- ----------- $29,922,573 $26,615,303 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Other liabilities $ 215,188 $ 178,877 ----------- ----------- Total liabilities 215,188 178,877 ----------- ----------- Stockholders' equity: Common stock, par value $.01 per share; authorized 5,000,000 shares; issued and outstanding 3,446,413.80 shares in 1998 and 3,236,712.7 shares in 1997 34,464 32,367 Paid-in capital 22,285,220 18,978,598 Retained earnings 7,103,642 7,276,174 Accumulated other comprehensive income 284,059 149,287 ----------- ----------- Total stockholders' equity 29,707,385 26,436,426 ----------- ----------- $29,922,573 $26,615,303 =========== =========== Statements of income and comprehensive income Years Ended December 31, -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Dividends from subsidiary $ 950,000 $ 475,000 $ 360,000 Interest and dividends on securities: Taxable 111,127 40,199 Other interest income 6,111 4,267 2,474 Management fee income from subsidiary 432,002 438,479 415,904 Other income 4,000 ---------- ---------- ---------- Total income 1,499,240 961,945 778,378 ---------- ---------- ---------- Salaries and employee benefits 376,940 333,410 311,038 Equipment expense 379 4,449 20,596 Other expense 146,641 124,676 96,872 ---------- ---------- ---------- Total expense 523,960 462,535 428,506 ---------- ---------- ---------- Income before income taxes (benefit) and equity in undistributed net income of subsidiary 975,280 499,410 349,872 Income taxes (benefit) 20,384 16,754 (2,400) ---------- ---------- ---------- Income before equity in undistributed net income of subsidiary 954,896 482,656 352,272 Equity in undistributed net income of subsidiary 2,408,146 2,363,334 2,025,923 ---------- ---------- ---------- Net income 3,363,042 2,845,990 2,378,195 ---------- ---------- ---------- Other comprehensive income, net of tax Unrealized holding gains (losses) on available-for-sale securities, parent company only 1,408 (1,792) Unrealized holding gains (losses) on available-for-sale securities, subsidiary 214,249 153,707 (35,650) Minimum pension liability adjustment, net of tax effect (80,885) ---------- ---------- ---------- Total other comprehensive income, net of tax 134,772 151,915 (35,650) ---------- ---------- ---------- Comprehensive income $3,497,814 $2,997,905 $2,342,545 ========== ========== ========== SLADE'S FERRY BANCORP --------------------- (Parent Company Only) Years Ended December 31, 1998, 1997 and 1996 -------------------------------------------- Statements of cash flows 1998 1997 1996 ---------- ---------- ---------- Cash flows from operating activities: Net income $3,363,042 $2,845,990 $2,378,195 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net income of subsidiary (2,408,146) (2,363,334) (2,025,923) Accretion, net of amortization of securities (8,159) (34,220) Depreciation and amortization 379 4,448 10,677 Increase (decrease) in taxes payable 12,686 5,007 (5,668) Increase in accrued expenses 2,888 775 910 (Increase) decrease in prepaid expenses 4,748 (13,223) (210) Increase in interest receivable (22,380) (5,977) (Increase) decrease in other assets (7,450) 13,639 (14,785) Increase (decrease) in other liabilities (7,750) 6,988 (636) ---------- ---------- ---------- Net cash provided by operating activities 929,858 460,093 342,560 ---------- ---------- ---------- Cash flows from investing activities: Additional investment in subsidiary bank (2,300,000) Capital expenditures (22,734) Purchases of held-to-maturity securities (590,583) (2,613,316) Proceeds from maturities of held-to-maturity securities 550,000 2,400,000 Proceeds from maturities of available-for-sale securities 2,350,000 Purchases of available-for-sale securities (2,850,461) (1,449,649) ---------- ---------- ---------- Net cash used in investing activities (563,778) (3,962,965) ---------- ---------- ---------- Cash flows from financing activities: Fractional shares paid in cash (8,117) (3,360) Dividends paid (914,943) (734,073) (658,165) Net proceeds from issuance of common stock 726,980 4,375,775 346,147 ---------- ---------- ---------- Net cash provided by (used in) financing activities (196,080) 3,641,702 (315,378) ---------- ---------- ---------- Net increase in cash and cash equivalents 170,000 138,830 27,182 Cash and cash equivalents at beginning of year 319,437 180,607 153,425 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 489,437 $ 319,437 $ 180,607 ========== ========== ========== Supplemental disclosure: Income taxes paid $ 7,698 $ 11,747 $ 3,268 The Parent Company Only Statements of Changes in Stockholders' Equity are identical to the Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996, and therefore are not reprinted here. Board of Directors Officers Peter G. Collias Slade's Ferry Bancorp- Slade's Ferry Bancorp Corporate Secretary Slade's Ferry Trust Company --------------------- - --------------------------- Donald T. Corrigan Sandra Curtis Thomas B. Almy Chairman of the Board Compliance Review Officer Architect - I.T. Almy Associates Kenneth R. Rezendes Luisa DiManno James D. Carey President Assistant Treasurer Executive Vice President of Bancorp Chief Executive Officer President of Bank William E. Diskin Chief Executive Officer of Bank James D. Carey Vice President Executive Vice President Peter G. Collias, Esquire Raymond L. Foster Clerk/Secretary of Bancorp and Bank Ralph S. Borges Vice President Treasurer Donald T. Corrigan Joseph J. Ganem Chairman of the Board of Bancorp Executive Management Vice President Chairman of the Board of Bank Slade's Ferry Trust Company --------------------------- Joseph Gesualdo Melvyn A. Holland James D. Carey Vice President Managing Partner President Rosenfield, Holland & Raymon PC Chief Executive Officer Russell F. Godin Certified Public Accountants Vice President Ralph S. Borges William Q. MacLean, Jr. Executive Vice President/Treasurer Elaine M. Guillemette Vice President Assistant Vice President Cornish & Co. Inc. Insurance Susan R. Hajder Senior Vice President Sandra Medeiros Francis A. Macomber Assistant Treasurer President - LeComtes All Star Dairy Inc. Charlene J. Jarest Vice President Charlotte C. Nadeau Assistant Vice President Majed Mouded MD Carol A. Martin Physician Senior Vice President Cecelia M. Machado Vice President Shaun O'Hearn, Sr. Manuel J. Tavares President - Bolger & O'Hearn Inc. Senior Vice President Jeannine M. Paliotti Vice President Lawrence J. Oliveira DDS Officers Orthodontist Slade's Ferry Trust Company Janice R. Partridge --------------------------- Vice President Peter Paskowski James H. Anctil Past President of Bank Vice President Fatima M. Rapoza Assistant Vice President Kenneth R. Rezendes Isola A. Anctil President/CEO of Bancorp Assistant Vice President Michelle Rivera President - K.R. Rezendes, Inc. Assistant Clerk/Secretary Assistant Treasurer William J. Sullivan Cherie Ashton Deborah A. Silvia President - Sullivan Funeral Homes Assistant Vice President Assistant Treasurer Charles Veloza Maria C. Barbosa Eduardo F. Sousa President - Charlie's Oil Co., Inc. Vice President Assistant Treasurer David F. Westgate Edward Bernardo Jr. Nancy E. Stokes President Vice President Vice President Quequechan Management Corp. Catherine Blakey Mary M. Sullivan Honorary Directors Assistant Vice President Vice President - ------------------ Edward S. Machado Noelia M. Brum Doreen Teixeira Past President of Bank Assistant Treasurer Assistant Treasurer Bernard T. Shuman Michelle Caron Richard Van Blarcom Past President/Treasurer Assistant Treasurer Vice President Priscilla Dress Corp. Corporate Headquarters General Counsels Shareholder Services Slade's Ferry Bancorp Atty. Peter G. Collias Slade's Ferry Bancorp 100 Slade's Ferry Avenue 84 North Main Street 100 Slade's Ferry Avenue Somerset, Massachusetts 02726 Fall River, Massachusetts 02720 Somerset, Massachusetts 02726 Tel. (508) 675-2121 Tel. (508) 675-7894 Tel. (508) 675-2121 Fax (508) 675-1751 Thomas H. Tucker, Esq. Annual Meeting 459 Washington St., Suite 27 The Annual Meeting of Stockholders BRANCH LOCATIONS Duxbury, MA 02332 of Slade's Ferry Bancorp will be Tel. (781) 934-8200 held at 7:30 p.m. on April 12, 1999 Fairhaven, MA at the Venus de Milo Restaurant, 75 Huttleston Avenue Independent Certified 75 GAR Highway Public Accountants Swansea, Massachusetts. Fall River, MA Shatswell MacLeod & Company PC 249 Linden Street Certified Public Accountants Dividend Reinvestment Plan 855 Brayton Avenue 83 Pine Street The Plan provides for: 1601 South Main Street West Peabody, Massachusetts 01960 * Reinvestment of all of the Tel. (978) 535-0206 dividends New Bedford, MA * Voluntary cash contributions 838 Pleasant Street Form 10-KSB of up to $5,000 annually, 833 Ashley Boulevard A copy of the Annual Report on minimum $100. Form 10-KSB for Slade's Ferry * No service fees or Seekonk, MA Bancorp as filed with the commissions 1400 Fall River Avenue (Rte.6) Securities and Exchange Commission will be forwarded Information may be obtained by Somerset, MA without charge to any stockholder contacting Shareholder Services 100 Slade's Ferry Avenue upon written request to: at (508) 675-2121 2722 County Street Somerset High School Ralph S. Borges, Treasurer Stock Trading Slade's Ferry Bancorp The common stock of Slade's Swansea, MA 100 Slade's Ferry Avenue Ferry Bancorp is listed on the Swansea Mall Somerset, MA 02726 NASDAQ Small Cap Market 2388 G.A.R. Highway under the symbol SFBC.