UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended March 31, 1999
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Commission file number 000-23904
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SLADE'S FERRY BANCORP
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3061936
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(State or other jurisdiction of (I.R.S. Employed
incorporation or organization) Identification Number)
100 Slade's Ferry Avenue
Somerset, Massachusetts 02726
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(Address of principal executive offices) (Zip Code)
(508)675-2121
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(Registrant's telephone number, including area code)
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
- ----------- ------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common stock ($.01 par value) 3,458,322.897 shares as of March 31, 1999.
- ------------------------------------------------------------------------
PART I
ITEM 1
Financial Statements
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SLADE'S FERRY BANCORP
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
March 31, 1999 December 31, 1998
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ASSETS:
Cash and due from banks $ 15,201,292 $ 15,686,520
Federal funds sold -0- 14,500,000
Investment securities(1) 17,736,079 20,921,254
Securities available for sale(2) 68,086,191 58,199,292
Federal Home Loan Bank stock 1,013,400 899,900
Loans (net) 217,075,082 213,938,277
Premises and equipment 6,707,378 6,687,271
Other real estate owned 1,144,140 1,026,095
Accrued interest receivable 2,184,804 1,598,282
Goodwill 2,797,068 2,853,768
Cash surrender value of life insurance 1,618,841 1,613,517
Other assets 3,138,852 2,430,544
--------------------------------
TOTAL ASSETS $336,703,127 $340,354,720
================================
LIABILITIES & STOCKHOLDERS' EQUITY:
Deposits $298,983,848 $303,785,865
Notes payable 823,660 847,990
Advances from Federal Home Loan Bank 4,451,548 4,475,454
Other borrowed funds 490,981 42,329
Other liabilities 1,830,944 1,495,697
--------------------------------
TOTAL LIABILITIES $306,580,981 $310,647,335
STOCKHOLDERS' EQUITY:
Common stock 34,583 34,464
Paid in capital 22,455,536 22,285,220
Retained earnings 7,768,586 7,103,642
Acumulated other comprehensive income (loss) (136,559) 284,059
--------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 30,122,146 $ 29,707,385
--------------------------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $336,703,127 $340,354,720
================================
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<F1> Investment securities are to be held to maturity and have a fair market
value of $17,944,595 as of March 31, 1999 and $21,282,941 as of December
31, 1998.
<F2> Securities classified as Available for Sale are stated at fair value with
any unrealized gains or losses reflected as an adjustment in
Stockholders' Equity.
CONSOLIDATED STATEMENT OF INCOME AND EXPENSE
(UNAUDITED)
3 MONTHS ENDING MARCH 31,
1999 1998
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INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $4,768,939 $4,885,359
Interest and dividends on investments 1,193,818 852,637
Other interest 104,039 120,117
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Total interest and dividend income 6,066,796 5,858,113
------------------------
INTEREST EXPENSE:
Interest on deposits 2,607,655 2,571,429
Interest on other borrowed funds 93,290 40,234
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Total interest expense 2,700,945 2,611,663
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Net interest and dividend income 3,365,851 3,246,450
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PROVISION FOR LOAN LOSSES 150,000 150,000
Net interest and dividend income
after provision for loan losses 3,215,851 3,096,450
------------------------
OTHER INCOME:
Service charges on deposit accounts 227,080 218,308
Security gains net 291,566 56,280
Other income 96,947 84,985
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Total other income 615,593 359,573
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OTHER EXPENSE:
Salaries and employee benefits 1,447,322 1,318,116
Occupancy expense 209,835 178,834
Equipment expense 137,748 150,073
Loss (gain) on sale of other real estate owned 20,365 4,236
Other expense 608,193 567,563
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Total other expense 2,423,463 2,218,822
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Income before income taxes 1,407,981 1,237,201
Income taxes 535,539 491,853
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NET INCOME $ 872,442 $ 745,348
========================
Earnings per share $ 0.25 $ 0.22
========================
Diluted earnings per share $ 0.25 $ 0.22
========================
Average shares outstanding 3,455,468 3,331,939
========================
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31
(Unaudited)
Reconciliation of net income to net cash used in operating activities: 1999 1998
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 872,442 $ 745,348
Adjustments to reconcile net income to net cash used in operating
activities:
Accretion, net of amortization of fair market value adjustments (2,179) (2,179)
Amortization of goodwill 56,700 56,700
Depreciation and amortization 165,528 165,156
Gain on sale of fixed assets -0- (2,700)
Securities available for sale (gains)losses, net (291,566) (56,280)
Provision for loan losses 150,000 150,000
Increase (decrease) in taxes payable (90,872) 374,309
(Increase) decrease in interest receivable (586,522) 11,605
Increase (decrease) in interest payable 16,028 2,460
Increase in accrued expenses 13,623 96,616
(Increase) decrease in prepaid expenses (41,395) 105,727
Accretion of securities, net of amortization (24,984) (33,136)
Accretion of securities available for sale, net of amortization 19,548 9,248
Loss on sale of other real estate owned 20,365 4,236
Change in unearned income (37,251) 48,404
(Increase) decrease in other assets (318,737) (2,316,486)
Increase in other liabilities 304,925 285,975
---------------------------
Net cash (used in) provided by operating activities 225,653 (354,997)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (15,370,525) (8,214,966)
Maturities of securities available for sale 4,620,816 7,364,656
Sales of securities available for sale 451,582 175,436
Proceeds from sale of other real estate owned 79,635 62,764
Proceeds from maturities of investment securities 3,692,532 1,813,228
Purchases of investment securities (482,373) (2,743,009)
Net (increase) decrease in loans (3,476,678) 3,046,958
Capital expenditures (185,635) (49,814)
Proceeds from sales of fixed assets -0- 2,700
Purchases of Federal Home Loan Bank Stock (113,500) (9,300)
Recoveries of previously charged-off loans 11,929 7,956
---------------------------
Net cash provided by (used in) investing activities (10,772,217) 1,456,609
---------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock $ 170,436 $ 160,209
Net decrease in demand deposits, NOW, money market and savings accounts (6,682,657) (2,824,588)
Net increase in time deposits 1,880,640 7,042,686
Net increase (decrease) in short-term borrowing 448,652 (94,108)
Dividends paid (207,499) (178,530)
Payments on Federal Home Loan Bank advances (23,906) -0-
Decrease in notes payable (24,330) (24,808)
---------------------------
Net cash provided by (used in) financing activities (4,438,664) 4,080,861
---------------------------
Net increase (decrease) in cash and cash equivalents (14,985,228) 5,182,473
Cash and cash equivalents at beginning of period 30,186,520 20,323,501
---------------------------
Cash and cash equivalents at end of period $ 15,201,292 $25,505,974
===========================
SUPPLEMENTAL DISCLOSURES:
Loans originating from sales of Other Real Estate Owned $ 125,000 $ 60,800
Interest paid $ 2,684,917 $ 2,609,203
Income taxes paid $ 626,411 $ 117,544
Loans transferred to Other Real Estate Owned $ 218,045 $ -0-
SLADE'S FERRY BANCORP AND SUBSIDIARY, SLADE'S FERRY TRUST COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10Q and,
accordingly, do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of the management of Slade's Ferry Bancorp, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
Note B - Accounting Policies
- ----------------------------
The accounting principles followed by Slade's Ferry Bancorp and subsidiary and
the methods of applying these principles which materially affect the
determination of financial position, results of operations, or changes in
financial position are consistent with those used at year end 1998.
The consolidated financial statements of Slade's Ferry Bancorp include its
wholly-owned subsidiary, Slade's Ferry Trust Company, and its subsidiaries,
the Slade's Ferry Realty Trust and the Slade's Ferry Securities Corporation.
All significant intercompany balances have been eliminated.
ITEM 2
Management's Discussion and Analysis
- ------------------------------------
Financial Condition
- -------------------
Assets at March 31, 1999 decreased by $3.7 Million to $336.7 Million from
$340.4 Million reported on December 31, 1998. The decrease is predominately
attributed to a decrease in deposit levels of $4.8 Million. The most noted
variance in the asset components was the decrease of $14.5 Million in the
Federal Funds Sold category. There was an increase in net loans of $3.1
Million and a net increase in the Investment Securities and Securities
Available-for-Sale categories of $6.7 Million.
Deposits decreased $4.8 Million to $299.0 Million at March 31, 1999 from
$303.8 Million reported at year end 1998. The decrease occurred primarily in
the Municipal N.O.W. Account category. This category decreased $3.1 Million
to $15.4 Million at March 31, 1999 from $18.5 Million at December 31, 1998.
The larger December 31, 1998 balance was the result of the late mailing of
real estate tax bills by some municipalities for bills originally due November
1, 1998.
At March 31, 1999, securities classified as Available-for-Sale had net
unrealized losses of $55,674 as a result of market conditions, compared to net
unrealized gains of $364,944 reported on December 31, 1998. Securities in the
Available-for-Sale category may be sold if it becomes desirable to improve
liquidity, or when management feels it would be appropriate to improve
interest rate risk by selling securities and reinvesting the proceeds into
higher yielding investments.
Investment Securities are securities that the Company will hold to maturity
and are carried at amortized cost on the balance sheet, and are summarized as
follows as of March 31, 1999.
Gross
Gross Unrealized
Amortized Unrealized Holding
(Dollars in Thousands) Cost Basis Holding Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------
Debt securities issued by the U. S.
Treasury and other U. S.
Government corporations and
agencies $ 6,332 $ 64 $ 4 $ 6,392
Debt securities issued by states of the
United States and political
subdivisions of the states 11,305 172 23 11,454
Mortgage-backed securities 99 1 -0- 100
Other debt securities -0- -0- -0- -0-
- ------------------------------------------------------------------------------------------------
$17,736 $237 $ 27 $17,946
================================================================================================
Investments in Available-for-Sale securities are carried at fair value on the
balance sheet and are summarized as follows as of March 31, 1999.
Gross
Gross Unrealized
Amortized Unrealized Holding
(Dollars in Thousands) Cost Basis Holding Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------
Debt securities issued by the U. S.
Treasury and other U. S.
Government corporations and
agencies $45,562 $ 68 $248 $45,382
Corporate Bonds 523 -0- 7 516
Marketable Equity 2,830 387 209 3,008
Mortgage-backed securities 19,058 32 135 18,955
Asset-backed securities 219 6 -0- 225
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$68,192 $493 $599 $68,086
================================================================================================
Decrease to Stockholders' Equity:
(In Whole Dollars)
Unrealized loss on Available for Sale Securities $106,125
Less tax effect 50,451
--------
Net unrealized loss on Available for Sale Securities $ 55,674
========
INFORMATION WITH RESPECT TO NONACCRUAL AND PAST DUE LOANS
AT MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998 AND 1997
At March 31 At December 31
- --------------------------------------------------------------------------------------------
(Dollars in Thousands) 1999 1998 1998 1997
- --------------------------------------------------------------------------------------------
Nonaccrual Loans $2,998 $4,815 $3,331 $4,597
Loans 90 days or more past due and still accruing 287 245 317 147
Real estate acquired by foreclosure
or substantively repossessed 1,144 92 1,026 159
Percentage of nonaccrual loans to total loans 1.38% 2.29% 1.53% 2.15%
Percentage of nonaccrual loans and real estate
acquired by foreclosure or substantively
repossessed to total assets 1.23% 1.57% 1.54% 2.00%
Percentage of allowance for loan losses
to nonaccrual loans 124.35% 79.20% 107.15% 80.36%
The $3.0 Million in nonaccrual loans consists of $2.5 Million of real estate
mortgages and $.5 Million attributed to commercial loans. There are no
restructured loans included in nonaccrual loans as of March 31, 1999.
The Company's nonperforming assets as a total decreased to $4.4 Million at
March 31, 1999, from $4.7 Million reported on December 31, 1998. The Company
considers nonaccrual loans, loans past due 90 days or more but still accruing,
and real estate acquired by foreclosure or substantively repossessed as
nonperforming assets. Nonaccrual loans which is the largest component of
nonperforming assets decreased by $333,000 during the first quarter. The $1.2
Million commercial real estate loan previously classified as nonaccrual in
March 1997 remains in this category despite payments being made by the
borrower which are applied to principal. Pursuant to the Company's normal
policy, this loan will remain in the nonaccrual status until the loan becomes
current and the borrower can demonstrate a regular consistent schedule of
payments. The real estate collateralizing this loan has an appraised value of
$2.5 Million obtained in June 1998. Loans 90 days or more but still accruing
decreased by $30,000 during the current quarter and real estate acquired by
foreclosure or substantively repossessed increased by $118,000.
The net decrease in the nonaccrual category from $3.3 Million at December 31,
1998 to $3.0 Million at March 31, 1999 is a combination of $.3 Million in
loans placed into the nonaccrual status, offset by $.6 Million representing
payments and loans resolved or charged off.
Real estate acquired through foreclosure or substantively repossessed
increased by $118,000 when compared to the balance on December 31, 1998 due to
the sale of one parcel of property carried at $100,000 and the transfer of
two properties from loans totaling $218,000. The current balance of
$1,144,140 represents six parcels of property of which two parcels with a
carrying value of $253,000 were sold in April, 1999.
The percentage of nonaccrual loans to total loans decreased from 1.53%
reported at year end to 1.38% at March 31, 1999 due to the combination of an
increase in total loans and a decrease in the nonaccrual category. The
percentage of nonaccrual loans and real estate acquired by foreclosure or
substantively repossessed to total assets decreased due to the decrease in
nonaccrual loans.
INFORMATION WITH RESPECT TO NONACCRUAL AND RESTRUCTURED LOANS
AT MARCH 31, 1999 AND 1998 AND DECEMBER 31, 1998 AND 1997
At March 31 At December 31
- -------------------------------------------------------------------------------------
(Dollars in Thousands) 1999 1998 1998 1997
- -------------------------------------------------------------------------------------
Nonaccrual Loans $2,998 $4,815 $3,331 $4,597
Interest income that would have been recorded
under original terms $ 70 $ 119 $ 318 $ 394
Interest income recorded during the period $ 3 $ 14 $ 37 $ 58
The Company stops accruing interest on a loan once it becomes past due 90 days
or more unless there is adequate collateral and the financial condition of the
borrower is sufficient. When a loan is placed on a nonaccrual status, all
previously accrued but unpaid interest is reversed and charged against current
income. Interest is thereafter recognized only when payments are received and
the loan becomes current.
Loans in the nonaccrual category will remain until the possibility of
collection no longer exists, the loan is paid off or becomes current. When a
loan is determined to be uncollectible, it is then charged off against the
Allowance for Loan Losses.
Statement of Financial Accounting Standards No. 114 "Accounting by Creditors
for Impairment of a Loan" applies to all loans except large groups of smaller-
balance homogeneous loans that are collectively evaluated for impairment,
loans measured at fair value or at a lower of cost or fair value, leases, and
debt securities as defined in Statement 115. Statement 114 requires that
impaired loans be valued at the present value of expected future cash flows
discounted at the loan's effective interest rate or as a practical expedient,
at the loan's observable market value of the collateral if the loan is
collateral dependent. Smaller balance homogeneous loans are considered by the
Company to include consumer installment loans and credit card loans.
Included in the $2,997,563 in nonaccrual loans are $2,883,060 which the
Company has determined to be impaired, for which $192,198 have a related
allowance for credit losses of $113,802 and $2,690,862 have no related
allowance for credit losses. Management is not aware of any other loans that
pose a potential credit risk or where the loans are current but the borrowers
are experiencing financial difficulty.
There were no other loans classified for regulatory purposes at March 31, 1999
that management reasonably expects will materially impact future operating
results, liquidity or capital resources.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Three Months Years Ended
At March 31 At December 31
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(Dollars in Thousands) 1999 1998 1998 1997
- --------------------------------------------------------------------------
Balance at January 1 $3,569 $3,694 $3,694 $3,354
- --------------------------------------------------------------------------
Charge-offs:
Commercial 0 (0) (0) (40)
Real estate - construction 0 (0) (0) (0)
Real estate - mortgage 0 (0) (716) (147)
Installment/consumer (4) (10) (76) (68)
- --------------------------------------------------------------------------
(4) (10) (792) (255)
- --------------------------------------------------------------------------
Recoveries:
Commercial 5 2 8 41
Real estate - construction 0 0 0 0
Real estate - mortgage 0 0 43 16
Installment/consumer 7 6 16 38
- --------------------------------------------------------------------------
12 8 67 95
- --------------------------------------------------------------------------
Net Charge-offs 8 (2) (725) (160)
- --------------------------------------------------------------------------
Additions charged to operations 150 150 600 500
- --------------------------------------------------------------------------
Balance at end of period $3,727 $3,842 $3,569 $3,694
==========================================================================
Ratio of net charge-offs to
average loans outstanding (.004%) 0.001% 0.34% 0.080%
The Allowance for Loan Losses at March 31, 1999 was $3,727,341, compared to
$3,569,282 at year end 1998. The Allowance for Loan Losses as a percent of
outstanding loans was 1.68% at March 31, 1999, and 1.64% at December 31, 1998.
The Bank provided $600,000 in 1998, $500,000 in 1997, and $150,000 as of March
31, 1999 to the Allowance for Loan Losses. Loans charged off were $792,000 in
1998, $255,000 in 1997, and $4,000 as of March 31, 1999. Recoveries on loans
previously charged off were $67,000 in 1998, $95,000 in 1997, and $12,000 as
of March 31, 1999. Management believes that the Allowance for Loan Losses of
$3,727,341 is adequate to absorb any losses in the foreseeable future, due to
the Bank's strong collateral position and the current asset quality.
The level of the Allowance for Loan Losses is evaluated by management and
encompasses several factors, which include but are not limited to, recent
trends in the nonperforming loans, the adequacy of the assets which
collateralize the nonperforming loans, current economic conditions in the
market area, and various other external and internal factors.
This table shows an allocation of the allowance for loan losses as of the end
of each of the periods indicated.
March 31, 1999 December 31, 1998 December 31, 1997
----------------------- ----------------------- -----------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
-----------------------------------------------------------------------------
(Dollars in Thousands)
Domestic:
Commercial $1,329(1) 20.51% $1,249(1) 20.06% $ 984(1) 17.14%
Real estate - Construction 42 2.51 27 1.73 44 3.12
Real estate - mortgage $2,037(2) 73.70 1,964(2) 75.21 2,311(2) 76.50
Consumer(3) 319(4) 3.28 329(4) 3.00 355(4) 3.24
--------------------------------------------------------------------------
$3,727 100.00% $3,569 100.00% $3,694 100.00%
==========================================================================
- ---------------------
<F1> Includes specifically reserved for impaired loans of $123,392 as of
March 31, 1999, $128,207 as of December 31, 1998, and $42,937 as of
December 31, 1997 as required by Financial Accounting Standard No. 114,
Accounting for Impairment of Loans.
<F2> Includes specifically reserved for impaired loans of $157,978 as of
March 31, 1999, $187,554 as of December 31, 1998, and $566,220 as of
December 31, 1997 as required by Financial Accounting Standard No. 114,
Accounting for Impairment of Loans.
<F3> Includes consumer, obligations of states and political subdivisions and
other.
<F4> Includes amounts specifically reserved for impaired loans of $5,043 as
of March 31, 1999, $9,126 as of December 31, 1998, and $14,413 as of
December 31, 1997 as required by Financial Accounting Standard No. 114,
Accounting for Impairment of Loans.
The loan portfolio's largest segment of loans is commercial real estate loans,
which represent 56.3% of gross loans. Residential real estate, represents
17.4% gross loans. The Company requires a loan to value ratio of 80% in both
commercial and residential mortgages. These mortgages are secured by real
properties which have a readily ascertainable appraised value.
Generally, commercial real estate loans have a higher degree of credit risk
than residential real estate loans because they depend primarily on the
success of the business. When granting these loans, the Company evaluates the
financial statements of the borrower(s), the location of the real estate, the
quality of management, and general economic and competitive conditions. When
granting a residential mortgage, the Company reviews the borrower(s) repayment
history on past debts, and assesses the borrower(s) ability to meet existing
obligations and payments on the proposed loans.
Commercial loans consist of loans predominantly collateralized by inventory,
furniture and fixtures, and accounts receivable. In assessing the collateral
for this type of loan, management applies a 40% liquidation value to
inventories, 25% to furniture, fixtures and equipment; and 60% to accounts
receivable. Commercial loans represent 20.5% of the loan portfolio.
Consumer loans are generally unsecured credits and represent 3% of the total
loan portfolio. These loans have a higher degree of risk then residential
mortgage loans. The underlying collateral of a secured consumer loan tends to
depreciate in value. Consumer loans are typically made based on the borrower's
ability to repay the loan through continued financial stability. The Company
endeavors to minimize risk by reviewing the borrower's repayment history on
past debts, and assessing the borrower's ability to meet existing obligations
on the proposed loans.
The allocation of the Allowance for Loan Losses is based on management's
judgement of potential losses in the respective portfolios. While management
has allocated reserves to various portfolio segments, the Allowance is general
in nature and is available for the portfolio in its entirety.
Results of Operations
- ---------------------
The Company's largest source of earnings is net interest and dividend income,
which is the difference between interest income earned on loans and
investments and interest expense paid on deposits and borrowed funds. Net
interest and dividend income for the three months ending March 31, 1999
increased by $119,401 to $3,365,851 when compared to $3,246,450 recorded
during the same period in 1998. Total interest and dividend income increased
by $208,683 due to a larger loan base and expansion of the investment
portfolio. This was offset by an increase in interest expense of $89,282 due
to higher deposit levels being serviced during the current three month period
compared to the same period in the previous year, and also an increase in
borrowings from the Federal Home Loan Bank.
The Provision for Loan Losses is a charge against earnings and funds the
Allowance for Loan Losses. It is management's desire to maintain an
appropriate ratio of the Allowance for Loan Losses to total outstanding loans.
The Bank's provision during the three month period ending March 31, 1999 was
$150,000, the same amount that was recorded during the same period in the
prior year.
Total Other Income increased by $256,020 for the first quarter of 1999
compared to the first quarter of 1998. Service charges on deposit accounts
increased slightly by $8,772 due to the continuous growth in the number of
accounts being serviced primarily due to the opening of the South Main Street
branch in Fall River in January 1999. As a result of favorable market
conditions, various marketable equity securities were sold during the first
three months of 1999 realizing a net gain of $291,566 compared to $56,280
realized in the same period of the previous year. The market trends of these
types of investments are continuously monitored and acted upon when management
feels it advantageous to respond to these market opportunities. The line item
Other Income increased by $11,962 compared to the same period in 1998. During
the first quarter of 1999, the Bank began printing customer checks internally
rather than outsourcing to check printing vendors. Fees of $12,851 were
recorded for the first three months of 1999. By printing checks internally,
customers will receive check orders much quicker and at a lower cost.
Total Other Expense for the first three months in 1999 was up by $204,641 to
$2,423,463 when compared to $2,218,822 recorded in the first quarter in 1998.
Salaries and Employee's Benefits which is the largest component of Other
Expense, increased by $129,206 due to general wage adjustments and increased
costs associated with employees medical insurance and retirement plan.
Occupancy and Equipment expenses combined, were up by $18,766 primarily due to
the depreciation on purchase and renovation of our newly opened South Main
Street branch in Fall River and newly acquired equipment.
A loss of $20,365 was realized on the sale of property previously acquired
through foreclosure during the current quarter compared to a loss of $4,236
recorded in the same period of the prior year.
The following table sets forth the components of the line item Other Expense,
which reflects an increase of $40,630 for the first quarter in 1999 compared
to the same period reported in 1998.
March 31, 1999 March 31, 1998 Variance
--------------------------------------------
Amortization of Goodwill $ 56,700 $ 56,700 $ -0-
Advertising & Public Relations 117,294 99,015 18,279
Stationery & Supplies 68,833 53,607 15,226
Communications 86,220 84,652 1,568
Professional Fees & Other Services 136,616 130,007 6,609
Other Miscellaneous Expenses 142,530 143,582 (1,052)
-----------------------------------------
$608,193 $567,563 $40,630
=========================================
Amortization of Goodwill represents the continuous amortizing of the premiums
paid above the book value to shareholders of Fairbank, Inc, parent company of
the National Bank of Fairhaven, due to the merger acquisition which occurred
in August 1996. This amortization expense will continue to the year 2011.
Advertising Expense increased by $18,279 due to costs associated with
promoting the opening of our two new branches on South Main Street, Fall River
in January 1999, and Ashley Boulevard in New Bedford at the end of March 1999.
Stationery and Supplies increased by $15,226. This is attributable to costs
associated with additional stationery and various supplies required at our two
new branch locations mentioned above. Also, as mentioned earlier, the Bank is
printing customer checks internally rather than outsourcing. Costs associated
with printing these checks totalled $9,119 for the first quarter of 1999.
Professional Fees and Other Service Fees increased by $6,609 primarily due to
fees for computer services provided at our two new branch locations. Other
Variances noted above are a result of normal business transactions.
Income before income taxes totaled $1,407,981 at March 31, 1999, an increase
of $170,780 when compared to $1,237,201 reported on March 31, 1998.
Applicable income taxes increased by $43,686 to $535,539 when compared to
$491,853 recorded in the first quarter of 1998. Net income of $872,442
reflects an increase of 17.0% from earnings of $745,348 reported at March 31,
1998. Diluted earnings per share for the first quarter in 1999 were $0.25
compared to $0.22 for the same period in 1998.
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, as of March 31, 1999, has completed changes and testing of all
essential systems utilizing both internal and external resources. Previously
identified applications for processing depositors' and borrowers' accounts,
stockholder information, origination and receiving electronic charges and
credits (ACH) items, general ledger processing and the PC network system,
including the teller system, went through a four phase testing schedule to
ensure full compliance to Year 2000 needs. As of March 31, 1999, all four
phases of the testing schedule have been completed, verified, and are
satisfactory.
The testing of 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 ATM renovation and testing has
also been completed.
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 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
the impact this could have on the Company's operations, liquidity and
financial condition.
The total cost of the Year 2000 project is estimated to be approximately
$40,000 to $50,000. These costs are not expected to be material to the
Company's operations, liquidity or 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. To date, the company has
incurred Year 2000 related expenses totaling $12,771 with all phases of the
testing schedule completed. It is anticipated that any further cost
pertaining to Year 2000 will be immaterial.
The Federal Deposit Insurance Corporation (FDIC) has established Year 2000
standards for safety and soundness consistent with the Federal Financial
Institution's 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 institutions, including the Company, concerning Year
2000 compliance.
Liquidity
- ---------
The Company's principal sources of funds are customer deposits, loan
amortization, loan payoffs, and the maturities of investment securities.
Through these sources, funds are provided for customer withdrawals from their
deposit accounts, loan originations, draw-downs on loan commitments,
acquisition of investment securities and other normal business activities.
Investors' capital also provides a source of funding.
The largest source of funds is provided by depositors. The largest component
of the Company's deposit base is reflected in the Time Deposit category. The
Company does not participate in brokered deposits. Deposits are obtained from
consumers and commercial customers within the Bank's community reinvestment
area, being Bristol County, Massachusetts and several abutting towns in Rhode
Island.
The Company also has the ability to borrow funds from correspondent banks, the
Federal Home Loan Bank, as well as the Federal Reserve Bank of Boston by
pledging various investment securities as collateral. The Company did not
have the need to borrow in 1998. During the first three months of 1999, the
Company borrowed $2,500,000 for one day. Tax payments made by our customers
which are owed to the Federal Reserve Bank Treasury Tax and Loan account are
classified as Short Term borrowings. The Notes Payable represents a note due
Fleet Bank. The note is attributable to Fairbank, Inc. which was assumed at
the time of the merger and 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. There is also $4,451,548 in advances from
the Federal Home Loan Bank representing the match funding program that is
available to qualified borrowers.
Excess available funds are invested on a daily basis as Federal Funds Sold and
can be withdrawn daily. The Bank attempts through its cash management
strategies to maintain a minimum level of Federal Funds Sold to further
enhance its liquidity.
Liquidity represents the ability of the Bank to meet its funding requirements.
In assessing the appropriate level of liquidity, the Bank considers deposit
levels, lending requirements, and investment maturities in light of prevailing
economic conditions. Through this assessment, the Bank manages its liquidity
level to optimize earnings and respond to fluctuations in customer borrowing
needs.
At March 31, 1999, the Bank's liquidity ratio stood at 31.4% as compared to
32.8% at December 31, 1998. The liquidity ratio is determined by dividing the
Bank's short term assets (cash and due from banks, interest bearing deposits
due from other banks, securities, and federal funds sold) by the Bank's total
deposits. Management believes the Bank's liquidity to be adequate to meet the
current and presently foreseeable needs of the Bank.
The comparison of cash flows for three months ending March 31, 1999 and 1998
shows an increase in the net cash provided by operating activities of $0.6
Million. There was a decrease in cash used for other assets of $2.0 Million.
In the first quarter of 1998, $1.6 Million was used to purchase single premium
life insurance policies, which provide each member of the Board of Directors
with a supplementary life insurance benefit. This decrease in other assets
was offset by an increase in net interest and dividend income of $0.5 Million,
an increase in cash paid to suppliers of $0.4 Million and an increase in taxes
payable of $0.5 Million.
Cash flows from investing activities show a net increase in cash used in
investing activities of $12.2 Million when compared to 1998. Purchases of
securities increased by $4.9 Million and maturities decreased by $0.9 Million
for a total of $5.8 Million attributed to the investment portfolio. In
addition, there was an increase in cash used in loan activity of $6.5 Million.
Cash used in financing activities increased by $8.5 Million during the first
three months of 1999 when compared to the same period in 1998. There was a
decrease in cash provided by demand, NOW, money market, and Savings Accounts
of $3.9 Million, along with a decrease in time deposits of $5.2 Million. This
was offset by an increase in short-term borrowings of $0.5 Million.
Capital
- -------
As of March 31, 1999, the Company had total capital of $30,122,146. This
represents an increase of $414,761 from $29,707,385 reported on December 31,
1998. The increase in capital was a combination of several factors.
Additions consisted of three months earnings of $872,442 and transactions
originating through the Dividend Reinvestment Program whereby 4,422.347 shares
were issued for cash contributions of $61,861 and 7,486.728 shares were issued
for $108,575 in lieu of cash dividend payments. These additions were offset
by dividends paid of $207,499.
Also, affecting capital is accumulated other comprehensive income (loss) which
reflects net unrealized gains or losses, net of taxes, on securities
classified as Available-for-Sale and the minimum pension liability adjustment.
On December 31, 1998 the Available-for-Sale portfolio had unrealized gains,
net of taxes, of $364,944, and on March 31, 1999, as a result of current
market values, the portfolio reflects unrealized losses, net of taxes, of
$55,674. There was no change in the minimum pension liability adjustment of
$80,885, net of taxes, recorded December 31, 1998.
Under the requirements for Risk Based and Leverage Capital of the federal
banking agencies, a minimum level of capital will vary among banks based on
safety and soundness of operations. Risk Based Capital ratios are calculated
with reference to risk-weighted assets, which include both on and off balance
sheet exposure.
At March 31, 1999 the actual Risk Based Capital of the Bank was $24,687,000
for Tier 1 Capital, exceeding the minimum requirements of $9,438,560 by
$15,248,440. Total Capital of $27,726,000 exceeded the minimum requirements
of $18,877,120 by $8,848,880 and Leverage Capital of $24,687,000 exceeded the
minimum requirements of $13,402,000 by $11,285,000. In addition to the
"minimum" capital requirements, "well capitalized" standards have also been
established by the Federal Banking Regulators.
The table below illustrates the capital ratios of the Company and the Bank on
March 31, 1999 and at December 31, 1998.
Well March 31, 1999 December 31, 1998
Capitalized ---------------- -----------------
Requirement Bancorp Bank Bancorp Bank
- --------------------------------------------------------------------------------
Total Capital (to Risk
Weighted Assets) 10% 12.86% 11.75% 12.80% 11.69%
- -------------------------------------------------------------------------------
Tier 1 Capital (to Risk
Weighted Assets) 6% 11.61% 10.46% 11.47% 10.36%
- -------------------------------------------------------------------------------
Leverage Capital (to
Average Assets) 5% 8.13% 7.37% 8.12% 7.38%
- -------------------------------------------------------------------------------
ITEM 3
Quantitative and Qualitative Disclosure of Market Risk
- ------------------------------------------------------
Interest Rate Risk
- ------------------
Volatility in interest rates requires the Company to manage interest rate risk
that arises from the differences in the timing of repricing of assets and
liabilities. The Company considers interest rate risk, the exposure of
earnings to adverse movements in interest rates, to be a significant market
risk as it could potentially have an affect on the Company's financial
condition and results of operation.
The Company's Asset-Liability Management Committee, comprised of the Bank's
Executive Management team, has the responsibility of managing interest rate
risk, and monitoring and adjusting the difference between interest-sensitive
assets and interest-sensitive liabilities ("GAP" position) within various time
periods.
Management's objective is to reduce and control the volatility of its net
interest margin by managing the relationship of interest-earning assets and
interest-bearing liabilities. In order to manage this relationship, the
committee utilizes a GAP report prepared on a monthly basis. The GAP report
indicates the differences or gap between interest-earning assets and interest-
bearing liabilities in various maturity or repricing time periods. This, in
conjunction with certain assumptions, and other related factors, such as
anticipated changes in interest rates and projected cash flows from loans,
investments and deposits, provides management a means of evaluating interest
rate risk.
In addition to the GAP report, the Company also uses an analysis to measure
the exposure of net interest income to changes in interest rates over a
relatively short (i.e., 12 months) time frame. The analysis projects future
interest income and expenses from the Company's earning assets and interest-
bearing liabilities. Depending on the GAP position, the Company's policy
limit on interest rate risk specifies that if interest rates were to change
immediately up or down 200 basis points, estimated net interest income for the
next twelve months should not decline by more than ten percent. The following
table reflects the Company's estimated exposure as a percentage of estimated
net interest income for the next twelve months, assuming an immediate change
in interest rates:
Rate Change Estimated Exposure as a Percentage of Net Interest Income
(Basis Points) March 31, 1999
- ----------------------------------------------------------------------------
+200 0.09%
-200 (3.14%)
The model used to monitor earnings-at-risk provides management a measurement
tool to assess the effect of changes in interest rates on the Company's
current and future earnings. The 10% limit established by the Company
provides an internal tolerance level to control interest rate risk exposure.
Part II
Other Information
ITEM 1
Legal Proceedings
- -----------------
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 in
May, 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.
ITEM 6
Exhibits and Reports on Form 8-K
- --------------------------------
(a) Exhibits: See exhibit index.
(b) Reports on Form 8-K: NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SLADE'S FERRY BANCORP
---------------------
(Registrant)
May 10, 1999 /s/ Kenneth R. Rezendes
- -------------- --------------------------------
(Date) (Signature) Kenneth R. Rezendes
President
May 10, 1999 /s/ James D. Carey
- ------------ --------------------
(Date) (Signature) James D. Carey
Executive Vice President
May 10, 1999 /s/ Ralph S. Borges
- ------------ -----------------------
(Date) (Signature) Ralph S. Borges
Treasurer
Chief Financial Officer
Chief Accounting Officer
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
10 Form of Director Supplemental Retirement Program Director
Agreement, Exhibit I thereto (Slade's Ferry Trust Company
Director Supplemental Retirement Program Plan) and Endorsement
Method Split Dollar Plan Agreement thereunder for Thomas B.
Almy (Similar forms of agreement entered into between Slade's
Ferry Trust Company and the other directors)*
27 Financial data schedule
- -----------------------------
* The Form of Directors' Paid-up Insurance Policy for Thomas B. Almy which
was also a part of the Director Supplemental Retirement Program was
filed as an exhibit to Registrant's Form 10-QSB for the quarter ended
June 30, 1998.