10-Q 1 slad10q1.txt BODY OF FORM 10-Q 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, 2002 -------------- Commission file number 000-23904 --------- SLADE'S FERRY BANCORP ------------------------------------------------------ (Exact name of registrant as specified in its charter) Massachusetts 04-3061936 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 100 Slade's Ferry Avenue Somerset, Massachusetts 02726 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) (508)675-2121 ---------------------------------------------------- (Registrant's telephone number, including area code) 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) 3,883,812.878 shares as of March 31, 2002. ------------------------------------------------------------------------ PART I ITEM 1 Financial Statements -------------------- SLADE'S FERRY BANCORP CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 December 31, 2001 ----------------------------------- (Unaudited) ASSETS: Cash and due from banks $ 15,734,362 $ 13,730,752 Interest-bearing demand deposits with other banks 201,521 174,945 Money market mutual funds 136,604 86,613 Federal Home Loan Bank overnight deposit 5,000,000 6,000,000 Federal funds sold 10,200,000 8,700,000 -------------------------------- Cash and Cash Equivalents 31,272,487 28,692,310 Interest-bearing time deposit with other banks 100,000 100,000 Investment securities(1) 14,466,066 16,281,712 Securities available for sale(2) 77,600,074 79,105,537 Federal Home Loan Bank stock 1,013,400 1,013,400 Loans, net 246,343,543 248,017,635 Premises and equipment 6,371,108 6,455,837 Goodwill 2,173,368 2,173,368 Accrued interest receivable 2,031,838 1,953,989 Cash surrender value of life insurance 7,812,077 7,697,441 Other assets 3,388,902 3,269,334 -------------------------------- TOTAL ASSETS $392,572,863 $394,760,563 ================================ LIABILITIES & STOCKHOLDERS' EQUITY: Deposits $334,844,360 $337,043,342 Federal Home Loan Bank advances 15,920,279 16,983,087 Other borrowed funds 1,215,073 465,216 Other liabilities 1,797,450 1,749,787 -------------------------------- TOTAL LIABILITIES 353,777,162 356,241,432 -------------------------------- Preferred stockholders' equity in a subsidiary company 51,500 53,000 -------------------------------- STOCKHOLDERS' EQUITY: Common stock 38,839 38,700 Paid in capital 26,971,141 26,761,997 Retained earnings 12,325,001 11,892,623 Accumulated other comprehensive loss (590,780) (227,189) -------------------------------- TOTAL STOCKHOLDERS' EQUITY 38,744,201 38,466,131 -------------------------------- TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $392,572,863 $394,760,563 ================================ -------------------- Investment securities are to be held to maturity and have a fair market value of $14,695,068 as of March 31, 2002 and $16,590,243 as of December 31, 2001. Securities classified as Available for Sale are stated at fair value with any unrealized gains or losses reflected as an adjustment in Stockholders' Equity.
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE (UNAUDITED) 3 MONTHS ENDING MARCH 31,
2002 2001 ------------------------ INTEREST AND DIVIDEND INCOME: Interest and fees on loans $4,519,745 $5,766,499 Interest and dividends on investments 1,201,182 1,251,616 Other interest 59,635 194,642 ------------------------ Total interest and dividend income 5,780,562 7,212,757 ------------------------ INTEREST EXPENSE: Interest on deposits 1,948,982 3,104,971 Interest on Federal Home Loan Bank advances 260,056 199,948 Interest on other borrowed funds 3,216 10,366 ------------------------ Total interest expense 2,212,254 3,315,285 ------------------------ Net interest and dividend income 3,568,308 3,897,472 Provision for loan losses 187,500 187,500 ------------------------ Net interest and dividend income after provision for loan losses 3,380,808 3,709,972 ------------------------ OTHER INCOME: Service charges on deposit accounts 141,590 140,923 Overdraft service charges 60,050 64,055 Gain (loss) on sales of available for sale securities, net (2,818) 0 Increase in cash surrender value of life insurance policies 114,636 92,866 Other income 155,772 108,278 ------------------------ Total other income 469,230 406,122 ------------------------ OTHER EXPENSE: Salaries and employee benefits 1,790,501 1,783,102 Occupancy expense 211,193 248,791 Equipment expense 125,450 143,542 Stationery and supplies 74,564 52,285 Professional fees 63,151 102,124 Marketing expense 100,979 101,598 Other expense 406,013 425,807 ------------------------ Total other expense 2,771,851 2,857,249 ------------------------ Income before income taxes 1,078,187 1,258,845 Income taxes 296,265 389,480 ------------------------ NET INCOME $ 781,922 $ 869,365 ======================== Basic earnings per share $ 0.20 $ 0.23 ======================== Diluted earnings per share $ 0.20 $ 0.23 ======================== Basic average shares outstanding 3,879,855 3,803,755 ======================== Diluted average shares outstanding 3,913,569 3,805,580 ======================== Dividends Per Share $ .09 $ .08 ======================== Comprehensive Income(1) $ 418,331 $1,137,796 ======================== -------------------- Calculated using the change in accumulated other comprehensive income (loss) for the period and net income for the period.
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 SLADE'S FERRY BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, ---------------------------- (Unaudited)
2002 2001 --------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 781,922 $ 869,365 Adjustments to reconcile net income to net cash provided by operating activities: Accretion, net of amortization of securities 30,885 9,163 Gain on sales of available-for-sale securities, net 2,818 0 Change in unearned income (42,675) (46,341) Provision for loan losses 187,500 187,500 Depreciation and amortization 152,139 182,666 Increase in cash surrender value of life insurance policies (114,636) 0 Amortization of goodwill 0 56,700 Accretion, net of amortization of fair market value adjustments 0 (2,850) (Increase) decrease in other assets 66,266 (145,250) Decrease in prepaid expenses 39,041 11,370 (Increase) decrease in interest receivable (77,849) 85,813 Increase (decrease) in other liabilities 21,257 (30,399) Decrease in accrued expenses (80,981) (187,112) Increase (decrease) in interest payable 5,041 (1,157) Increase in taxes payable 102,346 155,228 Decrease in minority interest in subsidiary (1,500) 0 --------------------------- Net cash provided by operating activities 1,071,574 1,144,696 --------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale securities (6,346,491) (13,431,233) Proceeds from maturities of available-for-sale securities 7,228,248 15,225,305 Purchases of held-to-maturity securities (1,429,214) (1,094,000) Proceeds from maturities of held-to-maturity securities 3,244,133 981,617 Net decrease in loans 1,520,474 5,751,042 Recoveries of loans previously charged off 8,793 6,483 Capital expenditures (67,409) (141,138) --------------------------- Net cash used in investing activities 4,158,534 7,298,076 ---------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 SLADE'S FERRY BANCORP AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, ---------------------------- (Unaudited) (Continued)
2002 2001 --------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand deposits, NOW, money market and savings accounts $ 6,172,344 $ (8,600,472) Net increase (decrease) in time deposits (8,371,326) 909,454 Payments on Federal Home Loan Bank, net (1,062,808) (38,183) Net increase (decrease) in other borrowed funds 749,857 (1,021,188) Proceeds from issuance of common stock 209,283 186,625 Dividends paid (347,281) (304,725) --------------------------- Net cash provided by financing activities (2,649,931) (8,868,489) --------------------------- Net increase (decrease) in cash and cash equivalents 2,580,177 (425,717) Cash and cash equivalents at beginning of year 28,692,310 28,060,709 --------------------------- Cash and cash equivalents at end of year $31,272,487 $ 27,634,992 =========================== SUPPLEMENTAL DISCLOSURES; Interest paid $ 2,207,213 $ 3,316,442 Income taxes paid $ 193,919 $ 234,252
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 SLADE'S FERRY BANCORP AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 31, 2002 Note A - Basis of Presentation ------------------------------ The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the management of Slade's Ferry Bancorp (the "Company"), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. 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 2001. 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, the Slade's Ferry Securities Corporation, Slade's Ferry Preferred Capital Corporation, and Slade's Ferry Loan Company. All significant intercompany balances have been eliminated. Note C - Impact of New Accounting Standards ------------------------------------------- In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". Statement No. 133, as amended by SFAS No. 138, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company adopted this Statement as of January 1, 2001. In management's opinion, the adoption of SFAS No. 133 did not have a material effect on the Company's consolidated financial statements. FASB has issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and rescinds SFAS Statement No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125". SFAS No. 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001; however, the disclosure provisions are effective for fiscal years ending after December 15, 2000. The adoption of this statement did not have a material impact on the Company's financial position or results of operation. Statement of Financial Accounting Standards No. 141, "Business Combinations", improves the consistency of the accounting and reporting for business combinations by requiring that all business combinations be 6 accounted for under a single method - the purchase method. Use of the pooling-of-interests method is no longer permitted. Statement No. 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. The adoption of SFAS No. 141 will have no immediate effect on the Company's consolidated financial statements since it had no pending business combinations as of December 31, 2001, or as of the accompanying consolidated financial statements. In June 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets", which is effective for fiscal years beginning after December 15, 2001. Under prior accounting standards, goodwill resulting from a business combination was amortized against income over its estimated useful life. As a result of SFAS No. 142, goodwill is generally no longer amortized as an expense after 2001, but instead will be reviewed and tested for impairment using a fair value methodology and assessment. Goodwill will be tested at least annually for impairment. Management does not anticipate an impairment adjustment to the goodwill reflected in the accompanying condensed consolidated balance sheet upon adoption of SFAS No. 142 on January 1, 2002. The effect of adopting SFAS No. 142 will be that the Company will cease to amortize the goodwill balance of $2.2 Million, which will reduce amortization of goodwill by $226,800 in 2002. ITEM 2 Management's Discussion and Analysis ------------------------------------ Financial Condition ------------------- Total assets decreased by $2.2 Million, or .6% from $394.8 Million at December 31, 2001 to $392.6 Million at March 31, 2002. The decrease of $2.2 Million is directly attributed to a decline in deposits, specifically certificate of deposit balances. Although our time deposit interest rates are competitive within our local market area, the lower interest rates offered during 2001 and through the first quarter of 2002, reflecting a series of reductions in interest rates initiated by the Federal Reserve Board, caused some customers to seek higher yields and alternative investment products. During the first quarter of 2002, loan demand improved as both consumer and commercial borrowers continued to take advantage of the lower interest rate environment that prevailed throughout 2001 and the first three months of 2002. Although new loan requests and commitments increased, a large loan payoff, combined with amortization of the existing loan portfolio during the three months ending March 31, 2002, resulted in a net decrease in loans of $1.7 Million. The combined investment portfolio decreased by $3.3 Million from $95.4 Million reported as of December 31, 2001 to $92.1 Million at March 31, 2002. The decrease in our loan and investment portfolios provided the liquidity to fund the withdrawals of our certificates of deposit and payment of a $1.0 Million loan advance from the Federal Home Loan Bank that matured in January 2002. The investment portfolio represents the second largest component of the Company's assets and consists of securities in the Available-for-Sale category and securities in the Held-to-Maturity category. The designation of which category the security is to be classified as is determined at the time of the purchase of the investment instrument. The Held-to-Maturity category consists predominately of securities of the U.S. Treasury, U.S. Government corporation and agencies, and securities issued by states of the United States and political subdivisions of states. The Company has the positive intent and ability to hold these securities to maturity. In managing the Held-to-Maturity portfolio, the Company seeks to maximize its return and maintain consistency to meet short and long term liquidity forecasts by purchasing securities with maturities laddered within a short-term period of 1-3 years, a mid-term period of 3-5 years, and some securities extending out to 10 years. The Company does not purchase investments with off-balance sheet characteristics, such as swaps, options, futures, and other 7 hedging activities that are called derivatives. The main objective of the investment policy is to provide adequate liquidity to meet reasonable declines in deposits and any anticipated increases in the loan portfolio, to provide safety of principal and interest, to generate earnings adequate to provide a stable income, and to fit within the overall asset/liability management objectives of the Company. 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, 2002.
Amortized Gross Unrealized Gross Unrealized (Dollars in Thousands) Cost Basis Holding Gains Holding Losses Fair Value ----------------------------------------------------------------------------------------------------------- Debt securities issued by the U. S. Treasury and other U. S. Government corporations and Agencies $ 750 $ 7 $ 0 $ 757 Debt securities issued by states of the United States and political subdivisions of the states 13,712 246 24 13,934 Mortgage-backed securities 3 0 0 3 Other debt securities 1 0 0 1 --------------------------------------------------------------------------------------------------------- Total $14,466 $253 $24 $14,695 =========================================================================================================
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 unrealized gains or losses, net of taxes, are reflected in Stockholders' Equity as a separate component. Investments in Available-for-Sale securities are carried at fair value on the balance sheet and are summarized as follows as of March 31, 2002.
Gains in Losses in Accumulated Accumulated Other Other Amortized Comprehensive Comprehensive (Dollars in Thousands) Cost Basis Income Income Fair Value ------------------------------------------------------------------------------------------------- Debt securities issued by the U. S. Treasury and other U. S. Government corporations and agencies $31,640 $359 $ 117 $31,882 Marketable Equities 5,905 319 1,345 4,879 Mortgage-backed securities 37,842 222 213 37,851 Corporate Bonds 2,936 56 4 2,988 ----------------------------------------------------------------------------------------------- Total $78,323 $956 $1,679 $77,600 ===============================================================================================
Decrease to Stockholders' Equity: (In Whole Dollars) Unrealized loss on Available-for-Sale Securities $ 723,489 Less tax effect (238,954) --------- Net unrealized loss on Available-for-Sale Securities $ 484,535 =========
8 The Available-for-Sale category at March 31, 2002 had net unrealized losses net of taxes of $484,535, of which $183,963 are net unrealized gains (net of tax) attributed to securities of the U.S. Treasury, other U.S. Government corporations and agencies, corporate bonds, and mortgage-backed securities, and $668,498 are net unrealized losses (net of tax) attributable to marketable equity securities. Securities of the U.S. Treasury, U.S. Government corporations and agencies, and mortgage-backed securities have little or no credit risk, other than being sensitive to changes in interest rates; and if held-to-maturity, these securities will mature at par. The Company amortizes premiums and accretes discounts over the life of the security. Marketable equity securities, however, have a greater risk as they are subject to rapid market fluctuations. These securities are constantly monitored and evaluated to determine their suitability for sale or retention in the portfolio. Management minimizes its risk by limiting the total amount invested into marketable equity securities to 6.5% of the total investment portfolio. At March 31, 2002, the amount invested in marketable equity securities was 6.3% of the total investment portfolio distributed over various business sectors. INFORMATION WITH RESPECT TO NONACCRUAL AND PAST DUE LOANS AT MARCH 31, 2002 AND 2001 AND DECEMBER 31, 2001 AND 2000
At March 31, At December 31, ------------------------------------------------------------------------------------------ (Dollars in Thousands) 2002 2001 2001 2000 ------------------------------------------------------------------------------------------ Nonaccrual Loans $ 839 $2,263 $1,138 $2,415 Loans 90 days or more past due and still accruing 0 181 444 335 Real estate acquired by foreclosure or substantively repossessed 0 0 0 0 Percentage of nonaccrual loans to total gross loans 0.33% 0.90% 0.45% 0.94% Percentage of nonaccrual loans, restructured loans, and real estate acquired by foreclosure or substantively repossessed to total assets 0.25% 0.59% 0.34% 0.64% Percentage of allowance for loan losses to nonaccrual loans 645.4% 218.02% 481.90% 197.76%
The $0.8 Million in nonaccrual loans as of March 31, 2002 consists of $0.6 Million of real estate mortgages and $0.2 Million attributed to commercial loans. Nonaccrual loans include restructured loans of $133,000 at March 31, 2002. The Company's nonperforming assets as a total decreased by $0.3 Million at March 31, 2002, from $1.1 Million reported on December 31, 2001 to $.8 Million as of March 31, 2002. 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 $299,253 during the first quarter of 2002. Loans 90 day or more but still accruing decreased by $443,882 during the current quarter. The percentage of nonaccrual loans to total gross loans decreased from 0.45% reported at year end to 0.33% at March 31, 2002 due to 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. 9 INFORMATION WITH RESPECT TO INTEREST ON NONACCRUAL AND PAST DUE LOANS AT MARCH 31, 2002 AND 2001 AND DECEMBER 31, 2001 AND 2000
At March 31, At December 31, ----------------------------------------------------------------------------------- (Dollars in Thousands) 2002 2001 2001 2000 ----------------------------------------------------------------------------------- Nonaccrual Loans $839 $2,263 $1,138 $2,415 Interest income that would have been recorded under original terms 18 60 109 228 Interest income recorded during the period 1 14 6 22
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. At March 31, 2002, there were $3,177,560 of loans which the Company has determined to be impaired, of which $3,117,308 have a related allowance for credit losses of $566,806. Loans deemed to be impaired decreased substantially from the $7,521,689 reported as of December 31, 2001. At year end 2001, impaired loans included one large loan relationship of $2,556,000; but as of March 31, 2002, payments continue to be current and this loan has been removed from impairment status. In addition, principal reductions, loan payoffs, charged off balances, loan upgrades, and a change in our impairment identification methodology are other factors resulting in a decrease of impaired loans. 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, 2002 that management reasonably expects will materially impact future operating results, liquidity or capital resources. 10 ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Three Months Years Ended At March 31, At December 31, -------------------------------------------------------------------------- (Dollars in Thousands) 2002 2001 2001 2000 -------------------------------------------------------------------------- Balance at January 1 $5,484 $4,776 $4,776 $3,766 -------------------------------------------------------------------------- Charge-offs: Commercial (263) (30) (73) (194) Real estate - construction 0 0 (0) 0 Real estate - mortgage 0 0 (0) (23) Installment/consumer (3) (6) (28) (138) -------------------------------------------------------------------------- Total Charge-offs (266) (36) (101) (355) -------------------------------------------------------------------------- Recoveries: Commercial 4 4 14 50 Real estate - construction 0 0 0 0 Real estate - mortgage 3 0 29 92 Installment/consumer 2 2 16 23 -------------------------------------------------------------------------- Total Recoveries 9 6 59 165 -------------------------------------------------------------------------- Net Charge-offs (257) (30) (42) (190) -------------------------------------------------------------------------- Additions charged to operations 188 188 750 1,200 -------------------------------------------------------------------------- Balance at end of period $5,415 $4,934 $5,484 $4,776 ========================================================================== Ratio of net charge-offs to average loans outstanding (0.10%) (.012%) (0.02%) (0.08%)
The Allowance for Loan Losses at March 31, 2001 was $5,415,088, compared to $5,484,519 at year end 2001. The Allowance for Loan Losses as a percentage of outstanding loans was 2.15% at March 31, 2002, and 2.16% at December 31, 2001. The Bank provided $750,000 in 2001, $1,200,000 in 2000, and $187,500 as of March 31, 2002 to the Allowance for Loan Losses. Loans charged off were $101,000 as of December 31, 2001, $355,000 in 2000, and $266,000 as of March 31, 2002. Recoveries on loans previously charged off were $59,000 in 2001, $165,000 in 2000, and $9,000 as of March 31, 2002. Management believes that the Allowance for Loan Losses of $5,415,088 is adequate to absorb any losses that are estimated to occur, 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. These factors include but are not limited to recent trends in the nonperforming loans, the adequacy of the assets that collateralize the nonperforming loans, the level of nonaccrual loans, current economic conditions in the market area, and various other external and internal factors. During 2000, management made the decision to change the methodology and guidelines used in calculating the adequate level of loan loss reserves. Increasing credit risk due to a higher commercial real estate loan portfolio and a rising interest rate environment are responsible for the review and change in the methodology and guidelines. Management's assessment of the adequacy of the Allowance for Loan Losses is reviewed by regulators, the Company's independent accountants, and outside loan review consultants. 11 This table shows an allocation of the allowance for loan losses as of the end of each of the periods indicated.
March 31, 2002 December 31, 2001 December 31, 2000 --------------------------------------------------------------------------- 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(5) $1,788(1) 16.77% $1,629(1) 17.91% $1,466(1) 19.66% Real estate - Construction 47 3.52 41 2.99 47 3.36 Real estate - mortgage 3,426(2) 76.02 3,585(2) 74.77 2,970(2) 71.91 Consumer(3) 154(4) 3.69 229(4) 4.33 293(4) 5.07 ------------------------------------------------------------------------ $5,415 100.00% $5,484 100.00% $4,776 100.00% ======================================================================== -------------------- Includes amounts specifically reserved for impaired loans of $516,288 as of March 31, 2002, $780,029 as of December 31, 2001, and $281,248 as of December 31, 2000 as required by Financial Accounting Standard No. 114, Accounting for Impairment of Loans. Includes amounts specifically reserved for impaired loans of $46,425 as of March 31, 2002, $413,663 as of December 31, 2001, and $132,911 as of December 31, 2000 as required by Financial Accounting Standard No. 114, Accounting for Impairment of Loans. Includes consumer, obligations of states and political subdivisions and other. Includes amounts specifically reserved for impaired loans of $4,093 as of March 31, 2002, $1,632 as of December 31, 2001, and $10,398 as of December 31, 2000 as required by Financial Accounting Standard No. 114, Accounting for Impairment of Loans. Includes commercial, financial, agricultural and nonprofit loans.
The loan portfolio's largest segment of loans is commercial real estate loans, which represent 58% of gross loans. Residential real estate, represents 18% of gross loans. The Company requires a loan to value ratio of 80% in both commercial and residential mortgages. These mortgages are secured by real properties which have a readily ascertainable appraised value. Generally, commercial real estate loans have a higher degree of credit risk than residential real estate loans because they depend primarily on the success of the business. When granting these loans, the Company evaluates the financial statements of the borrower(s), the location of the real estate, the quality of management, and general economic and competitive conditions. When granting a residential mortgage, the Company reviews the borrower(s) repayment history on past debts, and assesses the borrower(s) ability to meet existing obligations and payments on the proposed loans. Commercial loans consist of loans predominantly collateralized by inventory, furniture and fixtures, and accounts receivable. In assessing the collateral for this type of loan, management applies a 40% liquidation value to inventories, 25% to furniture, fixtures and equipment; and 60% to accounts receivable. Commercial loans represent 19% of the loan portfolio. Consumer loans are generally unsecured credits and represent 5% of the total loan portfolio. These loans have a higher degree of risk than residential mortgage loans. The underlying collateral of a secured consumer loan 12 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 performance of operations is very dependent on 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. The level of net interest income achieved is significantly impacted by several factors such as economic conditions, interest rates, asset/liability management, and corporate strategic planning. Net interest and dividend income for the three months ending March 31, 2002 decreased by $329,164 to $3,568,308 when compared to $3,897,472 recorded during the same period in 2001. Total interest and dividend income decreased by $1,432,195 partially offset by a decrease in total interest expense of $1,103,031. Although our net interest margin stabilized during the first quarter of 2002, the series of reductions in interest rates throughout 2001 impacted our net interest margin, as a result of loan and investment repricing at lower interest rates due to refinancing and prepayments. The Provision for Loan Losses is a charge against earnings and funds the Allowance for Loan Losses. It is management's desire to maintain the Allowance for Loan Losses at a level that is adequate to absorb future possible charge-offs of loans deemed to be uncollectible. The Bank's provision during the three month period ending March 31, 2002 was $187,500, the same amount provided during the same period in 2001. Total Other Income increased by $63,108 for the first quarter in 2002, from $406,122 reported for the first quarter in 2001 to $469,230 in 2002. Service charges on both deposit accounts and overdrafts combined decreased slightly by $3,338. The Bank realized a $2,818 loss on the sale of one security during the first three months of 2002. There were no losses realized on the sale of securities during the first quarter of 2001. There was an increase of $21,770 in the cash surrender value of life insurance policies associated with both the Directors' and Executive Officers' life insurance programs. The purchase of additional policies during 2001 for newly hired executives totaled $515,500 and continues to generate additional earnings. The line item Other Income increased by $47,494 when compared to the first three months of 2001. These income items represent earnings derived from safe deposit box rentals, checkbook printing revenue, exchange and commission fees, customer investment commission fees, ATM/debit card usage fees, and recoveries of previously recorded losses relating to check fraud. The category Other Expense, made up of various noninterest expenses, decreased by $85,398 to $2,771,851 recorded during the first three months ending March 31, 2002, compared to $2,857,249 reported for the same period in 2001. Salaries and employee benefits increased by $7,399 due to general wage adjustments and staff additions. Occupancy and equipment expenses combined totaled $336,643 during the first quarter in 2002, compared to $392,333 in 2001, a decrease of $55,690. The mild winter experienced during the first quarter of 2002 contributed to lower utility and snow removal costs. The expenses for stationery and supplies increased by $22,279 from $52,285 reported during the first quarter in 2001 to $74,564 in 2002. This increase was a result of additional cost for stationery and envelopes required for marketing and business development. Professional service fees decreased by $38,973 from the first quarter of 2001 to 2002. This decrease reflects cost associated with legal and consulting services and collection and repossession expenses. Marketing 13 expenses attributed to production and media costs for television and radio commercials, print advertising and other direct marketing decreased slightly by $619. The following table sets forth the components of the line item Other Expense, which reflects a decrease of $19,794 for the first quarter in 2002 compared to the same period reported in 2001.
March 31, 2002 March 31, 2001 Variance -------------------------------------------- Amortization of Goodwill $ 0 $ 56,700 $(56,700) Communications 81,240 82,912 (1,672) Committee Fees 46,550 40,910 5,640 Other Miscellaneous Expenses 278,223 245,285 32,938 ----------------------------------------- $406,013 $425,807 $(19,794) =========================================
The decrease of $19,794 was primarily due to a decrease of $56,700 in amortization expense pertaining to goodwill, due to the implementation of SFAS No. 142 previously mentioned, partially offset by an increase of $32,938 in various other miscellaneous expenses. Income before income taxes was $1,078,187 for the three month period ending March 31, 2002 compared to $1,258,845 reported for the same period in the prior year. Taxes totaled $296,265 down by $93,215 when compared to $389,480 reported for the first quarter in 2001. Net Income of $781,922 was down by 10.06% or $87,443 for the first quarter in 2002 compared to $869,365 in the same period in 2001. Diluted earnings per share for the first quarter in 2002 was $0.20 compared to $0.23 reported in 2001. 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. During the first quarter in 2001 and 2002, the Bank was not required to borrow short-term funds to meet current liquidity needs. 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. As of March 31, 2002, there is also $15,920,279 in advances from the Federal Home Loan Bank representing the match funding program that is available to qualified borrowers and an investment growth strategy transaction. 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 level of Federal Funds Sold to further enhance its liquidity, providing funds to meet lending and other cash requirements. 14 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, 2002, the Bank's liquidity ratio stood at 35.1%, slightly higher than the 34.9% level reported at December 31, 2001. 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. Capital ------- As of March 31, 2002, the Company had total capital of $38,744,201. This represents an increase of $278,070 from $38,466,131 reported on December 31, 2001. The increase in capital was a combination of several factors. Additions consisted of three months earnings of $781,922 and transactions originating through the Dividend Reinvestment Program whereby 2,782.986 shares were issued for cash contributions of $39,923 and 11,105.008 shares were issued for $169,360 in lieu of cash dividend payments. These additions were offset by dividends paid of $349,543. 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, 2001 the Available-for-Sale portfolio had unrealized losses, net of taxes, of $120,943, and on March 31, 2002, as a result of current market values, the portfolio reflects unrealized losses, net of taxes, of $484,535. There was no change in the minimum pension liability adjustment of $106,245, net of taxes, recorded December 31, 2001. 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, 2002 the actual Risk Based Capital of the Bank was $30,919,000 for Tier 1 Capital, exceeding the minimum requirements of $10,711,400 by $20,207,600. Total Capital of $34,292,000 exceeded the minimum requirements of $21,422,800 by $12,689,200 and Leverage Capital of $30,919,000 exceeded the minimum requirements of $15,432,840 by $15,486,160. 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, 2002 and at December 31, 2001.
Well March 31, 2002 December 31, 2001 Capitalized ---------------- ----------------- Requirement Bancorp Bank Bancorp Bank ------------------------------------------------------------------------------- Total Capital (to Risk Weighted Assets) > or = 10% 14.57% 12.81% 14.43% 12.55% ------------------------------------------------------------------------------- Tier 1 Capital (to Risk Weighted Assets) > or = 6% 13.32% 11.55% 13.18% 11.29% ------------------------------------------------------------------------------- Leverage Capital (to Average Assets) > or = 5% 9.18% 8.01% 8.98% 7.74% -------------------------------------------------------------------------------
15 Under the revised informal agreement entered into with the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation, effective January 17, 2002, the Bank is required to maintain a seven (7) percent Tier I Leverage Capital ratio. As of March 31, 2002, this ratio was 8.01% compared to 7.74% at year end 2001. In addition to meeting the required levels, the Company and the Bank's capital ratios meet the criteria of the "well capitalized" category established by the federal banking agencies as of March 31, 2002. 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:
Estimated Exposure as a Rate Change Percentage of Net Interest Income (Basis Points) March 31, 2002 ------------------------------------------------------ +200 (2.01)% -200 (4.47)%
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. 16 Part II Other Information ITEM 6 Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits: See exhibit index. (b) Reports on Form 8-K: A report on Form 8-K dated February 7, 2002 was filed with the Securities and Exchange Commission reporting under Item 5 the announcement of the early retirement as of March 29, 2002 of James D. Carey, President and Chief Executive Officer of the Bank and Executive Vice President of the Company. 17 EXHIBIT INDEX Exhibit No. Description Page ----------- ----------- ---- 3.1 Articles of Incorporation of Slade's Ferry Bancorp as amended (1) 3.2 By-laws of Slade's Ferry Bancorp as amended (2) 10.1 Slade's Ferry (formerly Weetamoe) Bancorp 1996 Stock Option Plan (as amended) (3) 10.2 Noncompetition Agreement between Slade's Ferry Trust Company and Edward S. Machado (A substantially identical contract exists with Peter Paskowski) (4) 10.3 Supplemental Executive Retirement Agreement between Slade's Ferry (formerly Weetamoe) Bancorp and Donald T. Corrigan (5) 10.4 Supplemental Executive Retirement Agreement between Slade's Ferry (formerly Weetamoe) Bancorp and James D. Carey (2) 10.5 Supplemental Executive Retirement Agreement between Slade's Ferry (formerly Weetamoe) Bancorp and Manuel J. Tavares (2) 10.6 Swansea Mall Lease (4) 10.7 Form of Director Supplemental Retirement Program Director Agreement, Exhibit I thereto (Slade's Ferry Trust Company Director Supplemental Retirement Program Plan) and Endorsement Method Split Dollar Plan Agreement thereunder for Thomas B. Almy. (Similar forms of agreement entered into between Slade's Ferry Trust Company and the other directors) (6) 10.8 Form of Directors' Paid-up Insurance Policy for Thomas B. Almy (part of the Director Supplemental Retirement Program). (Similar forms of policy entered into by Company for other directors) (7) 10.9 Form of Officers' Paid-up Endorsement Method Split Dollar Plan Agreement and Insurance Policies for Janice Partridge (Similar forms of policies entered into by Company for its President and other Vice Presidents) (8) -------------------- Incorporated by reference to the Registrant's Registration Statement on Form SB-2 filed with the Commission on April 14, 1997. Incorporated by reference to the Registrant's Form 10-KSB for the fiscal year ended December 31, 1996. Incorporated by reference to the Registrant's Form 10-Q for the quarter ended June 30, 1999. Incorporated by reference to the Registrant's Registration Statement on Form S-4 File No. 33-32131 Incorporated by reference to the Registrant's Form 10-KSB for the fiscal year ended December 31, 1994. Incorporated by reference to the Registrant's Form 10-Q for the quarter ended March 31,1999 Incorporated by reference to the Registrant's Form 10-QSB for the quarter ended June 30, 1998. Incorporated by reference to the Registrant's Form 10-Q for the quarter ended June 30, 2000. 18 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, 2002 /s/ Kenneth R. Rezendes -------------------- ------------------------------------- (Date) (Signature) Kenneth R. Rezendes President/Chief Executive Officer May 10, 2002 /s/ Donald T. Corrigan -------------------- ------------------------------------- (Date) (Signature) Donald T. Corrigan Chairman of the Board of Directors May 10, 2002 /s/ Edward Bernardo Jr. -------------------- ------------------------------------- (Date) (Signature) Edward Bernardo Jr. Vice President/Treasurer Chief Financial Officer/ Chief Accounting Officer 19