-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KWGIKefJG1GFkVjolwysNkJ0KPa1/mfaNFzTwPkk2SRhd86MYlkbbfP5+Qv6aJDG L/083IOeMdrZeXCOKnzeCA== 0000910647-03-000107.txt : 20030331 0000910647-03-000107.hdr.sgml : 20030331 20030331160939 ACCESSION NUMBER: 0000910647-03-000107 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SLADES FERRY BANCORP CENTRAL INDEX KEY: 0000857499 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 043061936 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23904 FILM NUMBER: 03630862 BUSINESS ADDRESS: STREET 1: 100 SLADES FERRY AVE STREET 2: PO BOX 390 CITY: SOMERSET STATE: MA ZIP: 02726 BUSINESS PHONE: 5086757894 MAIL ADDRESS: STREET 1: 100 SLADE FERRY AVE STREET 2: P O BOX 390 CITY: SOMERSET STATE: MA ZIP: 02726 FORMER COMPANY: FORMER CONFORMED NAME: WEETAMOE BANCORP DATE OF NAME CHANGE: 19940502 10-K 1 slad-10k.txt BODY OF FORM 10-K Cover: "It's Our People That Make the Difference" Slade's Ferry Bancorp 2002 Page One: "Passionate Leadership" Commitment to the cause has always been a hallmark of Slade's Ferry employees. And our chairman demonstrated that kind of dedication by taking on the day-to-day management of the organization while serving as interim president from March through August. Chairman Donald Corrigan, along with Vice Chair Kenneth Rezendes, kept Slade's Ferry on a steady course and initiated strategic planning to create a vision for the institution. As that planning began, it quickly became evident that the bank's permanent president would need to be passionate about helping the bank reach its full potential. Our search team envisioned an energetic motivator with the skills and expertise to refine the strategic plan and to put the results into practice. We wanted someone who would be excited about reenergizing the institution and able to develop employees' creativity so that, together, we could find new ways to address customer needs. After an exhaustive search, the board unanimously elected Mary Lynn Lenz to become the new president and CEO of Slade's Ferry Bancorp. With 28 years of financial services experience and a background in retail banking, Lenz is well equipped to take the torch passed on to her by Donald Corrigan and to address the dynamic needs of the bank while honoring its traditions. With strength and decisiveness, the board of Slade's Ferry Bancorp charted a new course and placed a passionate new leader at the helm in 2002. Page Two: "Top-of-the-Line Customer Service" We are people with deep roots here in the south coast. Tradition, honesty and integrity mean something to us. That's why banking relationships are so important. Slade's Ferry customers look to their local banker to be a trusted confidant, counselor and partner. They seek advice on how to pay for college, a wedding, or a new home and how to plan for retirement. But our customers also want assurances that they'll be well prepared to confront the unexpected curveballs that life can sometimes throw --like braces for your 13-year-old, a new hot water heater or shocks on your 1998 sedan. "My parents, and my husband's parents are long-time customers of Slade's Ferry, so I guess we were destined to become customers too," said Kelly Meehan. "We decided to re-mortgage our house to take advantage of low rates and to begin a remodeling project after our recent wedding. Connie [Barbosa, vice president of mortgage originations] provided amazing customer service. She kept us posted every step of the way. In fact, we were so pleased that we just opened a checking account too." The tellers, customer service specialists and branch managers at Slade's Ferry take pride in the one-on-one relationships that we build with our customers. We understand the needs of the people that we serve and help our customers' money work to its fullest advantage. By knowing both customer needs and the depth of the Slade's Ferry product line, we can help our customers meet their financial goals. In 2002 Slade's Ferry promoted new products in the marketplace. Home equity lines were advertised in the fourth quarter and more than 225 customers took advantage of the historically low interest rates being offered. With a reorganized Slade's Ferry Bank in 2003, customers can expect new products and a reenergized customer service team to respond to customers' banking needs in the months to come. Page Three: "Attentive Lenders" Successful commercial banking relationships are true partnerships. Lenders commit themselves to learning your business and you come to rely on us for expert advice and products tailored to fit your needs. At Slade's Ferry, your small business isn't just another number. You've invested in us, and that's why we invest time and manpower in your business. Roy Enoksen, CEO of Eastern Fisheries, is one customer who appreciates the value of his relationship with his banker, Bob Howard. Roy started his 50 million-dollar business by purchasing one fishing boat in 1978. Back then he had a commercial checking account at Slade's Ferry. Over the years, his business has grown into a corporation with five different business lines. In 2002, his scalloping business alone harvested 70 million pounds of scallops, satisfying 20 percent of domestic consumption. Consequently, his commercial banking needs have changed. And Slade's Ferry has been right there beside him, every step of the way. "My banker understands my industry and the local marketplace," said Enoksen. "I can call him at a moment's notice for help on a specific problem, or ask him to set aside a few hours to participate in a strategic planning session. Either way, I know I can count on Slade's Ferry to be there for Eastern Fisheries." With real estate in Boston's Route 128/Interstate 495 belt reaching new highs and commuter rail soon reaching into Fall River, southeastern Massachusetts is ripe for explosive commercial growth. Slade's Ferry is positioning itself for changes in the marketplace by adding lenders to its team so that the bank's commitment to attentive service will not be compromised as it gains market share in the years to come. Page Four: "Commitment to Community" When you examine the banking industry, you quickly realize that bigger isn't always better. After all, how can a lending institution out of Boston, Pittsburgh or even Providence for that matter, know the small business needs of Somerset, affordable housing issues facing Fall River or the lending needs of a social services organization in New Bedford. Living in the communities that you serve is the foundation of solid community banking. Slade's Ferry employees are volunteering alongside you at the PTA meeting, sharing your checkout aisle at the corner market, and coaching your kids at the YMCA. The bank understands the people of southeastern Massachusetts because our employees are an integral part of the fabric of the community. That's why we were there when New Bedford Community Health Center, the Child & Family Services of Greater New Bedford and the Fairhaven Community Nurses Association needed lending assistance in 2002. "We couldn't have responded to the community need appropriately, without the assistance of Slade's Ferry," said Rob Mendes of the New Bedford Boys & Girls Club. "We've been here in this neighborhood for 133 years, but the demand for our services has been growing exponentially in recent years. We serve up to 1,500 children each year so we needed more recreation and education space." With financing assistance from Ed Sousa at Slade's Ferry, the club added a new 20-station computer room and a dedicated classroom for tutorial assistance, along with a 8,200 square-foot gymnasium which will help to nurture yet another generation's healthy minds and bodies. As Slade's Ferry grows, our commitment to the communities we serve will never waiver. It is our goal to define and provide greater focus to our charitable giving efforts in the coming year. Page Five: BOARD OF DIRECTORS, Slade's Ferry Bancorp - Slade's Ferry Trust Co. Thomas B. Almy Architect Peter G. Collias, Esquire Clerk/Secretary of Bancorp and Bank Law Office of Peter G. Collias Donald T. Corrigan Chairman of the Board - Slade's Ferry Bancorp Chairman of the Board - Slade's Ferry Trust Co. Melvyn A. Holland Treasurer Rosenfield Raymon Restivo, PC Certified Public Accountants Mary Lynn D. Lenz President/Chief Executive Officer - Slade's Ferry Bancorp President/Chief Executive Officer Slade's Ferry Trust Co. William Q. MacLean, Jr. Account Executive Sylvia Insurance Agency, Inc. Francis A. Macomber President - LeComte's All Star Dairy, Inc. Majed Mouded, MD Physician Shaun O'Hearn, Sr. President - Bolger & O'Hearn, Inc. Lawrence J. Oliveira, DDS Orthodontist Peter Paskowski Past President - Slade's Ferry Trust Co. Kenneth R. Rezendes Vice Chairman - Slade's Ferry Bancorp Chairman - K. R. Rezendes, Inc. William J. Sullivan President - Sullivan Funeral Homes, Inc. Charles Veloza President - Charlie's Oil Co., Inc. David F. Westgate President - Quequechan Management Corp. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 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) Registrant's telephone number, including area code: (508) 675-2121 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [ ] The aggregate market value of the voting stock of Slade's Ferry Bancorp, held by nonaffiliates of the registrant as of February 21, 2003 was approximately $45,668,574. On that date, there were 3,952,185.757 shares of Slade's Ferry Bancorp Common Stock, $.01 par value outstanding. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement for Annual Meeting of Stockholders April 14, 2003 incorporated by reference into Part III. PART I ITEM 1 BUSINESS Description of Business Business of Slade's Ferry Bancorp - --------------------------------- Slade's Ferry Bancorp ("the Company") is a business corporation that was organized under the laws of the Commonwealth of Massachusetts on June 13, 1989 as Weetamoe Bancorp. The name Weetamoe Bancorp was changed to Slade's Ferry Bancorp effective January 1, 1997. The office of Slade's Ferry Bancorp is located at the office of the Bank at 100 Slade's Ferry Avenue, Somerset, Massachusetts, 02726, and its telephone number is the same as the Bank's: (508) 675-2121. The Company was organized for the purpose of becoming the holding company of the Bank. The Company's acquisition of the Bank was completed on April 1, 1990. The Bank (Slade's Ferry Trust Company) is a wholly-owned subsidiary of Slade's Ferry Bancorp. Competition - ----------- The primary business of Slade's Ferry Bancorp is the ongoing business of the Bank. The competitive conditions to be faced by Slade's Ferry Bancorp will be the same as those faced by the Bank. It is likely that, as a holding company, it may compete with other holding companies engaged in bank-related activities. Thus, the Company will face competition in undertaking to acquire other banks, financial institutions or companies engaged in bank-related activities, and in operating subsequent to any such acquisitions. While the Company investigates opportunities to acquire other banks or bank facilities when they occur and may in the future acquire other banks, financial institutions, or bank facilities, it is not currently engaged in any such acquisition. Employees - --------- At present there are four employees of the Bank and the Company whose compensation is paid by the Company. Although the Company has no current plans to do so, if the Company should acquire other financial institutions or pursue other lines of business, it may at such time hire additional employees. Business of Slade's Ferry Trust Company - --------------------------------------- On September 30, 1959, the Slade's Ferry Trust Company opened for business as a state chartered trust company incorporated under the laws of the Commonwealth of Massachusetts and as a member of the Federal Deposit Insurance Corporation (FDIC). The founders were a group of individuals from Somerset, Swansea, Fall River and Seekonk, Massachusetts who recognized the need for a local bank committed to personalized services. During the past three years, assets of the Bank increased by $40.3 Million. The Bank currently has twelve banking facilities extending east from Seekonk, Massachusetts to Fairhaven, Massachusetts. 2 The Bank also provides limited banking services at the Somerset High School. In addition, the Bank in 1999 received regulatory approval to establish a loan production office in Rhode Island. The office is named the Slade's Ferry Loan Company and is a subsidiary of Slade's Ferry Trust Company. The purpose for the loan production office is to solicit commercial and consumer borrowers in the Rhode Island area. The office is prohibited from accepting deposits and payments. In June 1999, the Bank established a Real Estate Investment Trust (REIT) as a subsidiary of Slade's Ferry Trust Company. The REIT, named the Slade's Ferry Preferred Capital Corporation, provided the means for the Bank to invest into the REIT certain designated, bank-owned real estate mortgage loans. The income derived on these loans was taxed at a reduced state tax rate. The Bank currently services numerous communities in Southeastern Massachusetts and contiguous areas of Rhode Island through its twelve facilities in Fall River, Somerset, Swansea, Seekonk, New Bedford and Fairhaven, and its loan production office in Warwick, Rhode Island. The Bank's major customer base consists of almost 35,300 personal savings, checking and money market accounts, and 9,400 personal certificates of deposit and individual retirement accounts. Its commercial base consists of over 3,200 checking, money market, corporate, and certificate of deposit accounts. The Bank does not have any major target accounts, nor does it derive a material portion of its deposits from any single depositor. It is a retail bank that services the needs of the local communities, and its loans are not concentrated within any single industry or group of related industries that would have any possible adverse effect on the business of the Bank. The Bank's business is not seasonal and its loan demand is well diversified. As of December 31, 2002, commitments under standby letters of credit aggregate approximately $636,400. Services - -------- The Bank engages actively in a broad range of banking activities, including demand, savings, time deposits, related personal and commercial checking account services, real estate mortgages, commercial and installment lending, payroll services, money orders, travelers checks, Visa, MasterCard, safe deposit rentals, automatic teller machines and cash management services. The Bank offers a full range of commercial, installment, student, and real estate loans. The service area of the Bank is approximately 300 square miles, including the southern geographic area of Bristol County, Massachusetts and extends over to the towns of Tiverton, Warren, Bristol and Barrington in the state of Rhode Island. Competition - ----------- The banking business in the market area served by the Bank is highly competitive. The Bank actively competes with other banks, financial institutions, and credit unions, including major banks and bank holding companies which have numerous offices and affiliates operating over wide geographic areas. The Bank competes for deposits, loans, and other business with these institutions. Many of the major commercial banks, or other affiliates in the service areas of the Bank, offer services such as international banking, internet banking, and trust services which are not currently offered directly by the Bank. 3 Supervision and Regulation Holding Company Regulation - -------------------------- Under the Federal Bank Holding Company Act ("BHCA"), the prior approval of the Federal Reserve Board ("FRB") is required before a corporation may acquire control of a bank. FRB approval must also be obtained before a bank holding company acquires all or substantially all of the assets of a bank, or merges or consolidates with another bank holding company. In considering any applications for approval of an acquisition or merger, the FRB is required to consider the financial and managerial resources of the companies and banks concerned, and the convenience and needs of the communities to be served. As a registered bank holding company, the Company is required to file with the FRB annual and periodic reports and such other additional information as the FRB may require. The Company and its subsidiaries are also subject to continuing regulation, supervision and examinations by the FRB. A bank holding company, with certain exceptions, may not acquire more than 5% of the voting shares of any company that is not a bank and may not engage, directly or through subsidiaries, in any activity other than banking, managing or controlling banks, or furnishing services to or performing services for its subsidiaries, without prior approval of the FRB. The FRB is authorized to approve the ownership by a bank holding company of voting shares of any company whose activities the FRB determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereof. Under the FRB's current regulations, and subject to certain restrictions and limitations specified therein, bank holding companies and their subsidiaries may be permitted by the FRB to engage in such non-banking activities as: (1) making, acquiring, or servicing loans or other extensions of credit such as would be made by a mortgage, finance, credit card, or factoring company; (2) operating an industrial bank or industrial loan company; (3) performing the functions of a trust company; (4) acting as an investment or financial advisor; (5) leasing real or personal property or acting as an agent or broker in leasing such property or acting as an agent or broker in leasing property in certain situations; (6) making investments to promote community welfare; (7) providing certain data processing and transmission services; (8) acting as principal, agent, or broker with respect to insurance directly related to extensions of credit by the bank holding company or its subsidiaries, and engaging in certain other insurance activities subject to specified conditions and limitations; (9) providing courier services for checks and certain other instrument exchanges among banks, and for audit and accounting media of a banking or financial nature; (10) providing management consulting advice under specified conditions to banks not affiliated with the bank holding company; (11) issuing and selling retail money orders having a face value of not more than $1,000 and travelers checks and selling U.S. Savings Bonds; (12) performing appraisals of real and personal property; (13) arranging commercial real estate equity financing under certain circumstances; (14) providing securities brokerage services as agent for the accounts of customers; (15) underwriting and dealing in certain government obligations and money market instruments; (16) providing foreign exchange advisory and transactional services; (17) acting as a futures commission merchant in specified capacities or providing investment advice as a futures commission merchant or commodity trading advisor with respect to certain financial futures contracts and options; (18) providing consumer financial counseling services; (19) providing tax planning and preparation services; (20) providing check guaranty services to subscribing merchants; (21) operating a collection agency; and (22) operating a credit bureau. In addition, a bank holding company may file an application for FRB approval to engage, directly or through subsidiaries, in other nonbank activities that the holding company reasonably believes are so closely related to banking as to be a proper incident thereto. 4 In addition, pursuant to the Bank Export Services Act of 1982, a bank holding company may invest up to 5% of its consolidated capital and surplus in shares of an export trading company unless such investment is disapproved by the FRB after notice as provided in that Act. As a bank holding company, the Company will be required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Bancorp's consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would violate any law, regulation, FRB order, directive, or any condition imposed by, or written agreement with, the FRB. The status of the Company as a registered bank holding company under the BHCA does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws. Under Massachusetts law, Board of Bank Incorporation approval is required before any company may become a bank holding company by directly or indirectly owning, controlling or holding the power to vote 25% or more of the voting stock of two or more banks. Further, such approval is required prior to a bank holding company's (i) acquiring voting stock of another bank institution if, as a result of the acquisition, such acquirer would, directly or indirectly, own or control more than 5% of the voting stock of such institution, or (ii) engaging in certain other transactions. The Company is not considered a bank holding company under Massachusetts's law since it does not control two or more banks. The activities of the Company, however, will be limited under Massachusetts's law to activities described above which would be permissible for a bank holding company registered under the BHCA. In addition, the acquisition by the Company of 25% or more of the voting stock or the power to elect a majority of the directors of another commercial bank, savings bank, cooperative bank, or savings and loan association would subject the Company to regulation as a bank holding company under applicable Massachusetts law and would require the approval of the Massachusetts Board of Bank Incorporation. Bank Regulation - --------------- As a Massachusetts-chartered, FDIC-insured trust company, the Bank is subject to regulation and supervision by the Commissioner of Banks, the FDIC and the FRB. The Massachusetts statutes and regulations govern, among other things, investment powers, deposit activities, borrowings, maintenance of surplus and reserve accounts, distribution of earnings, and payment of dividends. The Bank is also subject to state regulatory provisions covering such matters as issuance of capital stock, branching, and mergers and acquisitions. Deposit accounts at the Bank are insured by the FDIC, generally up to a maximum of $100,000 per insured depositor. As an insurer of deposits of certain thrift institutions and commercial banks, the FDIC issues regulations, conducts examinations, requires the filing of reports, and generally supervises the operations of institutions to which it provides deposit insurance. The approval of the FDIC is required prior to any merger or consolidation with another financial institution, or the establishment or relocation of an office facility. This supervision is intended primarily for the protection of depositors. As an FDIC-insured bank, the Bank is subject to certain FDIC requirements designed to maintain the safety and soundness of individual banks and the banking system. The FDIC periodically conducts 5 examinations of insured institutions and, based upon appraisals, may revalue assets of an insured institution and require establishment of specific reserves in amounts equal to the difference between such revaluation and the book value of the assets. In addition, the FDIC has a regulation which defines and sets minimum requirements for capital adequacy. Bank regulators have implemented risk based capital guidelines that require a bank to maintain certain minimum capital as a percent of such bank's assets and certain off-balance sheet items adjusted for predefined credit risk factors (risk adjusted assets). Under the requirements a minimum level of capital will vary among banks on safety and soundness of operation. At December 31, 2002 the minimum regulatory capital level of Risk Based Capital was 4% for Tier 1 Capital, 8% for Total Capital and Leverage Capital was 4%. The Company, the Bank, the Slade's Ferry Realty Trust, the Slade's Ferry Securities Corporation, the Slade's Ferry Preferred Capital Corporation, and the Slade's Ferry Loan Company are "affiliates" within the meaning of the Federal Reserve Act. Certain provisions of the Federal Reserve Act, made applicable to the Bank by Section 18(j) of the Federal Deposit Insurance Act and administered with respect to the Bank by the FDIC, limit the amounts of and establish collateral requirements with respect to the Bank's loans or extensions of credit to and investments in affiliates. In addition, related provisions of the Federal Reserve Act and FRB regulations also administered with respect to the Bank by the FDIC limit the amounts of and establish required procedures and credit standards with respect to loans and other extensions of credit to officers, directors and principal stockholders of the Bank, of the Company, and of any subsidiaries of the Company, and to related interests of such persons. Recent Regulatory Examinations - ------------------------------ During 2002, the Bank continued to operate under an informal agreement (Memorandum of Understanding) with the Federal Deposit Insurance Corporation and Massachusetts Commissioner of Banks. This agreement was originally entered into in December 2000. Following completion of a joint examination in 2001, and the most recent joint examination in 2002, a revised Memorandum of Understanding was entered into to be implemented during the first and second quarters of 2003. Management has made substantial progress towards addressing the provisions of the Memorandum but certain areas require continued efforts. Key areas that require attention going forward are the full implementation of management and strategic plans, asset quality improvement and refinement to both the loan and investment policies. During the life of the agreement, the Bank must maintain a Tier 1 Leverage Capital Ratio of at least seven (7) percent. The Board of Directors and bank management have made great strides addressing issues and concerns within the Memorandum of Understanding, and are committed to continue to take action to comply with the remaining provisions. Statistical Information - ----------------------- The following supplementary information required under Guide 3 (Statistical Disclosure by Bank Holding Companies) should be read in conjunction with the related financial statements and notes thereto, which are a part of this report. 6 DISTRIBUTION OF ASSETS, LIABILITIES, AND STOCKHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The following table sets forth the Company's average assets, liabilities, and stockholders' equity, interest income earned and interest paid, average rates earned and paid, and the net interest margin for the periods ending December 31, 2002, December 31, 2001, and December 31, 2000. Averages are daily averages.
2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- Average Interest(1) Avg. Int. Average Interest(1) Avg. Int. Average Interest(1) Avg. Int. (Dollars in Thousands) Balance Inc/Exp Rate Balance Inc/Exp Rate Balance Inc/Exp Rate - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS: Earning Assets (2) Commercial Loans $ 40,088 $ 2,337 5.83% $ 47,036 $ 4,757 10.11% $ 48,445 $ 4,504 9.30% Commercial Real Estate 157,900 10,947 6.93% 153,395 12,989 8.47% 152,580 14,194 9.30% Residential Real Estate 48,069 3,446 7.17% 38,819 2,868 7.39% 36,558 2,877 7.87% Consumer Loans 8,447 547 6.48% 12,093 940 7.77% 11,216 911 8.12% - ---------------------------------------------------------------------------------------------------------------------------------- Total Loans 254,504 17,277 6.79% 251,343 21,554 8.57% 248,799 22,486 9.04% Federal Funds Sold & FHLB Overnight Deposits 24,033 348 1.45% 23,136 819 3.54% 9,558 583 6.10% U.S. Treas/Govt Agencies 70,385 3,688 5.24% 72,778 4,258 5.85% 68,606 4,421 6.44% States & Political Subdivisions 14,044 799 5.69% 12,498 777 6.22% 11,889 787 6.62% Mutual Funds 117 7 5.98% 45 2 4.44% 55 3 5.45% Marketable Equity Securities 4,087 106 2.59% 4,116 91 2.21% 4,241 89 2.10% Other Investments 1,182 33 2.79% 1,037 67 6.46% 1,066 79 7.41% - ---------------------------------------------------------------------------------------------------------------------------------- Total Earning Assets 368,352 22,258 6.04% 364,953 27,568 7.55% 344,214 28,448 8.26% - ---------------------------------------------------------------------------------------------------------------------------------- Allowance for Loan Losses (5,462) (5,109) (4,202) Unearned Income (347) (443) (552) Cash and Due From Banks 15,250 13,351 12,883 Other Assets 22,760 21,837 20,938 - ---------------------------------------------------------------------------------------------------------------------------------- Total Assets $400,553 $394,589 $373,281 ================================================================================================================================== LIABILITIES & STOCKHOLDERS' EQUITY: Savings $ 62,078 570 0.92% $ 53,613 $ 878 1.64% $ 50,210 $ 1,006 2.00% NOW's 42,259 348 0.82% 37,834 700 1.85% 37,785 1,183 3.13% Money Market Accounts 9,250 24 0.26% 9,415 120 1.27% 10,607 174 1.64% CD's > $100M 32,384 1,117 3.45% 34,483 1,796 5.21% 31,689 1,537 4.85% Other Time Deposits 124,974 4,644 3.72% 141,698 7,839 5.53% 138,637 8,019 5.78% FHLB Advances & Other Borrowings 18,553 1,225 6.60% 15,734 993 6.31% 12,402 780 6.29% - ---------------------------------------------------------------------------------------------------------------------------------- Total Interest-bearing Liabilities 289,498 7,928 2.74% 292,777 12,326 4.21% 281,330 12,699 4.51% Demand Deposits 69,787 64,549 58,588 Other Liabilities 1,466 1,738 1,836 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities 360,751 359,064 341,754 - ---------------------------------------------------------------------------------------------------------------------------------- Common Stock 39 38 37 Paid-in Capital 27,343 26,264 25,109 Retained Earnings 12,684 9,516 7,648 Accumulated Other Comprehensive Income (Loss) (264) (293) (1,267) - ---------------------------------------------------------------------------------------------------------------------------------- Total Stockholders' Equity 39,802 35,525 31,527 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities & Stockholders' Equity $400,553 $394,589 $373,281 ================================================================================================================================== Net Interest Income $14,330 $15,242 $15,749 ================================================================================================================================== Net Interest Spread 3.30% 3.34% 3.75% ================================================================================================================================== Net Yield on Earning Assets 3.89% 4.18% 4.58% ================================================================================================================================== - -------------------- On a fully taxable equivalent basis based on tax rate of 27.70% for 2002, 31.40% for 2001, and 33.30% for 2000. Interest income on investments and net interest income includes a fully taxable equivalent adjustment of $221,000 in 2002, $244,000 in 2001, and $262,000 in 2000. Average balance includes non-accruing loans. The effect of including such loans is to reduce the average rate earned on the Company's loans.
7 NET INTEREST INCOME - CHANGES DUE TO VOLUME AND RATE(1)
2002 vs. 2001 2001 vs. 2000 Increase Increase (Decrease) (Decrease) - -------------------------------------------------------------------------------------------------------------- Total Due to Due to Total Due to Due to (Dollars in Thousands) Change(2) Volume Rate Change(2) Volume Rate - -------------------------------------------------------------------------------------------------------------- Interest Income: Federal Funds Sold & FHLB Overnight Deposit $ (471) $ 23 $ (494) $ 236 $ 655 $ (419) US Treas/Govt Agencies (570) (133) (437) (163) 257 (420) States & Political Subdivisions 22 92 (70) (10) 39 (49) Mutual Funds 5 3 2 (1) 0 (1) Marketable Securities 15 (1) 16 2 (3) 5 Other Investments (34) 7 (41) (12) (2) (10) Commercial Loans (2,420) (554) (1,866) 253 (136) 389 Commercial Real Estate (2,042) 347 (2,389) (1,205) 73 (1,278) Residential Real Estate 578 673 (95) (9) 173 (182) Consumer Loans (393) (260) (133) 29 70 (41) - -------------------------------------------------------------------------------------------------------------- Total Interest Income (5,310) 197 (5,507) (880) 1,126 (2,006) - -------------------------------------------------------------------------------------------------------------- Interest Expense: Savings Accounts (308) 109 (417) (128) 62 (190) NOW Accounts (352) 59 (411) (483) 1 (484) Money Market Accounts (96) (1) (95) (54) (17) (37) CD's > 100 M (679) (774) 95 259 141 118 Other Time Deposits (3,195) (91) (3,104) (180) 173 (353) FHLB Advances & Other Borrowings 232 182 50 213 210 3 - -------------------------------------------------------------------------------------------------------------- Total Interest Expense (4,398) (516) (3,882) (373) 570 (943) - -------------------------------------------------------------------------------------------------------------- Net Interest Income $ (912) $ 713 $(1,625) $ (507) $ 556 $(1,063) ============================================================================================================== - -------------------- Changes in interest income and interest expense attributable to changes in both volume and rate have been allocated equally to changes due to volume and changes due to rate. The change in interest income on investments and net interest income includes interest on a fully taxable equivalent basis based on a tax rate of 27.70% for 2002, 31.40% for 2001, and 33.30% for 2000.
8 Interest Rate Risk - ------------------ The Company considers interest rate risk to be a significant market risk as it could potentially have an effect on the Company's financial condition and results of operation. The definition of interest rate risk is the exposure of the Company's earnings to adverse movements in interest rates. Volatility in interest rates requires the Company to manage interest rate risk, which arises from the differences in the timing of repricing of assets and liabilities. 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 evaluating the difference between interest-sensitive assets and interest-sensitive liabilities within various time periods. The Company's objective is to reduce and control the volatility of its net interest income by managing the relationship of interest-earning assets and interest-bearing liabilities. In order to manage this relationship, the Committee utilizes a monthly GAP report. The GAP report provides a static analysis of repricing opportunities of rate-sensitive assets and rate-sensitive liabilities. It is prepared by categorizing these assets and liabilities into time periods based upon either their contractual or anticipated maturity or repricing. The analysis determines the net dollar amount of assets less liabilities that are repricing in various time frames. This, in conjunction with certain assumptions and other related factors, such as anticipated changes in interest rates, projected cash flows from loans, investments and deposits, provides a means of evaluating interest rate risk. Management also takes into consideration that certain assets and liabilities react differently to changes in interest rates. The interest sensitivity gap is determined by subtracting the amount of liabilities from the amount of assets that reprice in a particular time period. When more liabilities than assets reprice or mature within a given time frame, a liability sensitive position results (negative gap). A negative gap position would tend to increase net interest income when interest rates are falling, and decrease net interest income when rates are rising. Conversely, an asset sensitive position (positive gap) results when more assets than liabilities reprice within a given period. In this scenario, net interest income would increase when interest rates rise and decrease when rates fall. At December 31, 2002, the following GAP report indicates the Company's interest rate risk to have a reliance on short-term liabilities. This position would have an adverse effect on earnings in a rising rate environment and a positive effect on earnings in a decreasing rate environment. 9 INTEREST RATE - SENSITIVITY GAPS Repricing Period at December 31, 2002
Within 1-2 2-3 3-5 Over 5 (Dollars in Thousands) 1 Year Years Years Years Years Total - -------------------------------------------------------------------------------------------------------------------- Interest-Earning Assets: Federal Funds Sold & FHLB Overnight Deposit $ 19,500 $ 0 $ 0 $ 0 $ 0 $ 19,500 Investment Securities(1) 28,200 15,451 19,347 7,992 8,078 79,068 Loans 93,946 35,175 40,130 36,706 59,055 265,012 -------------------------------------------------------------------------- Total Earning Assets $141,646 $50,626 $59,477 $44,698 $67,133 $363,580 -------------------------------------------------------------------------- Interest Bearing Liabilities: NOW Checking and Savings Deposits $ 33,218 $16,609 $16,609 $44,290 $ 0 $110,726 Money Market Deposits 2,435 1,217 1,217 3,246 0 8,115 Term Deposits 128,663 13,579 2,272 0 0 144,514 FHLB Advances 0 1,000 0 0 18,185 19,185 Other Borrowings 0 0 0 0 0 0 -------------------------------------------------------------------------- Total Interest-bearing Liabilities $164,316 $32,405 $20,098 $47,536 $18,185 $282,540 -------------------------------------------------------------------------- Net Interest Sensitivity Gap $(22,670) $18,221 $39,379 $(2,838) $48,948 $ 81,040 Cumulative Gap $(22,670) $(4,449) $34,930 $32,092 $81,040 Cumulative Gap as a Percent of Total Assets (5.69%) (1.12%) 8.77% 8.06% 20.34% ========================================================================== - -------------------- Excludes money market mutual funds which are carried in cash and cash equivalents.
In addition to the GAP report, the Company also uses an Asset/Liability Model Performance Analysis to measure the exposure of net interest income to changes in interest rates over a relatively short time period (i.e. 12 months). This analysis involves projecting 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 300 basis points or down 100 basis points, the effect on estimated net interest income for the next 12 months that would be tolerated would be not more than a ten percent (10%) decrease. The following table reflects the Company's estimated exposure as a percentage of estimated net interest income for the next 12 months, assuming an immediate change in interest rates:
Rate Change Estimated Exposure as a Percentage of (Basis Points) Net Interest Income Dollar Impact - -------------------------------------------------------------------------------------- +300 (6.55%) ($965,000) -100 (2.30%) ($338,000)
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 Company's 10% limit establishes an internal tolerance level to control the Company's interest rate risk exposure and is monitored on a quarterly basis. 10 II. INVESTMENT PORTFOLIO The following table shows the book value of the major categories of investment securities Held-to-Maturity for the years indicated:
At December 31, - ----------------------------------------------------------------------------- (Dollars in Thousands) 2002 2001 2000 - ----------------------------------------------------------------------------- US Treasury Securities and Obligations of US Government Corporations and Agencies $ 0 $ 2,750 $ 6,948 Obligations of States and Political Subdivisions of the States 13,693 13,528 12,094 Mortgage-backed securities 2 3 59 Foreign Debt Securities 1 1 1 - ----------------------------------------------------------------------------- Total $13,696 $16,282 $19,102 =============================================================================
In the following table, the carrying value of Held-to-Maturity securities maturing within stated periods as of December 31, 2002, is shown with the weighted average interest yield from securities falling within the range of maturities:
US Treasury Obligations & Government of States & Mortgage- Foreign Corporations Political Backed Debt (Dollars in Thousands) & Agencies Subdivisions(1) Securities(2) Securities Total - ------------------------------------------------------------------------------------------------ Due in 1 year or less: Amount $ 0 $ 3,310 $ 0 $ 0 $ 3,310 Yield 0.00% 4.97% 0.00% 7.50% 4.97% Due in 1 to 5 years: Amount 0 6,980 2 1 6,983 Yield 0.00% 5.83% 7.84% 0.00% 5.83% Due in 5 to 10 years: Amount 0 1,360 0 0 1,360 Yield 0.00% 8.30% 0.00% 0.00% 8.30% Due after 10 years: Amount 0 2,043 0 0 2,043 Yield 0.00% 6.39% 0.00% 0.00% 6.39% - ------------------------------------------------------------------------------------------------ Amount $ 0 $13,693 $ 2 $ 1 $13,696 ================================================================================================ Yield 0.00% 5.95% 7.84% 7.50% 5.95% ================================================================================================ - -------------------- Rates of tax exempt securities are shown assuming a 27.70% tax rate. Mortgage-backed securities stated using average life.
11 The following table shows the amortized cost basis of the major categories of Available-for-Sale securities for the years indicated:
At December 31, - --------------------------------------------------------------------- (Dollars in Thousands) 2002 2001 2000 - --------------------------------------------------------------------- US Treasury Securities and Obligations of US Government Corporations and Agencies $26,424 $34,240 $40,934 Mortgage-backed Securities 32,512 36,129 22,089 Corporate Debt Securities 2,673 2,941 1,473 Marketable Equity Securities 3,986 6,015 4,582 - --------------------------------------------------------------------- Total $65,595 $79,325 $69,078 =====================================================================
In the following table, the amortized cost basis of Available-for-Sale securities (other than equity securities) maturing within stated periods as of December 31, 2002, is shown with the weighted average interest yield from securities falling within the range of maturities:
US Treasury & Government Mortgage- Corporate Corporations Backed Debt (Dollars in Thousands) & Agencies Securities(1) Securities Total - ------------------------------------------------------------------------------------- Due in 1 year or less: Amount $ 3,811 $ 3,703 $1,010 $ 8,524 Yield 5.42% 4.12% 5.85% 4.91% Due in 1 to 5 years: Amount 22,613 27,923 1,663 52,199 Yield 3.745% 5.23% 6.17% 4.62% Due in 5 to 10 years: Amount 0 755 0 755 Yield 0.00% 6.01% 0.00% 6.01% Due after 10 years: Amount 0 131 0 131 Yield 0.00% 5.99% 0.00% 5.99% - ------------------------------------------------------------------------------------- Amount $26,424 $32,512 $2,673 $61,609 ===================================================================================== Yield 3.99% 5.12% 6.05% 4.68% ===================================================================================== - -------------------- Mortgage-backed securities stated using average life.
12 The following table shows the amortized cost basis and fair value of the major categories of Held-to-Maturity securities as of December 31, 2002:
Gross Gross Amortized Unrealized Unrealized (Dollars in Thousands) Cost Basis Holding Gains Holding Losses Fair Value - ----------------------------------------------------------------------------------------------------------------- Debt securities issued by states of the United States and political subdivisions of the states $13,693 $573 $7 $14,259 Mortgage-backed securities 2 0 0 2 Foreign debt securities 1 0 0 1 - --------------------------------------------------------------------------------------------------------------- Total $13,696 $573 $7 $14,262 ===============================================================================================================
Investments in Available-for-Sale securities are carried at fair value on the balance sheet and are summarized as follows as of December 31, 2002.
Gross Gross Amortized Unrealized Unrealized (Dollars in Thousands) Cost Basis Holding Gains Holding Losses Fair Value - ----------------------------------------------------------------------------------------------------------------- Debt securities issued by the U.S. Treasury and other U.S. Government corporations and agencies $26,424 $239 $ 0 $26,663 Mortgage-backed securities 32,512 922 0 33,434 Corporate debt securities 2,673 106 0 2,779 Marketable equity securities 3,986 53 784 3,255 - --------------------------------------------------------------------------------------------------------------- Total $65,595 $1,320 $784 $66,131 ===============================================================================================================
Increase in Stockholder's Equity: (In Whole Dollars) Net unrealized gain on Available-for-Sale Securities $ 535,854 Less tax effect (312,582) --------- $ 223,272 =========
13 III. LOAN PORTFOLIO The following table shows the Company's amount of loans by category at the end of each of the last five years.
At December 31, - --------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 30,455 $ 45,238 $ 49,331 $ 46,354 $ 43,777 Real estate - construction and land development 14,078 7,600 8,601 5,014 3,773 Real estate - residential 90,330 60,936 55,871 52,330 51,220 Real estate - commercial 122,932 128,888 128,327 127,938 112,913 Consumer 6,881 10,643 12,872 9,393 6,477 Nonprofit 293 236 1,036 904 0 Obligations of states and political subdivisions 0 21 61 0 3 Other 43 322 54 116 67 - --------------------------------------------------------------------------------------------------------------------- Total Gross Loans 265,012 253,884 256,153 242,049 218,230 Allowance for Loan Losses (4,854) (5,484) (4,776) (3,766) (3,569) Unamortized adjustment to fair value (0) (0) (9) (20) (32) Unearned Income (342) (382) (519) (594) (691) - --------------------------------------------------------------------------------------------------------------------- Net Loans $259,816 $248,018 $250,849 $237,669 $213,938 =====================================================================================================================
The following table shows the maturity distributions and interest rate sensitivity of selected loan categories at December 31, 2002.
Within One to Five After Five (Dollars in Thousands) One Year Years Years Total - ---------------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $23,842 $ 5,217 $1,396 $30,455 Real Estate - construction & land development 258 10,687 3,133 14,078 - ---------------------------------------------------------------------------------------------------- Total $24,100 $15,904 $4,529 $44,533 ====================================================================================================
The following table shows the amounts, included in the table above, which are due after one year and which have fixed interest rates and adjustable rates:
Total Due After One Year - --------------------------------------------------------------------------------------------- (Dollars in Thousands) Fixed Rate Adjustable Rate Total - --------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $3,841 $ 2,772 $ 6,613 Real Estate - construction & land development 3,459 10,361 13,820 - --------------------------------------------------------------------------------------------- Total $7,300 $13,133 $20,433 =============================================================================================
14 NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
December 31, - --------------------------------------------------------------------------------------------------------- (Dollars in Thousands) 2002 2001 2000 1999 1998 Nonaccrual loans $635 $1,138 $2,415 $1,777 $3,331 Loans 90 days or more past due and still accruing 8 444 335 248 317 Real estate acquired by foreclosure or substantively repossessed 0 0 0 353 1,026 - --------------------------------------------------------------------------------------------------------- Total nonperforming assets $643 $1,582 $2,750 $2,378 $4,674 - --------------------------------------------------------------------------------------------------------- Restructured debt performing in accordance with amended terms, not included above $166 $ 186 $ 53 $ 518 $ 867 - --------------------------------------------------------------------------------------------------------- Percentage of nonaccrual loans to total loans 0.24% 0.45% 0.94% 0.73% 1.53% Percentage of nonaccrual loans, restructured loans and real estate acquired by foreclosure or substantively repossessed to total assets 0.20% 0.34% 0.64% 0.74% 1.54% Percentage of allowance for loan losses to nonaccrual loans 764.20% 481.90% 197.76% 211.92% 107.15%
Nonaccrual loans include restructured loans of $166,000 at December 31, 2002; $137,000 at December 31, 2001; $153,000 at December 31, 2000; $0 at December 31, 1999; and $0 at December 31, 1998. Information with respect to nonaccrual and restructured loans for the past five years ending December 31 is as follows:
December 31, - ---------------------------------------------------------------------------------------------------- (Dollars in Thousands) 2002 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------- Nonaccrual loans $635 $1,138 $2,415 $1,777 $3,331 Interest income that would have been recorded under original terms $303 $ 109 $ 228 $ 146 $ 318 Interest income recorded during the period $121 $ 6 $ 22 $ 37 $ 37
Nonperforming assets include nonaccrual loans, loans past due 90 days or more and still accruing, restructured loans not performing in accordance with amended terms, and other real estate acquired through foreclosure. Nonperforming assets as a total decreased to $0.6 Million at year end 2002, from $1.6 Million reported at year end 2001. Nonaccrual loans is the largest component of nonperforming assets, and at December 31, 2002, this category decreased by $.5 Million from December 31, 2001. There are no loans greater than $0.2 Million in this category, which is comprised of $0.4 Million of residential mortgages and $0.2 Million of other types of loans. Loans that became nonaccrual during the current year amounted to $482,762. Offsetting this increase were receipts of loan payments of $780,329 and loans of $99,990 that were deemed uncollectable and charged off to the Allowance for Loan Losses. There were two nonaccrual status loans that were transferred to accrual status during the year 2002 totaling $105,825. 15 The Company places a loan on nonaccrual status when, in the opinion of management, the collectability of the principal and interest becomes doubtful. Generally, when a commercial loan, commercial real estate loan or a residential real estate loan becomes past due 90 days or more, the Company discontinues the accrual of interest and reverses previously accrued interest. The loan remains in the nonaccrual status until the loan is current and six consecutive months of payments are made, then it is reclassified as an accruing loan. When it is determined that the collectability of the loan no longer exists, it is charged off to the Allowance for Loan Losses or, if applicable, any real estate that is collateralizing the loan is acquired through foreclosure, at which time it is categorized as Other Real Estate Owned. IV. SUMMARY OF LOAN LOSS EXPERIENCE The table below illustrates the changes in the Allowance for Loan Losses for the periods indicated.
- ----------------------------------------------------------------------------------------------------- (Dollars in Thousands) 2002 2001 2000 1999 1998 - ----------------------------------------------------------------------------------------------------- Balance at January 1 $5,484 $4,776 $3,766 $3,569 $3,694 - ----------------------------------------------------------------------------------------------------- Charge-offs: Commercial (336) (73) (194) (221) (0) Real estate-construction (0) (0) (0) (0) (0) Real estate-mortgage (20) (0) (23) (23) (716) Installment/Consumer (26) (28) (138) (158) (76) - ----------------------------------------------------------------------------------------------------- (382) (101) (355) (402) (792) - ----------------------------------------------------------------------------------------------------- Recoveries: Commercial 17 14 50 11 8 Real estate-construction 0 0 0 0 0 Real estate-mortgage 38 29 92 24 43 Installment/Consumer 7 16 23 14 16 - ----------------------------------------------------------------------------------------------------- 62 59 165 49 67 - ----------------------------------------------------------------------------------------------------- Net Charge-offs (320) (42) (190) (353) (725) - ----------------------------------------------------------------------------------------------------- Provision (benefit) charged to operations (310) 750 1,200 550 600 - ----------------------------------------------------------------------------------------------------- Balance at December 31 $4,854 $5,484 $4,776 $3,766 $3,569 ===================================================================================================== Allowance for Loan Losses as a percent of year end loans 1.83% 2.16% 1.86% 1.56% 1.64% Ratio of net charge-offs to average loans outstanding (0.13%) (0.02%) (0.08%) (0.15%) (0.34%)
16 The Allowance for Loan Losses at year end December 31, 2002 was $4,854,388 and $5,484,519, $4,776,360, $3,765,872, and $3,569,282 for years ending 2001, 2000, 1999, and 1998 respectively. The Allowance for Loan Losses as a percent of year end loans was 1.83% in 2002, 2.16% in 2001, 1.86% in 2000, 1.56% in 1999, and 1.64% in 1998. The level of the Allowance for Loan Losses is reviewed by management on an ongoing basis and encompasses several factors to evaluate the risk inherent in the loan portfolio. These factors include but are not limited to growth in the loan portfolio, risk characteristics of the types of loans in the portfolio, current economic conditions in the market area, trends in loan delinquencies and charge-offs, the value of underlying collateral securing loans, and other external and internal factors. During 2002, the implementation of an intensive process for evaluating loan loss provisions and the adequacy of the Allowance for Loan Losses took into account net charged off loans, a reduction in higher credit risk weighted loans such as commercial and industrial, commercial real estate, and consumer loans that resulted in a lower Allowance for Loan Loss requirement. This reduction in higher credit risk weighted loans resulted in no addition to the loan loss provision for 2002 and a recovery of $310,000 from 2001 provisions, as loan growth during 2002 was generally in lower credit risk weighted one-four family residential loans, including home equity loans. Management's assessment of the adequacy of the Allowance for Loan Losses is reviewed by regulatory agencies, the Company's independent accountants, and outside loan review consultants. The Company's provision for loan losses was a benefit to earnings in 2002 of $310,000.. Prior years' provisions were $750,000, $1,200,000, $550,000 and $600,000 for years ending 2001, 2000, 1999, and 1998 respectively. In 2002, the Company realized recoveries of previously charged-off loans of $62,000. Recoveries recorded in previous years were $59,000, $165,000, $49,000, and $67,000 in 2001, 2000, 1999, and 1998 respectively. 17 The table below shows an allocation of the allowance for loan losses as of the end of each of the last five years. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
December 31, 2002 December 31, 2001 December 31, 2000 December 31, 1999 December 31, 1998 - --------------------------------------------------------------------------------------------------------------------------------- Percent of Percent of Percent of Percent of Percent of Loans in Loans in Loans in Loans in Loans in Each Each Each Each Each Category to Category to Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans - --------------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands) Commercial(5) $1,155(1) 11.60% $1,629(1) 17.91% $1,466(1) 19.66% $1,356(1) 19.52% $1,249(1) 20.06% Real estate Construction 70 5.31% 41 2.99% 47 3.36% 34 2.07% 27 1.73% Real estate Mortgage 3,465(2) 80.48% 3,585(2) 74.77% 2,970(2) 71.91% 1,924(2) 74.48% 1,964(2) 75.21% Consumer(3) 164(4) 2.61% 229(4) 4.33% 293(4) 5.07% 452(4) 3.93% 329(4) 3.00% - ------------------------------------------------------------------------------------------------------------------------------- $4,854 100.00% $5,484 100.00% $4,776 100.00% $3,766 100.00% $3,569 100.00% ============================================================================================================================== - -------------------- Includes amounts specifically reserved for impaired loans of $412,761 as of December 31, 2002, $780,029 as of December 31, 2001, $281,248 as of December 31, 2000, $234,205 as of December 31, 1999 and $128,207 as of December 31, 1998, as required by Financial Accounting Standard No. 114, Accounting for Impairment of Loans. Includes amounts specifically reserved for impaired loans of $34,757 as of December 31, 2002, $413,663 as of December 31, 2001, $132,911 as of December 31, 2000, $147,884 as of December 31, 1999, and $187,554 as of December 31, 1998, as required by Financial Accounting Standard No. 114, Accounting for Impairment of Loans. Includes consumer, obligations of states and political subdivisions and other. Includes amounts specifically reserved for impaired loans of $29,606 as of December 31, 2002, $1,632 as of December 31, 2001, $10,398 as of December 31, 2000, $39,241 as of December 31, 1999 and $9,126 as of December 31, 1998 as required by Financial Accounting Standard No. 114, Accounting for Impairment of Loans Includes commercial, financial, agricultural and nonprofit.
The composition of the loan portfolio has become more diversified through 2002, resulting in a lesser degree of credit risk, and therefore a reduction in the allowance for loan losses maintained to cover estimated losses in the loan portfolio. The loan portfolio's largest segment of loans is still commercial real estate loans, which represent 46% of gross loans compared to 51% in 2001. Residential real estate loans represent 34% of gross loans in 2002 compared to 24% at December 31, 2001. 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 value. Real estate residential loans are both loans secured by one-to-four family property and home equity loans. Home equity loans are generally revolving lines of credit and are typically secured by second mortgages on one-to-four family owner-occupied properties. Generally, commercial real estate loans have a higher degree of credit risk than residential real estate loans because they depend primarily on the success of the business. When granting these loans, the Company evaluates the financial condition of the borrower(s), the location of the real estate, the quality of management, and general economic and competitive conditions. When granting a residential 18 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. Real estate construction loans comprise of both residential and commercial construction loans throughout our market area. 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 50% liquidation value to inventories; 25% to furniture, fixtures and equipment; and 70% to accounts receivable less than 90 days of invoice date. Commercial loans represent 11% of the loan portfolio as of December 31, 2002, compared to 18% as of December 31, 2001. Consumer loans are both secured and unsecured borrowings and represent only 3% 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 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. Total loan charge-offs in 2002 amounted to $382,000, when compared to losses of $101,000 in 2001, $355,000 in 2000, $402,000 in 1999, and $792,000 in 1998. The real estate-mortgage category incurred a loss of $20,000 in 2002 compared to no losses in 2001, $23,000 in 2000, $23,000 in 1999, and $716,000 in 1998. V. DEPOSITS Deposits are obtained from individuals and from small and medium sized businesses in the local market area. The Bank also attracts deposits from municipalities and other government agencies. The Bank does not solicit or accept brokered deposits. The following table sets forth the average amount and the average rate paid on deposits for the periods indicated.
2002 2001 2000 - ----------------------------------------------------------------------------------------------- Average Average Average Average Average Average (Dollars in Thousands) Balance Rate Balance Rate Balance Rate - ----------------------------------------------------------------------------------------------- Noninterest-bearing Demand Deposits $ 69,787 0.00% $ 64,549 0.00% $ 58,588 0.00% Interest-bearing Demand Deposits 42,259 0.82 37,834 1.85 37,785 3.13 Savings Deposits 62,078 0.92 53,613 1.64 50,210 2.00 Money Market Deposits 9,250 0.26 9,415 1.27 10,607 1.64 Time Deposits $100,000 or More 32,384 3.45 34,483 5.21 31,689 4.85 Other Time Deposits 124,974 3.72 141,698 5.53 138,637 5.78 - ---------------------------------------------------------------------------------------------- Totals $340,732 1.97% $341,592 3.32% $327,516 3.64% ==============================================================================================
19 As of December 31, 2002, time certificates of deposit in amounts of $100,000 or more had the following maturities:
(Dollars in Thousands) Three months or less $12,385 Over three months through six months 7,046 Over six months through twelve months 6,464 Twelve months and over 2,020 ------- $27,915 =======
VI. RETURNS ON EQUITY AND ASSETS The following table shows consolidated operating and capital ratios of the Company for each of the last three years:
Year Ended December 31, 2002 2001 2000 ------------------------------ Return on Average Assets 0.74% 0.81% 1.09% Return on Average Equity 7.45% 9.04% 12.92% Dividend Payout Ratio 47.50% 52.63% 36.84% Equity to Assets Ratio 9.94% 9.00% 8.45%
VII. SHORT TERM BORROWINGS The following table shows the Company's short-term borrowings at the end of each of the last three years, the maximum amount of borrowings and the average amounts outstanding as well as weighted average interest rates for the last three years.
(Dollars in Thousands) 2002 2001 2000 - ------------------------------------------------------------------------------------ Balance at December 31 $ 0 $ 465 $1,200 Maximum Amount Outstanding at Any Month's End $1,222 $1,237 $1,220 Average Amount Outstanding During the Year $ 484 $ 706 $ 723 Weighted Average Interest Rate During the Year 1.69% 4.03% 7.07%
The Bank has the ability to borrow funds from correspondent banks and 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 borrow during 2002 or 2001 to meet short-term liquidity needs. Tax payments made by our customers, which are owed to the Federal Reserve Bank Treasury Tax and Loan account, are classified as other borrowed funds. There is also $19,185,338 in borrowings from the Federal Home Loan Bank as of December 31, 2002 which represent the match funding program that is available to qualified borrowers. These borrowings totaled $16,983,087 at year end 2001. 20 Accounting for Deferred Income Taxes - ------------------------------------ The net deferred tax asset at year end 2002 was $1,849,723. The amount of taxable income required to be generated to fully realize such net deferred tax asset will be approximately $7.2 Million. The taxable income earned by the Company in 2002 was $4,099,735. 21 ITEM 2 PROPERTIES The main office of the Bank is located at 100 Slade's Ferry Avenue, Somerset, Massachusetts at the junctions of U.S. Routes 6, 138, and 103. The Bank has eleven additional branches located in Fairhaven, Fall River, New Bedford, Seekonk, Somerset and Swansea, Massachusetts, and a Loan Production Office in Warwick, Rhode Island. As of December 31, 2002, the following Bank properties are owned through the Bank's subsidiary, the Slade's Ferry Realty Trust:
Location Sq. Footage -------- ----------- Main Office 100 Slade's Ferry Avenue Somerset, MA 42,000 North Somerset 2722 County Street Somerset, MA 3,025 Linden Street 244-253 Linden Street Fall River, MA 1,750 Brayton Avenue 855 Brayton Avenue Fall River, MA 3,325 North Swansea 2388 G.A.R. Highway Swansea, MA 2,960 Seekonk 1400 Fall River Avenue Seekonk, MA 2,300 Fairhaven 75 Huttleston Avenue Fairhaven, MA 13,000 South Main Street 1601 South Main Street Fall River, MA 6,604 Ashley Boulevard 833 Ashley Boulevard New Bedford, MA 2,655 Offices listed below are leased by the Bank with the indicated lease expiration dates. Swansea Mall (expires 2003) Rt. 118 Swansea, MA 2,250 Brayton Avenue Drive Up Complex 16 Stevens St. Fall River, MA 549 (expires 2005) Walgreen's Drug Store 838 Pleasant St. New Bedford, MA 835 (expires 2004) Loan Production Office 188 Airport Road Warwick, RI 600 (Expires 2003)
The main office building contains approximately 42,000 square feet of usable space which the Bank occupies. The Bank also has a school banking facility located in the Somerset High School, Grandview Avenue, Somerset, Massachusetts that consists of 200 square feet which provides basic banking services to students and school staff. The Seekonk office is an 8,800 square foot building of which the Bank is utilizing 2,300 square feet and leasing out the remainder. 22 ITEM 3 LEGAL PROCEEDINGS The Company is not currently a party to any material pending legal proceedings; however, see Note 11 - Commitments and Contingent Liabilities of the Consolidated Financial Statements, Page F-23. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 2002, no matters were submitted to a vote of stockholders of the Company. 23 PART II ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information The Company's common stock is listed in the NASDAQ Small Cap Market under the symbol SFBC. The following table sets forth the range of high and low bids as reported for the NASDAQ Small Cap Market by quarters for the two-year period ended December 31, 2002.
2002 2001 - ------------------------------------------------------- High Low High Low - ------------------------------------------------------- 1st Quarter 15.40 13.55 10.00 8.81 - ------------------------------------------------------- 2nd Quarter 15.35 13.81 11.90 9.00 - ------------------------------------------------------- 3rd Quarter 15.00 13.05 13.75 10.26 - ------------------------------------------------------- 4th Quarter 13.74 11.66 14.00 11.10 - -------------------------------------------------------
Dividends - History and Policy The Company, since its inception in 1990 and prior thereto the Bank, has consistently paid dividends to stockholders since 1961. The Company paid four quarterly cash dividends of $.09 per share for a total of $.36 per share paid in 2002. The Company paid a quarterly cash dividend of $.08 per share in the first quarter of 2001, and then increased the cash dividend to $.09 per share for the remaining quarters. In addition, an extra cash dividend of $.09 per share was paid in December 2001 for a total of $.44 per share paid in 2001. The declaration of cash dividends is dependent on a number of factors, including regulatory limitations, and the Bank's operating results and financial condition. The stockholders of the Company will be entitled to dividends only when, and if, declared by the Company's Board of Directors out of funds legally available. Under the Massachusetts Business Corporation Law, a dividend may not be declared if the corporation is insolvent or if the declaration of the dividend would render the corporation insolvent. Chapter 172 Section 28 of the Massachusetts Statutes on Bank and Banking provides that a bank's Board of Directors may, subject to the restriction contained in the section, declare and pay dividends on capital stock out of net profits from time to time and to such extent as they deem advisable. However, under this provision, no cash dividend shall be paid unless, following the payment of such dividend, the capital stock and retained earnings account will be unimpaired. 24 ITEM 6 SELECTED FINANCIAL DATA The following table sets forth selected financial data for the last five years.
Year Ended December 31, - --------------------------------------------------------------------------------------------------------------------------- (Dollars in Thousands Except per Share Data) 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------- EARNINGS DATA Interest Income $ 22,037 $ 27,324 $ 28,186 $ 25,553 $ 24,306 Interest Expense 7,928 12,327 12,699 10,754 10,711 Net Interest Income 14,109 14,997 15,487 14,799 13,595 Provision (Benefit) for Loan Losses (310) 750 1,200 550 600 Noninterest Income 2,533 1,769 1,857 2,086 1,568 Noninterest Expense 12,852 11,408 10,206 10,556 8,984 Income Before Income Taxes 4,100 4,608 5,938 5,779 5,579 Applicable Income Taxes 1,134 1,398 1,864 1,923 2,216 Net Income 2,966 3,210 4,074 3,856 3,363 PER SHARE DATA (1) Net Income-Basic $ 0.76 $ 0.84 $ 1.09 $ 1.060 $ 0.940 Net Income-Diluted $ 0.75 $ 0.84 $ 1.09 $ 1.050 $ 0.940 Cash Dividends $ 0.36 $ 0.44 $ 0.40 $ 0.358 $ 0.265 Book Value (at end of period) $ 10.45 $ 9.94 $ 9.41 $ 8.567 $ 8.200 Avg. Shs. Outstanding 3,908,901 3,830,575 3,743,138 3,650,275 3,572,329 Shares Outstanding Year End 3,937,763 3,869,924 3,789,503 3,520,409 3,446,413 BALANCE SHEET DATA Assets $ 398,375 $ 394,761 $ 388,619 $ 358,121 $ 340,355 Loans 265,012 253,884 256,153 242,049 218,230 Unearned Discount 342 382 519 594 691 Allowance for Loan Losses 4,854 5,484 4,776 3,766 3,569 Loans, Net 259,816 248,018 250,849 237,669 213,938 Goodwill 2,173 2,173 2,400 2,627 2,854 Investments 80,618 96,401 88,109 81,806 79,978 Deposits 335,633 337,043 337,001 316,431 303,786 Stockholders' Equity 41,167 38,466 35,674 31,664 29,707 FINANCIAL RATIOS Net Yield on Interest Earning Assets (2) 3.89% 4.18% 4.58% 4.71% 4.70% Net Interest Spread (2) 3.30 3.34 3.75 3.99 3.91 Net Income as a Percentage of Average Assets 0.74 0.81 1.09 1.11 1.06 Average Equity 7.45 9.04 12.92 12.56 11.98 Dividend Payout Ratio 47.50 52.63 36.84 34.36 28.54 Average Equity to Average Assets 9.94 9.00 8.45 8.85 8.86 - -------------------- Earnings per share are computed based on the average number of shares of common stock outstanding during the year. On January 12, 1998, the Company declared a 5% stock dividend mailed to stockholders on February 11, 1998. On January 10, 2000, the Company declared a 5% stock dividend mailed to stockholders on February 9, 2000. Per share data has been restated to reflect the effect of the stock splits and the stock dividends. Calculated on a fully taxable equivalent basis.
25 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS The purpose of Management's Discussion and Analysis is to focus on certain significant factors which have affected the Company's operating results and financial condition, and to provide stockholders a more comprehensive review of the figures contained in the financial data of this report. Forward-looking Statements - -------------------------- This Form 10-K contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding the strength of the company's capital and asset quality. Other such statements may be identified by words such as "believes," "will," "expects," "project," "may," "developments," "strategic," "launching," "opportunities," "anticipates," "estimates," "intends," "plans," "targets" and similar expressions. These statements are based upon the current beliefs and expectations of Slade's Ferry Bancorp's management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements as a result of numerous factors. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements: (1) enactment of adverse government regulation; (2) competitive pressures among depository and other financial institutions may increase significantly and have an effect on pricing, spending, third-party relationships and revenues; (3) the strength of the United States economy in general and specifically the strength of the New England economies may be different than expected, resulting in, among other things, a deterioration in overall credit quality and borrowers' ability to service and repay loans, or a reduced demand for credit, including the resultant effect on the Bank's loan portfolio, levels of charge-offs and non-performing loans and allowance for loan losses; (4) changes in the interest rate environment may reduce interest margins and adversely impact net interest income; and (5) changes in assumptions used in making such forward-looking statements. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, Slade's Ferry Bancorp's actual results could differ materially from those discussed. All subsequent written and oral forward-looking statements attributable to Slade's Ferry Bancorp or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements set forth above. Slade's Ferry Bancorp does not intend or undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made. 2002 Items of Significance * In 2002, Slade's Ferry Bancorp recorded net income of $2,965,552 or $0.75 per share on a diluted basis compared to $3,210,253 or $0.84 per share on a diluted basis in 2001. This represents a decrease of $244,701 or 7.6% in net income and $0.09 or 10.71% per share on a diluted basis between 2002 and 2001. * Return on average equity for 2002 was 7.45%, down by 1.59% when compared to 9.04% reported in 2001. Return on average assets for 2002 was .74%, down by .07% when compared to .81% reported in 2001. 26 * Book value of the Company's common stock increased to $10.45 in 2002 from $9.94 reported in 2001 and $9.41 reported in 2000. RESULTS OF OPERATIONS Net interest income, which is the difference between interest and dividend income earned on earning assets and interest paid on interest- bearing liabilities is the main contributor to net income. Increases or decreases in interest rates due to economic conditions affect the yields earned on loans and investments and the cost of deposits and borrowings required to fund these earning assets. On a fully tax equivalent basis, our net interest income was $14.3 Million in 2002, $15.2 Million in 2001, and $15.7 Million in 2000. Although we had growth of $3.4 Million in average earning assets from $365.0 Million in 2001 to $368.4 Million in 2002, the historical low interest rate environment throughout 2002 continues to compress our net interest margins, as loans and investments reprice at lower interest rates due to refinancing opportunities and prepayments. Average earning assets produced a fully taxable equivalent yield of 6.04% in 2002, compared to 7.55% in 2001, and 8.26% in 2000. The loan portfolio, which generally generates higher interest yields than our investment portfolio represented 63.54% of average assets in 2002, compared to 63.70% in 2001, and 66.65% in 2000. Although average loans remained flat on average from 2001 to 2002, total actual gross loans increased by $11.1 Million from $253.9 Million as of December 31, 2001, to $265.0 Million as of December 31, 2002. This increase occurred during the last quarter of 2002 due to the Bank's aggressive solicitation of both residential mortgages and home equity loan products. Partially offsetting the decrease in the earning asset yield of 1.51% from 7.55% as of December 31, 2001 to 6.04% as of year end 2002, was a reduction of 1.47% in the cost funding the earning assets from 4.21% as of year end 2001 to 2.74% as of year end 2002. The decrease in the cost of funds in 2002 reflects the low interest rate environment and the repricing of certificates of deposit and other deposit products at lower rates. The net interest spread, representing the difference between the weighted average yield earned on our assets and the weighted average cost of interest-bearing liabilities decreased to 3.30% in 2002 from 3.34% in 2001 and 3.75% reported in 2000. Net yield on earning assets, which represents net interest income as a percentage of average earning assets decreased to 3.89% in 2002 from 4.18% in 2001 and 4.58% in 2000. As our earning assets repriced to lower interest rates at a faster pace than our interest-bearing liabilities, our earnings were negatively impacted as a direct result of decreasing interest margins. The Company provides for loan losses to maintain the Allowance for Loan Losses at a level that management believes to be adequate to absorb future charge-offs of loans deemed uncollectable. As previously stated, during 2002 the implementation of an intensive process for evaluating loan loss provision and adequacy of the Allowance for Loan Losses resulted in no addition to the provision for loan losses during 2002 and a recovery of $310,000 from 2001 provisions. As the composition of our loan portfolio gradually changed from higher credit risk weighted loans, such as commercial real estate and commercial and industrial, to residential and home equity loans requiring less credit risk weight and reserve allowance. The Bank's provision for 2002 was a benefit to earnings of $310,000, compared to expense provisions of $750,000 recorded in 2001 and $1,200,000 in 2000. 27 Total Other Income for 2002 increased by $763,285 or 43.1% to $2,532,817 from $1,769,532 recorded during 2001. Service charges on deposit accounts decreased slightly in 2002 to $551,060 when compared to $561,370 in 2001 and $564,444 in 2000. These decreases are primarily due to a lower amount of service charges being realized on demand deposit accounts, as a result of higher levels of compensating balances maintained in the business checking account category and free consumer deposit products being offered. Gains on sales and calls of available-for-sale securities increased by $610,898, from $14,934 recorded as of December 31, 2001 to $625,832 as of December 31, 2002. The gain recorded in 2000 was $333,581. During 2002, the Bank incurred significant writedowns on equity securities totaling $1.2 Million. For tax planning purposes, asset liability management and liquidity, the Company determined to sell various debt securities and realize gains to partially offset the writedown loss. Gains on the sale of other real estate owned (OREO) is a result of sales of real estate acquired through the foreclosure process. In 2002 and 2001, the Bank had no other real estate owned. The Bank realized a gain on the sale of OREO of $49,758 recognized in 2000. Increase in cash surrender value of life insurance policies associated with both the Directors' Life Insurance and Executive Officers' Life Insurance increased by $92,197 from $351,023 reported as of year end 2001 to $443,220 in 2002. This increase is due to an annual increase in the cash surrender value of these policies. Purchase of policies in 2002 for executives totaled $1,610,000, which generated additional earnings. The purchase of $1.7 Million in Bank Owned Life Insurance for Directors originated in 1998 and in 2000, approximately $5.0 Million was purchased for Executives. The line item Other Income represents income earned on safe deposit box rentals, checkbook printing revenue, exchange and commission fees, recoveries of previously recorded losses relating to check fraud, and customer investment commission fees, and ATM card usage. Total Other Expense increased by $1,443,415 to $12,851,802, when compared to $11,408,387 recorded in 2001. Total Other Expense was $10,255,640 in 2000. Salaries and Employee Benefits, which is the largest component of this category, increased by $243,987 to $7,368,364, up from $7,124,377 recorded in 2001. In 2000, Salaries and Benefits were $6,070,057. These increased expenses in 2002 were due to general wage adjustments, staff additions, the hiring of a new Chief Executive Officer (CEO), and expenses associated with a severance agreement entered into with the former CEO upon his early retirement. Occupancy and Equipment Expense combined totaled $1,323,413 in 2002, down by $103,442 when compared to $1,426,855 reported in 2001. Occupance and Equipment Expense was $1,390,355 in 2000. Costs associated with stationery and supplies were $276,824 in 2002, an increase of $35,638 when compared to $241,186 in 2001. These same costs were $224,501 in 2000. Professional fees associated with legal, audit, collection and repossession, and consultant expenses increased by $184,356, from $364,680 in 2001 to $549,036 in 2002. These expenses in 2000 were $385,079. The increase in 2002 is related to consultant services provided by the new CEO prior to her official election, and human resource, investment advisory, strategy planning and asset liability management consultants. Also, additional professional services were provided in the search for a new CEO. 28 Marketing Expenses attributed to advertising, business development, and public relations decreased by $66,277, from $421,480 in 2001 to $355,203 in 2002. Marketing Expense in 2000 was $556,960. As we continue to promote and develop the Bank in our market areas, we attempt to control cost as much as possible. The assessment for F.D.I.C. deposit insurance decreased by $2,190 in 2002, from $160,305 in 2001 to $158,115. In 2000, this cost was $63,684. The Bank incurred total writedown charges of $1,240,868 on certain equity securities during 2002. During the third quarter of 2002, the Company determined that with a very volatile, uncertain stock market, equity securities with significant declines in fair market value would be written down to fair market value and sold. In addition, writedown charges were incurred on certain publicly-traded securities whose decline in fair market value was other than temporary and deemed impaired. In writing down these equity securities to fair market value and recognizing capital losses, the Company took advantage of tax benefits derived by offsetting this year's capital losses against current and previous years' capital gains. There were no security writedowns in 2001 or 2000. Management reviews and monitors security valuations and impairment issues at least on a quarterly basis to determine if declines in market values are other than temporary. The following table sets forth the components of the line item Other Expense.
2002 2001 2000 - ----------------------------------------------------------------------------- Amortization of Goodwill $ 0 $ 226,800 $ 226,800 Communications 322,020 326,234 308,636 Other Real Estate Owned Expense 0 0 38,000 Committee Fees 212,250 190,900 189,350 Other Various Expense 1,045,709 925,570 802,218 - ----------------------------------------------------------------------------- Other Expense Total $1,579,979 $1,669,504 $1,565,004 =============================================================================
Goodwill arising from the acquisition of Fairbank, Inc. has been amortized on a straight-line basis over a period of fifteen years. The amortization of goodwill discontinued upon the adoption of Statement of Financial Accounting Standards No. 142 effective January 1, 2002, which requires that goodwill no longer be amortized, but instead be reviewed and tested for impairment on an annual basis. In accordance with the accounting standard, the Company tested its goodwill for impairment as of January 1, 2002 and December 31, 2002. The Company determined that its goodwill as of those dates was not impaired. Communications Expense decreased by $4,214 in 2002. This expense was $326,234 and $308,636 respectively for 2001 and 2000. Since the Bank had no Other Real Estate Owned during 2002, and 2001, no expenses relating to this property were incurred. In 2000, expenses incurred to sell other real estate owned was $38,000. 29 Committee fees increased by $21,350 from $190,900 reported in 2001 to $212,250 in 2002. This expense in 2000 was $189,350. Additional committee meetings were necessary during 2002 while interviewing candidates for the CEO position. Other Various Expenses increased by $120,139 in 2002 from $925,570 reported in 2001 to $1,045,709. This expense in 2000 was $802,218. Income before income taxes totaled $4,099,735 as of year-end 2002, a decrease of $508,550 when compared to $4,608,285 reported as of December 31, 2001. Applicable taxes decreased by $263,849 to $1,134,183 when compared to $1,398,032 reported in the prior year. The Company's net earnings were $2,965,552, $3,210,253, and $4,074,439 for 2002, 2001, and 2000 respectively. Diluted earnings per share were $.75 for twelve months ending December 31, 2002 compared to $.84 for the same period in 2001. The Massachusetts Department of Revenue ("DOR") has issued Notices of Intent to assess additional state excise taxes to several financial institutions in the Commonwealth that have established real estate investment trusts ("REIT") in their corporate structure. The DOR contends that dividends received by banks from REIT subsidiaries are fully taxable in Massachusetts. The Company believes that the Massachusetts statute that provides for the dividend-received deduction of 95% of certain dividend distributions applies to dividends that have been made to banks by their subsidiary. Slade's Ferry Trust Company formed a REIT subsidiary in 1999, Slade's Ferry Preferred Capital Corporation. The Bank received a notice from the DOR dated November 6, 2002 pertaining to tax year filings of 1999, 2000, and 2001. This notice assessed additional state excise taxes and interest due of $1,659,449. The Company has not recorded any expense for this notice in its financial statements at this time, and the Company intends to vigorously appeal any and all assessments. In a matter that may affect the assessment described above, on March 5, 2003, the Commonwealth of Massachusetts enacted tax legislation that imposes taxes on the Bank for the above described dividends paid by the Bank's REIT to the Bank. The new tax, including interest, for the Bank is approximately $1,971,000 covering the years ending 1999, 2000, 2001, and 2002. The Company will expense this amount in its financial statements for the quarter ending March 31, 2003, net of the tax benefit of approximately $686,000. The Company believes the legislation will be challenged, especially the retroactive provisions, on the constitutional and other grounds. The Company would support such a challenge and otherwise intends to defend vigorously its position. 30 Unaudited Quarterly Financial Summary
(Dollars in Thousands) - --------------------------------------------------------------------------------- March 31 June 30 September 30 December 31 - --------------------------------------------------------------------------------- 2002: Revenues $6,250 $5,991 $6,534 $5,795 Operating Income 1,078 (8) 1,588 1,442 Net Income 782 57 1,251 876 Earnings per share Basic $ 0.20 $ 0.01 $ 0.32 $ 0.23 Diluted $ 0.20 $ 0.01 $ 0.32 $ 0.22 2001: Revenues $7,619 $7,349 $7,375 $6,751 Operating Income 1,259 1,002 1,214 1,133 Net Income 869 715 832 794 Earnings per share Basic $ 0.23 $ 0.19 $ 0.22 $ 0.20 Diluted $ 0.23 $ 0.19 $ 0.22 $ 0.20
FINANCIAL CONDITION Loans The composition of our loan portfolio has changed since December 31, 2001.Loan demand for residential real estate and home equity loans increased during 2002 as new and existing homeowners took advantage of the lower interest rates. During the fourth quarter of 2002, the Bank aggressively solicited both residential and home equity loans resulting in a year end net increase in loans of 11.1%, from $253.9 Million as of December 31, 2001 to $265.0 reported for the same period in 2002. New commercial loan commitments decreased due to the uncertainty of the economy and focused on refinancing existing debt to lower rates. The largest segment of the loan portfolio is commercial real estate loans representing 46% of total loans compared to 51% as of December 31, 2001. These loans are collateralized by various types of commercial properties, without any predominate type of property nor concentration of credit in any one industry. The properties consist of apartment complexes, medical centers, strip malls, factories with multiple tenants, and retail office units located in the Bank's market area extending throughout Southeastern Massachusetts and nearby cities and towns in Rhode Island. Commercial real estate loans generally have a higher degree of credit risk than residential real estate loans because they are predominately dependent on the success of the business. The Bank adheres to a credit criteria policy that strives to maintain the quality of the loan portfolio. The process of granting a commercial loan consists of an independent analysis of the financial condition of the borrower and the business entity by the Bank's credit risk division. In turn, the borrowing request is further evaluated by the Loan Committee and all loans in excess of $250,000 are submitted to the Executive Committee of the Board of Directors for final approval before the loan is granted. Periodically, during the life of the loan, analysis of financial statements of the business is performed to determine if there are any weaknesses or negative trends developing, and if so, contact with the borrower is made to ascertain the cause and what remedial action is planned. Another component in the loan portfolio is residential real estate and home equity loans, which accounts for 34% of the loan portfolio and is comprised of first mortgages on one to four family 31 properties and second mortgages. These loan types were 24% of the loan portfolio as of December 31, 2001. Credit is granted based on income to debt ratio, a satisfactory credit report and the appraised value of the property. The Bank also provides a program to encourage home ownership for first-time homebuyers. Other types of loans total 20% of the portfolio and are comprised of commercial and industrial loans which are generally short-term loans to finance business inventory, consumer credit installment loans, automobile financing, nonprofit and real estate construction loans. Investments - ----------- The investment portfolio represents the second largest component of the Company's assets and consists of securities in the Available-for-Sale category and securities in the Held-to-Maturity category. The designation of which category the security is to be classified as is determined at the time of the purchase of the investment instrument. Securities in the Available-for-Sale category are securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. These securities may be sold in response to interest rate changes, liquidity needs or other factors. Any unrecognized gain or loss, net of taxes for the Available-for Sale securities, is reflected in Stockholders Equity as a separate component. The Available-for-Sale category at December 31, 2002 had net unrecognized gains of $535,854 of which $1,266,775 in unrecognized gains, net are attributed to securities of U.S. Treasury, other U.S. Government corporations and agencies, mortgage-backed securities and corporate debt securities, and $730,921 in unrecognized losses, net are attributable to marketable equity securities. Securities of 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 December 31, 2002, the amount invested in marketable equity securities at amortized cost was 5.0% of the total investment portfolio distributed over various business sectors. The Held-to-Maturity category consists predominately of 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 to 15 years. The Company does not purchase investments with off-balance sheet characteristics, such as swaps, options, futures, and other hedging activities that are called derivatives. The main objective of the investment policy is to provide adequate liquidity to meet reasonable declines in deposits and any anticipated increases in the loan portfolio, to provide safety of principal and interest, to generate earnings adequate to provide a stable income and to fit within the overall asset/liability management objectives of the Company. 32 Deposits and Other Liabilities Total deposits remained flat through most of 2002. Certificates of deposit (term deposits) is the largest component of interest-bearing deposits with maturities extending out to a maximum of three years. Total interest-bearing deposits decreased by approximately $8.4 Million from $271.7 Million to $263.3 Million. Due to the significant decrease in short- term rates over the last twelve months, customers are attempting to find better yielding alternative investments. Offsetting this decrease in interest-bearing deposits was an increase of $7.0 Million in noninterest bearing deposits. The Bank is a member of the Federal Home Loan Bank (FHLB) and borrows funds secured by residential mortgage loans and other assets. This borrowing mechanism enables the Bank to match-fund loans to commercial borrowers who meet certain credit and deposit requirements. At December 31, 2002, the Bank had $19.2 Million of loans match-funded with FHLB compared to $17.0 Million at year end 2001. Asset/Liability Management and Interest Rate Risk - ------------------------------------------------- The Company's Asset-Liability Management Committee, comprised of the Bank's Executive Management team, monitors and evaluates the interest rate sensitivity of the Company's assets and liabilities. 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 which 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. Management also considers that certain assets and liabilities react differently to changes in interest rates. Some assets may have rate caps or prepayment fees attached to the instrument, and some liabilities have early withdrawal penalties. 33 A positive gap results when more assets than liabilities are expected to reprice within a certain time frame, and a negative gap reflects an excess of liabilities repricing in that period. A positive gap would tend to increase net interest income when rates are rising and decrease net interest income when rates are falling. A negative gap position would tend to produce the opposite effect. At December 31, 2002, for the period from 0 days to 2 years, the Company has a cumulative negative gap position of $4.4 Million. This equates to a percentage of total assets of a negative 1.12% which is within the specific target for interest rate sensitivity established by the Company. The negative gap occurs as a result of the amount of deposits that are subject to repricing during this time period. 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 interest expense from the Company's interest- 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 up 300 basis points or down 100 basis points, estimated net interest income for the next twelve months would not decline by more than ten percent. The following table reflects the Company's estimated exposure as a percentage and the dollar impact of estimated net interest income for the next twelve months, assuming an immediate change in interest rates:
Estimated Exposure as a Percentage Rate Change of Net Interest Income (Basis Points) December 31, 2002 Dollar Impact - ------------------------------------------------------------------------- +300 (6.55%) ($965,000) -100 (2.30%) ($338,000)
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. Nonperforming Assets - -------------------- The Company considers nonaccrual loans, loans past due 90 days or more but still accruing, restructured loans not performing in accordance with amended terms, and real estate acquired through foreclosure as nonperforming assets. Nonperforming assets as a total decreased to $0.6 Million at year end 2002, from $1.6 Million reported at year end 2001. At year end 2000, nonperforming assets totaled $2.8 Million. Nonaccrual loans is the largest component of nonperforming assets, and at December 31, 2002, this category decreased to $0.6 Million from $1.1 Million reported at end of previous year. The Company places a loan on nonaccrual status when, in the opinion of management, the collectability of the principal and interest becomes doubtful. Generally, when a commercial loan or a commercial real estate loan becomes past due 90 days or more, or a residential real estate loan becomes past due 120 days or more, the Company discontinues the accrual of interest and reverses previously accrued interest. The loan remains in the nonaccrual status until the loan is current and six months of payments are made. Then it is reclassified as an accruing loan. 34 If it is determined that collectability of the loan no longer exists, the loan is charged-off to the Allowance for Loan Losses, or if applicable, any real estate collateralizing the loan is acquired through foreclosure and categorized as Other Real Estate Owned. Loans 90 days or more past due but still accruing decreased to $7,700 at year end 2002 from $444,000 reported at year end 2001. Management continues to accrue on these loans due to the excess values of collateral securing these loans compared to their outstanding balances. There was no real estate acquired by foreclosure or substantively repossessed at December 31, 2002 and at the end of the prior year. The percentage of nonaccrual loans to total loans decreased from the prior year due to the decrease of loans in the nonaccrual category and the decline of the loan portfolio. In addition, the percentage of nonaccrual loans, restructured loans and real estate acquired by foreclosure to total assets decreased as result of increased asset levels. The $166,000 of restructured loans represents one borrower where the original loan term was amended and payments are current under the amended terms. Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" applies to all loans except large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, loans measured at fair value or at a lower of cost or fair value, leases, and debt securities as defined in Statement 115. Statement 114 requires that impaired loans be valued at the present value of expected future cash flows discounted at the loan's effective interest rate or at the loan's obtainable market value, or the fair value of the collateral if the loan is collateral dependent. Smaller-balance homogeneous loans are considered by the Company to include residential loans, consumer loans, and credit card loans. At December 31, 2002, there were $2,497,626 in loans which the Company has determined to be impaired, of which $2,497,626 have a related allowance for credit losses of $477,124. As of December 31, 2001, the recorded investment in impaired loans was $7,521,689, of which $7,461,437 have a related allowance for credit losses of $1,195,324. The increase during 2001 was primarily due to the addition to impairment of two loans totaling approximately $4,700,000, which have related credit loss allowances. 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. 35 Allowance for Loan Losses - ------------------------- The table below illustrates the changes in the Allowance for Loan Losses for the periods indicated.
- -------------------------------------------------------------------------------------------------- (Dollars In Thousands) 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------- Balance at January 1 $ 5,484 $ 4,776 $ 3,766 $ 3,569 $ 3,694 ----------------------------------------------------------- Charge Offs: Commercial (336) (73) (194) (221) (0) Real estate construction 0 (0) (0) (0) (0) Real estate mortgage (20) (0) (23) (23) (716) Installment/Consumer (26) (28) (138) (158) (76) ----------------------------------------------------------- (382) (101) (355) (402) (792) ----------------------------------------------------------- Recoveries: Commercial 17 14 50 11 8 Real estate construction 0 0 0 0 0 Real estate mortgage 38 29 92 24 43 Installment/Consumer 7 16 23 14 16 ----------------------------------------------------------- 62 59 165 49 67 ----------------------------------------------------------- Net charge offs (320) (42) (190) (353) (725) ----------------------------------------------------------- Provision (benefit) charged to operations (310) 750 1,200 550 600 ----------------------------------------------------------- Balance at December 31 $ 4,854 $ 5,484 $ 4,776 $ 3,766 $ 3,569 ----------------------------------------------------------- Allowance for Loan Losses as a percent of year end loans 1.83% 2.16% 1.86% 1.56% 1.64% Ratio of net charge offs to average loans outstanding (0.13%) (0.02%) (0.08%) (0.15%) (0.34%)
The Allowance for Loan Losses is available to absorb losses on loans deemed by management as uncollectable. In assessing the adequacy of the level of the allowance, management considers the status of nonaccrual loans and specific borrower situations, the current economic climate of the area, including national credit trends and the historical credit experiences within the region. Additions to the allowance are provided by charges to earnings and recoveries on previously charged-off loans. Deductions from the Allowance are transacted as a charge-off when a loan is deemed uncollectable. The Allowance for Loan Losses as a percentage of outstanding loans at December 31, 2002, was 1.83% compared to 2.16% reported at year end 2001. The ratios at years ending 2000, 1999, and 1998 were 1.86%, 1.56% and 1.64% respectively. In 2002, the Company deducted $310,000 from the Allowance and recovered $62,397 from previously charged-off loans. Loans charged-off during 2002 totaled $382,528 resulting in net charge-offs of $320,131. Net charge-offs for prior years were $41,841, $189,512, $353,410, and $724,583 for 2001, 2000, 1999 and 1998 respectively. In addition to management's assessment of the Allowance for Loan Losses, the Allowance is also evaluated by regulatory agencies and independent accountants as part of their examination and audit procedures. 36 Liquidity - --------- Liquidity represents the ability of the Bank to meet its funding requirements. In assessing the appropriate level of liquidity, the Bank considers deposit levels, lending requirements and investment maturities in light of prevailing economic conditions. Through this assessment, the Bank manages its liquidity level to optimize earnings and respond to fluctuations in customer borrowing needs. The Company's principle sources of funds are customer deposits, loan amortization, loan payoffs, and the maturities of investment securities. Through these sources, funds are provided for customer withdrawals from deposit accounts, loan origination, drawdowns on loan commitments, acquisitions of investment securities, and other normal business activities. Investors' capital also provides a source of funding. The largest source of funds is provided by depositors. The largest component of the Company's deposit base is term certificates which extend out to a maximum of three years. The Company does not participate in brokered deposits. Deposits are obtained from consumers and commercial customers within the Bank's community reinvestment area, being Bristol County, Massachusetts and several abutting towns in Rhode Island. The Company also has the ability to borrow funds for liquidity purposes from correspondent banks, the Federal Home Loan Bank, as well as the Federal Reserve Bank of Boston, by pledging various investment securities as collateral. Tax payments made by our customers which are owed to the Federal Reserve Bank's Treasury Tax and Loan account are classified as Other Borrowed Funds. Excess available funds are invested on a daily basis into Federal Funds Sold. An appropriate level of Federal Funds Sold is maintained to meet loan commitments, anticipated loan growth and deposit forecasts. Funds exceeding this level are then used to purchase investment securities that are suitable in yields and maturities for the investment portfolio. Liquidity in 2002 was primarily provided by the proceeds from the maturities and sales of securities totaling $56.5 Million, and advances, net of payments, from the Federal Home Loan Bank of $2.2 Million. These were offset by purchases of securities of $40.8 Million, loan originations, principal collections and purchased loans of $11.5 Million, and purchases of life insurance policies for Executive Officers of $1.6 Million. Other factors affecting liquidity included cash provided by other operating activities and cash used in financing activities as indicated in the cash flow statements. Capital - ------- As of December 31, 2002, the Company had total capital of $41,167,004. This represents an increase of $2,700,873 from $38,466,131 reported on December 31, 2001. The increase in capital was a combination of several factors. Additions consisted of twelve months earnings of $2,965,552 and transactions originating through the Dividend Reinvestment Program whereby 10,062.350 shares were issued for cash contributions of $138,112 and 47,172.146 shares were issued for $676,313 in lieu of cash dividend payments. There were also stock options exercised resulting in $72,683, net of tax benefit. These additions were offset by dividends paid of $1,412,840. Also, affecting capital is the line item Accumulated other comprehensive income (loss) which reflects net unrealized gains or losses, net of taxes, on securities classified as Available-for-Sale and the 37 minimum pension liability adjustment. On December 31, 2001, the Available-for- Sale portfolio had unrealized losses, net of taxes, of $120,943, and on December 31, 2002, as a result of current market values, the portfolio reflects unrealized gains, net of taxes, of $223,272. There was an increase in the minimum pension liability adjustment from $106,246, net of taxes, recorded December 31, 2001 to $234,180 as of December 31, 2002. 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. Under the revised informal agreement entered into with the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation, the Bank is required to maintain a seven (7) percent Tier I Leverage Capital. As of December 31, 2002, this ratio was 8.00%. 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 December 31, 2002. 38 The following table illustrates the capital position of Slade's Ferry Bancorp and Slade's Ferry Trust Company for years ending December 31, 2002 and 2001.
Slade's Ferry Bancorp 2002 2001 - --------------------------------------------------------------------------------------------------- (Dollars in Thousands) Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------- Total Capital (to Risk Weighted Assets) $ 41,540 14.84% $ 39,393 14.43% Minimum required 22,291 8.00 21,832 8.00 Excess 19,249 6.84 17,561 6.43 Tier I Capital (to Risk Weighted Assets) 38,040 13.59 35,956 13.18 Minimum required 11,146 4.00 10,916 4.00 Excess 26,894 9.59 25,040 9.18 Risk Adjusted Assets, net of goodwill, Nonqualifying intangibles, excess allowance and excess deferred tax assets 278,650 272,900 Tier I Capital (Leverage Ratio) 38,040 9.48 35,956 8.98 Minimum required 16,053 4.00 16,025 4.00 Excess 21,987 5.48 19,931 4.98 Quarterly average total assets, net of goodwill, Nonqualifying intangibles and excess deferred tax assets 401,325 400,625 Slade's Ferry Trust Company 2002 2001 - --------------------------------------------------------------------------------------------------- (Dollars in Thousands) Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------- Total Capital (to Risk Weighted Assets) $ 35,240 12.63% $ 34,046 12.55% Minimum required 22,208 8.00 21,697 8.00 Excess 13,032 4.63 12,349 4.55 Tier I Capital (to Risk Weighted Assets) 31,753 11.38 30,630 11.29 Minimum required 11,104 4.00 10,849 4.00 Excess 20,649 7.38 19,781 7.29 Risk Adjusted Assets, net of goodwill, Nonqualifying intangibles, excess allowance and excess deferred tax assets 277,600 271,225 Tier I Capital (Leverage Ratio) 31,753 8.00 30,630 7.74 Minimum required (1) 15,868 4.00 15,834 4.00 Excess 15,885 4.00 14,796 3.74 Quarterly average total assets, net of goodwill, Nonqualifying intangibles and excess deferred tax assets 396,700 395,850 - -------------------- The Bank is required to maintain a 7% Tier 1 Leverage Capital ratio under the revised informal agreement with the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation, effective January 17, 2002.
39 ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The most significant market risk factor affecting the financial condition and operating results of Slade's Ferry Bancorp is interest rate risk. Reference is hereby made to this Form 10-K, pages 10 and 11, under the headings "Interest Rate Risk" and "Interest Rate Sensitivity GAPS Report" for a discussion of market risk. ITEM 8 CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's consolidated financial statements, together with the independent auditors' report, appear beginning on page F-1 of the Annual Report on Form 10-K. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company had no disagreements with its independent accountants on accounting and financial disclosure matters. 40 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Reference is hereby made to the Company's definitive Proxy Statement for the Annual Meeting of Stockholders April 14, 2003. The information set forth under the heading "Directors and Executive Officers" and under the heading "Section 16(a) Beneficial Ownership Reporting Compliance" of such Proxy Statement is incorporated herein by reference. ITEM 11 EXECUTIVE COMPENSATION Reference is hereby made to the Company's definitive Proxy Statement for the Annual Meeting of Stockholders April 14, 2003. The information set forth under the heading "Executive Compensation Tables and Information" of such Proxy Statement is incorporated herein by reference. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Reference is hereby made to the Company's definitive Proxy Statement for the Annual Meeting of Stockholders April 14, 2003. The information set forth under this heading of such Proxy Statement is incorporated herein by reference. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Reference is hereby made to the Company's definitive Proxy Statement for the Annual Meeting of Stockholders April 14, 2003. The information set forth under this heading of such Proxy Statement is incorporated herein by reference. 41 ITEM 14 CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures As required by Rule 13a-15 under the Securities Exchange Act of 1934, within the 90 days prior to the date of this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company's disclosure controls and procedures. In designing and evaluating the Company's disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that they believe the Company's disclosure controls and procedures are reasonably effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. In connection with the rules regarding disclosure and control procedures, we intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. (b) Changes in internal controls. None. 42 ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) Consolidated Financial Statements Page ---- Independent Auditors' Report F-2 Consolidated Balance Sheets F-3 Consolidated Statements of Income F-4 Consolidated Statements of Changes in Stockholders' Equity F-5 Consolidated Statements of Cash Flows F-7 Notes to Consolidated Financial Statements F-9 (2) Financial Statement Schedules All financial statement schedules required by Item 15(a)(2) have been omitted because they are inapplicable or because the required information has been included in the Consolidated Financial Statements or Notes thereto. (3) Exhibits: see attached Exhibits Index Page X-1 (b) Reports on Form 8-K: A report on Form 8-K dated September 18, 2002 was filed with the Securities and Exchange Commission reporting under Item 5 the announcement of the hiring of Mary Lynn D. Lenz as President and Chief Executive Officer of the Bank effective immediately. She was also named as Executive Vice President of the Company and appointed to the Board of Directors of both the Bank and the Company. A report on Form 8-K dated November 12, 2002 was filed with the Securities and Exchange Commission reporting under Item 5 the election of Mary Lynn D. Lenz as President and Chief Executive Officer of the Company replacing Kenneth R. Rezendes. Ms. Lenz is also the President and Chief Executive Officer of Slade's Ferry Bank ("the Bank"), the Company's wholly owned subsidiary. Mr. Rezendes remains on the Board of Directors of the Company as vice-chairman. A report on Form 8-K dated March 6, 2003 was filed with the Securities and Exchange Commission reporting under Item 5 the announcement of establishing a liability in the first quarter of 2003 of approximately $1.3 Million for additional state taxes, including interest (net of any federal tax deduction associated with such taxes and interest) as a result of new legislation that retroactively disallows the deduction for dividends received from a real estate investment trust subsidiary ('REIT') for fiscal years 1999 through 2002. 43 CERTIFICATIONS I, Mary Lynn D. Lenz, certify that: 1. I have reviewed this annual report on Form 10-K of Slade's Ferry Bancorp; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date: 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 18, 2003 /s/ Mary Lynn D. Lenz ------------------------------------- President/Chief Executive Officer 44 CERTIFICATIONS I, Edward Bernardo, Jr., certify that: 1. I have reviewed this annual report on Form 10-K of Slade's Ferry Bancorp; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date: 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 18, 2003 /s/ Edward Bernardo Jr ----------------------- Treasurer Chief Financial Officer/ Chief Accounting Officer 45 Mary Lynn D. Lenz, President and Chief Executive Officer, and Edward Bernardo, Jr. Vice President and Treasurer of Slade's Ferry Bancorp (the "Company"), each hereby certifies, pursuant to Section 906 of the Sarbanes- Oxley Act of 2002, 18 U.S.C. Section 1350, that to the best of his knowledge: 1) this Annual Report on Form 10-K of the Company for the annual period ended December 31, 2002 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 780(d); and 2) the information contained in this Form 10-K fairly represents in all material respects, the financial condition and results of operations of the Company. March 18, 2003 /s/ Mary Lynn D. Lenz - -------------- --------------------- (Date) (Signature) Mary Lynn D. Lenz President/Chief Executive Officer March 18, 2003 /s/ Edward Bernardo Jr - -------------- ---------------------- (Date) (Signature) Edward Bernardo Jr. Vice President/Treasurer Chief Financial Officer/ Chief Accounting Officer 46 SIGNATURES - ---------- In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 18, 2003. Slade's Ferry Bancorp By/s/ Mary Lynn D. Lenz --------------------- Mary Lynn D. Lenz, President/ Chief Executive Officer and Director In accordance with the requirements of the Exchange Act, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Thomas B. Almy 03/18/03 /s/ Edward Bernardo Jr. 03/18/03 - --------------------------------------- ----------------------------------- Thomas B. Almy Edward Bernardo Jr. Director Treasurer/Chief Financial Officer/ Chief Accounting Officer /s/ Donald T. Corrigan 03/18/03 /s/ Peter G. Collias 03/18/03 - --------------------------------------- ----------------------------------- Donald T. Corrigan Peter G. Collias Chairman of the Board and Director Director /s/ Mary Lynn D. Lenz 03/18/03 /s/ Melvyn A. Holland 03/18/03 - --------------------------------------- ----------------------------------- Mary Lynn D. Lenz Melvyn A. Holland President/CEO and Director Director /s/ William Q. MacLean Jr. 03/18/03 /s/ Francis A. Macomber 03/18/03 - --------------------------------------- ----------------------------------- William Q. MacLean Jr. Francis A. Macomber Director Director /s/ Majed Mouded, MD 03/18/03 /s/ Shaun O'Hearn Sr. 03/18/03 - --------------------------------------- ----------------------------------- Majed Mouded, MD Shaun O'Hearn Sr. Director Director /s/ Lawrence J. Oliveira, DDS 03/18/03 /s/ Peter Paskowski 03/18/03 - --------------------------------------- ----------------------------------- Lawrence J. Oliveira, DDS Peter Paskowski Director Director /s/ Kenneth R. Rezendes 03/18/03 /s/ William J. Sullivan 03/18/03 - --------------------------------------- ----------------------------------- Kenneth R. Rezendes William J. Sullivan Vice Chairman and Director Director /s/ Charles Veloza 03/18/03 /s/ David F. Westgate 03/18/03 - --------------------------------------- ----------------------------------- Charles Veloza David F. Westgate Director Director 47 INDEX TO FINANCIAL STATEMENTS Slade's Ferry Bancorp and Subsidiaries Page ---- Independent Auditors' Report F-2 Consolidated Balance Sheets as of December 31, 2002 and December 31, 2001 F-3 Consolidated Statements of Income for the years ended December 31, 2002, December 31, 2001 and December 31, 2000 F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2002, December 31, 2001 and December 31, 2000 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2002, December 31, 2001 and December 31, 2000 F-7 Notes to Consolidated Financial Statements F-9 F-1 [LOGO] SHATSWELL, MacLEOD & COMPANY, P.C. ---------------------------------- CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholders Slade's Ferry Bancorp Somerset, Massachusetts INDEPENDENT AUDITORS' REPORT ---------------------------- We have audited the accompanying consolidated balance sheets of Slade's Ferry Bancorp and Subsidiary as of December 31, 2002 and 2001 and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Slade's Ferry Bancorp and Subsidiary as of December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. /s/ SHATSWELL, MacLEOD & COMPANY, P.C. SHATSWELL, MacLEOD & COMPANY, P.C. West Peabody, Massachusetts January 15, 2003 (except for Note 11 which is March 5, 2003) F-2 SLADE'S FERRY BANCORP AND SUBSIDIARY ------------------------------------ CONSOLIDATED BALANCE SHEETS --------------------------- December 31, 2002 and 2001 --------------------------
ASSETS 2002 2001 - ------ ------------ ------------ Cash and due from banks $ 14,985,461 $ 13,730,752 Interest bearing demand deposits with other banks 8,508 174,945 Money market mutual funds 222,567 86,613 Federal Home Loan Bank overnight deposit 10,000,000 6,000,000 Federal funds sold 9,500,000 8,700,000 ------------ ------------ Cash and cash equivalents 34,716,536 28,692,310 Interest bearing time deposit with other bank 200,000 100,000 Investments in available-for-sale securities (at fair value) 65,907,926 79,105,537 Investments in held-to-maturity securities (fair values of $14,262,405 as of December 31, 2002 and $16,590,243 as of December 31, 2001) 13,696,254 16,281,712 Federal Home Loan Bank stock 1,013,400 1,013,400 Loans, net of allowance for loan losses of $4,854,388 in 2002 and $5,484,519 in 2001 259,816,056 248,017,635 Premises and equipment 6,067,879 6,455,837 Goodwill 2,173,368 2,173,368 Accrued interest receivable 1,492,591 1,953,989 Cash surrender value of life insurance 9,750,661 7,697,441 Deferred taxes 1,849,723 2,202,139 Other assets 1,690,589 1,067,195 ------------ ------------ Total assets $398,374,983 $394,760,563 LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Deposits: Noninterest-bearing $ 72,277,469 $ 65,293,871 Interest-bearing 263,355,063 271,749,471 ------------ ------------ Total deposits 335,632,532 337,043,342 Federal Home Loan Bank advances 19,185,338 16,983,087 Other borrowed funds 465,216 Other liabilities 2,336,109 1,749,787 ------------ ------------ Total liabilities 357,153,979 356,241,432 ------------ ------------ Preferred stockholders' equity in a subsidiary company 54,000 53,000 ------------ ------------ Stockholders' equity: Common stock, par value $.01 per share; authorized 10,000,000 shares; issued and outstanding 3,937,762.9 shares in 2002 and 3,869,924.9 shares in 2001 39,378 38,700 Paid-in capital 27,693,199 26,761,997 Retained earnings 13,445,335 11,892,623 Accumulated other comprehensive loss (10,908) (227,189) ------------ ------------ Total stockholders' equity 41,167,004 38,466,131 ------------ ------------ Total liabilities and stockholders' equity $398,374,983 $394,760,563 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 SLADE'S FERRY BANCORP AND SUBSIDIARY ------------------------------------ CONSOLIDATED STATEMENTS OF INCOME --------------------------------- Years Ended December 31, 2002, 2001 and 2000 --------------------------------------------
2002 2001 2000 ----------- ----------- ----------- Interest and dividend income: Interest and fees on loans $17,276,773 $21,554,165 $22,486,187 Interest and dividends on securities: Taxable 3,826,659 4,410,499 4,588,612 Tax-exempt 577,982 533,287 524,652 Interest on federal funds sold 227,229 598,934 509,738 Other interest 127,831 226,785 77,157 ----------- ----------- ----------- Total interest and dividend income 22,036,474 27,323,670 28,186,346 ----------- ----------- ----------- Interest expense: Interest on deposits 6,703,002 11,333,086 11,918,906 Interest on Federal Home Loan Bank advances 1,216,559 965,008 728,622 Interest on other borrowed funds 8,193 28,436 51,143 ----------- ----------- ----------- Total interest expense 7,927,754 12,326,530 12,698,671 ----------- ----------- ----------- Net interest and dividend income 14,108,720 14,997,140 15,487,675 Provision (benefit) for loan losses (310,000) 750,000 1,200,000 ----------- ----------- ----------- Net interest and dividend income after provision (benefit) for loan losses 14,418,720 14,247,140 14,287,675 ----------- ----------- ----------- Other income: Service charges on deposit accounts 551,060 561,370 564,444 Overdraft service charges 333,977 257,586 250,454 Gain on sales and calls of available-for-sale securities, net 625,832 14,934 333,581 Gain on sales of other real estate owned, net 49,758 Increase in cash surrender value of life insurance policies 443,220 351,023 282,855 Other income 578,728 584,619 425,101 ----------- ----------- ----------- Total other income 2,532,817 1,769,532 1,906,193 ----------- ----------- ----------- Other expense: Salaries and employee benefits 7,368,364 7,124,377 6,070,057 Occupancy expense 845,366 861,407 822,890 Equipment expense 478,047 565,448 567,465 Stationary and supplies 276,824 241,186 224,501 Professional fees 549,036 364,680 385,079 Marketing expense 355,203 421,480 556,960 FDIC deposit insurance premium 158,115 160,305 63,684 Writedown of securities 1,240,868 Other expense 1,579,979 1,669,504 1,565,004 ----------- ----------- ----------- Total other expense 12,851,802 11,408,387 10,255,640 ----------- ----------- ----------- Income before income taxes 4,099,735 4,608,285 5,938,228 Income taxes 1,134,183 1,398,032 1,863,789 ----------- ----------- ----------- Net income $ 2,965,552 $ 3,210,253 $ 4,074,439 =========== =========== =========== Earnings per common share $ .76 $ .84 $ 1.09 =========== =========== =========== Earnings per common share assuming dilution $ .75 $ .84 $ 1.09 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. F-4 SLADE'S FERRY BANCORP AND SUBSIDIARY ------------------------------------ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ---------------------------------------------------------- Years Ended December 31, 2002, 2001 and 2000 --------------------------------------------
Accumulated Other Comprehensive Common Paid-in Retained Income Stock Capital Earnings (Loss) Total ------- ----------- ----------- ----------- ----------- Balance, December 31, 1999 $35,204 $23,147,447 $ 9,635,213 $(1,153,618) $31,664,246 Comprehensive income: Net income 4,074,439 Other comprehensive income 532,932 Comprehensive income 4,607,371 Issuance of common stock from dividend reinvestment plan 749 739,805 740,554 Stock issuance relating to optional cash contribution plan 157 151,124 151,281 Stock options exercised 17 14,009 14,026 Issuance of 5% common stock dividend 1,768 1,832,835 (1,836,628) (2,025) Dividends declared ($.40 per share) (1,501,080) (1,501,080) ------- ----------- ----------- ----------- ----------- Balance, December 31, 2000 37,895 25,885,220 10,371,944 (620,686) 35,674,373 Comprehensive income: Net income 3,210,253 Other comprehensive income 393,497 Comprehensive income 3,603,750 Issuance of common stock from dividend reinvestment plan 732 803,201 803,933 Stock issuance relating to optional cash contribution plan 73 73,576 73,649 Dividends declared ($.44 per share) (1,689,574) (1,689,574) ------- ----------- ----------- ----------- ----------- Balance, December 31, 2001 38,700 26,761,997 11,892,623 (227,189) 38,466,131 Comprehensive income: Net income 2,965,552 Other comprehensive income 216,281 Comprehensive income 3,181,833 Issuance of common stock from dividend reinvestment plan 472 675,841 676,313 Stock issuance relating to optional cash contribution plan 100 138,012 138,112 Stock options exercised 106 94,963 95,069 Tax benefit of stock options 22,386 22,386 Dividends on minority interest preferred stock ($40.00 per share) (4,320) (4,320) Dividends declared ($.36 per share) (1,408,520) (1,408,520) ------- ----------- ----------- ----------- ----------- Balance, December 31, 2002 $39,378 $27,693,199 $13,445,335 $ (10,908) $41,167,004 ======= =========== =========== =========== ===========
F-5 SLADE'S FERRY BANCORP AND SUBSIDIARY ------------------------------------ CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ---------------------------------------------------------- Years Ended December 31, 2002, 2001 and 2000 -------------------------------------------- (continued)
2002 2001 2000 --------- --------- ---------- Other comprehensive income and reclassification disclosure for the years ended December 31: Unrealized gains (losses) on securities Net unrealized gains on available-for-sale securities $ 53,577 $ 853,519 $1,279,547 Reclassification adjustment for realized (gains) losses in net income 615,036 (14,934) (333,581) --------- --------- ---------- Net unrealized gains on securities 668,613 838,585 945,966 Income tax expense (324,398) (362,985) (391,915) --------- --------- ---------- Net of tax amount 344,215 475,600 554,051 --------- --------- ---------- Minimum pension liability adjustment (216,583) (138,992) (35,752) Income tax benefit 88,649 56,889 14,633 --------- --------- ---------- Net of tax amount (127,934) (82,103) (21,119) --------- --------- ---------- Other comprehensive income, net of tax $ 216,281 $ 393,497 $ 532,932 ========= ========= ==========
Accumulated other comprehensive loss consists of the following as of December 31:
2002 2001 2000 --------- --------- ---------- Net unrealized gains (losses) on available-for-sale securities, net of taxes $ 223,272 $(120,943) $ (596,543) Minimum pension liability adjustment, net of taxes (234,180) (106,246) (24,143) --------- --------- ---------- Accumulated other comprehensive loss $ (10,908) $(227,189) $ (620,686) ========= ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. F-6 SLADE'S FERRY BANCORP AND SUBSIDIARY ------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Years Ended December 31, 2002, 2001 and 2000 --------------------------------------------
2002 2001 2000 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 2,965,552 $ 3,210,253 $ 4,074,439 Adjustments to reconcile net income to net cash provided by operating activities: Amortization, net of accretion of securities 162,144 152,995 2,929 Gain on sales and calls of available-for-sale securities, net (625,832) (14,934) (333,581) Writedown of securities 1,240,868 Change in unearned income (40,927) (137,081) (75,141) Provision (benefit) for loan losses (310,000) 750,000 1,200,000 Depreciation and amortization 637,342 685,577 709,152 (Gain) loss on sale of property and equipment 501 (107,109) Gain on sales of other real estate owned, net (49,758) Increase in cash surrender value of life insurance policies (443,220) (351,023) (282,855) Amortization of goodwill 226,800 226,800 Accretion, net of amortization of fair market value adjustments (8,550) (11,400) (Increase) decrease in other assets (29,839) 12,061 (2,114) (Increase) decrease in prepaid expenses 142,237 (28,262) 52,580 Increase in income taxes receivable (714,639) (120,379) (Increase) decrease in interest receivable 461,398 397,937 (409,175) Increase (decrease) in other liabilities 211,588 (4,085) 61,352 Increase (decrease) in accrued expenses 159,259 (158,468) (379,813) Increase (decrease) in interest payable (13,394) (53,826) 76,045 Deferred tax (benefit) expense 116,667 (196,033) (260,758) Increase (decrease) in taxes payable (180,512) 680,208 ------------ ------------ ------------ Net cash provided by operating activities 3,919,705 4,075,361 5,278,910 ------------ ------------ ------------ Cash flows from investing activities: Increase in interest bearing time deposits with other banks (100,000) (100,000) Purchases of available-for-sale securities (37,391,128) (61,088,695) (13,211,935) Proceeds from sales of available-for-sale securities 16,853,893 891,375 2,884,051 Proceeds from maturities of available-for-sale securities 33,638,864 49,790,967 4,880,762 Purchases of held-to-maturity securities (3,417,675) (4,156,673) (5,317,668) Proceeds from maturities of held-to-maturity securities 5,990,548 6,971,893 5,737,924 Loan originations and principal collections, net (11,209,891) 19,935,261 (9,609,846) Purchases of loans (300,000) (17,767,255) (4,589,892) Recoveries of loans previously charged off 62,397 58,821 165,300 Capital expenditures (253,582) (464,323) (405,533) Proceeds from sale of property and equipment 10,099 202,109 Proceeds from sales of other real estate owned 143,853 Investment in life insurance policies (1,610,000) (515,500) (4,918,838) ------------ ------------ ------------ Net cash provided by (used in) investing activities 2,273,525 (6,242,020) (24,241,822) ------------ ------------ ------------
F-7 SLADE'S FERRY BANCORP AND SUBSIDIARY ------------------------------------ CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Years Ended December 31, 2002, 2001 and 2000 -------------------------------------------- (continued)
2002 2001 2000 ------------ ------------ ------------ Cash flows from financing activities: Net increase in demand deposits, NOW and savings accounts 22,661,421 7,818,060 13,929,857 Net increase (decrease) in time deposits (24,072,231) (7,775,619) 6,639,857 Long-term advances from Federal Home Loan Bank 3,450,000 6,428,000 8,100,000 Payments on Federal Home Loan Bank long-term advances (1,247,749) (2,170,821) (2,130,859) Net decrease in other borrowed funds (465,216) (734,784) (48,461) Proceeds from issuance of common stock 814,425 877,582 891,835 Stock options exercised 95,069 14,026 Fractional shares paid in cash (2,025) Dividends paid (1,405,723) (1,644,158) (1,479,575) Repurchase of minority interest preferred stock (1,500) Issuance of minority interest preferred stock 2,500 ------------ ------------ ------------ Net cash provided by (used in) financing activities (169,004) 2,798,260 25,914,655 ------------ ------------ ------------ Net increase in cash and cash equivalents 6,024,226 631,601 6,951,743 Cash and cash equivalents at beginning of year 28,692,310 28,060,709 21,108,966 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 34,716,536 $ 28,692,310 $ 28,060,709 ============ ============ ============ Supplemental disclosures: Interest paid $ 7,941,148 $ 12,380,356 $ 12,622,626 Income taxes paid 1,732,155 1,894,956 1,444,339 Loans originating from the sales of other real estate owned 259,000
The accompanying notes are an integral part of these consolidated financial statements. F-8 SLADE'S FERRY BANCORP AND SUBSIDIARY ------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ Years Ended December 31, 2002, 2001 and 2000 -------------------------------------------- NOTE 1 - NATURE OF OPERATIONS - ----------------------------- Slade's Ferry Bancorp (Company) is a Massachusetts corporation that was organized in 1990 to become the holding company of Slade's Ferry Trust Company (Bank). The Company's primary activity is to act as the holding company for the Bank. The Bank is a state chartered bank, which was incorporated in 1959 and is headquartered in Somerset, Massachusetts. The Bank operates its business from twelve banking offices located in Massachusetts and a loan company in Rhode Island. The Bank is engaged principally in the business of attracting deposits from the general public and investing those deposits in residential and commercial real estate loans, and in commercial, consumer and small business loans. NOTE 2 - ACCOUNTING POLICIES - ---------------------------- The accounting and reporting policies of the Company and its subsidiary conform to accounting principles generally accepted in the United States of America and predominant practices within the banking industry. The consolidated financial statements were prepared using the accrual basis of accounting. The significant accounting policies are summarized below to assist the reader in better understanding the consolidated financial statements and other data contained herein. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates. BASIS OF PRESENTATION: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank and the Bank's wholly-owned subsidiaries, Slade's Ferry Realty Trust, Slade's Ferry Securities Corporation, Slade's Ferry Loan Company and Slade's Ferry Preferred Capital Corporation. Slade's Ferry Realty Trust was formed to hold ownership of real estate, Slade's Ferry Securities Corporation was formed to hold securities for tax benefits in Massachusetts, Slade's Ferry Loan Company provides the opportunity to solicit commercial and consumer borrowers in the Rhode Island area and Slade's Ferry Preferred Capital Corporation, a real estate investment trust, was formed to hold real estate mortgage loans. All significant intercompany accounts and transactions have been eliminated in the consolidation. CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash and cash equivalents include cash on hand, cash items, due from banks, money market mutual funds, Federal Home Loan Bank overnight deposit and federal funds sold. Cash and due from banks as of December 31, 2002 includes $2,640,000 which is subject to withdrawals and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank. SECURITIES: Investments in debt securities are adjusted for amortization of premiums and accretion of discounts. Gains or losses on sales of investment securities are computed on a specific identification basis. F-9 The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-sale, or trading. This security classification may be modified after acquisition only under certain specified conditions. In general, securities may be classified as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale. -- Held-to-maturity securities are measured at amortized cost in the consolidated balance sheet. Unrealized holding gains and losses are not included in earnings or in a separate component of capital. They are merely disclosed in the notes to the consolidated financial statements. -- Available-for-sale securities are carried at fair value on the consolidated balance sheet. Unrealized holding gains and losses are not included in earnings, but are reported as a net amount (less expected tax) in a separate component of capital until realized. -- Trading securities are carried at fair value on the consolidated balance sheet. Unrealized holding gains and losses for trading securities are included in earnings. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. LOANS: Loans receivable that management has the intent and ability to hold until maturity or payoff are reported at their outstanding principal balances reduced by amounts due to borrowers on unadvanced loans, by any charge-offs, the allowance for loan losses and any deferred fees or costs on originated loans, or unamortized premiums or discounts on purchased loans. Interest on loans is recognized on a simple interest basis. Loan origination and commitment fees and certain direct origination costs are deferred, and the net amount amortized as an adjustment of the related loan's yield. The Company is amortizing these amounts over the contractual life of the related loans. Residential real estate loans are generally placed on nonaccrual when reaching 120 days past due or in process of foreclosure. All closed- end consumer loans 90 days or more past due and any equity line in the process of foreclosure are placed on nonaccrual status. Secured consumer loans are written down to realizable value and unsecured consumer loans are charged-off upon reaching 120 or 180 days past due depending on the type of loan. Commercial real estate loans and commercial business loans and leases which are 90 days or more past due are generally placed on nonaccrual status, unless secured by sufficient cash or other assets immediately convertible to cash. When a loan has been placed on nonaccrual status, previously accrued and uncollected interest is reversed against interest on loans. A loan can be returned to accrual status when collectibility of principal is reasonably assured and the loan has performed for a period of time, generally six months. Cash receipts of interest income on impaired loans is credited to principal to the extent necessary to eliminate doubt as to the collectibility of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered. F-10 ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost, less accumulated depreciation and amortization. Cost and related allowances for depreciation and amortization of premises and equipment retired or otherwise disposed of are removed from the respective accounts with any gain or loss included in income or expense. Depreciation and amortization are calculated principally on the straight-line method over the estimated useful lives of the assets. Estimated lives are 3 to 40 years for buildings and 2 to 20 years for furniture and equipment. Leasehold improvements are amortized over the lesser of the life of the lease or the estimated life of the improvements. OTHER REAL ESTATE OWNED AND IN-SUBSTANCE FORECLOSURES: Other real estate owned includes properties acquired through foreclosure and properties classified as in-substance foreclosures in accordance with Financial Accounting Standards Board Statement No. 15, "Accounting by Debtors and Creditors for Troubled Debt Restructuring." These properties are carried at the lower of cost or estimated fair value less estimated cost to sell. Any writedown from cost to estimated fair value required at the time of foreclosure or classification as in-substance foreclosure is charged to the allowance for loan losses. Expenses incurred in connection with maintaining these assets, subsequent writedowns and gains or losses recognized upon sale are included in other expense. In accordance with Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan," the Company classifies loans as in-substance repossessed or foreclosed if the Company receives physical possession of the debtor's assets regardless of whether formal foreclosure proceedings take place. F-11 ADVERTISING: The Company directly expenses costs associated with advertising as they are incurred. INCOME TAXES: The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are established for the temporary differences between the accounting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when the amounts related to such temporary differences are realized or settled. FAIR VALUES OF FINANCIAL INSTRUMENTS: Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," requires that the Company disclose estimated fair value for its financial instruments. Fair value methods and assumptions used by the Company in estimating its fair value disclosures are as follows: Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values. Securities (including mortgage-backed securities): Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans receivable: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Accrued interest receivable: The carrying amount of accrued interest receivable approximates its fair value. Deposit liabilities: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Federal Home Loan Bank Advances: Fair values for Federal Home Loan Bank advances are estimated using a discounted cash flow technique that applies interest rates currently being offered on advances to a schedule of aggregated expected monthly maturities on Federal Home Loan Bank advances. Other borrowed funds: Fair values for other borrowed funds are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar borrowings. Off-balance sheet instruments: The fair value of commitments to originate loans is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments and the unadvanced portion of loans, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligation with the counterparties at the reporting date. F-12 EARNINGS PER SHARE: Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method. STOCK BASED COMPENSATION: At December 31, 2002, the Company has a stock-based employee compensation plan which is described more fully in Note 16. The Company accounts for the plan under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. No stock-based employee compensation cost is reflected in net income (except for appreciation from options surrendered as described in Note 16), as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS Statement No. 123, "Accounting for Stock-Based Compensation", to stock-based employee compensation.
For the years Ended December 31, ------------------- 2002 2001 2000 ---------- ---------- ---------- Net income, as reported $2,965,552 $3,210,253 $4,074,439 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 59,377 80,475 114,540 ---------- ---------- ---------- Pro forma net income $2,906,175 $3,129,778 $3,959,899 ========== ========== ========== Earnings per share: Basic - as reported $.76 $.84 $1.09 Basic - pro forma $.74 $.82 $1.06 Diluted - as reported $.75 $.84 $1.09 Diluted - pro forma $.74 $.81 $1.06
RECENT ACCOUNTING PRONOUNCEMENTS: 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 operations. F-13 In June 2001, the FASB issued SFAS No. 141, "Business Combinations". This Statement addresses financial accounting and reporting for business combinations and supercedes APB Opinion No. 16, "Business Combinations", and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises". Under Opinion 16, business combinations were accounted for using one of two methods, the pooling-of-interests method or the purchase method. All business combinations in the scope of SFAS No. 141 are to be accounted for using one method - the purchase method. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001 and to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The adoption of SFAS No. 141 had no immediate effect on the Company's consolidated financial statements since it had no pending business combinations as of June 30, 2001 or as of the date of the issuance of these consolidated financial statements. If the Company consummates business combinations in the future, any such combinations that would have been accounted for by the pooling-of-interests method under Opinion 16 will be accounted for under the purchase method and the difference in accounting could have a substantial impact on the Company's consolidated financial statements. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". This Statement addresses financial accounting and reporting for required goodwill and other intangible assets and supercedes APB Opinion No. 17, "Intangible Assets". The initial recognition and measurement provisions of SFAS No. 142 apply to intangible assets which are defined as assets (not including financial assets) that lack physical substance. The term "intangible assets" is used in SFAS No. 142 to refer to intangible assets other than goodwill. The accounting for a recognized intangible asset is based on its useful life. An intangible asset with a finite useful life is amortized; an intangible asset with an indefinite useful life is not amortized. An intangible asset that is subject to amortization shall be reviewed for impairment in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 142 provides that goodwill shall not be amortized. Goodwill is defined as the excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed. SFAS No. 142 further provides that goodwill shall be tested for impairment at a level of reporting referred to as a reporting unit. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value. SFAS No. 142 was effective as follows: All of the provisions of SFAS No. 142 were applied in fiscal years beginning after December 15, 2001, to all goodwill and intangible assets recognized in the Company's statement of financial position at the beginning of that fiscal year, regardless of when those previously recognized assets were initially recognized. The Company's assets as of December 31, 2001 include goodwill of $2,173,368 recognized in the acquisition of Fairbank, Inc., in 1997. This goodwill was being amortized at the rate of $226,800 per year. Under SFAS No. 142 this amortization was discontinued after December 31, 2001 but is subject to the impairment review requirements of SFAS No. 142. In accordance with SFAS No. 142 the Company tested its goodwill for impairment as of January 1, 2002 and December 31, 2002. The Company determined that its goodwill as of those dates was not impaired. F-14 The following is a reconciliation of reported net income adjusted for adoption of SFAS No. 142 for the years ended December 31:
2002 2001 2000 ---------- ---------- ---------- Reported net income $2,965,552 $3,210,253 $4,074,439 Add back goodwill amortization, net of tax effect 133,971 133,971 ---------- ---------- ---------- Adjusted net income $2,965,552 $3,344,224 $4,208,410 ========== ========== ========== Basic earnings per share: Reported net income $.76 $.84 $1.09 Goodwill amortization .03 .03 ---- ---- ----- Adjusted net income $.76 $.87 $1.12 ==== ==== ===== Diluted earnings per share: Reported net income $.75 $.84 $1.09 Goodwill amortization .03 .03 ---- ---- ----- Adjusted net income $.75 $.87 $1.12 ==== ==== =====
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supercedes SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," but retains the basic recognition and measurement model for assets held for use and held for sale. The provisions of SFAS No. 144 are required to be adopted starting with fiscal years beginning after December 15, 2001. This Statement did not have a material impact on the Company's consolidated financial statements. In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Management does not anticipate that this Statement will have any material impact on the Company's consolidated financial statements. In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial Institutions", an Amendment of SFAS Nos. 72 and 144 and FASB Interpretation No. 9. SFAS No. 72 "Accounting for Certain Acquisitions of Banking or Thrift Institutions" and FASB Interpretation No. 9 "Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method" provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, SFAS No. 147 removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with SFAS No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". Thus, the requirement in paragraph 5 of 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of SFAS No. 147. In addition, SFAS Statement No. 147 amends SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that SFAS No. 144 requires for other long-lived assets that are held and used. F-15 Paragraph 5 of SFAS No. 147, which relates to the application of the purchase method of accounting, was effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets were effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 were effective on October 1, 2002, with earlier application permitted. There was no impact on the Company's consolidated financial statements on adoption of this Statement. NOTE 3 - INVESTMENTS IN SECURITIES - ---------------------------------- Debt and equity securities have been classified in the consolidated balance sheets according to management's intent. The carrying amount of securities and their approximate fair values are as follows as of December 31:
Gains In Losses In Accumulated Accumulated Amortized Other Other Cost Comprehensive Comprehensive Fair Basis Income Income Value ----------- ---------- ---------- ---------- Available-for-sale securities: December 31, 2002: Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies $26,423,978 $ 239,307 $ 80 $26,663,205 Mortgage-backed securities 32,511,788 921,833 56 33,433,565 Corporate debt securities 2,672,502 105,771 2,778,273 Marketable equity securities 3,986,371 52,916 783,837 3,255,450 ----------- ---------- ---------- ---------- 65,594,639 1,319,827 783,973 66,130,493 Money market mutual funds included in cash and cash equivalents (222,567) (222,567) ----------- ---------- ---------- ---------- $65,372,072 $1,319,827 $ 783,973 $65,907,926 =========== ========== ========== =========== December 31, 2001: Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies $34,240,332 $ 508,328 $ 83,094 $34,665,566 Mortgage-backed securities 36,128,956 332,183 94,103 36,367,036 Corporate debt securities 2,941,168 69,571 5,038 3,005,701 Marketable equity securities 6,014,453 297,247 1,157,853 5,153,847 ----------- ---------- ---------- ---------- 79,324,909 1,207,329 1,340,088 79,192,150 Money market mutual funds included in cash and cash equivalents (86,613) (86,613) ----------- ---------- ---------- ---------- $79,238,296 $1,207,329 $1,340,088 $79,105,537 =========== ========== ========== ===========
F-16
Gross Gross Net Unrecognized Unrecognized Carrying Holding Holding Fair Amount Gains Losses Value ----------- -------- ------- ----------- Held-to-maturity securities: December 31, 2002: Debt securities issued by states of the United States and political subdivisions of the states $13,693,091 $573,177 $ 7,127 $14,259,141 Mortgage-backed securities 2,163 101 2,264 Foreign debt securities 1,000 1,000 ----------- -------- ------- ----------- $13,696,254 $573,278 $ 7,127 $14,262,405 =========== ======== ======= =========== December 31, 2001: Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies $ 2,749,710 $ 27,593 $ $ 2,777,303 Debt securities issued by states of the United States and political subdivisions of the states 13,528,291 292,100 11,264 13,809,127 Mortgage-backed securities 2,711 102 2,813 Foreign debt securities 1,000 1,000 ----------- -------- ------- ----------- $16,281,712 $319,795 $11,264 $16,590,243 =========== ======== ======= ===========
The scheduled maturities of securities (other than equity securities) were as follows as of December 31, 2002:
Available-For-Sale Held-To-Maturity ------------------ -------------------------------- Fair Net Carrying Fair Value Amount Value ----------- ------------ ----------- Due within one year $ 4,669,064 $ 3,309,472 $ 3,344,434 Due after one year through five years 23,757,975 6,981,002 7,377,223 Due after five years through ten years 1,014,439 1,360,333 1,439,282 Due after ten years 2,043,284 2,099,202 Mortgage-backed securities 33,433,565 2,163 2,264 ----------- ------------ ----------- $62,875,043 $13,696,254 $14,262,405 =========== =========== ===========
During 2002, proceeds from sales of available-for-sale securities amounted to $16,853,893. Gross realized gains and gross realized losses on those sales amounted to $725,961 and $97,410, respectively. During 2001, proceeds from sales of available-for-sale securities amounted to $891,375. Gross realized gains and gross realized losses on those sales amounted to $57,588 and $42,654, respectively. During 2000, proceeds from sales of available-for-sale securities amounted to $2,884,051. Gross realized gains and gross realized losses on those sales amounted to $428,447 and $94,866, respectively. The tax expense applicable to these net realized gains amounted to $245,565, $6,112 and $136,534 for the years ended December 31, 2002, 2001 and 2000, respectively. There were no securities of issuers whose aggregate carrying amount exceeded 10% of stockholders' equity as of December 31, 2002. Total carrying amounts of $2,963,317 and $4,554,448 of debt securities were pledged to secure treasury tax and loan, trust department and public funds on deposit as of December 31, 2002 and 2001, respectively. F-17 NOTE 4 - LOANS - -------------- Loans consisted of the following as of December 31:
2002 2001 ------------ ------------ Commercial, financial and agricultural $ 30,454,898 $ 45,237,663 Real estate - construction and land development 14,077,763 7,600,286 Real estate - residential 90,330,046 60,936,137 Real estate - commercial 122,931,918 128,887,954 Consumer 6,881,094 10,642,900 Nonprofit 293,202 236,388 Obligations of states and political subdivisions 21,400 Other 42,757 321,587 ------------ ------------ 265,011,678 253,884,315 Allowance for loan losses (4,854,388) (5,484,519) Unearned income (341,234) (382,161) ------------ ------------ Net loans, carrying amount $259,816,056 $248,017,635 ============ ============
Certain directors and executive officers of the Company and companies in which they have significant ownership interest were customers of the Bank during 2002. Total loans to such persons and their companies amounted to $5,974,212 as of December 31, 2002. During the year ended December 31, 2002, $8,425,060 of advances were made and repayments totaled $8,868,272. Changes in the allowance for loan losses were as follows for the years ended December 31:
2002 2001 2000 ---------- ---------- ---------- Balance at beginning of period $5,484,519 $4,776,360 $3,765,872 Loans charged off (382,528) (100,662) (354,812) Provision (benefit) for loan losses (310,000) 750,000 1,200,000 Recoveries of loans previously charged off 62,397 58,821 165,300 ---------- ---------- ---------- Balance at end of period $4,854,388 $5,484,519 $4,776,360 ========== ========== ==========
The following table sets forth information regarding nonaccrual loans and accruing loans 90 days or more overdue as of December 31:
2002 2001 ---- ---- Nonaccrual loans $ 635,227 $1,138,497 ========== ========== Accruing loans which are 90 days or more overdue $ 7,747 $ 443,882 ========== ==========
F-18 Information about loans that meet the definition of an impaired loan in Statement of Financial Accounting Standards No. 114 is as follows as of December 31:
2002 2001 ---------------------- ------------------------- Recorded Related Recorded Related Investment Allowance Investment Allowance In Impaired For Credit In Impaired For Credit Loans Losses Loans Losses ---------- -------- ---------- --------- Loans for which there is a related allowance for credit losses $2,497,626 $477,124 $7,461,437 $1,195,324 Loans for which there is no related allowance for credit losses 60,252 ---------- -------- ---------- --------- Totals $2,497,626 $477,124 $7,521,689 $1,195,324 ========== ======== ========== ========== Average recorded investment in impaired loans during the year ended December 31 $3,283,438 $6,134,847 ========== ========== Related amount of interest income recognized during the time, in the year ended December 31, that the loans were impaired Total recognized $ 254,159 $ 562,278 ========== ========== Amount recognized using a cash-basis method of accounting $ 99,081 $ 157,735 ========== ==========
NOTE 5 - PREMISES AND EQUIPMENT - ------------------------------- The following is a summary of premises and equipment as of December 31:
2002 2001 ---- ---- Land $ 1,710,368 $ 1,710,368 Buildings 6,955,758 6,940,613 Furniture and equipment 4,677,474 4,449,637 Leasehold improvements 383,436 383,436 ----------- ----------- 13,727,036 13,484,054 Accumulated depreciation and amortization (7,659,157) (7,028,217) ----------- ----------- $ 6,067,879 $ 6,455,837 =========== ===========
NOTE 6 - DEPOSITS - ----------------- The aggregate amount of time deposit accounts in denominations of $100,000 or more as of December 31, 2002 and 2001 was $27,915,361 and $33,448,818, respectively. For time deposits as of December 31, 2002, the scheduled maturities for each of the following three years ended December 31, are: 2003 $128,662,622 2004 13,579,817 2005 2,271,843 ------------ Total $144,514,282 ============
Deposits from related parties held by the Company as of December 31, 2002 and 2001 amounted to $2,286,572 and $2,773,437, respectively. F-19 NOTE 7 - FEDERAL HOME LOAN BANK ADVANCES - ---------------------------------------- Advances consist of funds borrowed from the Federal Home Loan Bank (FHLB). Maturities of advances from the FHLB for the five years ending after December 31, 2002, and thereafter, are summarized as follows: AMOUNT ------ 2003 $ 282,347 2004 1,296,281 2005 320,097 2006 342,617 2007 361,666 Thereafter 16,582,330 ----------- $19,185,338 ===========
Interest rates on FHLB advances ranged from 4.89 percent to 7.72 percent. At December 31, 2002, the weighted average interest rate on FHLB advances was 6.69 percent. As of December 31, 2002, a $3,000,000 advance from the FHLB maturing in 2015 is redeemable at par at the option of the FHLB on January 7, 2003 and each calendar quarter thereafter. Amortizing advances are being repaid in equal monthly payments and are being amortized from the date of the advance to the maturity date on a direct reduction basis. Borrowings from the FHLB are secured by a blanket lien on qualified collateral, consisting primarily of loans with first mortgages secured by one to four family properties, certain unencumbered investment securities and other qualified assets. NOTE 8 - OTHER BORROWED FUNDS - ----------------------------- Other borrowed funds consist of treasury tax and loan deposits and generally are repaid within one to 120 days from the transaction date. NOTE 9 - INCOME TAXES - --------------------- The components of income tax expense are as follows for the years ended December 31:
2002 2001 2000 ---------- ---------- ---------- Current: Federal $ 920,469 $1,513,874 $2,086,337 State 97,047 80,191 38,210 ---------- ---------- ---------- 1,017,516 1,594,065 2,124,547 ---------- ---------- ---------- Deferred: Federal 79,782 (162,866) (253,043) State 36,885 (56,212) (87,440) Change in the valuation allowance 23,045 79,725 ---------- ---------- ---------- 116,667 (196,033) (260,758) ---------- ---------- ---------- Total income tax expense $1,134,183 $1,398,032 $1,863,789 ========== ========== ==========
F-20 The reasons for the differences between the statutory federal income tax rates and the effective tax rates are summarized as follows for the years ended December 31:
2002 2001 2000 ------ ------ ------ % of % of % of Income Income Income ------ ------ ------ Federal income tax at statutory rate 34.0% 34.0% 34.0% Increase (decrease) in tax resulting from: Tax-exempt income (8.5) (6.5) (4.6) Dividends received deduction (.6) (.4) (.3) Unallowable expenses .6 .7 .2 Amortization of goodwill 1.7 1.3 State tax, net of federal tax benefit 2.2 .3 (.6) Change in valuation allowance .5 1.4 ---- ---- ---- Effective tax rates 27.7% 30.3% 31.4% ---- ---- ----
The Company had gross deferred tax assets and gross deferred tax liabilities as follows as of December 31:
2002 2001 ---------- ---------- Deferred tax assets: Allowance for loan losses $1,853,640 $2,111,553 Deferred loan fees 144,487 155,543 Interest on non-performing loans 124,928 79,299 Accrued employee benefits 198,896 200,903 Deferred compensation 56,034 Writedown of securities 52,941 Minimum pension liability adjustment 162,267 73,618 Net unrealized holding loss on available-for-sale equity securities 248,513 231,643 Other adjustments 670 10,408 ---------- ---------- Gross deferred tax assets 2,842,376 2,862,967 Valuation allowance (154,814) (102,770) ---------- ---------- 2,687,562 2,760,197 ---------- ---------- Deferred tax liabilities: Accelerated depreciation (208,833) (197,939) Prepaid pensions (116,204) (135,471) Discount accretion (1,434) (2,504) Deferred gain on stock conversion (2,317) (2,317) Net unrealized holding gain on available-for-sale debt securities (509,051) (219,827) ---------- ---------- Gross deferred tax liabilities (837,839) (558,058) ---------- ---------- Net deferred tax assets $1,849,723 $2,202,139 ========== ==========
NOTE 10 - EMPLOYEE BENEFITS - --------------------------- The Company has a defined benefit pension plan (plan) that up to January 1, 1998 covered substantially all of its full time employees who met certain eligibility requirements. On January 1, 1998 the Bank suspended the plan so that employees no longer earn additional defined benefits for future service. Employees were eligible under the plan upon attaining age 21 and completing one year of service. The benefits paid are based on 1.5% of total salary plus .5% of compensation in excess of integration level per year of service. The integration level was the first $750 of monthly compensation. The accrued benefit is based on years of service. F-21 The following tables set forth information about the plan as of December 31 and the years then ended:
2002 2001 ---------- ---------- Change in projected benefit obligation: Benefit obligation at beginning of year $1,125,986 $1,199,450 Interest cost 70,896 77,745 Actuarial loss 106,111 86,454 Expected distributions (113,185) (237,663) ---------- ---------- Benefit obligation at end of year 1,189,808 1,125,986 ---------- ---------- Change in plan assets: Plan assets at estimated fair value at beginning of year 830,561 1,048,186 Actual return on plan assets (44,745) (5,274) Benefits paid (113,185) (212,351) ---------- ---------- Fair value of plan assets at end of year 672,631 830,561 ---------- ---------- Funded status at end of year (517,177) (295,425) Unrecognized net actuarial loss 680,356 510,841 Unrecognized prior service cost 34,365 21,189 Unamortized net obligation existing at date of adoption of SFAS No. 87 86,365 94,372 ---------- ---------- Net amount recognized $ 283,909 $ 330,977 ========== ========== Amounts recognized in the balance sheet consist of: Prepaid benefit cost $ 283,909 $ 330,977 Accrued benefit liability (517,177) (295,425) Intangible asset 120,730 115,561 Accumulated other comprehensive loss before income tax benefit 396,447 179,864 ---------- ---------- Net amount recognized $ 283,909 $ 330,977 ========== ==========
The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0% for 2002 and 2001. The weighted-average expected long-term rate of return on assets was 7.0% for 2002 and 2001. Components of net periodic benefit cost:
2002 2001 2000 ------- ------- ------- Interest cost on benefit obligation $70,896 $77,745 $86,948 Expected return on assets (44,514) (61,105) (75,177) Amortization of net transition obligation 8,007 8,007 8,007 Amortization of prior service cost (13,176) (13,176) (13,176) Recognized actuarial loss 25,855 18,277 14,753 ------- ------- ------- Net periodic benefit cost $47,068 $29,748 $21,355 ======= ======= =======
Securities of the Company included in plan assets as of December 31, 2002 and 2001 consist of 3,730 shares of Slade's Ferry Bancorp common stock with a market value of $49,833 and $55,950, respectively. The Company has a 401(k) plan for eligible employees who attain age 21 and complete one year of service. The Company contributes a discretionary amount to be allocated to eligible participants. Current contributions vest fully after seven years of continuous service. The amount that may be deferred by the employees is limited by the amount that will not cause the plan to exceed IRS limitations. Contributions made by the Company charged to employee benefit expense amounted to $20,000, $17,500 and $15,000 for the years ended December 31, 2002, 2001 and 2000, respectively. The Company adopted a profit-sharing plan, ("Plan") effective October 1, 1998. The Company contributes amounts to the plan at the Company's discretion. Cost recognized by the Company for the profit-sharing plan amounted to $300,000, $300,000 and $150,000 for the years ended December 31, 2002, 2001 and 2000, respectively. F-22 NOTE 11 - COMMITMENTS AND CONTINGENT LIABILITIES - ------------------------------------------------ The Company is obligated under certain agreements issued during the normal course of business which are not reflected in the accompanying consolidated financial statements. The Company is obligated under various lease agreements covering branch offices and equipment. These agreements are considered to be operating leases. The total minimum rental due in future periods under these agreements is as follows as of December 31, 2002: 2003 $110,785 2004 55,113 2005 33,759 -------- Total minimum lease payments $199,657 ========
Certain leases contain provisions for escalation of minimum lease payments contingent upon increases in real estate taxes and percentage increases in the consumer price index. The total rental expense amounted to $123,857 for 2002, $126,256 for 2001 and $123,316 for 2000. The Massachusetts Department of Revenue ("DOR") has issued Notices of Intent to assess additional state excise taxes to several financial institutions in the Commonwealth that have established real estate investment trusts ("REIT") in their corporate structure. The DOR contends that dividends received by banks from REIT subsidiaries are fully taxable in Massachusetts. The Company believes that the Massachusetts statute that provides for the dividend received deduction of 95% of certain dividend distributions applies to dividends that have been made to banks by their REIT subsidiary. Slade's Ferry Trust Company formed a REIT subsidiary in 1999, Slade's Ferry Preferred Capital Corporation. The Bank received a notice from the DOR dated November 6, 2002 pertaining to tax year filings of 1999, 2000 and 2001. This notice assessed additional state excise taxes and interest due of $1,659,449. The Company has not recorded any expense for this notice in its financial statements at this time, and the Company intends to vigorously appeal any and all assessments. In a matter that may affect the assessment described above, on March 5, 2003, the Commonwealth of Massachusetts enacted tax legislation that imposes taxes on the Bank for the above described dividends paid by the Bank's REIT to the Bank. The new tax, including interest, for the Bank is approximately $1,971,000 covering the years ending 1999, 2000, 2001 and 2002. The Company will expense this amount in its financial statements for the quarter ended March 31, 2003, net of the tax benefit of approximately $686,000. The Company believes the legislation will be challenged, especially the retroactive provisions, on constitutional and other grounds. The Company would support such a challenge and otherwise intends to defend vigorously its position. NOTE 12 - FINANCIAL INSTRUMENTS - ------------------------------- The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, standby letters of credit and unadvanced funds on loans. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. F-23 Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include secured interests in mortgages, accounts receivable, inventory, property, plant and equipment and income-producing properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Of the total standby letters of credit outstanding as of December 31, 2002, $36,375 are secured by deposits at the Bank. The estimated fair values of the Company's financial instruments, all of which are held or issued for purposes other than trading, are as follows as of December 31:
2002 2001 ----------------------------- ---------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ ------------ ----------- Financial assets: Cash and cash equivalents $ 34,716,536 $ 34,716,536 $ 28,692,310 $ 28,692,310 Interest bearing time deposits with other banks 200,000 200,000 100,000 100,000 Available-for-sale securities 65,907,926 65,907,926 79,105,537 79,105,537 Held-to-maturity securities 13,696,254 14,262,405 16,281,712 16,590,243 Federal Home Loan Bank stock 1,013,400 1,013,400 1,013,400 1,013,400 Loans, net 259,816,056 261,470,000 248,017,635 252,172,000 Accrued interest receivable 1,492,591 1,492,591 1,953,989 1,953,989 Financial liabilities: Deposits 335,632,532 336,950,000 337,043,342 339,627,000 FHLB advances 19,185,338 22,389,000 16,983,087 18,248,000 Other borrowed funds 465,216 465,216
The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets under the indicated captions. Accounting policies related to financial instruments are described in Note 2. The notional amounts of financial instrument liabilities with off-balance sheet credit risk are as follows as of December 31:
2002 2001 ----------- ----------- Commitments to originate loans $10,047,203 $14,812,646 Standby letters of credit 636,400 638,371 Unadvanced portions of loans: Consumer loans (including credit card loans and student loans) 323,438 1,810,081 Commercial real estate loans 257,913 150,754 Home equity loans 6,751,986 1,574,586 Commercial loans 15,481,747 12,224,353 Construction loans 8,223,751 7,756,973 ----------- ----------- $41,722,438 $38,967,764 =========== ===========
There is no material difference between the notional amounts and the estimated fair values of the off-balance sheet liabilities. F-24 NOTE 13 - SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK - --------------------------------------------------------- Most of the Bank's business activity is with customers located within the state. There are no concentrations of credit to borrowers that have similar economic characteristics. The majority of the Bank's loan portfolio is comprised of loans collateralized by real estate located in the state of Massachusetts. NOTE 14 - EARNINGS PER SHARE (EPS) - ---------------------------------- Earnings per share were calculated using the weighted average number of common shares outstanding. Reconciliation of the numerators and the denominators of the basic and diluted per share computations for net income are as follows:
Income Shares Per-Share (Numerator) (Denominator) Amount ---------- --------- --------- Year ended December 31, 2002 Basic EPS Net income and income available to common stockholders $2,965,552 3,908,901 $ .76 Effect of dilutive securities, options 25,781 ---------- --------- Diluted EPS Income available to common stockholders and assumed conversions $2,965,552 3,934,682 $ .75 ========== ========= Year ended December 31, 2001 Basic EPS Net income and income available to common stockholders $3,210,253 3,830,575 $ .84 Effect of dilutive securities, options 13,116 ---------- --------- Diluted EPS Income available to common stockholders and assumed conversions $3,210,253 3,843,691 $ .84 ========== ========= Year ended December 31, 2000 Basic EPS Net income and income available to common stockholders $4,074,439 3,743,138 $1.09 Effect of dilutive securities, options 3,112 ---------- --------- Diluted EPS Income available to common stockholders and assumed conversions $4,074,439 3,746,250 $1.09 ========== =========
NOTE 15 - REGULATORY MATTERS - ---------------------------- The Company and its subsidiary the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company's and the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Their capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. F-25 In 2000, the Bank, as a result of an examination by the FDIC entered into a Memorandum of Understanding with the FDIC and the Massachusetts Division of Banks which provides, among other things, that the Bank (1) maintain a Tier I leverage capital ratio of not less than seven percent and a Tier I Risk- Based capital ratio of not less than nine percent and (2) develop specific plans and proposals for the reduction and improvement of lines of credit which are subject to adverse classification or special mention in the amount of $1,000,000 or more. During 2001, the Bank continued to operate under this informal agreement (Memorandum of Understanding) with the Federal Deposit Insurance Corporation and Massachusetts Commissioner of Banks. Following completion of the most recent joint examination in 2002, a revised Memorandum of Understanding was entered into to be implemented during the first and second quarters of 2003. Under the revised agreement, the Bank agreed to address and implement certain plans, procedures, and policies. These include fully implementing the management plan detailed in the completed management assessment. In addition, the Bank agreed to revise and implement loan and credit administration policies, including a written classified and criticized asset reduction plan and a revised loan policy providing for standards applicable to lending concentrations. During the life of the agreement, the Bank must maintain a seven (7) percent Tier 1 leverage capital ratio. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2002, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2002, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk- based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Company's and the Bank's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions: ----------------- ------------------ ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollar amounts in thousands) As of December 31, 2002: Total Capital (to Risk Weighted Assets): Consolidated $41,540 14.84% $22,291 >8.0% N/A Slade's Ferry Trust Company 35,240 12.63 22,208 >8.0 $27,760 >10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated 38,040 13.59 11,146 >4.0 N/A Slade's Ferry Trust Company 31,753 11.38 11,104 >4.0 16,656 >6.0 Tier 1 Capital (to Average Assets): Consolidated 38,040 9.48 16,053 >4.0 N/A Slade's Ferry Trust Company 31,753 8.00 15,868 >4.0 19,835 >5.0
F-26
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes: Action Provisions: ----------------- ------------------ ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollar amounts in thousands) As of December 31, 2001: Total Capital (to Risk Weighted Assets): Consolidated $39,393 14.43% $21,832 >8.0% N/A Slade's Ferry Trust Company 34,046 12.55 21,697 >8.0 $27,122 >10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated 35,956 13.18 10,916 >4.0 N/A Slade's Ferry Trust Company 30,630 11.29 10,849 >4.0 16,273 >6.0 Tier 1 Capital (to Average Assets): Consolidated 35,956 8.98 16,025 >4.0 N/A Slade's Ferry Trust Company 30,630 7.74 15,834 >4.0 19,793 >5.0
The declaration of cash dividends is dependent on a number of factors, including regulatory limitations, and the Company's operating results and financial condition. The stockholders of the Company will be entitled to dividends only when, and if, declared by the Company's Board of Directors out of funds legally available therefor. Under the Massachusetts Business Corporation Law, a dividend may not be declared if the corporation is insolvent or if the declaration of the dividend would render the corporation insolvent. The declaration of future dividends, whether by the Board of Directors of the Company or the Bank, will be subject to favorable operating results, financial conditions, tax considerations, and other factors. As of December 31, 2002 the Bank would be restricted from declaring dividends in an amount greater than approximately $13,032,000 as such declaration would decrease capital below the Bank's required minimum level of regulatory capital. NOTE 16 - STOCK OPTION PLAN - --------------------------- As of December 31, 2002 the Company has a stock option plan (Plan). The Plan is divided into two separate equity incentive programs, a Discretionary Grant Program and an Automatic Grant Program. The maximum number of shares of common stock issuable over the term of the Plan may not exceed 275,625 shares and the maximum aggregate number of shares issuable under both programs in any plan year may not exceed 55,125 shares. Unless sooner terminated by the Board, the Plan will in all events terminate on March 11, 2006. Under the Discretionary Grant Program, key employees, including officers, may be granted incentive stock options to purchase shares of common stock of the Company. The option exercise price per share may not be less than one hundred percent of the fair market value of common stock at grant date and options generally become exercisable in periodic installments over the optionee's period of service. Two types of stock appreciation rights are authorized for issuance: (1) tandem rights, which require the option holder to elect between the exercise of the underlying option for shares of common stock and the surrender of such option for an appreciation distribution and (2) limited rights, which are automatically exercised upon the occurance of a hostile takeover. Eligibility for participation in the Automatic Grant Program is limited to non-employee directors of the Company or its subsidiary. Under the Automatic Grant Program a nonstatutory option for 2,000 shares of common stock is granted each plan year to eligible directors. The exercise price per share is equal to one hundred percent of the fair market value per share of common stock at grant date and each option has a maximum five year term. Each option under the Automatic Grant Program is immediately vested. The Company applies APB Opinion 25 and related Interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its stock option plan except for $66,437 and $12,490 in stock appreciation paid in 2002 and 2001, respectively, to participants who surrendered their options. F-27 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in the years ended December 31, 2002, 2001 and 2000: dividend yield of 3.2 percent in 2002, 3.5 percent in 2001 and 2 percent in 2000; expected volatility of 30 percent in 2002, 23 percent in 2001 and 23 percent in 2000; risk-free interest rate of 5 percent in 2002, 4.93 percent in 2001 and 6.37 percent in 2000; and expected lives of 5 years in 2002, 5 years in 2001 and 5 years in 2000. A summary of the status of the Company's stock option plan as of December 31 and changes during the years then ending are presented below:
2002 2001 2000 ------------------------- ------------------------- ------------------------ Weighted-Average Weighted-Average Weighted-Average Options Shares Exercise Price Shares Exercise Price Shares Exercise Price - ------------------------ ------ ---------------- ------ ---------------- ------ ---------------- Outstanding at beginning of year 170,628 $11.41 135,345 $11.85 102,954 $12.64 Granted 28,000 14.15 43,500 9.50 41,500 10.00 Exercised (9,712) 8.48 0 0 (1,654) 8.48 Forfeited (10,300) 13.01 0 0 (7,455) 13.21 Surrendered for stock appreciation value (14,028) 9.50 (8,217) 8.48 0 ------ ----- ----- Outstanding at end of year 164,588 12.12 170,628 11.41 135,345 11.85 Options exercisable at year-end 164,588 170,628 135,345 Weighted-average fair value of options granted during the year $ 3.59 $ 1.85 $ 2.76
The following table summarizes information about fixed stock options outstanding as of December 31, 2002:
Options Outstanding and Exercisable -------------------------------------------------------------------------- Weighted-Average Number Remaining Weighted-Average Exercise Price Outstanding Contractual Life Exercise Price -------------- ----------- ---------------- -------------- $16.19 24,413 .3 years $16.19 12.86 35,175 1.3 years 12.86 10.00 37,500 2.3 years 10.00 9.50 39,500 3.3 years 9.50 14.15 28,000 4.3 years 14.15 ------- 164,588 2.4 years 12.12 =======
NOTE 17 - MINORITY INTEREST IN SUBSIDIARY - ----------------------------------------- In 1999 the Bank formed a subsidiary, Slade's Ferry Preferred Capital Corporation (SFPCC) which issued to the Bank 1,000 shares of SFPCC common stock. No other shares of SFPCC common stock have been issued. SFPCC also issued to the Bank 1,000 shares of SFPCC 8% Cumulative Non-Convertible Preferred Stock (the "Preferred Stock"). No other shares of SFPCC preferred stock have been issued. Minority interest in subsidiary consists of 108 shares, at a stated value of $500 per share, of the preferred stock owned by the Bank. These shares were issued in 1999 to directors and employees of the Bank. All voting rights of SFPCC vest exclusively with its common stockholder, the Bank. The preferred stock has a liquidation value of $500 per share. The holders of the preferred stock are entitled to receive dividends, when, as and if declared by the Board of Directors of the SFPCC. Such dividends declared accumulate and are paid on such date as determined by the Board of Directors of the Bank. F-28 NOTE 18 - RECLASSIFICATION - -------------------------- Certain amounts in the prior year have been reclassified to be consistent with the current year's statement presentation. NOTE 19 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS - ------------------------------------------------------------ The following condensed financial statements are for Slade's Ferry Bancorp (Parent Company Only) and should be read in conjunction with the consolidated financial statements of Slade's Ferry Bancorp and Subsidiary. F-29 SLADE'S FERRY BANCORP --------------------- (Parent Company Only) CONDENSED FINANCIAL STATEMENTS ------------------------------
Balance sheets December 31, 2002 2001 ----------- ----------- ASSETS - ------ Cash $ 2,091,213 $ 813,138 Money market mutual fund 50,046 ----------- ----------- Cash and cash equivalents 2,091,213 863,184 Investments in available-for-sale securities (at fair value) 4,517,685 4,775,744 Investment in subsidiary, Slade's Ferry Trust Company 34,918,305 33,110,950 Premises and equipment 5,043 10,289 Accrued interest receivable 32,178 60,821 Other assets 561,054 78,697 ----------- ----------- Total assets $42,125,478 $38,899,685 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Due to subsidiary $ 453,414 $ 63,810 Other liabilities 500,740 369,744 ----------- ----------- Total liabilities 954,154 433,554 ----------- ----------- Stockholders' equity: Common stock, par value $.01 per share; authorized 10,000,000 shares; issued and outstanding 3,937,762.9 shares in 2002 and 3,869,924.9 shares in 2001 39,378 38,700 Paid-in capital 27,693,199 26,761,997 Retained earnings 13,449,655 11,892,623 Accumulated other comprehensive loss (10,908) (227,189) ----------- ----------- Total stockholders' equity 41,171,324 38,466,131 ----------- ----------- Total liabilities and stockholders' equity $42,125,478 $38,899,685 =========== ===========
Statements of income
Years Ended December 31, 2002 2001 2000 ----------- ----------- ----------- Dividends from subsidiary $ 1,400,000 $ 1,685,000 $ 1,500,000 Interest and dividends on securities: Taxable 200,692 223,801 180,766 Other interest income 413 10,315 9,537 Gain on sale of available-for-sale securities, net 89,861 Management fee income from subsidiary 541,065 393,408 441,750 ----------- ----------- ----------- Total income 2,232,031 2,312,524 2,132,053 ----------- ----------- ----------- Salaries and employee benefits 576,782 368,405 394,654 Shareholder relations expense 45,140 75,743 85,479 Other expense 258,145 68,408 94,479 ----------- ----------- ----------- Total expense 880,067 512,556 574,612 ----------- ----------- ----------- Income before income tax expense (benefit) and equity in undistributed net income of subsidiary 1,351,964 1,799,968 1,557,441 Income tax expense (benefit) (17,769) 48,421 24,635 ----------- ----------- ----------- Income before equity in undistributed net income of subsidiary 1,369,733 1,751,547 1,532,806 Equity in undistributed net income of subsidiary 1,595,819 1,458,706 2,541,633 ----------- ----------- ----------- Net income $ 2,965,552 $ 3,210,253 $ 4,074,439 =========== =========== ===========
F-30 SLADE'S FERRY BANCORP --------------------- (Parent Company Only) STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY --------------------------------------------- Years Ended December 31, 2002, 2001 and 2000 --------------------------------------------
Accumulated Other Comprehensive Common Paid-in Retained Income Stock Capital Earnings (Loss) Total ------- ----------- ----------- ----------- ----------- Balance, December 31, 1999 $35,204 $23,147,447 $ 9,635,213 $(1,153,618) $31,664,246 Comprehensive income: Net income 4,074,439 Other comprehensive income 532,932 Comprehensive income 4,607,371 Issuance of common stock from dividend reinvestment plan 749 739,805 740,554 Stock issuance relating to optional cash contribution plan 157 151,124 151,281 Stock options exercised 17 14,009 14,026 Issuance of 5% common stock dividend 1,768 1,832,835 (1,836,628) (2,025) Dividends declared ($.40 per share) (1,501,080) (1,501,080) ------- ----------- ----------- ----------- ----------- Balance, December 31, 2000 37,895 25,885,220 10,371,944 (620,686) 35,674,373 Comprehensive income: Net income 3,210,253 Other comprehensive income 393,497 Comprehensive income 3,603,750 Issuance of common stock from dividend reinvestment plan 732 803,201 803,933 Stock issuance relating to optional cash contribution plan 73 73,576 73,649 Dividends declared ($.44 per share) (1,689,574) (1,689,574) ------- ----------- ----------- ----------- ----------- Balance, December 31, 2001 38,700 26,761,997 11,892,623 (227,189) 38,466,131 Comprehensive income: Net income 2,965,552 Other comprehensive income 216,281 Comprehensive income 3,181,833 Issuance of common stock from dividend reinvestment plan 472 675,841 676,313 Stock issuance relating to optional cash contribution plan 100 138,012 138,112 Stock options exercised 106 94,963 95,069 Tax benefit of stock options 22,386 22,386 Dividends declared ($.36 per share) (1,408,520) (1,408,520) ------- ----------- ----------- ----------- ----------- Balance, December 31, 2002 $39,378 $27,693,199 $13,449,655 $ (10,908) $41,171,324 ======= =========== =========== =========== ===========
F-31 SLADE'S FERRY BANCORP --------------------- (Parent Company Only) Years Ended December 31, 2002, 2001 and 2000 --------------------------------------------
Statements of cash flows 2002 2001 2000 ----------- ----------- ----------- Net income $ 2,965,552 $ 3,210,253 $ 4,074,439 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net income of subsidiary (1,595,819) (1,458,706) (2,541,633) Amortization (accretion) of securities, net 1,066 (1,562) (9,490) Gain on sales of available-for-sale securities, net (89,861) Depreciation and amortization 5,246 5,071 4,547 (Increase) decrease in due from subsidiary 10,380 217,987 (217,987) (Increase) decrease in interest receivable 28,643 (13,021) (21,515) Increase in income taxes receivable (434,229) (77,353) (Increase) decrease in prepaid expenses (874) 993 9,599 (Increase) decrease in other assets 1,062 (406) Deferred tax expense (benefit) (36,354) 328 (106) Increase (decrease) in taxes payable (199,864) 222,274 Increase in accrued expenses 35,554 1,115 244 Increase in due to subsidiary 379,224 63,810 Increase (decrease) in other liabilities 96,528 6,300 (50) Stock issued in exchange for stock appreciation 12,711 ----------- ----------- ----------- Net cash provided by operating activities 1,377,767 1,756,413 1,519,916 ----------- ----------- ----------- Cash flows from investing activities: Purchases of available-for-sale securities (6,517,023) (4,257,414) (888,418) Proceeds from maturities of available-for-sale securities 3,450,000 2,900,000 Proceeds from sales of available-for-sale securities 3,421,905 Proceeds from maturities of held-to-maturity securities 500,000 Capital expenditures (2,099) ----------- ----------- ----------- Net cash provided by (used in) investing activities 354,882 (1,359,513) (388,418) ----------- ----------- ----------- Cash flows from financing activities: Net proceeds from issuance of common stock 814,425 877,582 905,861 Proceeds from exercise of stock options 82,358 Dividends paid (1,401,403) (1,644,158) (1,479,575) Fractional shares paid in cash (2,025) ----------- ----------- ----------- Net cash used in financing activities (504,620) (766,576) (575,739) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 1,228,029 (369,676) 555,759 Cash and cash equivalents at beginning of year 863,184 1,232,860 677,101 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 2,091,213 $ 863,184 $ 1,232,860 =========== =========== =========== Supplemental disclosure: Income taxes paid (received) $ 452,814 $ 325,310 $ (197,533)
F-32 NOTE 20 - Quarterly Results of Operations (UNAUDITED) - ----------------------------------------------------- Summarized quarterly financial data for 2002 and 2001 follows:
(In thousands, except earnings per share) 2002 Quarters Ended -------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- Interest and dividend income $5,781 $5,544 $5,485 $5,227 Interest expense 2,212 2,013 1,974 1,729 ------ ------ ------ ------ Net interest and dividend income 3,569 3,531 3,511 3,498 Provision (benefit) for loan losses 188 188 (686) Other income 469 447 1,049 568 Other expense 2,772 3,798 2,972 3,310 ------ ------ ------ ------ Income (loss) before income taxes 1,078 (8) 1,588 1,442 Income tax expense (benefit) 296 (65) 337 566 ------ ------ ------ ------ Net income $ 782 $ 57 $1,251 $ 876 ====== ====== ====== ====== Basic earnings per common share $0.20 $0.01 $0.32 $0.23 ===== ===== ===== ===== Earnings per common share assuming dilution $0.20 $0.01 $0.32 $0.22 ===== ===== ===== ===== (In thousands, except earnings per share) 2001 Quarters Ended -------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- Interest and dividend income $7,213 $6,939 $6,856 $6,316 Interest expense 3,315 3,261 3,084 2,667 ------ ------ ------ ------ Net interest and dividend income 3,898 3,678 3,772 3,649 Provision for loan losses 188 188 188 186 Other income 406 410 519 435 Other expense 2,857 2,898 2,889 2,765 ------ ------ ------ ------ Income before income taxes 1,259 1,002 1,214 1,133 Income tax expense 390 287 382 339 ------ ------ ------ ------ Net income $ 869 $ 715 $ 832 $ 794 ====== ====== ====== ====== Basic earnings per common share $0.23 $0.19 $0.22 $0.20 ===== ===== ===== ===== Earnings per common share assuming dilution $0.23 $0.19 $0.22 $0.20 ===== ===== ===== =====
F-33 SLADE'S FERRY BANCORP AND SUBSIDIARY BOARD OF DIRECTORS - -------------------------- Slade's Ferry Bancorp - Slade's Ferry Trust Company Thomas B. Almy Architect Peter G. Collias, Esquire Clerk/Secretary of Bancorp and Bank Law Office of Peter G. Collias Donald T. Corrigan Chairman of the Board of Bancorp Chairman of the Board of Bank Melvyn A. Holland Treasurer Rosenfield Raymon Restivo PC Certified Public Accountants Mary Lynn D. Lenz President/Chief Executive Officer - Sladle's Ferry Bancorp President/Chief Executive Officer - Slade's Ferry Trust Co. William Q. MacLean, Jr. Account Executive Sylvia Group Francis A. Macomber President - LeComtes Dairy, Inc. Majed Mouded MD Physician Shaun O'Hearn, Sr. President - Bolger & O'Hearn Inc. Lawrence J. Oliveira DDS Orthodontist Peter Paskowski Past President of Bank Kenneth R. Rezendes Vice Chairman of Bancorp Chairman - K.R. Rezendes, Inc. William J. Sullivan President - Sullivan Funeral Homes, Inc. Charles Veloza Past President - Charlie's Oil Co., Inc. David F. Westgate President Quequechan Management Corp. OFFICERS - -------- Slade's Ferry Bancorp Donald T. Corrigan Chairman of the Board Kenneth R. Rezendes Vice Chairman Mary Lynn D. Lenz President/Chief Executive Officer Edward Bernardo, Jr. Treasurer EXECUTIVE MANAGEMENT Slade's Ferry Trust Company Mary Lynn D. Lenz President Chief Executive Officer James H. Amidon Vice President Edward Bernardo, Jr. Vice President/Treasurer Joseph Gesualdo Vice President Donna Sosnowski Senior Vice President Manuel J. Tavares Senior Vice President OFFICERS Slade's Ferry Trust Company Isola A. Anctil Assistant Vice President Assistant Clerk/Secretary Cherie Ashton Assistant Vice President Maria C. Barbosa Vice President Kelli A. Bienvenue Assistant Treasurer Catherine Blakey Assistant Vice President Paula M. Botelho Assistant Vice President Michelle Caron Assistant Treasurer Peter G. Collias Corporate Secretary David J. Costa Assistant Vice President Sandra Curtis Compliance Review Officer Luisa DiManno Assistant Treasurer Joseph J. Ganem Vice President Arthur R. Gauthier Vice President Russell F. Godin Vice President Elaine M. Guillemette Assistant Vice President Mark F. Harriman Vice President Raymond C. Harris Vice President Robert C. Howard, Jr. Vice President Cecelia M. Machado Senior Vice President/Auditor Carol A. Martin Senior Vice President Charlotte C. Nadeau Assistant Vice President Jeannine M. Paliotti Vice President Fatima M. Rapoza Assistant Vice President Michelle Rivera Assistant Treasurer Joanne Sandner Assistant Treasurer Deborah A. Silvia Assistant Treasurer Eduardo F. Sousa Assistant Vice President Nancy E. Stokes Vice President Mary M. Sullivan Vice President Richard Van Blarcom Vice President CORPORATE HEADQUARTERS Slade's Ferry Bancorp 100 Slade's Ferry Avenue Somerset, Massachusetts 02726 Tel. (508) 675-2121 Fax (508) 675-1751 Web site: www.sladesferry.com BRANCH LOCATIONS Fairhaven, MA - ------------- 75 Huttleston Avenue Fall River, MA - -------------- 249 Linden Street 855 Brayton Avenue 1601 South Main Street New Bedford, MA - --------------- 838 Pleasant Street 833 Ashley Boulevard Seekonk, MA - ----------- 1400 Fall River Avenue (Rte. 6) Somerset, MA - ------------ 100 Slade's Ferry Avenue 2722 County Street Somerset High School Swansea, MA - ----------- Swansea Mall 2388 G.A.R. Highway LOAN PRODUCTION OFFICE Slade's Ferry Loan Co. 188 Airport Road Warwick, RI 02889 Tel. (401) 732-3222 GENERAL COUNSELS Atty. Peter G. Collias 84 North Main Street Fall River, Massachusetts 02720 Tel. (508) 675-7894 Thomas H. Tucker, Esq. 459 Washington Street Suite 27 Duxbury, Massachusetts 02332 Tel. (781) 934-8200 INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Shatswell, MacLeod and Company, P.C. Certified Public Accountants 83 Pine Street West Peabody, Massachusetts 01960 Tel. (978) 535-0206 FORM 10-K Additional copies of the annual report on form 10-K, filed by Slade's Ferry Bancorp for 2002, with the Securities and Exchange Commission may be obtained without charge by writing to: Shareholder Services Edward Bernardo, Jr., Treasurer Slade's Ferry Bancorp 100 Slade's Ferry Avenue Somerset, MA 02726 SHAREHOLDER SERVICES Slade's Ferry Bancorp 100 Slade's Ferry Avenue Somerset, Massachusetts 02726 Tel. (508) 675-2121 ANNUAL MEETING The Annual Meeting of Stockholders of Slade's Ferry Bancorp will be held at 6:30 p.m. on April 14, 2003 at the Venus de Milo Restaurant, 75 G.A.R. Highway, Swansea, Massachusetts. DIVIDEND REINVESTMENT PLAN The Plan provides for * Reinvestment of all of the dividends * Voluntary cash contributions of up to $5,000 annual, minimum $100. * No service fees or commissions Information may be obtained by contacting Shareholder Services at (508) 675-2121. STOCK TRADING The common stock of Slade's Ferry Bancorp is listed on the NASDAQ Small Cap Market under the symbol SFBC. Exhibit Index ------------- Exhibit No. Description Item - ----------- ----------- ---- 3.1 Articles of Incorporation of Slade's Ferry Bancorp (1) as amended 3.2 By-laws of Slade's Ferry Bancorp as amended (2) 10.1 Slade's Ferry (formerly Weetamoe) Bancorp 1996 Stock (3) Option Plan as amended 10.2 Noncompetition Agreement between Slade's Ferry Trust (4) Company and Edward S. Machado (A substantially identical contract exists with Peter Paskowski) 10.3 Supplemental Executive Retirement Agreement between (5) Slade's Ferry (formerly Weetamoe) Bancorp and Donald T. Corrigan 10.4 Supplemental Executive Retirement Agreement as amended between Slade's Ferry (formerly Weetamoe) Bancorp and James D. Carey 10.5 Supplemental Executive Retirement Agreement between (2) Slade's Ferry (formerly Weetamoe) Bancorp and Manuel J. Tavares 10.6 Swansea Mall Lease (4) 10.7 Form of Director Supplemental Retirement Program (6) Director Agreement Exhibit 1 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) 10.8 Form of Directors' Paid-up Insurance Policy for (7) Thomas B. Almy (part of the Director supplemental Retirement Program). (Similar forms of policy entered into by Company for other directors). 10.9 Form of Officers' Paid-up Endorsement Method Split (8) Dollar Plan Agreement and Insurance Policies for Janice Partridge (Similar forms of policies entered into by Company for its President and other Vice Presidents) 10.10 Severance Agreement ("Release of All Demands") with James D. Carey 21 List of subsidiaries of Slade's Ferry Bancorp (9) 23 Consent of Independent Public Accounts ============================================================ (1) Incorporated by reference to the Registrant's Registration Statement on Form SB-2 filed with the Commission on April 14, 1997. (2) Incorporated by reference to the Registrant's Form 10-KSB for the fiscal year ended December 31, 1996. (3) Incorporated by reference to the Registrant's Form 10-QSB for the quarter ended March 31, 1996. (4) Incorporated by reference to the Registrant's Registration Statement on Form S-4 File No. 33-32131. (5) Incorporated by reference to the Registrant's Form 10-KSB for the fiscal year ended December 31, 1994. (6) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended March 31, 1999. (7) Incorporated by reference to the Registrant's Form 10-QSB for the quarter ended June 30, 1998. (8) Incorporated by reference to the Registrant's Form 10-Q for the quarter ended June 30, 2000. (9) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1999 X-1 EX-10 3 sladx104.txt EXHIBIT 10.4 Exhibit 10.4 ------------ SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT THIS AGREEMNT is made this 15th day of May, 1996 between Weetamoe Bancorp, a Massachusetts corporation, with its principal place of business in Somerset, Massachusetts, hereafter referred to as the Employer, or the Corporation, and James D. Carey of Somerset, Massachusetts, Executive Vice- President of the Corporation, hereafter referred to as the Employee. James D. Carey has been employed by the Corporation or its subsidiary Slades Ferry Bank ("the Bank") for a number of years. During this time, he has performed his duties ably and well, to the satisfaction and substantial benefit of the Corporation and the Bank. As a result, the Corporation wishes to provide additional incentive to retain the services of James D. Carey until his retirement. THEREFORE, in consideration of these premises and the mutual promises and obligation set forth hereafter, James D. Carey as Employee and the Corporation as Employer agree as follows: 1. The Corporation agrees that, if Employee remains continuously employed by the Corporation and/or its subsidiary Bank until his retirement, in such offices and capacities as he may be elected to by the Board of Directors of either entity at such compensation as may be mutually agreed upon, the Corporation will pay and the Employee shall be entitled to receive additional compensation in the amount of $2,500 per month for one hundred twenty (120) months commencing on the first day of the first month following his retirement. 2.(a) The Corporation agrees that the Employee may retire from full-time employment upon the first day of the month immediately following his 65th birthday, or at any time prior thereto after completing fifteen years continuous employment with the Corporation if he becomes permanently and totally disabled as defined in paragraph (b) or at anytime following his 65th birthday, but not later than the first day of February following his 70th birthday, hereinafter called the Retirement Date. (b) Employee shall be deemed to have become permanently and totally disabled if and when the Board of Directors of the Corporation determines, on the basis of medical or other evidence satisfactory to it, that the Employee qualifies as disabled under the Social Security Act (42 U.S.C. section 1382) as amended for the purposes of supplemental security income. 3. The Corporation agrees that, in the event of the death of the Employee after completing fifteen years continuous employment with the Corporation and prior to the Retirement Date while employed by the Corporation, it will pay to his surviving spouse, if any, or, if none, in equal shares to his children then living and deceased children leaving issue then living by right of representation, or to such other persons as he may have designated, or if none, to his estate, $2,500 per month for one hundred and twenty (120) consecutive months commencing upon the first day of the first month following the date of death of the Employee. If any beneficiary should die prior to the receipt of all such payments, any remaining payments shall be made to such beneficiary's estate. 4. The Corporation agrees to pay to or for the benefit of Employee from the date of his retirement and thereafter for and during the term of his natural life such amounts as are required for the employer contribution to provide medical health insurance coverage comparable to that provided X-2 immediately before his retirement, supplemental to Medicare as it may be amended, in the form of Blue Cross/Blue Shield Medex Gold or its substantial equivalent according to the schedule of contribution by the Corporation or the Bank and the Employee as is in effect for the Corporation's (or the Bank's, if provided through the Bank) employees generally at the time of Employee's retirement. The Corporation agrees to pay to or for the benefit of Employee's wife such amounts as are required according to the schedule of contribution by the Corporation or the Bank and the Employee, as amended from time to time, to provide master health insurance in effect at the Corporation or the Bank and available to employees generally, or its equivalent, for Employee's wife until she attains the age of 65 years or obtains coverage under the Medicare program, whichever first occurs, and thereafter to pay such amounts as are required under such schedule of contribution as is in effect at that time to provide comparable medical health insurance coverage supplemental to Medicare as it may be amended, in the form of Blue Cross/Blue Shield Medex Gold, or its substantial equivalent, for and during the term of her natural life. 5. Employee's rights and benefits under this agreement are in addition to and not a substitute for Employee's rights and benefits under the Corporation or Bank's other retirement, disability or benefit plans. Subject to the terms of the group life insurance policy in force at the time of retirement, the Bank will continue to include the Employee in the current group life insurance policy in force at the time of retirement. 6. In the event that the Employee should die on or after the Retirement Date but prior to receipt of any amount to which he is entitled hereunder pursuant to Paragraph 1, or of all such amounts, any amounts remaining unpaid shall be paid to such beneficiary or beneficiaries as the Employee may designate by filing with the Corporation a notice in writing, but in the absence of any such designation, such unpaid amounts shall be so paid to his surviving spouse, if any, or, if none, in equal shares to his children then living and deceased children leaving issue then living by right of representation, and if none, then to his estate. 7. Whenever the Employee's beneficiaries (other than his, his spouse's or any beneficiary's estate) shall be entitled to receive any amount hereunder, the amount shall be paid to such beneficiaries in monthly installments: (a) over a period of ten (10) years, in the event that no monthly installment payments have theretofore commenced to the Employee, or (b) for the balance of the ten (10) year period (commencing with the first such installment so received by the Employee), on the same due dates, in the event payment of monthly installments shall have theretofore commenced to the Employee. 8. Notwithstanding any other provision of the Agreement to the contrary, the Employee shall have the right, with the consent of the Corporation, to elect that payment of the amounts due hereunder be made (a) over a longer period than one hundred and twenty (120) months or (b) as a life annuity (with or without refund). 9. Notwithstanding any other provision of this Agreement to the contrary, following his retirement, the Employee shall have the right, without the consent of the Corporation, to demand X-3 immediate distribution to him in cash or in kind of an amount equal to the value of the Supplemental Executive Retirement Account determined as of the date of such demand, following completion after his retirement of any three (3) successive fiscal years of the Corporation in which the book value of the Corporation shall have been successively decreased or any one or more successive fiscal year(s) in which the book value of the Corporation shall have decreased by a total of more than 33 1/3%. 10. As used herein the term "Value of the Account" shall mean an amount equal to the sum of the monthly remaining payments for the remaining period of payment discounted at the prime lending rate as published in the Wall Street Journal on the first Monday after the event triggering the valuation. 11. Except as otherwise expressly provided in this Agreement, Employee agrees on behalf of himself and of his executors and administrators, heirs, legatees, distributees, and any other person or persons claiming any benefits under him under this Agreement that this Agreement and its rights, interests, and benefits shall not be assigned, transferred, pledged, or hypothecated in any way by Employee or any executor, administrators, heir, legatee, distributee, or other person claiming under Employee by virtue of this Agreement, and shall not be subject to execution, attachment, or similar process. Any attempted assignment, transfer, pledge or hypothecation, or other disposition of this Agreement or of such rights, interests, and benefits contrary to the above provisions, or the levy of any attachment or similar process thereupon, shall be null and void and without effect. 12. This agreement does not constitute an employment agreement. Nothing contained in this agreement shall be construed to be a contract of employment for any term of years, nor as conferring upon the Employee the right to continue to be employed by the Corporation or the Bank in his present capacity, or in any other capacity. It is expressly understood by the parties hereto that this Agreement relates exclusively to additional compensation for the Employee's services, which compensation is payable after his retirement from full-time service with the Corporation and the Bank or his death, and is not intended to be an employment contract. The benefits payable under this agreement shall be independent of, and in addition to, any benefits under any other employment agreement that may exist from time to time between the parties hereto, or any other compensation payable by the corporation to the Employee whether as salary or otherwise. In the event that Employee's employment is terminated for any reason other than his death or retirement under the provision of paragraphs 2 and 3 hereof, this Agreement shall automatically terminate and the Corporation shall have no further obligation hereunder. 13. The rights of the Employee under this agreement and of any beneficiary of the Employee shall be solely those of an unsecured creditor of the Corporation, and neither the Employee nor any beneficiary of the Employee shall have or acquire any interest, rights or claims to any property or assets of the Corporation by virtue of this agreement except as set forth in paragraph 16.B. The Corporation's obligation hereunder, except as set forth in paragraph 16.B., shall be an unfunded and unsecured promise to pay money in the future. 14. Hereafter, either during his full-time employment or while he is receiving any benefits under this Agreement, Employee agrees that he will not enter into competition with the Corporation or the Bank, directly or indirectly, within the Town of Somerset or a fifty (50) mile radius thereof, wither as a director, officer, employee, agent, consultant, partner or any other capacity with any business X-4 which is in substantial competition with the Corporation or the Bank. The reasonable judgment of a majority of the Board of Directors that such competition exists shall be conclusive for the purposes of this Agreement. This provision shall not be construed to prevent the Employee from owning shares in any publicly traded corporation for investment purposes. 15. In the event that Employee should violate the provisions of Article 14 hereof, and should he continue to do so without adequate cause for a period of thirty days after the Corporation shall have requested him in writing to refrain from an action prohibited by said Article 14, Employee agrees that no further payments shall be due him, his spouse, or any other designated beneficiary under this Agreement and that the Corporation shall have no further obligation whatsoever hereunder. Any disputes hereunder shall be referred to arbitration pursuant to Article 17 hereof. 16.A. The Corporation agrees that it will not merge or consolidate with any other corporation or organization, or permit its business to be taken over by any other organization, unless and until the succeeding or continuing corporation or other organization shall expressly assume the rights and obligations of the Corporation herein set forth. The Corporation further agrees that it will not cease its business activities or terminate its existence, other than as heretofore set forth in this Article, without having made adequate provision for the fulfilling of its obligations hereunder. 16.B. In the event of a change of control (as defined below) of the Corporation, Employee shall have the right (exercisable within 90 days of the change of control) to require the Corporation to immediately fund the unpaid portion of Employee's compensation hereunder by establishing an irrevocable trust account with an independent corporate Trustee which is a national or state charted bank with Trustee powers located in Massachusetts or Rhode Island, funded with an amount which will be sufficient to meet all of Employer's obligations hereunder. The terms of the Trust shall meet the requirements of the Internal Revenue Service for "rabbi trusts" and shall generally provide as set forth herein modified or expanded as necessary to meet said IRS requirements. The Trust fund shall be held and managed by the Trustee for the exclusive purpose of providing the compensation hereunder to Employee hereunder and the Trustee shall act as agent of the Corporation by making payments of benefits to the Employee in accordance with the terms hereof. Any and all expenses and taxes incurred by reason of the Trust and its income shall be paid by the Corporation. After all benefits payable hereunder have been paid to the Employee or his beneficiaries or after this agreement has otherwise properly terminated under its terms, any amounts remaining in the Trust account shall revert to Corporation. Except for the rights of creditors in the event of Corporation's bankruptcy or receivership, Corporation shall have no right to reclaim amounts contributed to the Trust hereunder until all benefits have been paid or this agreement has properly terminated under its terms. In the event of Corporation's bankruptcy or receivership, the Trustee shall, upon proper notice, deliver all assets held hereunder to the Trustee in bankruptcy or the duly court appointed receiver for the benefit of the general creditors (including Employee) of Corporation. "Change of Control" as used herein means any merger or consolidation with or acquisition by any other organization, the sale of substantially all assets of the Corporation to another person or organization, or the acquisition directly or indirectly of 20% or more of the common stock of the Corporation by one or more persons or organizations acting in concert. X-5 17. Unless otherwise provided in this agreement, any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration in accordance with the Rules of the American Arbitration Association, and judgment upon the award rendered by the Arbitrator(s) may be entered in any Court having jurisdiction thereof. The Corporation agrees that it will pay Employee's costs including reasonable attorneys' fees in connection with any controversy or claim hereunder in which employee prevails or in which the Arbitrator(s) or court determine that the Corporation should pay such costs. 18. This agreement shall be binding upon and inure to the benefit of the parties, the Corporation's successors and assigns, and the Employee's heirs, beneficiaries, executors and administrators. IN WITNESS WHEREOF the parties have executed this agreement the day and year first written above. Weetamore Bancorp Attest: /s/ Peter G. Collias By: /s/ Ralph S. Borges -------------------- --------------------------- Secretary (Title: Treasurer) /s/ James D. Carey ------------------------------- James D. Carey For corporate authority, see Vote of Weetamoe Bancorp taken on December 11, 1995 X-6 AMENDMENT 1 TO SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT Agreement made this 23rd day of December, 1998 by and between Slade's Ferry Bancorp (formerly Weetamoe Bancorp), a Massachusetts corporation ("the Corporation") and James D. Carey of Somerset, Massachusetts, Executive Vice-President of the Corporation ("Carey"). Whereas, the parties hereto have previously entered into a Supplemental Executive Retirement Agreement dated May 15, 1996 ("the Agreement"); and Whereas, since the time of the Agreement, Mr. Carey has performed ably and well both in his capacity as Executive Vice President of the Corporation and as President of its subsidiary, Slade's Ferry Bank, to the substantial benefit of the Corporation and the Bank: and Whereas, the Corporation wishes to provide additional incentive to retain the services of Mr. Carey until his retirement. Therefore, in consideration of these premises and other good and valuable consideration, receipt of which is hereby acknowledged, the parties agree: 1. To amend the Agreement by increasing the amount of monthly compensation set forth in Articles 1 and 3 of the Agreement from $2,500 per month to $3,000 per month. 2. In all other respects, the Agreement remains in full force and effect. IN WITNESS WHEREOF the parties have executed this Amendment the day and year first written above. Slade's Ferry Bancorp Attest: /s/ Peter G. Collias By: /s/ Ralph S. Borges ---------------------- --------------------------- (Title: /s/ James D. Carey ------------------------------- James D. Carey X-7 AMENDMENT 2 ----------- TO -- SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT ------------------------------------------- Agreement made this 9th day of August, 2002 by and between Slade's Ferry Bancorp, a Massachusetts corporation with its principal place of business at 100 Slade's Ferry Avenue, Somerset, Massachusetts (formerly Weetamoe Bancorp.) ("Employer") and James D. Carey of 311 Pearce Road, Swansea, Massachusetts ("Retiree"). RECITALS 1. The Employer and Retiree entered into a Supplemental Executive Retirement Agreement ("SERP") on May 15, 1996 (the Employer then being known as Weetamoe Bancorp). 2. The SERP was amended on December 23, 1998 wherein the monthly payment to be paid was increased by Five Hundred and no/100 ($500.00) to Three Thousand and no/100 ($3,000.00) per month. 3. The Retiree has retired effective March 31, 2002 at a time when he has failed to qualify for continuation of benefits under the SERP as required by the provisions of paragraph 2(a). 4. The Retiree has been employed continuously by the Employer for a period of 14 years and the Employer has provided a severance agreement or allowance to the Retiree incident to the Retiree's retirement and although the Retiree is not entitled to benefits under the SERP, the Employer is desirous of providing benefits for the Retiree pursuant to the SERP but as herein modified. Now therefore, in consideration of the above and for consideration conclusively presumed the parties agree as follows: A. The provisions of paragraph 2(a) of the SERP are amended by changing "fifteen years" to fourteen years" and any requirement or provision concerning permanent and total disability in said paragraph is deleted. B. The entire paragraph numbered 3 concerning payment on death prior to retirement is deleted and is not applicable to the facts currently. C. The entire paragraph numbered 4 concerning medical health insurance coverage is deleted and no obligation does or will be effective against the Employer to provide such coverage pursuant to the SERP. D. The entire paragraph numbered 5 concerning retirement, disability or benefit plans is deleted and no obligation does or will be effective against the Employer to provide such benefits. E. Paragraph 14 is amended to provide that the provisions concerning non competition shall apply also from the date of the Retiree's retirement to the age of 65 when he is paid pursuant to the SERP by adding after the word "employment" in the first sentence the following "or from the date of the Retiree's retirement to the date the Retiree begins to receive benefits". X-8 F. a) Paragraph 1 is amended by deleting the phrase "one hundred twenty (120) months commencing on the first day of the first month following his retirement" and inserting in place thereof "one hundred and eight (108) months commencing on the date of the Employee's 65th birthday". b) Paragraph 7(a) is amended by deleting the phrase "ten (10) years" and inserting in place thereof "nine (9) years". c) Paragraph 7(b) is amended by deleting the phrase "ten (10) year period" and inserting in place thereof "nine (9) year period". d) Paragraph 8(a) is amended by deleting the phrase "one hundred and twenty (120) months" and inserting in place thereof "one hundred and eight (108) months". Except as herein amended the SERP shall remain in full force and effect and be binding and inure to the benefit of the parties, the Employer's successors and assigns, and the Retiree's heirs, beneficiaries, executors and administrators. IN WITNESS WHEREOF, the parties have executed this agreement on the date first above written. Slade's Ferry Bancorp By: /s/ Donald T. Corrigan, Chairman --------------------------------------- /s/ Kenneth R. Rezendes, President/CEO --------------------------------------- /s/ James D. Carey --------------------------------------- James D. Carey X-9 EX-10 4 slad1010.txt EXHIBIT 10.10 Exhibit 10.10 ------------- RELEASE OF ALL DEMANDS This release of all demands is made and executed this 9th day of August, 2002 by James D. Carey of 311 Pearce Road, Swansea, Massachusetts 02777 (herein "Carey") in favor of the Slade's Ferry Bancorp. and Slade's Ferry Trust Company and all its affiliate companies (herein "Slade's"). RECITALS A. Carey has been employed by Slade's Ferry Bancorp. serving as Executive Vice President of the Bancorp. B. Incident to the above employment Carey served as President of Slade's Ferry Trust Company and certain of its affiliate companies. C. Carey also served as Director of Slade's Ferry Bancorp., Slade's Ferry Trust Company and certain of its affiliates. D. Carey resigned as Director and resigned his employment effective March 29, 2002. Now therefore in consideration of the above recitals and in consideration of the following actions: 1. Slade's will pay to Carey the amount of $160,000.00 payable $5,000.00 every two weeks for a period of 15 months, or 32 payments, commencing on the effective date of May 1, 2002. 2. Slade's will continue Carey as enrolled on the Slade's health plan for 15 months commencing on the effective date of May 1, 2002. 3. Slade's and Carey will amend the SERP agreement to allow Carey to qualify under the agreement for 9 years at the age of 65, the terms of the amendments being more specifically delineated in the attached exhibit "A". 4. Slade's will transfer title to a motor vehicle identified as a 1999 Lincoln Towncar (VIN# 1LNHM82WOXY662529) valued at $18,195.00. 5. Slade's has obtained approval of the above actions from regulatory authorities which oversee and have jurisdiction under the FDIC Act and FDIC Rules and Regulations. In consideration of the above recitals and the actions above listed, taken and to be taken, Carey hereby remises, releases, and forever discharges the said Slade's of and from all debts, demands, actions, causes of actions, suits, accounts, covenants, contracts, agreements, damages, and any and all claims, demands and liabilities whatsoever of every name and nature, both in law and in equity, which against the said Slade's, or its successors and assigns he now has or ever had from the beginning of the world to this date and more specifically on account of his employment by Slade's and business association with Slade's. No promise or inducement has been made in executing this release, other than those herein contained; Carey does not rely on any statement or representation made by any person, firm or corporation hereby released, or any attorney, agent or other person representing it. The undersigned acknowledges that the Slade's does not make any admission, agreement, consent, statement or declaration that the Slade's its agents, servants, employees, has violated any law, committed any wrongdoing, interfered with any right, breached any obligation or contract, or otherwise engaged in any improper conduct with reference to Carey. X-10 Executed as a sealed instrument. /s/ Sandra Mota /s/ James D. Carey - ------------------------------ -------------------------------- Witness James D. Carey Dated: August 9, 2002 ----------------------- X-11 EX-23 5 slad-x23.txt EXHIBIT 23 Exhibit 23 ---------- SHATSWELL, MacLEOD & COMPANY, P.C. ---------------------------------- CERTIFIED PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in this Annual Report on Form 10-K of Slade's Ferry Bancorp of our report dated January 15, 2003 (except for Note 11 which is March 5, 2003). /s/ Shatswell, MacLeod & Company, P.C. SHATSWELL, MacLEOD & COMPANY, P.C. West Peabody, Massachusetts March 19, 2003 -----END PRIVACY-ENHANCED MESSAGE-----