-----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, QiudZ0MsG1aWc2Wd8FmXnFU7WLo2M8YAmH3MkxvZ8hpFyVDyMHLUahkGIO8Me/hz ExNyVTR0ZnMdcjQ2D0ygYQ== 0000910647-04-000157.txt : 20040330 0000910647-04-000157.hdr.sgml : 20040330 20040330143800 ACCESSION NUMBER: 0000910647-04-000157 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040330 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: 04700107 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003 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 Identification Number) incorporation or organization) 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. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No X ------- ------ The aggregate market value of the voting stock of Slade's Ferry Bancorp. held by nonaffiliates of the registrant as of June 30, 2003 was $50,051,961, based on the last reported sale price on the Nasdaq Small Cap Market system on that date. As of March 19, 2004, there were 4,024,216 shares of Slade's Ferry Bancorp. Common Stock, $.01 par value outstanding. DOCUMENTS INCORPORATED BY REFERENCE The registrant's Proxy Statement for its Annual Meeting of Stockholders scheduled to be held May 10, 2004, which is to be filed with the Securities Exchange Commission, is incorporated by reference into Part III. TABLE OF CONTENTS ITEM 1 - Business 3 ITEM 2 - Properties 31 ITEM 3 - Legal Proceedings 32 ITEM 4 - Submissions of Matters to a Vote of Security Holders 32 ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters 33 ITEM 6 - Selected Financial Data 34 ITEM 7 - Management's Discussion and Analysis 35 ITEM 7A - Quantitative and Qualitative Disclosures About Market Risk 52 ITEM 8 - Consolidated Financial Statements and Supplementary Data 52 ITEM 9 - Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 52 ITEM 9A - Controls and Procedures 52 ITEM 10 - Directors and Executive Officers of the Registrant 53 ITEM 11 - Executive Compensation 53 ITEM 12 - Security Ownership of Certain Beneficial Owners and Management 53 ITEM 13 - Certain Relationships and Related Transactions 53 ITEM 14 - Principal Accountant Fees and Services 56 ITEM 15 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K 56 2 PART I ITEM 1 BUSINESS Description of Business Business of Slade's Ferry Bancorp. and Slade's Ferry Trust Company - ------------------------------------------------------------------ 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 100 Slade's Ferry Avenue, Somerset, Massachusetts, 02726, and its telephone number is (508) 675-2121. The Company was organized for the purpose of becoming the holding company of Slade's Ferry Trust Company (the "Bank"). The Bank is a wholly- owned subsidiary of Slade's Ferry Bancorp. 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. Over the past three years, assets of the Bank have increased by $44.7 Million. At December 31, 2003 assets were $439.4 Million, deposits were $333.1 Million, and stockholders' equity was $42.7 Million. The Bank currently has eleven banking facilities extending east from Seekonk, Massachusetts to Fairhaven, Massachusetts. 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. Following a change in law that terminated the preferential tax treatment, on December 8, 2003, the Bank, acting in its capacity as sole common stockholder of Slade's Ferry Preferred Capital Corporation, authorized the liquidation and dissolution of Slade's Ferry Preferred Capital Corporation, and adopted the Plan of Liquidation and Dissolution. Slade's Ferry Preferred Capital Corporation was subsequently liquidated and dissolved as of December 16, 2003. The Bank currently services numerous communities in Southeastern Massachusetts and contiguous areas of Rhode Island through its eleven 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 27,100 personal savings, checking and money market accounts, and 8,620 personal certificates of deposit and individual retirement accounts. Its commercial base consists of over 2,530 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. 3 The Bank's business is not seasonal and its loan demand is well diversified. As of December 31, 2003, commitments under standby letters of credit aggregate approximately $113,900. Competition - ----------- The primary business of Slade's Ferry Bancorp. is the ongoing business of the Bank. The competitive conditions facing Slade's Ferry Bancorp. are the same as those faced by the Bank. The Company competes with other holding companies engaged in bank-related activities. 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. Personnel - --------- As of December 31, 2003, the Company employed three full-time employees and the Bank had 157 full-time equivalent employees. Services - -------- The Bank engages in a broad range of banking services and its principal business is gathering deposits from customers within its market area, and investing these funds in commercial and residential real estate loans, commercial loans, construction loans, home equity and other consumer loans. In addition, a portion of the funds is used in purchasing investment securities. The investment portfolio of the Bank consists of U. S. Government and agency securities, mortgage-backed securities, obligations of state and political subdivisions, corporate bonds, and a small portion of marketable equity securities. The Bank provides a variety of deposit products to both individual and business customers, including demand deposit checking accounts, NOW accounts, money market deposit accounts, savings accounts, Individual Retirement accounts, and various term certificates of deposit. The Bank's deposits are insured by Federal Deposit Insurance Corporation (FDIC) up to the maximum of $100,000. In addition to loan and deposit products, the Bank provides other services such as offering money orders, travelers checks, safe deposit rentals, access to automated teller machines, and debit and charge cards. The Bank is a member of the Federal Home Loan of Boston which serves as a source of liquidity to fund lending and investment activities. 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. The following supplementary information should be read in conjunction with the related financial statements and notes thereto, which are a part of this report. 4 I. 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, net interest spread and the net interest margin for the periods ending December 31, 2003, December 31, 2002, and December 31, 2001. Averages are daily averages.
2003 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- 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: Loans(2) Commercial $ 32,044 $ 1,739 5.43% $ 40,088 $ 2,337 5.83% $ 47,036 $ 4,757 10.11% Commercial Real Estate 172,299 10,955 6.36 157,900 10,947 6.93 153,395 12,989 8.47 Residential Real Estate 85,648 4,604 5.37 48,069 3,446 7.17 38,819 2,868 7.39 Consumer 5,043 305 6.04 8,447 547 6.48 12,093 940 7.77 ------------------ ------------------ ------------------ Total Loans 295,034 17,603 5.97 254,504 17,277 6.79 251,343 21,554 8.57 ------------------ ------------------ ------------------ Federal Funds Sold & FHLB Overnight Deposit 15,720 148 0.94 24,033 348 1.45 23,136 819 3.54 U.S. Treas/Govt Agencies 53,807 2,195 4.08 70,385 3,688 5.24 72,778 4,258 5.85 State & Political Subdivision Obligations 12,659 895 7.07 14,044 799 5.69 12,498 777 6.22 Mutual Funds 81 5 6.17 117 7 5.98 45 2 4.44 Marketable Equity Securities 3,031 94 3.10 4,087 106 2.59 4,116 91 2.21 Other Investments 1,714 60 3.50 1,182 33 2.79 1,037 67 6.46 ------------------ ------------------ ------------------ Total Interest Earning Assets 382,046 21,000 5.50 368,352 22,258 6.04 364,953 27,568 7.55 ------------------ ------------------ ------------------ Allowance for Loan Losses (4,607) (5,462) (5,109) Unearned Income (388) (347) (443) Cash and Due From Banks 17,091 15,250 13,351 Other Assets 22,293 22,760 21,837 -------- -------- -------- Total Assets $416,435 $400,553 $394,589 ======== ======== ======== LIABILITIES & STOCKHOLDERS' EQUITY: Deposits Savings $ 67,487 349 0.52% $ 62,078 570 0.92% $ 53,613 $ 878 1.64% NOW Accounts 42,908 222 0.52 42,259 348 0.82 37,834 700 1.85 Money Market Accounts 19,838 235 1.18 9,250 24 0.26 9,415 120 1.27 CD's > $100M 27,735 640 2.31 32,384 1,117 3.45 34,483 1,796 5.21 Other Time Deposits 113,204 3,059 2.70 124,974 4,644 3.72 141,698 7,839 5.53 FHLB Advances & Other Borrowings 28,824 1,568 5.44 18,553 1,225 6.60 15,734 993 6.31 ------------------ ------------------ ------------------ Total Interest-bearing Liabilities 299,996 6,073 2.02 289,498 7,928 2.74 292,777 12,326 4.21 ------------------ ------------------ ------------------ Demand Deposits 72,602 69,787 64,549 Other Liabilities 1,947 1,466 1,738 -------- -------- -------- Total Liabilities 374,545 360,751 359,064 -------- -------- -------- Common Stock 40 39 38 Paid-in Capital 28,205 27,343 26,264 Retained Earnings 13,711 12,684 9,516 Accumulated Other Comprehensive Loss (66) (264) (293) -------- -------- -------- Total Stockholders' Equity 41,890 39,802 35,525 -------- -------- -------- Total Liabilities & Stockholders' Equity $416,435 $400,553 $394,589 ======== ======== ======== Net Interest Income $14,927 $14,330 $15,242 ======= ======= ======= Net Interest Spread 3.48% 3.30% 3.34% ==== ==== ==== Net Interest Margin 3.91% 3.89% 4.18% ==== ==== ==== - -------------------- On a fully taxable equivalent basis based on tax rate of 42.80% for 2003, 27.70% for 2002, and 31.40% for 2001. Interest income on investments and net interest income includes a fully taxable equivalent adjustment of $383,000 in 2003, $221,000 in 2002, and $244,000 in 2001. Average balance includes non-accruing loans. The effect of including such loans is to reduce the average rate earned on the Company's loans.
5 The following table sets forth the net interest income changes due to volume and rate: NET INTEREST INCOME - CHANGES DUE TO VOLUME AND RATE(1)
2003 vs. 2002 2002 vs. 2001 Increase Increase (Decrease) (Decrease) - ----------------------------------------------------------------------------------------------------------- Total Due to Due to Total Due to Due to (In Thousands) Change(2) Volume Rate Change(2) Volume Rate - ----------------------------------------------------------------------------------------------------------- Interest Income: Commercial Loans $ (598) $ (453) $ (145) $ (2,420) $(554) $(1,866) Commercial Real Estate Loans 8 950 (942) (2,042) 347 (2,389) Residential Real Estate Loans 1,158 2,358 (1,200) 578 673 (95) Consumer Loans (242) (214) (28) (393) (260) (133) Federal Funds Sold & FHLB Overnight Deposit (200) (100) (100) (471) 23 (494) US Treas/Govt Agencies (1,493) (773) (720) (570) (133) (437) State & Political Subdivision Obligations 96 (88) 184 22 92 (70) Mutual Funds (2) (2) 0 5 3 2 Marketable Equity Securities (12) (31) 19 15 (1) 16 Other Investments 27 17 10 (34) 7 (41) ------- ------ ------- -------- ----- ------- Total Interest Income (1,258) 1,664 (2,922) (5,310) 197 (5,507) ------- ------ ------- -------- ----- ------- Interest Expense: Savings (221) 39 (260) (308) 109 (417) NOW (126) 4 (130) (352) 59 (411) Money Market Accounts 211 77 134 (96) (1) (95) CD's > $100 M (477) (134) (343) (679) (774) 95 Other Time Deposits (1,585) (375) (1,210) (3,195) (91) (3,104) FHLB Advances & Other Borrowings 343 618 (275) 232 182 50 ------- ------ ------- -------- ----- ------- Total Interest Expense (1,855) 229 (2,084) (4,398) (516) (3,882) ------- ------ ------- -------- ----- ------- Net Interest Income $ 597 $1,435 $ (838) $ (912) $ 713 $(1,625) ======= ====== ======= ======== ===== ======= - -------------------- 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 42.80% for 2003, 27.70% for 2002, and 31.40% for 2001.
6 Interest Rate Risk - ------------------ The Company considers interest rate risk to be its primary significant market risk exposure 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 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. Market risk is the risk of loss arising from adverse changes in the fair market value of financial instruments due to changes in interest rates, exchange rates, equity prices, or the credit quality of debt securities. Interest rate risk arises from the exposure of holding interest- sensitive financial instruments such as government, corporate, and municipal bonds. The Company's Finance/Investment Committee, comprised of designated executive management and directors, is responsible for managing and monitoring interest rate risk, and reviewing with the Board of Directors, at least quarterly, the interest rate risk positions, the impact changes in interest rates would have on net interest income, and the maintenance of interest rate risk exposure within approved guidelines. The 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 quarterly 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, 2003, 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. 7 INTEREST RATE - SENSITIVITY GAP Repricing Period at December 31, 2003
Within 1-2 2-3 3-5 Over 5 (In Thousands) 1 Year Years Years Years Years Total - ---------------------------------------------------------------------------------------------------------------- Interest-Earning Assets: Loans $117,925 $ 37,404 $27,182 $52,996 $100,587 $336,094 Federal Funds Sold & FHLB Overnight Deposit 4,000 0 0 0 0 4,000 Investment Securities(1) 8,627 14,017 9,752 22,256 3,719 58,371 ----------------------------------------------------------------------- Total Earning Assets $130,552 $ 51,421 $36,934 $75,252 $104,306 $398,465 ----------------------------------------------------------------------- Interest-Bearing Liabilities: NOW Checking and Savings Deposits $ 31,779 $ 15,890 $15,890 $42,372 $ 0 $105,931 Money Market Deposits 7,271 3,635 3,635 9,694 0 24,235 Term Deposits 109,310 12,621 6,634 1,040 45 129,650 FHLB Advances 5,300 8,000 8,000 17,423 21,752 60,475 ----------------------------------------------------------------------- Total Interest-bearing Liabilities $153,735 $ 40,146 $34,159 $70,529 $ 21,797 $320,366 ----------------------------------------------------------------------- Net Interest Sensitivity Gap $(23,183) $ 11,275 $ 2,775 $ 4,723 $ 82,509 $ 78,099 Cumulative Gap $(23,183) $(11,908) $(9,133) $(4,410) $ 78,099 Cumulative Gap as a Percent of Total Assets (5.28%) (2.71%) (2.08%) (1.00%) 17.77% ======================================================================= - ------------------- Excludes money market mutual funds which are carried in cash and cash equivalents.
In addition to the GAP report the Company quantifies its interest rate risk exposure using a simulation model. This simulation analysis is used to measure the exposure to net interest income to changes in interest rates over a specified time frame. The simulation analysis projects future interest income and interest expense under different rate scenarios. Internal guidelines on limitations on interest rate risk specify that for every 100 basis points of immediate change in interest rate, projected net interest income over the next twelve months should not decline by more than 5%. The simulation model currently utilizes a 300 basis point increase in interest rates and a 50 basis point decrease in rates. Due to the existing low interest rate environment in effect with the average Federal Funds overnight trading at approximately 1.00%, the simulation model only reduces rates downward by 50 basis points. The interest rate movements used assume an instant and parallel change in interest rates and no implementation of any strategic plans are made in response to the change in rates. Prepayment speeds for loans are based on median dealer forecasts for each interest rate scenario. The following table reflects the Company's estimated exposure as a percentage of net interest income and the dollar impact for the next twelve months, assuming an immediate change in interest rates set forth below:
Rate Change Estimated Exposure as a Percentage of (Basis Points) Net Interest Income Dollar Impact -------------------------------------------------------------------------- +300 (10.63%) ($1,757,000) - 50 (0.36%) ($ 60,000)
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 limit established by the Company provides an internal tolerance level to control interest rate risk exposure. 8 II. INVESTMENT PORTFOLIO The following table shows the amortized cost basis of the Company's major categories of investment securities Held-to-Maturity for the years indicated:
At December 31, - ------------------------------------------------------------------------------- (In Thousands) 2003 2002 2001 - ------------------------------------------------------------------------------- U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $ 0 $ 0 $ 2,750 State and Political Subdivision Obligations 11,299 13,693 13,528 Mortgage-backed Securities 1 2 3 Foreign Debt Securities 0 1 1 - ------------------------------------------------------------------------------- Total $11,300 $13,696 $16,282 ===============================================================================
In the following table, the amortized cost basis of the Company's Held-to-Maturity securities maturing within stated periods as of December 31, 2003, is shown with the weighted average interest yield from securities falling within the range of maturities:
U.S. Treasury State & & Government Political Mortgage- Corporations Subdivision Backed (In Thousands) & Agencies Obligations(1) Securities(2) Total - ----------------------------------------------------------------------------------------- Due in 1 year or less: Amount $ 0 $ 2,704 $ 0 $ 2,704 Yield 0.00% 5.67% 0.00% 5.67% Due in 1 to 5 years: Amount 0 5,808 1 5,809 Yield 0.00% 7.35% 7.73% 7.35% Due in 5 to 10 years: Amount 0 1,526 0 1,526 Yield 0.00% 7.69% 0.00% 7.69% Due after 10 years: Amount 0 1,261 0 1,261 Yield 0.00% 8.30% 0.00% 8.30% - ----------------------------------------------------------------------------------------- Amount $ 0 $11,299 $ 1 $11,300 ========================================================================================= Yield 0.00% 7.10% 7.73% 7.10% ========================================================================================= - -------------------- Rates of tax exempt securities are shown assuming a 42.80% tax rate. Mortgage-backed securities stated using average life.
9 The following table shows the amortized cost basis of the Company's major categories of Available-for-Sale securities for the years indicated:
At December 31, - ------------------------------------------------------------------- (In Thousands) 2003 2002 2001 - ------------------------------------------------------------------- U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $27,932 $26,424 $34,240 Mortgage-backed Securities 14,034 32,512 36,129 Corporate Debt Securities 1,658 2,673 2,941 Marketable Equity Securities 3,511 3,986 6,015 - ------------------------------------------------------------------- Total $47,135 $65,595 $79,325 ===================================================================
In the following table, the amortized cost basis of the Company's Available-for-Sale securities (other than equity securities) maturing within stated periods as of December 31, 2003, is shown with the weighted average interest yield from securities falling within the range of maturities:
U.S. Treasury & Government Mortgage- Corporate Corporations Backed Debt (In Thousands) & Agencies Securities(1) Securities Total - ------------------------------------------------------------------------------------- Due in 1 year or less: Amount $ 0 $ 1,776 $ 700 $ 2,476 Yield 0.00% 4.93% 6.41% 5.35% Due in 1 to 5 years: Amount 27,932 11,826 958 40,716 Yield 3.04% 4.88% 5.91% 3.64% Due in 5 to 10 years: Amount 0 0 0 0 Yield 0.00% 0.00% 0.00% 0.00% Due after 10 years: Amount 0 432 0 432 Yield 0.00% 4.58% 0.00% 4.58% - ------------------------------------------------------------------------------------- Amount $27,932 $14,034 $1,658 $43,624 ===================================================================================== Yield 3.04% 4.88% 6.12% 3.75% ===================================================================================== - -------------------- Mortgage-backed securities stated using average life.
10 The following table shows the amortized cost basis and fair value of the Company's major categories of Held-to-Maturity securities as of December 31, 2003:
Gross Gross Amortized Unrealized Unrealized (In Thousands) Cost Basis Holding Gains Holding Losses Fair Value - -------------------------------------------------------------------------------------------------- U.S. Treasury Securities and Obligation of U.S. Government Corporations and Agencies $11,299 $552 $ 0 $11,851 Mortgage-backed Securities 1 0 0 1 - ------------------------------------------------------------------------------------------------ Total $11,300 $552 $ 0 $11,852 ================================================================================================
The Company's investments in Available-for-Sale securities are carried at fair value on the balance sheet and are summarized as follows as of December 31, 2003:
Gains in Losses in Accumulated Accumulated Other Other Amortized Comprehensive Comprehensive (In Thousands) Cost Basis Income Income Fair Value - ------------------------------------------------------------------------------------------------- Debt securities issued by the U.S. Government corporations and Agencies $27,932 $ 73 $351 $27,654 Mortgage-backed Securities 14,034 449 3 14,480 Corporate Debt Securities 1,658 70 0 1,728 Marketable Equity Securities 3,511 198 345 3,364 - ----------------------------------------------------------------------------------------------- Total $47,135 $790 $699 $47,226 ===============================================================================================
11 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, - ---------------------------------------------------------------------------------------------------------------- (In Thousands) 2003 2002 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 33,980 $ 30,455 $ 45,238 $ 49,331 $ 46,354 Real Estate - construction and land development 10,346 14,078 7,600 8,601 5,014 Residential Real Estate 147,178 90,330 60,936 55,871 52,330 Commercial Real Estate 140,572 122,932 128,888 128,327 127,938 Consumer 3,961 6,881 10,643 12,872 9,393 Other 57 336 579 1,151 1,020 - ---------------------------------------------------------------------------------------------------------------- Total Gross Loans 336,094 265,012 253,884 256,153 242,049 Allowance for Loan Losses (4,154) (4,854) (5,484) (4,776) (3,766) Unamortized adjustment to fair value (0) (0) (0) (9) (20) Unearned Income (443) (342) (382) (519) (594) - ---------------------------------------------------------------------------------------------------------------- Net Loans $331,497 $259,816 $248,018 $250,849 $237,669 ================================================================================================================
The following table shows the maturity distributions and interest rate sensitivity of selected loan categories at December 31, 2003:
Within One One to Five After Five (In Thousands) Year Years Years Total - ---------------------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 26,931 $ 5,586 $ 1,463 $ 33,980 Real Estate - construction and land development 222 4,171 5,953 10,346 Residential Real Estate 25,586 57,681 63,911 147,178 Commercial Real Estate 61,883 49,432 29,257 140,572 Consumer 3,246 712 3 3,961 Other 57 0 0 57 - ---------------------------------------------------------------------------------------------------------- Total $117,925 $117,582 $100,587 $336,094 ==========================================================================================================
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 - ----------------------------------------------------------------------------------------------- (In Thousands) Fixed Rate Adjustable Rate Total - ----------------------------------------------------------------------------------------------- Commercial, financial, and agricultural $ 3,677 $ 3,372 $ 7,049 Real Estate - construction and land development 6,251 3,873 10,124 Residential Real Estate 86,988 34,604 121,592 Commercial Real Estate 30,715 47,974 78,689 Consumer 715 0 715 - ----------------------------------------------------------------------------------------------- Total $128,346 $89,823 $218,169 ===============================================================================================
12 The table set forth below shows nonaccrual, past due and restructured loans: NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
December 31, - ----------------------------------------------------------------------------------------------------------- (In Thousands) 2003 2002 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------- Nonaccrual loans $ 407 $ 635 $1,138 $2,415 $1,777 Loans 90 days or more past due and still accruing 0 8 444 335 248 Real estate acquired by foreclosure or substantively repossessed 0 0 0 0 353 - ----------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 407 $ 643 $1,582 $2,750 $ 2,378 - ----------------------------------------------------------------------------------------------------------- Restructured debt performing in accordance with amended terms, not included above $ 198 $ 166 $ 186 $ 53 $ 518 - ----------------------------------------------------------------------------------------------------------- Percentage of nonaccrual loans to total loans 0.12% 0.24% 0.45% 0.94% 0.73% Percentage of nonaccrual loans, restructured loans and real estate acquired by foreclosure or substantively repossessed to total assets 0.14% 0.20% 0.34% 0.64% 0.74% Percentage of allowance for loan losses to nonaccrual loans 1,020.64% 764.20% 481.90% 197.76% 211.92%
Nonaccrual loans include restructured loans of $107,000 at December 31, 2003; $121,000 at December 31, 2002; $137,000 at December 31, 2001; $153,000 at December 31, 2000; and $0 at December 31, 1999. Information with respect to nonaccrual and restructured loans for the past five years ended December 31 is as follows:
December 31, - --------------------------------------------------------------------------------------------- (In Thousands) 2003 2002 2001 2000 1999 - --------------------------------------------------------------------------------------------- Nonaccrual loans $407 $635 $1,138 $2,415 $1,777 Interest income that would have been recorded under original terms $ 41 $303 $ 109 $ 228 $ 146 Interest income recorded during the period $ 30 $121 $ 6 $ 22 $ 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 $407,000 at year end 2003, from $643,000 reported at year end 2002. Nonaccrual loans is the largest component of nonperforming assets, and at December 31, 2003, this category decreased by approximately $228,000 from December 31, 2002. There are no loans greater than $200,000 in this category, which is comprised of $165,000 of residential mortgages and $242,000 of other types of loans. 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 13 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.
(In Thousands) 2003 2002 2001 2000 1999 - ------------------------------------------------------------------------------------------------ Balance at January 1 $4,854 $5,484 $4,776 $3,766 $3,569 - ------------------------------------------------------------------------------------------------ Charge-offs: Commercial, financial and agricultural (10) (336) (73) (194) (221) Commercial Real Estate (0) (0) (0) (0) (0) Residential Real Estate (169) (20) (0) (23) (23) Consumer (32) (26) (28) (138) (158) - ------------------------------------------------------------------------------------------------ (211) (382) (101) (355) (402) - ------------------------------------------------------------------------------------------------ Recoveries: Commercial, financial and agricultural 55 17 14 50 11 Commercial Real Estate 0 0 0 0 0 Residential Real Estate 44 38 29 92 24 Consumer 14 7 16 23 14 - ------------------------------------------------------------------------------------------------ 113 62 59 165 49 - ------------------------------------------------------------------------------------------------ Net Charge-offs (98) (320) (42) (190) (353) Provision (benefit) charged to operations (602) (310) 750 1,200 550 - ------------------------------------------------------------------------------------------------ Balance at December 31 $4,154 $4,854 $5,484 $4,776 $3,766 ================================================================================================ Allowance for Loan Losses as a percent of year end loans 1.24% 1.83% 2.16% 1.86% 1.56% Ratio of net charge-offs to average loans outstanding (0.03%) (0.13%) (0.02%) (0.08%) (0.15%)
14 The Company's Allowance for Loan Losses at year end December 31, 2003 was $4,154,394 and $4,854,388, $5,484,519, $4,776,360, and $3,765,872 for years ending 2002, 2001, 2000, and 1999, respectively. The Allowance for Loan Losses as a percent of year end loans was 1.24% in 2003, 1.83% in 2002, 2.16% in 2001, 1.86% in 2000, and 1.56% in 1999. The level of the allowance for loan losses is evaluated monthly by management and reviewed by the Board of Directors. Factors considered in the evaluation process include growth of the loan portfolio, risk characteristics of the loan types in the portfolio, the value of underlying collateral, delinquency and charge off trends, current economic conditions within our market area, and various other external and internal factors. The allowance for loan losses is maintained at a level that management considers to be adequate to absorb estimated losses within our loan portfolio. Management's assessment of the adequacy of the allowance for loan losses is reviewed annually by an independent loan review consultant, the Company's independent accountants, and regulatory agencies. As the composition of our loan portfolio gradually changes and diversifies from higher credit risk weighted loans, such as commercial real estate and commercial and industrial, to residential and home equity loans, less reserve allowance will be required. During 2003, diversifications in the loan portfolio, stronger underwriting guidelines, the sale of loans previously deemed substandard, and overall improvement in credit quality of existing loans, resulted in a decrease in the overall credit risk imbedded in the loan portfolio. After thorough review and analysis of the adequacy of the loan loss reserve during 2003, the Bank recovered $602,000 of previously provided loan loss provisions, compared to a provision benefit of $310,000 recorded for 2002. Loans charged off were $211,000 in 2003 and prior years' charge offs were $382,000, $101,000, $355,000 and $402,000 in 2002, 2001, 2000, and 1999, respectively. In 2003, the Company realized recoveries of previously charged-off loans of $113,000. Recoveries recorded in previous years were $62,000, $59,000, $165,000, and $49,000 in 2002, 2001, 2000, and 1999, respectively. Management believes that the Allowance for Loan Losses of approximately $4,154,000 as of December 31, 2003 is adequate to cover potential losses in the loan portfolio, based on current information available to management. The Bank must maintain an Allowance for Loan and Lease Losses (ALLL) at a level that is sufficient to absorb the projected credit losses associated with the loan portfolio. Projected credit losses should reflect consideration of all significant factors that affect repayment as of the evaluation date. Projected losses on loan categories should reflect historical net charge-off levels for similar loans, adjusted for changes in current conditions or other relevant factors. Calculation of historical charge-off rates can range from a simple average of net charge-offs over a relevant period, to more complex techniques such as migration analysis. Portions of the ALLL can be attributed to, or based upon, the risks associated with individual loans or groups of loans. The monthly Asset Watch List Review process forms the basis of identification of loans with quantifiable loss potential as well as the remaining group of Criticized and Classified loans. Loan quality ratings are utilized as the primary criteria in preparing the Asset Watch List, which primarily includes loans determined to be Criticized and Classified. Loans with ratings of "4" (Special Mention), "5" (Substandard), or "6" (Doubtful) are included in the Asset Watch List. Appropriate ratings changes are made when facts that warrant an upgrade or downgrade in a particular loan rating are evident. Loan ratings are generally reviewed on a quarterly basis. Loans that are rated Substandard are inadequate to the current sound net worth and paying capacity of the borrower or of the collateral pledged. These loan types have a defined weakness that 15 could jeopardize the liquidation of the debt, and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as Doubtful have all the weaknesses inherent in loans rated Substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, highly questionable and improbable. Loans which do not currently expose the Bank to any significant risk to warrant classification into one of the aforementioned risk ratings, but possess potential weaknesses that deserve management's attention, are designated Special Mention. The Bank utilizes an independent third party to conduct semi-annual credit analyses of its commercial and commercial real estate loan portfolios. The Bank utilizes an assessment methodology that incorporates both target (or specific) reserves for individual loans where loss potential and anticipated charge-off, both partial and complete, can be accurately assessed, as well as the application of general loss ratios to arrive at a comprehensive reserve calculation. The Bank uses this reserve methodology to identify target reserves of 50% to 100% where appropriate on Criticized and Classified loans based on internal risk ratings. This methodology also incorporates delinquency trends, charge-off experience, new loan volume and mix, credit exposure, and various other risks as they may arise in the ongoing analysis of loan portfolio management, off balance sheet commitments, which include pending loan commitments, as well as, historical extension of credit under existing construction loans, lines of credit, and amounts due borrower. The groups of loans rated "Pass" will be reserved, utilizing weighting factors deemed appropriate given the Bank's loan loss experience over an extended period of time, as well as including a factor to account for unforeseen loan loss potential. This approach allows for the recognition of a well-defined loss profile, while still providing for unforeseen or unanticipated losses within the portfolio. A "Pass" loan is a loan which does not expose the Bank to significant risk. Loans in this category have the following characteristics: borrower is a well to recently established business, borrower is operating in an industry where conditions are good, borrower has capable management team, borrower has above average performance in comparison to industry peers, loan is typically well secured by collateral, and borrower's financial statements evidence the ability to adequately service the indebtedness. Based on the Bank's loss experience as well as the perceived levels of risk associated with the various loan portfolio, reserve factors are applied to the loan portfolio i.e., commercial and industrial, commercial real estate, residential mortgage, home equity, and consumer loans. A loan is defined as being "impaired" when it becomes probable (most likely to occur) that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. When a loan is 90 days past due, it will be evaluated for impairment status. Loans that have been placed on non-accrual because payments are sporadic or no payments have been made, or because collateral coverage is insufficient and current financial data is not available, are evaluated for impairment status. Based on the market value or discounted cash flow methods, if the loan is not deemed to be repaid in full according to the terms of the relevant loan agreement, a watch list reserve will be instituted and the subject loan will be classified as "impaired". Loans that are rated substandard, may or may not be on non-accrual. Substandard loans will be evaluated, no less than annually, for possible impairment status. Either the market value or discounted cash flow method is used. In the case of unsecured loans which are rated substandard, the discounted 16 cash flow method will be used and a watch list reserve (if applicable) will be instituted and the loan will be classified as "impaired". In addition, all restructured and renegotiated debt will be classified as "impaired". All loans that have been classified as "impaired" will be placed on the Bank's Impaired Loan Report. This report is reviewed monthly by the Board of Directors. Reviewing of the impaired loans includes, but is not limited to evaluation and adjustment of watch list reserves (if necessary) and/or determination of any charge-offs. 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, 2003 December 31, 2002 December 31, 2001 December 31, 2000 December 31, 1999 - ------------------------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------------------------- (In Thousands) Commercial(5) $ 943(1) 10.11% $1,155(1) 11.60% $1,629(1) 17.91% $1,466(1) 19.66% $1,356(1) 19.52% Commercial Real Estate 52 3.08 70 5.31 41 2.99 47 3.36 34 2.07 Residential Real Estate 3,071(2) 85.62 3,465(2) 80.48 3,585(2) 74.77 2,970(2) 71.91 1,924(2) 74.48 Consumer(3) 88(4) 1.19 164(4) 2.61 229(4) 4.33 293(4) 5.07 452(4) 3.93 - ------------------------------------------------------------------------------------------------------------------------------- $4,154 100.00% $4,854 100.00% $5,484 100.00% $4,776 100.00% $3,766 100.00% =============================================================================================================================== - -------------------- Includes amounts specifically reserved for impaired loans of $251,280 as of December 31, 2003, $412,761 as of December 31, 2002, $780,029 as of December 31, 2001, $281,248 as of December 31, 2000, and $234,205 as of December 31, 1999, as required by Financial Accounting Standard No. 114, Accounting for Impairment of Loans. Includes amounts specifically reserved for impaired loans of $23,621 as of December 31, 2003, $34,757 as of December 31, 2002, $413,663 as of December 31, 2001, $132,911 as of December 31, 2000, and $147,884 as of December 31, 1999, 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 $170 as of December 31, 2003, $29,606 as of December 31, 2002, $1,632 as of December 31, 2001, $10,398 as of December 31, 2000, and $39,241 as of December 31, 1999 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 in 2003, resulting in a lesser degree of credit risk, and therefore a reduction was made in the allowance for loan losses maintained to cover inherent losses in the loan portfolio. The loan portfolio's largest segment of loans has changed from commercial real estate to residential real estate and home equity loans which represented 43.8% of gross loans at December 31, 2003 compared to 34.1% at December 31, 2002. Commercial real estate loans, with a higher degree of credit risk, represented 41.8% in 2003, compared to 46.4% at in 2002. The Bank requires a loan to value ratio of 80% in both commercial and residential mortgages. These real estate loans are secured by real properties which have a readily ascertainable value. 17 Real estate residential loans include both loans secured by one-to four-family property, home equity loans, and multi-family residential 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 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 is comprised of both residential and commercial construction loans throughout our market area. As of December 31, 2003, these loans represented 3.1% of the loan portfolio compared to 5.3% at December 31, 2002. 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 10.1% of the loan portfolio as of December 31, 2003, compared to 11.5% as of December 31, 2002. Consumer loans are both secured and unsecured borrowings and at December 31, 2003 represents only 1.2% of the total loan portfolio compared to 2.6% at December 31, 2002. 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 2003 amounted to $211,000, as compared to charge offs of $382,000 in 2002, $101,000 in 2001, $355,000 in 2000, and $402,000 in 1999. The residential real estate category incurred a loss of $169,000 in 2003 compared to a loss of $20,000 in 2002, no losses in 2001, $23,000 in 2000, and $23,000 in 1999. 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. 18 The following table sets forth the average amount and the average rate paid on deposits for the periods indicated.
2003 2002 2001 - ------------------------------------------------------------------------------------------------ Average Average Average Average Average Average (In Thousands) Balance Rate Balance Rate Balance Rate - ------------------------------------------------------------------------------------------------ Demand Deposits $ 72,602 0.00% $ 69,787 0.00% $ 64,549 0.00% NOW Accounts 42,908 0.52 42,259 0.82 37,834 1.85 Savings Accounts 67,487 0.52 62,078 0.92 53,613 1.64 Money Market Accounts 19,838 1.18 9,250 0.26 9,415 1.27 CD's >$100M 27,735 2.31 32,384 3.45 34,483 5.21 Other Time Deposits 113,204 2.70 124,974 3.72 141,698 5.53 -------- -------- -------- Totals $343,774 1.66% $340,732 2.47% $341,592 4.09% ======== ======== ========
As of December 31, 2003, time certificates of deposit in amounts of $100,000 or more had the following maturities:
(In Thousands) Three months or less $ 6,739 Over three months through six months 9,113 Over six months through twelve months 5,428 Twelve months and over 4,150 ------- $25,430 =======
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, 2003 2002 2001 ---------------------------- Return on Average Assets 0.65% 0.74% 0.81% Return on Average Equity 6.42% 7.45% 9.04% Dividend Payout Ratio 53.22% 47.50% 52.63% Equity to Assets Ratio (Average) 10.06% 9.94% 9.00%
VII. SHORT TERM BORROWINGS The Bank has the ability to borrow funds from the Federal Home Loan Bank to partially fund their loan commitments and other liquidity needs. Advances from the Federal Home Loan Bank are collateralized by a blanket pledge on the Banks' first mortgages on one-to four-family owner occupied residential property and securities issued or guaranteed by the U.S. Government and its agencies. In addition the Bank maintains borrowing lines of credit with correspondent banks to meet short-term liquidity needs. Short-term borrowings include funds advanced from the Federal Home Loan Bank, correspondent banks, and funds held for U.S. Treasury Tax and Loan Notes. 19 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.
(In Thousands) 2003 2002 2001 - ------------------------------------------------------------------------------- Balance at December 31 $5,300 $ 0 $ 465 Maximum Amount Outstanding at Any Month's End $5,300 $1,222 $1,237 Average Amount Outstanding During the Year $1,047 $ 484 $ 706 Weighted Average Interest Rate During the Year 1.80% 1.69% 4.03%
REGULATION General The Bank is a Massachusetts-chartered trust company, and its deposit accounts are insured up to applicable limits by the Bank Insurance Fund of the FDIC. The Bank is subject to extensive regulation, examination and supervision by the Commonwealth of Massachusetts Division of Banks as its primary corporate regulator, and by the FDIC as the deposit insurer. The Company, as a bank holding company controlling the Bank, is subject to the Bank Holding Company Act of 1956, as amended, and the rules and regulations of the Federal Reserve Board under the Bank Holding Company Act. The Bank and the Company are also subject to the provisions of the Massachusetts General Laws applicable to trust companies and other depository institutions and their holding companies (the Massachusetts banking laws) and the regulations of the Massachusetts Division of Banks under the Massachusetts banking laws applicable to bank holding companies. The Company is also subject to the rules and regulations of the Securities and Exchange Commission. Any change in such laws and regulations, whether by the Division, the FDIC, the Federal Reserve Board, or the Securities and Exchange Commission or through legislation, could have a material adverse impact on the Company and the Bank and their operations and stockholders. Massachusetts Banking Regulation Community Reinvestment Act. The Bank is subject to provisions of the Massachusetts Community Reinvestment Act, which are similar to those imposed by the federal Community Reinvestment Act with the exception of the assigned exam ratings. Massachusetts banking law provides for an additional exam rating of "high satisfactory" in addition to the federal Community Reinvestment Act ratings of "outstanding," "satisfactory," "needs to improve" and "substantial noncompliance." The Division is required to consider a bank's Massachusetts Community Reinvestment Act rating when reviewing The Bank's application to engage in certain transactions, including mergers, asset purchases and the establishment of branch offices or automated teller machines, and provides that such assessment may serve as a basis for the denial of any such application. The Massachusetts Community Reinvestment Act requires the Division to assess a bank's compliance with the Massachusetts Community Reinvestment Act and to make such assessment available to the public. The Bank's latest Massachusetts Community Reinvestment Act rating, received by letter, dated November 13, 2002, from the Division was a rating of "Satisfactory." 20 Loans-to-One-Borrower Limitations. With specified exceptions, the total obligations of a single borrower to a Massachusetts chartered trust company may not exceed 20% stockholders' equity. A trust company may lend additional amounts up to 100% of its retained earnings account if secured by collateral meeting the requirements of the Massachusetts banking laws. The Bank currently complies with applicable loans-to-one-borrower limitations. Dividends. Under the Massachusetts banking laws, a trust company may, subject to several limitations, declare and pay a dividend on its capital stock out of the Bank's net profits. A dividend may not be declared, credited or paid by a stock trust company so long as there is any impairment of capital stock. No dividend may be declared on the Bank's common stock for any period other than for which dividends are declared upon preferred stock, except as authorized by the Commissioner. The approval of the Commissioner is also required for a trust company to declare a dividend, if the total of all dividends declared by the trust company in any calendar year shall exceed the total of its net profits for that year combined with its retained net profits of the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock. In addition, federal law may also limit the amount of dividends that may be paid by the Bank. See "- Federal Banking Regulation - Prompt Corrective Action." Examination and Enforcement. The Division is required to periodically examine savings banks at least once every calendar year or at least once each 18-month period if the trust company qualifies as well capitalized under the prompt corrective action provisions of the Federal Deposit Insurance Act. See "- Federal Banking Regulation - Prompt Corrective Action." Federal Banking Regulation Capital Requirements. FDIC regulations require BIF-insured banks, such as the Bank to maintain minimum levels of capital. The FDIC regulations define two classes of capital known as Tier 1 and Tier 2 capital. The FDIC regulations establish a minimum leverage capital requirement for banks in the strongest financial and managerial condition, with a rating of 1 (the highest examination rating of the FDIC for banks) under the Uniform Financial Institutions Rating System, of not less than a ratio of 3.0% of Tier 1 capital to total assets. For all other banks, the minimum leverage capital requirement is 4.0%, unless a higher leverage capital ratio is warranted by the particular circumstances or risk profile of the depository institution. The FDIC regulations also require that banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of a ratio of total capital (which is defined as the sum of Tier 1 capital and Tier 2 capital) to risk-weighted assets of at least 8% and a ratio of Tier 1 capital to risk-weighted assets of at least 4%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The federal banking agencies, including the FDIC, have also adopted regulations to require an assessment of an institution's exposure to declines in the economic value of a bank's capital due to changes in interest rates when assessing the Bank's capital adequacy. Under such a risk assessment, examiners will evaluate a bank's capital for interest rate risk on a case-by-case basis, with consideration of both quantitative and qualitative factors. 21 Institutions with significant interest rate risk may be required to hold additional capital. The agencies also issued a joint policy statement providing guidance on interest rate risk management, including a discussion of the critical factors affecting the agencies' evaluation of interest rate risk in connection with capital adequacy. The Bank was considered "well- capitalized" under FDIC guidelines at December 31, 2003. Activity Restrictions on State-Chartered Banks. Section 24 of the Federal Deposit Insurance Act, as amended (FDIA), which was added by the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), generally limits the activities and investments of state-chartered FDIC insured banks and their subsidiaries to those permissible for federally chartered national banks and their subsidiaries, unless such activities and investments are specifically exempted by Section 24 or consented to by the FDIC. Section 24 provides an exception for investments by a bank in common and preferred stocks listed on a national securities exchange or the shares of registered investment companies if (1) The Bank held such types of investments during the 14-month period from September 30, 1990 through November 26, 1991; (2) the state in which the Bank is chartered permitted such investments as of September 30, 1991; and (3) The Bank notifies the FDIC and obtains approval from the FDIC to make or retain such investments. Upon receiving such FDIC approval, an institution's investment in such equity securities will be subject to an aggregate limit up to the amount of its Tier 1 capital. The Bank received approval from the FDIC to retain and acquire such equity investments subject to a maximum permissible investment equal to the lesser of 100% of The Bank's Tier 1 capital or the maximum permissible amount specified by The Banking Act. Section 24 also provides an exception for majority owned subsidiaries of a bank, but Section 24 limits the activities of such subsidiaries to those permissible for a national bank, permissible under Section 24 of the FDIA and the FDIC regulations issued pursuant thereto, or as approved by the FDIC. Before making a new investment or engaging in a new activity not permissible for a national bank or otherwise permissible under Section 24 of the FDIC regulations thereunder, an insured bank must seek approval from the FDIC to make such investment or engage in such activity. The FDIC will not approve the activity unless The Bank meets its minimum capital requirements and the FDIC determines that the activity does not present a significant risk to the FDIC insurance funds. Enforcement. The FDIC has extensive enforcement authority over insured savings banks, including The Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease and desist orders and to remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and to unsafe or unsound practices. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state bank if that bank is "critically undercapitalized." For this purpose, "critically undercapitalized" means having a ratio of tangible capital to total assets of less than 2%. The FDIC may also appoint a conservator or receiver for a state bank on the basis of the institution's financial condition or upon the occurrence of certain events. 22 Deposit Insurance. Pursuant to FDICIA, the FDIC established a system for setting deposit insurance premiums based upon the risks a particular institution poses to its deposit insurance fund. Under the risk-based deposit insurance assessment system, the FDIC assigns an institution to one of three capital categories based on the institution's financial information, as of the most recent quarterly report filed with the applicable bank regulatory agency prior to the assessment period. The three capital categories are (1) well capitalized, (2) adequately capitalized and (3) undercapitalized using capital ratios that are substantially similar to the prompt corrective action capital ratios discussed below. See "-Federal Banking Regulation - Prompt Corrective Action" below. The FDIC also assigns an institution to supervisory subgroup based on a supervisory evaluation provided to the FDIC by the institution's primary federal regulator and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds (which may include, if applicable, information provided by the institution's state supervisor). An institution's assessment rate depends on the capital category and supervisory category to which it is assigned. Any increase in insurance assessments could have an adverse effect on the earnings of insured institutions, including the Bank. Under the FDIA, the FDIC may terminate the insurance of an institution's deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. Transactions with Affiliates of The Bank. Transactions between an insured bank, such as The Bank, and any of its affiliates is governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the Bank. Currently, a subsidiary of a bank that is not also a depository institution is not treated as an affiliate of The Bank for purposes of Sections 23A and 23B, but the Federal Reserve Board has proposed a comprehensive regulation implementing Sections 23A and 23B, which would establish certain exceptions to this policy. Section 23A: * limits the extent to which the Bank or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such bank's capital stock and retained earnings, and limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and retained earnings; and * requires that all such transactions be on terms that are consistent with safe and sound banking practices. The term "covered transaction" includes the making of loans, purchase of assets, issuance of guarantees and other similar types of transactions. Further, most loans by a bank to any of its affiliates must be secured by collateral in amounts ranging from 100 to 130 percent of the loan amounts. In addition, any covered transaction by a bank with an affiliate and any purchase of assets or services by a bank from an affiliate must be on terms that are substantially the same, or at least as favorable to the Bank, as those that would be provided to a non-affiliate. Effective April 1, 2003, the Federal Reserve Board, or FRB, rescinded its interpretations of Sections 23A and 23B of the FRA and replaced these interpretations with Regulation W. In addition, Regulation W makes various changes to existing law regarding Sections 23A and 23B, including 23 expanding the definition of what constitutes an affiliate subject to Sections 23A and 23B and exempting certain subsidiaries of state-chartered banks from the restrictions of Sections 23A and 23B. Under Regulation W, all transactions entered into on or before December 12, 2002, which either became subject to Sections 23A or 23B solely because of Regulation W, and all transactions covered by Sections 23A and 23B, the treatment of which will change solely because of Regulation W, became subject to Regulation W on July 1, 2003. All other covered affiliate transactions become subject to Regulation W on April 1, 2003. The Federal Reserve Board expects each depository institution that is subject to Sections 23A and 23B to implement policies and procedures to ensure compliance with Regulation W. We do not expect that the changes made by Regulation W will have a material adverse effect on our business. The Bank's authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more that the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank's capital. The regulations allow small discounts on fees on residential mortgages for directors, officers and employees. In addition, extensions for credit in excess of certain limits must be approved by the Bank's Board of Directors. Section 402 of the Sarbanes-Oxley Act of 2002 prohibits the extension of personal loans to directors and executive officers of issuers (as defined in Sarbanes-Oxley). The prohibition, however, does not apply to mortgages advanced by an insured depository institution, such as The Bank, that are subject to the insider lending restrictions of Section 22(h) of the Federal Reserve Act. Community Reinvestment Act. Under the Community Reinvestment Act (CRA), any insured depository institution, including the Bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA requires the FDIC, in connection with its examination of a savings bank, to assess the depository institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications for additional branches and acquisitions. The CRA requires the FDIC to provide a written evaluation of an institution's CRA performance utilizing a four-tiered descriptive rating system and requires public disclosure of an institution's CRA rating. The Bank received a "Satisfactory" rating on its last CRA exam in 2002. Safety and Soundness Standards. Pursuant to the requirements of FDICIA, as amended by the Riegle Community Development and Regulatory Improvement Act of 1994, each federal banking agency, including the FDIC, has adopted guidelines establishing general standards relating to internal controls, information and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings, and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and 24 exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director, or principal stockholder. In addition, the FDIC adopted regulations to require a bank that is given notice by the FDIC that it is not satisfying any of such safety and soundness standards to submit a compliance plan to the FDIC. If, after being so notified, a bank fails to submit an acceptable compliance plan or fails in any material respect to implement an accepted compliance plan, the FDIC may issue an order directing corrective and other actions of the types to which a significantly undercapitalized institution is subject under the "prompt corrective action" provisions of FDICIA. If a bank fails to comply with such an order, the FDIC may seek to enforce such an order in judicial proceedings and to impose civil monetary penalties. Prompt Corrective Action. FDICIA also established a system of prompt corrective action to resolve the problems of undercapitalized institutions. The FDIC, as well as the other federal banking regulators, adopted regulations governing the supervisory actions that may be taken against undercapitalized institutions. The regulations establish five categories, consisting of "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." The severity of the action authorized or required to be taken under the prompt corrective action regulations increases as a bank's capital decreases within the three undercapitalized categories. All banks are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person if, following such distribution, The Bank would be undercapitalized. Federal Reserve System Under Federal Reserve Board regulations, the Bank is required to maintain noninterest-earning reserves against its transaction accounts. The Federal Reserve Board regulations generally require that reserves of 3% must be maintained against aggregate transaction accounts of $38.8 million or less, subject to adjustment by the Federal Reserve Board. Total transaction accounts in excess of $38.8 million are required to have a reserve of 10% held against them, which are also subject to adjustment by the Federal Reserve Board. The first $6.6 million of otherwise reservable balances, subject to adjustments by the Federal Reserve Board, are exempted from the reserve requirements. The Bank is in compliance with these requirements. Because required reserves must be maintained in the form of either vault cash, a noninterest-bearing account at a Federal Reserve Bank, or a pass- through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the Bank's interest-earning assets. The USA PATRIOT Act In response to the events of September 11th, 2001, President George W. Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to The Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative 25 obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions: X Pursuant to Section 352, all financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and controls, (ii) specific designation of an anti-money laundering compliance officer, (iii) ongoing employee training programs, and (iv) an independent audit function to test the anti-money laundering program. X Pursuant to Section 326, on May 9, 2003, the Secretary of the Department of Treasury, in conjunction with other bank regulators issued Joint Final Rules that provide for minimum standards with respect to customer identification and verification. These rules became effective on October 1, 2003. X Section 312 requires financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) to establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering. X Effective December 25, 2001, financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and will be subject to certain record keeping obligations with respect to correspondent accounts of foreign banks. X Bank regulators are directed to consider a holding company's effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications. Recent Regulatory Examination 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 2002, a revised Memorandum of Understanding was entered into during the first quarter of 2003. Subsequent to December 31, 2003, as a result of the improved condition and operation of the Bank, as detailed in the Joint Report of Examination dated September 22, 2003, the FDIC with concurrence from the Massachusetts Commissioner of Banks, has terminated the Aforementioned Memorandum of Understanding effective January 22, 2004. All conditions and reporting requirements previously imposed cease immediately. Holding Company Regulation Federal Regulation. As a bank holding company, the Company is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval will be required for The Company to acquire 26 direct or indirect ownership or control of any voting securities of any bank or bank holding company if, after giving effect to such acquisition, it would, directly or indirectly, own or control more than 5% of any class of voting shares of such bank or bank holding company. A bank holding company is required to give the Federal Reserve Board 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, will be equal to 10% or more of the Company's consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. Such notice and approval is not required for a bank holding company that would be treated as "well capitalized" under applicable regulations of the Federal Reserve Board, that has received a composite "1" or "2" rating at its most recent bank holding company inspection by the Federal Reserve Board, and that is not the subject of any unresolved supervisory issues. In addition, a bank holding company which does not qualify as a financial holding company under the Gramm-Leach-Bliley Financial Services Modernization Act, is generally prohibited from engaging in, or acquiring direct or indirect control of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be permissible. Bank holding companies that do qualify as a financial holding company may engage in activities that are financial in nature or incident to activities which are financial in nature. Bank holding companies may qualify to become a financial holding company if it meets certain criteria set forth by the Federal Reserve Board. Under the Federal Deposit Insurance Act, depository institutions are liable to the FDIC for losses suffered or anticipated by the FDIC in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. This law would potentially be applicable to the Company if it ever acquired as a separate subsidiary a depository institution in addition to the Bank. Massachusetts Regulation Under the Massachusetts banking laws, a company owning or controlling two or more banking institutions, including a savings bank, is regulated as a bank holding company. The term "company" is defined by the Massachusetts banking laws similarly to the definition of "company" under the Bank Holding Company Act. Each Massachusetts bank holding company: * must obtain the approval of the Massachusetts Board of Bank Incorporation before engaging in certain transactions, such as the acquisition of more than 5% of the voting stock of another banking institution; * must register, and file reports, with the Division; and * is subject to examination by the Division. The Company will become a Massachusetts bank holding company if it acquires a second banking institution and hold and operate it separately from the Bank. 27 Acquisition of The Company or The Bank Federal Restrictions. Under the federal Change in Bank Control Act, any person (including a company), or group acting in concert, seeking to acquire 10% or more of the outstanding shares of the Company's common stock will be required to submit prior notice to the Federal Reserve Board, unless the Federal Reserve Board has found that the acquisition of such shares will not result in a change in control of the Company. Under the Change in Bank Control Act, the Federal Reserve Board has 60 days within which to act on such notices, taking into consideration factors, including the financial and managerial resources of the acquirer, the convenience and needs of the communities served by the Company and the Bank, and the anti-trust effects of the acquisition. Under the Bank Holding Company Act, any company would be required to obtain prior approval from the Federal Reserve Board before it may obtain "control," within the meaning of the Bank Holding Company Act, of the Company. The term "control" is defined generally under the Bank Holding Company Act to mean the ownership or power to vote 25% more of any class of voting securities of an institution or the ability to control in any manner the election of a majority of the institution's directors. An existing bank holding company would require FRB approval prior to acquiring more than 5% of any class of voting stock of the Company. Massachusetts Restrictions. Under the Massachusetts banking laws, the prior approval of the Division is required before any person may acquire a Massachusetts bank holding company. For this purpose, the term "person" is defined broadly to mean a natural person or a corporation, company, partnership, or other forms of organized entities. The term "acquire" is defined differently for an existing bank holding company and for other companies or persons. A bank holding company will be treated as "acquiring" a Massachusetts bank holding company if a bank holding company acquires more than 5% of any class of the voting shares of Bank Holding Company. Any other person will be treated as "acquiring" a Massachusetts bank holding company if it acquires ownership or control of more than 25% of any class of the voting shares of a bank holding company. The Sarbanes-Oxley Act On July 30, 2002, President George W. Bush signed into law the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from the type of corporate wrongdoing that occurred in Enron, WorldCom and similar companies. The Sarbanes-Oxley Act's principal legislation includes: X the creation of an independent accounting oversight board; X auditor independence provisions which restrict non-audit services that accountants may provide to their audit clients; X additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer certify financial statements; X the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer's securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; X an increase in the oversight of, and enhancement of certain requirements relating to audit committees of public companies and how they interact with The Company's independent auditors; 28 X requirement that audit committee members must be independent and are absolutely barred from accepting consulting, advisory or other compensatory fees from the issuer; X requirement that companies disclose whether at least one member of the committee is a "financial expert" (as such term is defined by the Securities and Exchange Commission) and if not, why not; X expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods; X a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions; X disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; X mandatory disclosure by analysts of potential conflicts of interest; and X a range of enhanced penalties for fraud and other violations. Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition. Federal Securities Law Our common stock is registered with the Securities and Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We are subject to information, proxy solicitation, insider trading restrictions, and other requirements under the Exchange Act. 29 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 operates its business from eleven banking offices 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, 2003, the following Bank properties, which include Automated Teller Machines (ATM's), 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. 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) - -------------------- * The ATM at this location dispenses cash only. ** There is no ATM at this location.
Office listed below is rented by the Bank as a tenant at will: Loan Production Office 3280 Post Road Warwick, RI 150
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. 30 ITEM 3 LEGAL PROCEEDINGS Neither the Company nor any of its subsidiaries are a party to, and none of their properties are the subject of, any material legal proceedings, other than routine litigation incidental to the Company's business. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS During the fourth quarter of 2003, no matters were submitted to a vote of stockholders of the Company. 31 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, 2003:
2003 2002 ------------------------------------ High Low High Low ------------------------------------ 1st Quarter $14.26 $13.25 $15.40 $13.55 ------------------------------------ 2nd Quarter $15.77 $14.18 $15.35 $13.81 ------------------------------------ 3rd Quarter $18.50 $15.60 $15.00 $13.05 ------------------------------------ 4th Quarter $23.00 $18.55 $13.74 $11.66 ------------------------------------
As of March 19, 2004, there were approximately 1,352 holders of the Company's common stock. Dividends - History and Policy The Company paid four quarterly cash dividends of $.09 per share for a total of $.36 per share paid in 2003 and 2002, and expects to continue to pay comparable dividends in the future. The declaration of cash dividends, however, 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. 32 ITEM 6 SELECTED FINANCIAL DATA The following table sets forth selected financial data for the last five years:
Year Ended December 31, - ----------------------------------------------------------------------------------------------------------- (In Thousands Except per Share Data) 2003 2002 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------- EARNINGS DATA Interest Income $ 20,617 $ 22,037 $ 27,324 $ 28,186 $ 25,553 Interest Expense 6,073 7,928 12,327 12,699 10,754 ----------------------------------------------------------------- Net Interest Income 14,544 14,109 14,997 15,487 14,799 Provision (Benefit) for Loan Losses (602) (310) 750 1,200 550 Noninterest Income 2,214 2,533 1,769 1,857 2,086 Noninterest Expense 12,662 12,852 11,408 10,206 10,556 ----------------------------------------------------------------- Income Before Income Taxes 4,698 4,100 4,608 5,938 5,779 Applicable Income Taxes 2,010 1,134 1,398 1,864 1,923 ----------------------------------------------------------------- Net Income $ 2,688 $ 2,966 $ 3,210 $ 4,074 $ 3,856 ================================================================= PER SHARE DATA (1) Net Income-Basic $ 0.68 $ 0.76 $ 0.84 $ 1.09 $ 1.06 Net Income-Diluted $ 0.67 $ 0.75 $ 0.84 $ 1.09 $ 1.05 Cash Dividends $ 0.36 $ 0.36 $ 0.44 $ 0.40 $ 0.35 Book Value (at end of period) $ 10.70 $ 10.45 $ 9.94 $ 9.41 $ 8.57 Avg. Shs. Outstanding (Basic) 3,969,737 3,908,901 3,830,575 3,743,138 3,650,275 Shares Outstanding Year End 3,995,857 3,937,763 3,869,924 3,789,503 3,520,409 BALANCE SHEET DATA Assets $ 439,449 $ 398,375 $ 394,761 $ 388,619 $ 358,121 Loans 336,094 265,012 253,884 256,153 242,049 Unearned Income 443 342 382 519 594 Allowance for Loan Losses 4,154 4,854 5,484 4,776 3,766 Loans, Net 331,497 259,816 248,018 250,849 237,669 Goodwill 2,173 2,173 2,173 2,400 2,627 Investments 61,487 80,618 96,401 88,109 81,806 Deposits 333,145 335,633 337,043 337,001 316,431 Stockholders' Equity 42,742 41,167 38,466 35,674 31,664 FINANCIAL RATIOS Net Interest Margin(2) 3.91% 3.89% 4.18% 4.58% 4.71% Net Interest Spread (2) 3.48 3.30 3.34 3.75 3.99 Net Income as a Percentage of Average Assets 0.65 0.74 0.81 1.09 1.11 Average Equity 6.42 7.45 9.04 12.92 12.56 Dividend Payout Ratio 53.22 47.50 52.63 36.84 34.36 Average Equity to Average Assets 10.06 9.94 9.00 8.45 8.85 - -------------------- (1) Earnings per share are computed based on the average number of shares of common stock outstanding during the year, adjusted to reflect a 5% stock dividend paid in 2000. (2) Calculated on a fully taxable equivalent basis.
33 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. This discussion should be read in conjunction with our audited financial statements and the related notes for the year ended December 31, 2003. 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 the Company'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, the Company's actual results could differ materially from those discussed. All subsequent written and oral forward-looking statements attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements set forth above. The Company 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. Overview Slade's Ferry Trust Company is a community bank that strives to meet the financial service needs of our local community and provide quality service to individuals and businesses within our market area. Historically, the Bank has been a provider of traditional banking products and services to businesses and individuals, including loan products such as commercial and residential real estate, home equity, commercial and industrial loans, and various deposit products. The Bank gathers substantially all of its deposits within its market area and uses these deposits, as well as other financial sources, to fund its investment and loan portfolio. 34 The year ending December 31, 2003 was a very important year for the Bank. We worked diligently to strengthen our balance sheet and made great strides in marketing our products and services. During 2003, our loan portfolio increased by 26.8%, attributable primarily to an aggressive marketing campaign to promote home equity loans and residential mortgages. This was part of our overall strategy to diversify our loan portfolio, which historically was heavily weighted toward commercial real estate loans that carried a higher credit risk to the loan portfolio. This strategy enabled the Bank to help its customers take advantage of the low interest rate environment while reducing the loan portfolio's risk profile. On the deposit side of the business, a campaign to promote money market accounts was very successful, generating more than $16.0 Million in core deposits. The Bank also focused on strengthening and expanding its retail banking division, introducing a sales culture, developing and marketing various deposit products and planning to implement products such as Internet banking and cash management services during the second quarter of 2004. The Bank closely adhered to its strategic plan during 2003 to reorganize, improve efficiencies, increase assets, diversify the loan portfolio, enhance retail products and services, and reinvest in the bank infrastructure to remain competitive. As a result, the Bank intends to continue its efforts to increase its assets, earnings, and improve its market presence. You should read our financial results for the year ended December 31, 2003 in the context of this strategy. The following overview is a summary of the items management focuses on when evaluating the condition of the Company, including items of significant importance for the Company's year ended December 31, 2003: * In 2003, Slade's Ferry Bancorp. recorded net income of $2,687,886 or $0.67 per share on a diluted basis compared to $2,965,552 or $0.75 per share on a diluted basis in 2002. This represents a decrease of $277,666 or 9.4% in net income and $0.08 or 10.67% per share on a diluted basis between 2003 and 2002. This decrease is due to an increase in income tax expense of $876,000 primarily a result of the REIT tax settlement, and a decrease in noninterest income of $319,000, offset partially by an increase in net interest income after benefit for loan loss of $727,000 and a decrease in noninterest expenses of $190,000. * Return on average equity for 2003 was 6.42%, down by 1.03% when compared to 7.45% reported in 2002. Return on average assets for 2003 was .65%, down by .09% when compared to .74% reported in 2002. The decrease in both these ratios for 2003 is primarily due to the increase in income tax expense and interest of $658,168 as a result of the settlement with the Massachusetts Department of Revenue related to the Bank's REIT subsidiary, as described below. * On June 20, 2003, the Bank and its subsidiary real estate investment trust, Slade's Ferry Preferred Capital Corporation, entered into an agreement with the Massachusetts Department of Revenue (the "DOR") settling the dispute concerning the dividends received deduction through calendar year 2002 claimed or to be claimed by the Bank. Under the agreement, the Bank agreed to pay and the DOR agreed to abate 50% of all tax and interest assessed or unassessed relating to the REIT dividend deduction. This resulted in a charge of $658,168 for state income taxes and interest, net of federal income tax benefits. 35 * Book value of the Company's common stock increased to $10.70 in 2003 from $10.45 reported in 2002 and $9.94 reported in 2001. This is the result of an increase of $1.6 Million in total stockholders' equity and only 58,094 additional shares issued during 2003. * Total assets increased by $41.1 Million, or 10.3% from $398.4 Million in 2002 to $439.4 Million in 2003. This increase was directly related to the increase of $41.3 Million in advances from the Federal Home Loan Bank. * Total gross loans increased by $71.1 Million or 26.8% from $265.0 Million in 2002 to $336.1 Million in 2003. This is due to the increase of $56.8 Million in residential mortgage and home equity loans, $17.6 Million in commercial real estate loans, and $3.5 Million in commercial, financial, and agricultural loans, offset by a decrease of $3.7 Million in real estate construction loans, and $3.2 Million in consumer, nonprofit and other loans. This is consistent with the Bank's strategic plan, which emphasizes growth in consumer loan mortgages and loan diversification. * Asset quality improved; nonperforming assets, as a percentage of total loans, decreased from 0.24% in 2002 to 0.12% reported in 2003. Total loan charge-offs also decreased from $382,000 in 2002 to $211,000 in 2003, as credit quality in the loan portfolio improved. * Capital adequacy ratios continue to meet criteria of "well capitalized" under regulatory guidelines. These ratios in 2003 were 13.64% for total capital, 12.39% for Tier 1, and 9.33% for leverage capital. * Subsequent to December 31, 2003, as a result of the improved condition and operation of the Bank, as detailed in the Joint Report of Examination dated September 22, 2003, the FDIC with concurrence from the Massachusetts Commissioner of Banks, has terminated the aforementioned Memorandum of Understanding effective January 22, 2004. All conditions and reporting requirements previously imposed cease immediately. Critical Accounting Policies Our significant accounting policies are described in Note 2 to our Consolidated Financial Statements. In preparing financial information, management is required to make significant judgments, estimates, and assumptions that impact the reported amounts of certain assets, liabilities, revenues and expenses. The accounting principles followed by the Company and the methods of applying these principles conform to accounting principles generally accepted in the United States, and general banking practices. The Company considers the following to be its critical accounting policies: allowance for loan losses, goodwill and other intangible assets other than temporary impairment of investments, and deferred taxes. Allowance for Loan Losses. Establishing an appropriate level of allowance for loan losses involves a high degree of judgment. The allowance for loan losses is established through a charge or credit to the provision for loan losses, and is based on management's projection of the adequate level of the allowance in relation to the inherent loss exposure in the loan portfolio. On a monthly basis, management evaluates the adequacy of the allowance which includes a formal analysis which considers, among other factors, business and economic conditions and industry trends, the size and characteristics of the loan portfolio, delinquency trends, charge-off experience, loan growth, nonaccrual loan trends, and 36 portfolio migration information. Although management uses available information to project the appropriate level of the allowance which is based on factors and risk identification procedures discussed in "Item I Business - - Summary of Loan Loss Experience", the use of judgments and projections may change in the future. Changes in factors or assumptions used by management to determine the adequacy of the allowance or the availability of new information could cause the allowance for loan losses to be increased or decreased in future periods. In addition, bank regulatory agencies, as part of their examination process, may require the Bank to recognize adjustments to the allowance based on their judgments and projections. Accounting for Acquisitions and Review of Goodwill. The Company completed an acquisition in 1996 and used the purchase method of accounting. For acquisitions under this method, the Company recorded assets acquired and liabilities assumed at their estimated fair value, which in some instances involves estimates based on internal and third party pressures, or other valuation techniques. In addition, this purchase acquisition resulted in goodwill, which is subject to ongoing periodic impairment tests, and is evaluated using fair value techniques that contain estimates. If the estimated fair value is less than the carrying amount, a loss due to impairment would be recognized to reduce the carrying value to fair value. Other Than Temporary Impairment. Management records a writedown impairment charge when it believes an investment experiences a decrease in value that is other than temporary. In making a decision whether an investment is permanently impaired, management reviews current and forecasted information about the underlying investment that is available, applicable industry data, and analyst reports. When an investment is deemed to be permanently impaired, it is written down to current fair market value. Future adverse changes in economic and market conditions, deterioration in credit quality, and continued poor financial results of underlying investments or other factors could result in further losses that may not be reflected in an investment's current book value that could result in future writedown charges due to impairment. Deferred Tax Estimates. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. The Company must also assess the probability that deferred tax assets will be recovered from future taxable income, and establish a valuation allowance for any assets determined not likely to be recovered. Management exercises judgment in evaluating the amount and timing of recognition of the resulting deferred tax assets and liabilities, including projections of future taxable income. These judgments are estimates and assumptions and are reviewed on a continuing basis. RESULTS OF OPERATIONS The Company's operating performance is dependant on net interest income, which is the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowed funds. The level of net interest income achieved is impacted by several factors such as economic conditions, interest rates, asset/liability management, and corporate tax and strategic planning. On a fully tax equivalent basis, our net interest income was $14.9 Million in 2003, compared to $14.3 Million in 2002, and $15.2 Million in 2001. The increase in net income of $600,000 from 2002 to 2003 has been primarily attributable to the growth in the loan portfolio and the continued reduction in the rates paid on interest-bearing liabilities and borrowings. Average earning assets produced a yield of 5.50% in 2003, compared to 6.04% in 2002, and 7.55% in 2001. The low interest rate environment continues to 37 decrease our earning asset yields as loans and investments reprice at lower interest rates due to refinancing opportunities and prepayments. The loan portfolio, which generally generates higher interest yields than our investment portfolio represented 70.9% of average assets in 2003, compared to 63.5% in 2002, and 63.7% in 2001. The increase of 7.4% from 2002 to 2003 was primarily the result of growth in originations of both residential real estate and home equity loans. This increase reflected the lower interest rate environment, aggressive solicitation and pricing of these loan types, and the Bank's strategic plan to diversify the loan portfolio by increasing these loan types, resulting in a reduction in credit risk exposure within the overall loan portfolio. The Bank intends to continue its competitive pricing of these loans within our market area, however, our marketing and pricing strategy may vary as necessary to achieve our goals for diversifying the loan portfolio. Partially offsetting the decrease in the earning asset yield of .54% from 6.04% as of December 31, 2002 to 5.50% as of year end 2003 was a reduction of .72% in the cost of funding the earning assets from 2.74% as of year end 2002 to 2.02% as of 2003. The decrease in the cost of funds in 2003 reflects the low interest rate environment resulting in the repricing of certificates of deposit and other deposit products to lower rates. Our net interest spread, representing the difference between the weighted average yield earned on our earning assets and the average cost of interest bearing liabilities increased to 3.48% in 2003 from 3.30% in 2002 and 3.34% reported in 2001. The increase in the net interest spread from 2002 to 2003 was the result of the decrease in the Bank's cost of interest- bearing liabilities due to the low interest rate environment. The average interest rate on these liabilities decreased by 72 basis points from 2.74% in 2002 to 2.02% in 2003. In comparison, the average interest rate on earning assets decreased by 54 basis points, from 6.04% in 2002 to 5.50% in 2003. Net interest margin, which represents net interest income as a percentage of average earning assets increased slightly to 3.91% in 2003 from 3.89% in 2002, and 4.18% in 2001. This increase was the result of the lower interest rate environment and asset/liability management objectives to manage balance sheet coordination and interest rate risk in achieving reasonable and stable net interest income throughout various interest rate cycles. The provision for loan losses is a charge against earnings and funds the Allowance for Loan Losses. It is management's intent to maintain the allowance for loan losses at a level that is adequate to absorb inherent losses within the loan portfolio. In determining the appropriate level of the allowance for loan losses, management takes into consideration past and anticipated loss experience, prevailing economic condition, evaluations of underlying collateral, the volume of the loan portfolio and the balance of nonperforming and classified loans. Management assesses the allowance for loan losses on a monthly basis. After thorough review and analysis of the adequacy of the loan loss reserve, the diversification of the loan portfolio into residential mortgages and home equity loans resulting in a reduction in overall credit risk, the continued improvement in asset quality in the loan portfolio, and the reduction and sale of loans deemed substandard, it was deemed prudent by management to recover $602,326 of previously provided loan loss provisions during 2003. The Bank's provision for 2003 was a benefit to earnings of $602,326 compared to a benefit of $301,000 in 2002, and a provision of $750,000 in 2001. Total other income for 2003 decreased by $319,272 or 12.6% from $2,532,817 recorded during 2002 to $2,213,545 in 2003. This decrease is predominantly the result of a decrease in net gains of sales 38 of available- for-sale securities from $625,832 recognized during 2002 to $1,944 in 2003 and $14,934 in 2001. The gains recognized during 2002 resulted from sales of various securities to partially offset a writedown charge of $1,240,868, discussed further below, due to various impairment adjustments of equity securities that were deemed to be other than temporary. No securities writedown charges were necessary during 2003 or 2001. Partially offsetting the decrease of $623,888 in security gains from 2002 to 2003 was increases in both service charges on deposit accounts and overdraft service charges of $234,075. Service charges on deposit accounts increased in 2003 to $569,189 when compared to $551,060 in 2002, and $561,370 in 2001. Overdraft service charges increased by $215,946 from $333,977 recorded in 2002 to $549,923 in 2003. In 2001 overdraft fees were $257,586. This increase was due to a new overdraft fee pricing schedule and procedure implemented during the second quarter of 2003. The cash surrender values of Bank Owned Life Insurance policies associated with both the Directors' and officers' life insurance programs increased by $67,524 from 2002 to 2003 due additional earnings generated from the purchase of additional policies for newly hired vice presidents during 2003 and two new directors. It is anticipated that new policies for officers hired as vice presidents would be purchased in accordance with this program. Other income increased slightly, by $3,017 from $578,728 recorded in 2002 to $581,745 in 2003. This income represents earnings derived from fees associated with safe deposit box rentals, ATM/debit card usage, customer investment commissions, and other miscellaneous income. Total Other Expense, made up of various noninterest expenses decreased by $190,073 to $12,661,729, as compared to $12,851,802 recorded in 2002. Total other expense was $11,408,387 in 2001. Salaries and employee benefits, which is the largest component in this category, increased by $410,423, (or 5.6%) from $7,368,364 for 2002 to $7,778,787 for 2003. In 2001, salaries and benefits were $7,124,377. The increase was attributable to additions to staff to support consumer lending activities, sales incentive commissions paid for achieving sales production targets, general salary increases due to annual performance reviews, and annual bonuses. A Chief Operating Officer/Chief Financial Officer was also hired in the second quarter of 2003, and during the third quarter of 2003, a Director of Retail and an Investment Executive was hired. In addition, employee benefit expense increased as the Company increased its contribution to a pension plan during 2003. Occupancy and Equipment expense combined totaled $1,428,247 in 2003, an increase of $104,834 when compared to $1,323,413 reported in 2002. Occupancy and equipment expense was $1,426,855 in 2001. The increase from 2002 to 2003 was primarily due to increased snow removal cost resulting from a cold, severe winter, and higher energy cost during the first quarter of 2003. In addition, real estate taxes on bank owned properties increased during 2003, and costs associated with closing a branch office in Swansea were recorded during the third quarter of 2003. Stationary and supplies expense decreased by $63,749 from $276,824 recorded in 2002 to $213,075 in 2003. This decrease was due to new inventory control procedures, and the closing of one branch office. This cost was $241,186 in 2001. 39 Professional fees increased by $479,734 or 87.4%, from $549,036 in 2002 to $1,028,770 in 2003. These expenses in 2001 were $364,680. This increase reflects costs associated with consultants contracted for marketing, advertising, investment advisory, strategic planning, pension actuaries, and information technology. In addition, legal expenses for both corporate and loan related matters increased in 2003. The substantial increase in 2003 was attributed to improving efficiencies throughout the Bank and implementing best practice procedures. In addition, the introduction of a new sales culture, the enhancement and expansion of our consumer loan products and operations, the promotion of the Bank through marketing and advertising, the introduction of new retail deposit products, and the significant upgrade and improvement of our information technology and computer systems required additional cost and investments. These expenses are expected to continue, but stabilize, as the Bank, through its strategic planning process, focuses on growth and profitability. Marketing Expenses attributed to production and media costs, print advertising, and other direct marketing increased by $19,923, from $355,203 recorded in 2002 to $375,126 in 2003. This expense in 2001 was $421,480. Many new loan and deposit products and promotions were introduced during 2003. The assessment for FDIC deposit insurance decreased by $2,565 in 2003, from $158,115 in 2002 to $155,550 in 2003. In 2001, this cost was $160,305. Included in Total Expenses in 2002 was a writedown of securities of $1,240,868 due to the recognition of impairment adjustments on equity securities that were deemed to be other than temporary. During 2003 and 2001, no writedowns were necessary. The investment portfolio is reviewed at least quarterly to determine if declines in market values are other than temporary and deemed impaired. In managing and evaluating its investment portfolio and reporting on its performance and condition, the Bank applies a methodology to identify whether a decline in market value below cost of an individual security is other than temporary. If the decline is judged to be other than temporary, the cost basis of the security will be written down to a new cost basis and the writedown will be accounted for as a realized loss. Using a variety of factors to estimate the outcome of future events, management performs an analysis of the Bank's investments to identify those securities that may be permanently impaired. Generally accepted accounting principles (GAAP) provide and reflect interpretive guidance for directing management on impairment decisions. All securities will be monitored and evaluated to determine whether a recommendation will be made to sell or impair securities. The methodology used to determine whether losses are other than temporary involve projecting the outcome of future events. Judgments are required in determining whether factors exist that indicate that an impairment loss has occurred. These judgments are based on subjective and objective factors, including knowledge and experience about past and current events and assumptions about future events. If the fair market value of a security is significantly below amortizing cost, the following factors would be applied to determine if a loss is other than temporary: the decline is due to adverse conditions specifically related to the security or to conditions in an industry or geographic area, the decline has existed for an extended period of time, management does not possess both the intent and ability to hold the security for a period of time sufficient to allow for any anticipated recovery of fair value, the security has been downgraded by a rating agency, the financial condition of the issuer has deteriorated, and dividends have been reduced or eliminated, or scheduled interest payments have not been made 40 The following table sets forth the components of Other Expense:
2003 2002 2001 - -------------------------------------------------------------------------- Amortization of Goodwill $ 0 $ 0 $ 226,800 Communications 336,136 322,020 326,234 Committee Fees 178,250 212,250 190,900 Interest Expense -(Associated with REIT Settlement) 128,977 0 0 Other Various Expenses 1,038,811 1,045,709 925,570 - -------------------------------------------------------------------------- Other Expense Total $1,682,174 $1,579,979 $1,669,504 ==========================================================================
Goodwill arising from the Company's acquisition of Fairbank, Inc. in 1996 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 June 30, 2003 and determined that its goodwill as of that date was not impaired. As previously mentioned, the Bank entered into an agreement to settle the dispute concerning the REIT dividends received deduction through calendar year 2002. The interest assessed on this additional state tax liability amounted to $128,977 for calendar years 1999 through 2002. Income before income taxes totaled $4,697,602 as of year-end 2003, an increase of $597,867 as compared to $4,099,735 reported as of December 31, 2002. Applicable taxes increased by $875,533 to $2,009,716 when compared to $1,134,183 reported in the prior year. During 2003 the Company recorded a state income tax provision of $529,191, net of federal and state income tax benefits, as a result of the settlement with the Massachusetts Department of Revenue that retroactively disallowed the REIT dividend deduction for the years ended December 31, 1999 through December 31, 2002. Due to the impact of this additional tax provision and the related $128,977 of interest charge, the effective tax rate for 2003 was 42.80% compared to 27.70% for 2002. This increase from 2002 primarily reflects the impact of the State of Massachusetts' change in tax law that eliminated the tax benefit derived from REIT dividends. The Company's net earnings were $2,687,886, $2,965,552, and $3,210,253 for 2003, 2002, and 2001, respectively. Diluted earnings per share were $.67 for twelve months ending December 31, 2003 compared to $.75 for the same period in 2002 and $.84 in 2001. 41 Unaudited Quarterly Financial Summary
(In Thousands) - ----------------------------------------------------------------------------------- March 31 June 30 September 30 December 31 - ----------------------------------------------------------------------------------- 2003: Revenues $5,535 $5,678 $5,699 $5,918 Operating Income 622 1,597 1,019 1,459 Net Income (Loss) (692) 1,609 700 1,071 Earnings (loss) per share Basic $(0.18) $ 0.41 $ 0.18 $ 0.27 Diluted $(0.17) $ 0.40 $ 0.17 $ 0.27 2002: Revenues $6,250 $5,991 $6,534 $5,795 Operating Income (Loss) 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
FINANCIAL CONDITION Total assets increased by $41.0 Million, or 10.3%, from $398.4 Million at December 31, 2002 to $439.4 Million at December 31, 2003. The increase in total assets during 2003 is most significant in the gross loan portfolio that experienced a 26.8% increase. The increase in total assets was primarily the result of an increase in advances from the Federal Home Loan Bank of $41.3 Million, from $19.2 Million at December 31, 2002 to $60.5 Million at December 31, 2003. Loans - ----- The loan portfolio represents the largest component of the Company's assets. Total loans increased by $71.1 Million, or 26.8%, from $265.0 Million at December 31, 2002 to $336.1 Million at December 31, 2003. The increases in 2003 were primarily due to increases of $56.9 Million in residential mortgage and home equity loans, $21.2 Million in commercial and commercial real estate loans, offset by decreases in consumer and construction loans of $6.7 Million. The growth in the commercial and commercial real estate loan portfolios was encouraging in light of the impact of the economic slowdown and strong competition for these customers. The consumer loan portfolio consisting of direct and indirect auto loans and other consumer installment loans decreased by $2.9 Million. Additionally, during 2003, aggressive plans to improve the quality of our loan portfolio resulted in the sale of approximately $2.0 Million of loans. The composition of our loan portfolio has changed since December 31, 2002. Loan demand for residential real estate and home equity loans increased throughout 2003 as new and existing homeowners took advantage of the lower interest rates. The largest segment of the loan portfolio is now residential real estate and home equity loans which accounts for 43.8% of the loan portfolio, and is comprised of first mortgages on one-to four- family properties, mortgages on multi-family properties, and second mortgages on one-to four-family properties. These loan types were 34.1% of the loan portfolio as of December 31, 2002. Credit is granted based on income to debt ratio, a satisfactory credit report, and the appraised value 42 of the property. The Bank also provides a program to encourage home ownership for first time homebuyers. Another component of the loan portfolio is commercial real estate loans representing 41.8% of total loans compared to 46.3% as of December 31, 2002. These loans are collateralized by various types of commercial properties, without any predominate type of property or concentration of credit in any one industry. The properties consist of apartment complexes, medical centers, strip malls, factories, and retail units located in the Bank's market area extending throughout Southeastern Massachusetts and cities and towns in Rhode Island. Commercial real estate loans generally have a higher degree of credit 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 $500,000 are submitted to the Executive Committee of the Board of Directors for final approval. Annually, 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. Other types of loans total 14.4% of the loan portfolio and are comprised of commercial and industrial loans, which are generally short-term loans to finance business inventory, consumer installment loans, automobile financing, nonprofit, and real estate construction loans. These loan types represented 19.6% of the loan portfolio in 2002. Investments - ----------- The main objectives of the investment portfolio are to achieve a competitive rate of return over a reasonable time period and provide liquidity. 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 is determined at the time of the purchase. 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 Held-to-Maturity category consists mostly 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. Total investments decreased by $19.1 Million, or 23.7%, to $61.5 Million as of December 31, 2003, from $80.6 Million reported as of December 31, 2002. This decrease in investments of $19.1 Million during 2003, primarily the result of scheduled maturities and call features, combined with an increase of $41.3 Million in FHLB borrowings and a decrease of $15.5 Million in federal funds sold and overnight FHLB deposits, provided the liquidity to fund the $71.1 Million increase in the loan portfolio. Included in investments in 2003 is $3.0 Million of stock of the FHLB, compared to $1.0 Million in 2002. The Bank is required to invest in FHLB stock in an amount determined on the basis of the Bank's 43 residential mortgage loans and borrowings from the FHLB. This stock is redeemable at par and earns a quarterly dividend at the discretion of the FHLB. The Company's current investment strategy is to concentrate on the purchase of U.S. Government and agency obligations, and corporate bonds generally maturing or callable within five to seven years. Our investment policy permits investments in mortgage-backed securities, usually having a longer weighted average life. As of December 31, 2003, the net unrealized gain on securities classified as Available-for-Sale was $91,000, consisting of net unrealized gains of $238,000 on debt securities offset by net unrealized losses of $147,000 on marketable equity securities. Off Balance Sheet Arrangements - ------------------------------ The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company's financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Recent Accounting Pronouncements: - --------------------------------- In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). 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. This Statement did not have a material impact on the Company's consolidated financial statements. In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial Institutions" ("SFAS No. 147"), 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 SFAS 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 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. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 44 45"). FIN 45 elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 clarifies that a guarantor is required to disclose (a) the nature of the guarantee; (b) the maximum potential amount of future payments under the guarantee; (c) the carrying amount of the liability; (d) the nature and extent of any recourse provisions or available collateral that would enable the guarantor to recover the amounts paid under the guarantee. 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. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted the initial recognition and initial measurement provisions of FIN 45 effective as of January 1, 2003 and adopted the disclosure requirements effective as of December 31, 2002. The adoption of this interpretation did not have a material effect on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock- Based Compensation - Transition and Disclosure, an amendment of SFAS Statement No. 123" ("SFAS No. 148"). SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition provisions and disclosure provisions are required for financial statements for fiscal years ending after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 as of December 31, 2002 and currently uses the intrinsic value method of accounting for stock options. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement (a) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (b) clarifies when a derivative contains a financing component, (c) amends the definition of an underlying to conform to language used in FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," and (d) amends certain other existing pronouncements. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003. There was no substantial impact on the Company's consolidated financial statements on adoption of this Statement. 45 In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that certain financial instruments that were previously classified as equity must be classified as a liability. Most of the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. This Statement did not have any material effect on the Company's consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), in an effort to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. In December 2003, the FASB revised Interpretation No. 46, also referred to as Interpretation 46 (R) ("FIN 46(R)"). The objective of this interpretation is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. This interpretation changes that, by requiring a variable interest entity to be consolidated by a company only if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The Company is required to apply FIN 46, as revised, to all entities subject to it no later than the end of the first reporting period ending after March 15, 2004. However, prior to the required application of FIN 46, as revised, the Company shall apply FIN 46 or FIN 46 (R) to those entities that are considered to be special-purpose entities as of the end of the first fiscal year or interim period ending after December 15, 2003. The adoption of this interpretation has not and is not expected to have a material effect on the Company's consolidated financial statements. In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised 2003)"). This Statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This Statement retains the disclosure requirements contained in SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits," which it replaces. It requires additional disclosures to those in the original Statement 132 about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. This Statement is effective for financial statements with fiscal years ending after December 15, 2003 and interim periods beginning after December 15, 2003. Adoption of this Statement did not have a material impact on the Company's consolidated financial statements. Deposits and Borrowed Funds - --------------------------- The Bank's major source of funds are deposits, borrowings and amortization from principal payments or payoffs on loans and mortgage-backed securities, and maturities or calls of investments. Total deposits decreased by $2.5 Million from $335.6 Million at December 31, 2002 to $333.1 Million at December 31, 2003. Total interest- bearing deposits decreased by $3.5 Million, from $263.4 46 Million at December 31, 2002 to $259.9 Million at December 31, 2003. This decrease was primarily the result of declining interest rates for these products and depositors attempting to find better yielding alternative investments. Non-interest bearing deposits increased by $1.0 Million, from $72.3 Million at December 31, 2002 to $73.3 Million at December 31, 2003. The Bank does not engage in gathering brokered deposits. The Bank's marketing campaign during 2003 to promote new money market account products has been very successful generating more than $10.0 Million in new core deposits. Borrowings are generally used to fund long-term fixed rate loans and short-term liquidity requirements, or to manage interest rate risk. The Bank is a member of the Federal Home Loan Bank of Boston and is authorized to borrow funds to meet deposit withdrawals or to expand the loan or investment portfolios. These borrowing advances are subject to collateral requirements and borrowing limitations. The Bank also has available a federal funds purchase line of credit with a correspondent bank. The Bank may also obtain funds from the discount window of the Federal Reserve Bank of Boston. As of December 31, 2003, Federal Home Loan Bank advances increased by $41.3 Million, from $19.2 Million at December 31, 2002 to $60.5 Million at December 31, 2003. This substantial increase was primarily to fund loan growth. The Bank took advantage of the low interest rate environment to obtain advances from the Federal Home Loan Bank to augment its funding sources, and also as a tool to hedge against interest rate risk. Asset/Liability Management and Interest Rate Risk - ------------------------------------------------- The Company's Finance/Investment Committee, comprised of designated members of the Company's executive management and Board of Directors is responsible for managing and monitoring interest rate risk, and reviewing with the Board of Directors, at least quarterly, the interest rate risk positions, the impact changes in interest rates would have on net interest income, and the maintenance of interest rate risk exposure within approved guidelines. The 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 quarterly 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. 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, 2003, for the period from 1 day to 2 years, the Company had a cumulative negative gap position of $11.9 Million. This equates to a percentage of total assets of a negative 2.71% which is within the specific target 47 for interest rate sensitivity established by the Company. The negative gap occurs as a result of the amount of deposits, especially term deposits that are subject to repricing during this time period. For further discussion of the Company's estimated exposure as a percentage of net interest income and the dollar impact for the next twelve months, see "Item 1 - Interest Rate Sensitivity Gap" on page 8. Nonperforming Assets - -------------------- Nonperforming assets as a total decreased to $407,000 at year end 2003, from $643,000 reported at year end 2002. At year end 2001, nonperforming assets totaled $1,582,000. Nonaccrual loans is the largest component of nonperforming assets, and at December 31, 2003, this category decreased to $407,000 from $635,000 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. 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. Prior to foreclosure, the Bank will generally obtain an updated appraisal of the property. As of December 31, 2003, there were no loans 90 days or more past due compared to $7,700 reported at year end 2002. 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, 2003 and at the end of the prior year. The percentage of nonaccrual loans to total loans decreased by 50% from the prior year due to the decrease of loans in nonaccrual status and the increase of the loan portfolio. In addition, the percentage of nonaccrual loans, restructured loans and real estate acquired by foreclosure to total assets decreased as a result of increased asset levels. The $107,000 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. 48 Loans are considered impaired when it is probable that the Company will not be able to collect principal, interest, and fees according to the contractual terms of the loan agreement. At December 31, 2003, there were $1,964,791 in loans which the Company has determined to be impaired, of which $1,858,135 have a related allowance for credit losses of $275,071. As of December 31, 2002, the recorded investment in impaired loans was $2,497,626, of which $2,497,626 have a related allowance for credit losses of $477,124. Management is not aware of any other loans that pose a potential credit risk or where the loans are current but the borrowers are experiencing financial difficulty. Allowance for Loan Losses - ------------------------- The Allowance for Loan Losses is established through provisions for loan losses based on management's ongoing evaluation of credit risk within the loan portfolios. 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, 2003, was 1.24% compared to 1.83% reported at year end 2002. The ratios at years ending 2001, 2000, and 1999 were 2.16%, 1.86% and 1.56%, respectively. In 2003, the Company deducted $211,000 from the Allowance and recovered $113,000 from previously charged- off loans. Loans charged-off during 2003 totaled $211,000 resulting in net charge-offs of $98,000. Net charge-offs for prior years were $320,000, $42,000, $190,000, and $353,000 for 2002, 2001, 2000 and 1999, respectively. In addition to management's assessment of the Allowance for Loan Losses, the Allowance is also evaluated by independent loan review consultants, regulatory agencies, and independent accountants as part of their examination and audit procedures. 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 funding 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 and cash withdrawals from deposit accounts. The Company's principle sources of funds are customer deposits, borrowings, principal and interest payments on outstanding loans and mortgage-backed securities, maturities of investment securities and funds provided from operations. Although scheduled payments from amortization of loans, mortgage-backed securities, and maturing investment securities are predictable sources of liquidity, deposit cash flows and loan prepayments are influenced by interest rate movement. In addition, deposit flow could be impacted by other instruments available to the public such as mutual funds and annuities. The largest source of funds is provided by depositors. The greatest component of the Company's deposit base is term certificates which extend out to a maximum of five years. The Company does not 49 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. Deposit flows are influenced by the level of interest rates, economic conditions, and the attractiveness of competing deposits and other investment alternatives. The Bank also has the ability to borrow funds for liquidity purposes 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, and in the case of FHLB borrowings, one to four family residential loans are secured as collateral. Borrowings from the FHLB increased by $41.3 Million from $19.2 Million at December 31, 2002 to $60.5 Million at December 31, 2003. During 2003, the Bank took advantage of the low interest rate environment to draw down some longer term structured funding opportunities, and to hedge against any possible interest rate risk as a result of the increase in long term, fixed rate residential mortgages. As of December 31, 2003, the Bank had approximately $14.0 Million in available borrowing capacity with the FHLB that is contingent upon the purchase of additional FHLB stock. 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. The Bank's primary source of funds during 2003 was provided by new advances from the FHLB of $41.6 Million, which is net of payments on existing borrowings, proceeds from maturities, calls, and sales of investment securities totaling $59.2 Million, proceeds from sale of loans totaling $2.5 Million, and a decrease of $15.5 Million from Federal Funds Sold and FHLB overnight deposits. The use of these funds totaling $118.1 Million in both operating and financing activities as follows: $71.6 Million in new loan originations net of principal collections, $38.7 Million in investment purchases, $2.0 Million in purchases of FHLB stock, $1.1 Million in investments in life insurance policies, and $2.2 Million in purchases of loans. In addition, total deposits, due to a decrease in time deposits, declined by $2.5 Million. Based on historical trends, the avoidance of using brokered deposits, the Bank's current competitive pricing strategy, and the addition of new deposit products, retail services and targeted promotions, management believes that the Bank will continue to attract new customer relationships in both deposits and loans. Our ability to attract new customers, however, will be influenced by, among other things, regional bank consolidations. 50 Contractual Obligations - ----------------------- The following table is a summary of the Company's contractual obligations as of December 31, 2003 to commitments under contractual leases, FHLB advances and borrowed funds by contractual maturity date for the next five years.
Payment due by period --------------------------------------------------------------------------- Less than 1 More than 5 Contractual Obligations Total year 1-3 years 3-5 years years - ----------------------- ----- ----------- --------- --------- ----------- FHLB Advances and Borrowed Funds $60,474,864 $8,644,736 $16,769,290 $17,795,748 $17,265,090 Operating Lease Obligations 120,165 66,509 53,656 0 0 --------------------------------------------------------------------------- Total $60,595,029 $8,711,245 $16,822,946 $17,795,748 $17,265,090 ===========================================================================
Capital - ------- Total Stockholders' equity was $42.7 Million at December 31, 2003, as compared to $41.2 Million at December 31, 2002, for an increase of $1.5 Million. This increase during 2003 resulted from net income of $2.7 Million for the year then ended, which was partially offset by dividends declared of $1.4 Million. The increase in capital was a combination of several factors, including twelve months earnings of $2.7 Million and transactions originating through the Dividend Reinvestment Program whereby 7,712 shares were issued for optional cash contributions of $113,394 and 42,028 shares were issued for $682,786 in lieu of cash dividend payments. There were also stock options exercised resulting in the issuance of common stock totaling $93,850, including a tax benefit. These additions were offset by dividends paid of $1,434,626. Capital also increased as a result of accumulated other comprehensive income (loss), which reflects net unrealized gains or losses, net of taxes, on securities classified as Available-for-Sale and the minimum pension liability adjustment. On December 31, 2002, the Available-for-Sale portfolio had unrealized gains, net of taxes, of $223,272, and on December 31, 2003, as a result of current market values, the portfolio reflects unrealized losses, net of taxes, of $9,740. There was an increase in the minimum pension liability adjustment from $234,180, net of taxes, recorded December 31, 2002 to $595,879 as of December 31, 2003. Under the requirements for Risk Based and Leverage Capital of the federal banking agencies, a minimum level of capital will vary among banks based on safety and soundness of operations. Risk Based Capital ratios are calculated with reference to risk-weighted assets, which include both on and off balance sheet exposure. In addition to meeting the required levels, 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, 2003. 51 The following table illustrates the capital position of Slade's Ferry Bancorp. and Slade's Ferry Trust Company for years ending December 31, 2003 and 2002.
Slade's Ferry Bancorp. 2003 2002 - ------------------------------------------------------------------------------------------------ (In Thousands) Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------ Total Capital (to Risk Weighted Assets) $ 44,510 13.64% $ 41,540 14.84% Minimum required 26,113 8.00 22,291 8.00 Excess 18,397 5.64 19,249 6.84 Tier I Capital (to Risk Weighted Assets) 40,429 12.39 38,040 13.59 Minimum required 13,056 4.00 11,146 4.00 Excess 27,373 8.39 26,894 9.59 Risk Adjusted Assets, net of goodwill, Nonqualifying intangibles, excess allowance and excess deferred tax assets 326,300 278,650 Tier I Capital (Leverage Ratio) 40,429 9.33 38,040 9.48 Minimum required 17,335 4.00 16,053 4.00 Excess 23,094 5.33 21,987 5.48 Quarterly average total assets, net of goodwill, Nonqualifying intangibles and excess deferred tax assets 433,320 401,325 Slade's Ferry Trust Company 2003 2002 - ------------------------------------------------------------------------------------------------ (In Thousands) Amount Ratio Amount Ratio - ------------------------------------------------------------------------------------------------ Total Capital (to Risk Weighted Assets) $ 37,384 11.48% $ 35,240 12.63% Minimum required 26,057 8.00 22,208 8.00 Excess 11,327 3.48 13,032 4.63 Tier I Capital (to Risk Weighted Assets) 33,312 10.23 31,753 11.38 Minimum required 13,028 4.00 11,104 4.00 Excess 20,284 6.23 20,649 7.38 Risk Adjusted Assets, net of goodwill, Nonqualifying intangibles, excess allowance and excess deferred tax assets 325,625 277,600 Tier I Capital (Leverage Ratio) 33,312 7.75 31,753 8.00 Minimum required (1) 17,198 4.00 15,868 4.00 Excess 16,114 3.75 15,885 4.00 Quarterly average total assets, net of goodwill, Nonqualifying intangibles and excess deferred tax assets 429,830 396,700 - -------------------- The Bank was required to maintain a 7% Tier 1 Leverage Capital ratio while under the informal agreement with the Massachusetts Commissioner of Banks and the Federal Deposit Insurance Corporation originally entered into in 2000, revised in 2002 and subsequently to December 31, 2003, as a result of the improved condition and operation of the Bank, terminated effective January 22, 2004.
52 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. See pages 10 and 11, under the headings "Interest Rate Risk" and "Interest Rate Sensitivity-GAP Report" for a discussion of our 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 this 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. ITEM 9A CONTROLS AND PROCEDURES Management of the Company, including the Company's President and Chief Executive Officer and Chief Financial Officer and Chief Operations Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Company's President and Chief Executive Officer and Chief Financial Officer and Chief Operations Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required. There have been no changes in the Company's internal control over financial reporting identified in connection with the evaluation that occurred during the Company's last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, the Company's internal control over financial reporting. 53 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 to be held May 10, 2004. The information set forth under the headings "Directors and Executive Officers", "Information About the Board of Directors and Management" and "Section 16(a) Beneficial Ownership Reporting Compliance" of such Proxy Statement is incorporated herein by reference. The Company has adopted a Code of Conduct and Ethics, which applies to the Company's officers, directors and employees, including the Company's principal executive officer, principal financial officer, principal accounting officer or controller or person performing similar functions for the Company. Our Code of Conduct and Ethics meets the requirements of a "code of ethics" as defined by Item 406 of Regulation S-K and is filed as Exhibit 14 to this annual report on Form 10-K. ITEM 11 EXECUTIVE COMPENSATION Reference is hereby made to the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 10, 2004. The information set forth under the headings "Executive Compensation", "Performance Graph", "Summary Compensation Table", "Benefit Plans" and "Employment Contracts, Termination of Employment and Change In Control Amendments" 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 to be held May 10, 2004. The information set forth under the headings "Security Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" 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 to be held May 10, 2004. The information set forth under the heading "Certain Relationships and Related Transactions" of such Proxy Statement is incorporated herein by reference. 54 ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES Reference is hereby made to the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 10, 2004. The information set forth under the heading "Audit Fees and Pre-approval Policies" of such Proxy Statement is incorporated herein by reference. 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: --------
Exhibit No. Description Item - ----------- ----------- ---- 3.1 Articles of Incorporation of Slade's Ferry Bancorp. as (1) amended 3.2 By-laws of Slade's Ferry Bancorp. as amended (2) 4.1 Articles of Incorporation of Slade's Ferry Bancorp. (see Exhibit 3.1) (1) 4.2 Bylaws of Slade's Ferry Bancorp. as amended (see Exhibit 3.2) (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 Company and (4) Edward S. Machado (A substantially identical contract exists with Peter Paskowski) 10.3 Supplemental Executive Retirement Agreement between Slade's Ferry (5) (formerly Weetamoe) Bancorp. and Donald T. Corrigan 10.4 Supplemental Executive Retirement Agreement as amended between Slade's Ferry (2) (formerly Weetamoe) Bancorp. and James D. Carey 55 10.5 Supplemental Executive Retirement Agreement between Slade's Ferry (2) (formerly Weetamoe) Bancorp. and Manuel J. Tavares 10.6 Swansea Mall Lease (4) 10.7 Form of Director Supplemental Retirement Program Director Agreement, (6) 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 Thomas B. Almy (part (7) 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 Dollar Plan Agreement and (8) 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 (9) 10.11 Supplemental Executive Retirement Agreement between Slade's Ferry Bancorp (10) and Mary Lynn D. Lenz. 10.12 Change-in-Control Severance Agreement between Slade's Ferry Bancorp, Slade's (10) Ferry Trust Company and Mary Lynn D. Lenz 10.13 Confidentiality and Non-Solicitation Agreement between Slade's Ferry Bancorp (10) and Mary Lynn D. Lenz 14 Code of Conduct and Ethics 21 List of subsidiaries of Slade's Ferry Bancorp. (11) 23 Consent of Independent Public Accounts 31.1 Rule 13a-14(a)/15d-14(a) Certification of the CEO 31.2 Rule 13a-14(a)/15d-14(a) Certification of the CFO 32.1 Section 1350 Certification of the CEO 32.2 Section 1350 Certification of the CFO - -------------------- Incorporated by reference to the Registrant's Registration Statement on Form SB-2 filed with the Commission on April 14, 1997. Incorporated by reference to the Registrant's Form 10-KSB for the fiscal year ended December 31, 1996. Incorporated by reference to the Registrant's Form 10-QSB for the quarter ended March 31, 1996. Incorporated by reference to the Registrant's Registration Statement on Form S-4 File No. 33-32131. Incorporated by reference to the Registrant's Form 10-KSB for the fiscal year ended December 31, 1994. Incorporated by reference to the Registrant's Form 10-Q for the quarter ended March 31, 1999. Incorporated by reference to the Registrant's Form 10-QSB for the quarter ended June 30, 1998. Incorporated by reference to the Registrant's Form 10-Q for the quarter ended June 30, 2000. Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2002. 56 Incorporated by reference to the Registrant's Form 10-Q for the quarter ended March 31, 2003. Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1999.
(b) A report on Form 8-K dated October 21, 2003 was furnished to the Securities and Exchange Commission reporting under Items 9 and 12 the issuance of a press release disclosing certain information concerning our third quarter results of operation and financial condition and furnishing the release as an exhibit. A report on Form 8-K dated January 29, 2004 was furnished to the Securities and Exchange Commission reporting under Items 9 and 12 the issuance of a press release disclosing certain information concerning our third quarter results of operation and financial condition and furnishing the release as an exhibit. (c) See Item 15(a)(3) above. 57 SIGNATURES - ---------- Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized Slade's Ferry Bancorp. By /s/ Mary Lynn D. Lenz --------------------------- Mary Lynn D. Lenz, President/ Chief Executive Officer and Director March 29, 2004 Pursuant to the requirements of the Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Thomas B. Almy 03/29/04 /s/ Peter G. Collias 03/29/04 - --------------------------------------- ------------------------------------- Thomas B. Almy Peter G. Collias Director Director /s/ Anthony F. Cordeiro 03/29/04 /s/ Paul C. Downey 03/29/04 - --------------------------------------- ------------------------------------- Anthony F. Cordeiro Paul C. Downey Director Director /s/ Mary Lynn D. Lenz 03/29/04 /s/ Melvyn A. Holland 03/29/04 - --------------------------------------- ------------------------------------- Mary Lynn D. Lenz Melvyn A. Holland President/CEO and Director Director /s/ William Q. MacLean Jr. 03/29/04 /s/ Francis A. Macomber 03/29/04 - --------------------------------------- ------------------------------------- William Q. MacLean Jr. Francis A. Macomber Director Director /s/ Majed Mouded, MD 03/29/04 /s/ Shaun O'Hearn Sr. 03/29/04 - --------------------------------------- ------------------------------------- Majed Mouded, MD Shaun O'Hearn Sr. Director Director /s/ Lawrence J. Oliveira, DDS 03/29/04 /s/ Peter Paskowski 03/29/04 - --------------------------------------- ------------------------------------- Lawrence J. Oliveira, DDS Peter Paskowski Director Director /s/ Kenneth R. Rezendes 03/29/04 /s/ William J. Sullivan 03/29/04 - --------------------------------------- ------------------------------------- Kenneth R. Rezendes William J. Sullivan Chairman of the Board and Director Director /s/ Charles Veloza 03/29/04 /s/ David F. Westgate 03/29/04 - --------------------------------------- ------------------------------------- Charles Veloza David F. Westgate Director Vice Chairman and Director /s/ Deborah A. McLaughlin 03/29/04 - --------------------------------------- ------------------------------------- Deborah A. McLaughlin Chief Financial Officer/Chief Operations Officer 58 INDEX TO FINANCIAL STATEMENTS Slade's Ferry Bancorp. and Subsidiaries Page Independent Auditors' Report F-2 Consolidated Balance Sheets as of December 31, 2003 and December 31, 2002 F-3 Consolidated Statements of Income for the years ended December 31, 2003, December 31, 2002 and December 31, 2001 F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2003, December 31, 2002 and December 31, 2001 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 2003, December 31, 2002 and December 31, 2001 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, 2003 and 2002 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, 2003. 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, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, 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 13, 2004 (except for Note 14 as to which the date is January 22, 2004) F-2 SLADE'S FERRY BANCORP. AND SUBSIDIARY ------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- December 31, 2003 and 2002 --------------------------
ASSETS 2003 2002 - ------ ------------ ------------ Cash and due from banks $ 18,428,932 $ 14,985,461 Interest bearing demand deposits with other banks 213,438 8,508 Money market mutual funds 63,539 222,567 Federal Home Loan Bank overnight deposit 10,000,000 Federal funds sold 4,000,000 9,500,000 ------------ ------------ Cash and cash equivalents 22,705,909 34,716,536 Interest bearing time deposits with other bank 200,000 200,000 Investments in available-for-sale securities (at fair value) 47,162,852 65,907,926 Investments in held-to-maturity securities (fair values of $11,851,713 as of December 31, 2003 and $14,262,405 as of December 31, 2002) 11,300,402 13,696,254 Federal Home Loan Bank stock 3,023,800 1,013,400 Loans, net of allowance for loan losses of $4,154,394 in 2003 and $4,854,388 in 2002 331,496,525 259,816,056 Premises and equipment 5,894,736 6,067,879 Goodwill 2,173,368 2,173,368 Accrued interest receivable 1,497,104 1,492,591 Cash surrender value of life insurance 10,980,879 9,750,661 Deferred taxes 1,996,213 1,849,723 Other assets 1,016,753 1,690,589 ------------ ------------ Total assets $439,448,541 $398,374,983 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Deposits: Noninterest-bearing $ 73,253,462 $ 72,277,469 Interest-bearing 259,891,355 263,355,063 ------------ ------------ Total deposits 333,144,817 335,632,532 Federal Home Loan Bank advances 60,474,864 19,185,338 Other liabilities 3,086,719 2,336,109 ------------ ------------ Total liabilities 396,706,400 357,153,979 ------------ ------------ Preferred stockholders' equity in a subsidiary company 54,000 ------------ ------------ Stockholders' equity: Common stock, par value $.01 per share; authorized 10,000,000 shares; issued and outstanding 3,995,857.1 shares in 2003 and 3,937,762.9 shares in 2002 39,959 39,378 Paid-in capital 28,609,206 27,693,199 Retained earnings 14,698,595 13,445,335 Accumulated other comprehensive loss (605,619) (10,908) ------------ ------------ Total stockholders' equity 42,742,141 41,167,004 ------------ ------------ Total liabilities and stockholders' equity $439,448,541 $398,374,983 ============ ============
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, 2003, 2002 and 2001 --------------------------------------------
2003 2002 2001 ----------- ----------- ----------- Interest and dividend income: Interest and fees on loans $17,602,784 $17,276,773 $21,554,165 Interest and dividends on securities: Taxable 2,349,161 3,826,659 4,410,499 Tax-exempt 511,761 577,982 533,287 Interest on federal funds sold 100,791 227,229 598,934 Other interest 52,133 127,831 226,785 ----------- ----------- ----------- Total interest and dividend income 20,616,630 22,036,474 27,323,670 ----------- ----------- ----------- Interest expense: Interest on deposits 4,505,217 6,703,002 11,333,086 Interest on Federal Home Loan Bank advances 1,567,953 1,216,559 965,008 Interest on other borrowed funds 8,193 28,436 ----------- ----------- ----------- Total interest expense 6,073,170 7,927,754 12,326,530 ----------- ----------- ----------- Net interest and dividend income 14,543,460 14,108,720 14,997,140 (Benefit) provision for loan losses (602,326) (310,000) 750,000 ----------- ----------- ----------- Net interest and dividend income after (benefit) provision for loan losses 15,145,786 14,418,720 14,247,140 ----------- ----------- ----------- Other income: Service charges on deposit accounts 569,189 551,060 561,370 Overdraft service charges 549,923 333,977 257,586 Gain on sales and calls of available-for-sale securities, net 1,944 625,832 14,934 Increase in cash surrender value of life insurance policies 510,744 443,220 351,023 Other income 581,745 578,728 584,619 ----------- ----------- ----------- Total other income 2,213,545 2,532,817 1,769,532 ----------- ----------- ----------- Other expense: Salaries and employee benefits 7,778,787 7,368,364 7,124,377 Occupancy expense 886,287 845,366 861,407 Equipment expense 541,960 478,047 565,448 Stationary and supplies 213,075 276,824 241,186 Professional fees 1,028,770 549,036 364,680 Marketing expense 375,126 355,203 421,480 FDIC deposit insurance premium 155,550 158,115 160,305 Writedown of securities 1,240,868 Other expense 1,682,174 1,579,979 1,669,504 ----------- ----------- ----------- Total other expense 12,661,729 12,851,802 11,408,387 ----------- ----------- ----------- Income before income taxes 4,697,602 4,099,735 4,608,285 Income taxes 2,009,716 1,134,183 1,398,032 ----------- ----------- ----------- Net income $ 2,687,886 $ 2,965,552 $ 3,210,253 =========== =========== =========== Earnings per common share $ .68 $ .76 $ .84 =========== =========== =========== Earnings per common share assuming dilution $ .67 $ .75 $ .84 =========== =========== ===========
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, 2003, 2002 and 2001 --------------------------------------------
Accumulated Other Common Paid-in Retained Comprehensive Stock Capital Earnings Loss Total ------ -------- -------- -------------- ------ 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 Comprehensive income: Net income 2,687,886 Other comprehensive loss (594,711) Comprehensive income 2,093,175 Issuance of common stock from dividend reinvestment plan 424 682,362 682,786 Stock issuance relating to optional cash contribution plan 73 113,321 113,394 Stock options exercised 84 93,766 93,850 Tax benefit of stock options 26,558 26,558 Dividends on minority interest preferred stock ($40.00 per share) (4,040) (4,040) Dividends declared ($.36 per share) (1,430,586) (1,430,586) ------- ----------- ----------- --------- ----------- Balance, December 31, 2003 $39,959 $28,609,206 $14,698,595 $(605,619) $42,742,141 ======= =========== =========== ========= ===========
F-5 SLADE'S FERRY BANCORP. AND SUBSIDIARY ------------------------------------- CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY ---------------------------------------------------------- Years Ended December 31, 2003, 2002 and 2001 -------------------------------------------- (continued)
2003 2002 2001 --------- --------- --------- Other comprehensive income and reclassification disclosure for the years ended December 31: Unrealized (losses) gains on securities Net unrealized (losses) gains on available-for-sale securities $(442,358) $ 53,577 $ 853,519 Reclassification adjustment for realized (gains) losses in net income (1,944) 615,036 (14,934) --------- --------- --------- Net unrealized (losses) gains on securities (444,302) 668,613 838,585 Income tax benefit (expense) 211,290 (324,398) (362,985) --------- --------- --------- Net of tax amount (233,012) 344,215 475,600 --------- --------- --------- Minimum pension liability adjustment (612,323) (216,583) (138,992) Income tax benefit 250,624 88,649 56,889 --------- --------- --------- Net of tax amount (361,699) (127,934) (82,103) --------- --------- --------- Other comprehensive (loss) income, net of tax $(594,711) $ 216,281 $ 393,497 ========= ========= =========
Accumulated other comprehensive loss consists of the following as of December 31:
2003 2002 2001 --------- --------- --------- Net unrealized (losses) gains on available-for-sale securities, net of taxes $ (9,740) $ 223,272 $(120,943) Minimum pension liability adjustment, net of taxes (595,879) (234,180) (106,246) --------- --------- --------- Accumulated other comprehensive loss $(605,619) $ (10,908) $(227,189) ========= ========= =========
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, 2003, 2002 and 2001 --------------------------------------------
2003 2002 2001 ------------ ------------ ------------ Cash flows from operating activities: Net income $ 2,687,886 $ 2,965,552 $ 3,210,253 Adjustments to reconcile net income to net cash provided by operating activities: Amortization, net of accretion of securities 184,489 162,144 152,995 Gain on sales and calls of available-for-sale securities, net (1,944) (625,832) (14,934) Writedown of securities 1,240,868 Change in unearned income 102,159 (40,927) (137,081) (Benefit) provision for loan losses (602,326) (310,000) 750,000 Depreciation and amortization 639,402 637,342 685,577 (Gain) loss on sale of property and equipment (1,400) 501 (107,109) Increase in cash surrender value of life insurance policies (510,744) (443,220) (351,023) Amortization of goodwill 226,800 Accretion, net of amortization of fair market value adjustments (8,550) Decrease (increase) in other assets 39,511 (29,839) 12,061 Decrease (increase) in prepaid expenses 51,976 142,237 (28,262) Decrease (increase) in income taxes receivable 607,674 (714,639) (120,379) (Increase) decrease in interest receivable (4,513) 461,398 397,937 Increase (decrease) in other liabilities 78,062 211,588 (4,085) Increase (decrease) in accrued expenses 3,033 159,259 (158,468) Increase (decrease) in interest payable 46,853 (13,394) (53,826) Deferred tax expense (benefit) 315,424 116,667 (196,033) Decrease in taxes payable (180,512) ------------ ------------ ------------ Net cash provided by operating activities 3,635,542 3,919,705 4,075,361 ------------ ------------ ------------ Cash flows from investing activities: Increase in interest bearing time deposits with other banks (100,000) (100,000) Purchases of available-for-sale securities (33,726,207) (37,391,128) (61,088,695) Proceeds from sales of available-for-sale securities 864,217 16,853,893 891,375 Proceeds from maturities of available-for-sale securities 50,993,737 33,638,864 49,790,967 Purchases of held-to-maturity securities (4,926,305) (3,417,675) (4,156,673) Proceeds from maturities of held-to-maturity securities 7,308,637 5,990,548 6,971,893 Purchases of Federal Home Loan Bank stock (2,010,400) Loan originations and principal collections, net (71,600,640) (11,209,891) 19,935,261 Purchases of loans (2,176,873) (300,000) (17,767,255) Proceeds from sale of loans 2,484,080 Recoveries of loans previously charged off 113,131 62,397 58,821 Capital expenditures (459,857) (253,582) (464,323) Proceeds from sale of property and equipment 1,400 10,099 202,109 Redemption of life insurance policy 331,026 Investment in life insurance policies (1,050,500) (1,610,000) (515,500) ------------ ------------ ------------ Net cash (used in) provided by investing activities (53,854,554) 2,273,525 (6,242,020) ------------ ------------ ------------
F-7 SLADE'S FERRY BANCORP. AND SUBSIDIARY ------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Years Ended December 31, 2003, 2002 and 2001 -------------------------------------------- (continued)
2003 2002 2001 ------------ ------------ ------------ Cash flows from financing activities: Net increase in demand deposits, NOW and savings accounts 12,376,880 22,661,421 7,818,060 Net decrease in time deposits (14,864,595) (24,072,231) (7,775,619) Long-term advances from Federal Home Loan Bank 37,279,000 3,450,000 6,428,000 Payments on Federal Home Loan Bank long-term advances (289,474) (1,247,749) (2,170,821) Net change in short-term advances from Federal Home Loan Bank 4,300,000 Net decrease in other borrowed funds (465,216) (734,784) Proceeds from issuance of common stock 796,180 814,425 877,582 Stock options exercised 93,850 95,069 Dividends paid (1,429,456) (1,405,723) (1,644,158) Repurchase of minority interest preferred stock (56,000) (1,500) ssuance of minority interest preferred stock 2,000 2,500 ------------ ------------ ------------ Net cash provided by (used in) financing activities 38,208,385 (169,004) 2,798,260 ------------ ------------ ------------ Net (decrease) increase in cash and cash equivalents (12,010,627) 6,024,226 631,601 Cash and cash equivalents at beginning of year 34,716,536 28,692,310 28,060,709 ------------ ------------ ------------ Cash and cash equivalents at end of year $ 22,705,909 $ 34,716,536 $ 28,692,310 ============ ============ ============ Supplemental disclosures: Interest paid $ 6,026,317 $ 7,941,148 $ 12,380,356 Income taxes paid 1,086,618 1,732,155 1,894,956
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, 2003, 2002 and 2001 -------------------------------------------- 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 eleven 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 those 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. This Corporation was dissolved effective December 16, 2003 and is no longer in existence. The assets and liabilities were transferred to Slade's Ferry Trust Company. 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, interest bearing demand deposits with other banks, money market mutual funds, Federal Home Loan Bank overnight deposit and federal funds sold. F-9 Cash and due from banks as of December 31, 2003 and 2002 includes $1,936,000 and $2,640,000, respectively, which is subject to withdrawals and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank. SECURITIES: Investments in debt securities are adjusted for amortization of premiums and accretion of discounts. Gains or losses on sales of investment securities are computed on a specific identification basis. The Company classifies debt and equity securities into one of three categories: held-to-maturity, available-for-sale, or trading. This security classification may be modified after acquisition only under certain specified conditions. In general, securities may be classified as held-to-maturity only if the Company has the positive intent and ability to hold them to maturity. Trading securities are defined as those bought and held principally for the purpose of selling them in the near term. All other securities must be classified as available-for-sale. -- Held-to-maturity securities are measured at amortized cost in the consolidated balance sheets. 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 sheets. 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 sheets. 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 adjusted for 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 F-10 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. 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 F-11 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 1 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 Statement of Financial Accounting Standards (SFAS) 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 SFAS 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. 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: SFAS 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. F-12 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. 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, 2003, the Company has a stock-based employee compensation plan which is described more fully in Note 15. 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 15), 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. F-13
For the years ended December 31, -------------------------------------- 2003 2002 2001 ---------- ---------- ---------- Net income, as reported $2,687,886 $2,965,552 $3,210,253 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 131,920 59,377 80,475 ---------- ---------- ---------- Pro forma net income $2,555,966 $2,906,175 $3,129,778 ========== ========== ========== Earnings per share: Basic - as reported $.68 $.76 $.84 Basic - pro forma $.64 $.74 $.82 Diluted - as reported $.67 $.75 $.84 Diluted - pro forma $.64 $.74 $.81
RECENT ACCOUNTING PRONOUNCEMENTS: In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). 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. This Statement did not have a material impact on the Company's consolidated financial statements. In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial Institutions" ("SFAS No. 147"), 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 SFAS 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 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. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 clarifies that a guarantor is required to disclose (a) the nature of the guarantee; (b) the maximum potential amount of future payments under F-14 the guarantee; (c) the carrying amount of the liability; (d) the nature and extent of any recourse provisions or available collateral that would enable the guarantor to recover the amounts paid under the guarantee. 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. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements in FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted the initial recognition and initial measurement provisions of FIN 45 effective as of January 1, 2003 and adopted the disclosure requirements effective as of December 31, 2002. The adoption of this interpretation did not have a material effect on the Company's financial position or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS Statement No. 123" ("SFAS No. 148"). SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition provisions and disclosure provisions are required for financial statements for fiscal years ending after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 as of December 31, 2002 and currently uses the intrinsic value method of accounting for stock options. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This Statement (a) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, (b) clarifies when a derivative contains a financing component, (c) amends the definition of an underlying to conform to language used in FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," and (d) amends certain other existing pronouncements. The provisions of SFAS No. 149 are effective for contracts entered into or modified after June 30, 2003. There was no substantial impact on the Company's consolidated financial statements on adoption of this Statement. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that certain financial instruments that were previously classified as equity must be classified as a liability. Most of the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is F-15 effective at the beginning of the first interim period beginning after June 15, 2003. This Statement did not have any material effect on the Company's consolidated financial statements. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), in an effort to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. In December 2003, the FASB revised Interpretation No. 46, also referred to as Interpretation 46 (R) ("FIN 46(R)"). The objective of this interpretation is not to restrict the use of variable interest entities but to improve financial reporting by companies involved with variable interest entities. Until now, one company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. This interpretation changes that, by requiring a variable interest entity to be consolidated by a company only if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. The Company is required to apply FIN 46, as revised, to all entities subject to it no later than the end of the first reporting period ending after March 15, 2004. However, prior to the required application of FIN 46, as revised, the Company shall apply FIN 46 or FIN 46 (R) to those entities that are considered to be special-purpose entities as of the end of the first fiscal year or interim period ending after December 15, 2003. The adoption of this interpretation has not and is not expected to have a material effect on the Company's consolidated financial statements. In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits - an amendment of SFAS No. 87, SFAS No. 88 and SFAS No. 106" ("SFAS No. 132 (revised 2003)"). This Statement revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This Statement retains the disclosure requirements contained in SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits," which it replaces. It requires additional disclosures to those in the original Statement 132 about assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. This Statement is effective for financial statements with fiscal years ending after December 15, 2003 and interim periods beginning after December 15, 2003. Adoption of this Statement did not have a material impact on the Company's consolidated financial statements. F-16 NOTE 3 - INVESTMENTS IN SECURITIES Debt and equity securities have been classified in the consolidated balance sheets according to management's intent. The amortized cost 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, 2003: Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies $27,932,088 $ 72,545 $350,469 $27,654,164 Mortgage-backed securities 14,033,905 449,213 3,389 14,479,729 Corporate debt securities 1,657,969 70,453 1,728,422 Marketable equity securities 3,510,877 198,505 345,306 3,364,076 ----------- ---------- -------- ----------- 47,134,839 790,716 699,164 47,226,391 Money market mutual funds included in cash and cash equivalents (63,539) (63,539) ----------- ---------- -------- ----------- $47,071,300 $ 790,716 $699,164 $47,162,852 =========== ========== ======== =========== 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 =========== ========== ======== =========== Gains In Losses In Accumulated Accumulated Amortized Other Other Cost Comprehensive Comprehensive Fair Basis Income Income Value --------- ------------- ------------- ----- Held-to-maturity securities: December 31, 2003: Debt securities issued by states of the United States and political subdivisions of the states $11,299,521 $ 551,281 $ $11,850,802 Mortgage-backed securities 881 30 911 ----------- ---------- -------- ----------- $11,300,402 $ 551,311 $ $11,851,713 =========== ========== ======== =========== 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 =========== ========== ======== ===========
F-17 The scheduled maturities of debt securities were as follows as of December 31, 2003:
Available-For-Sale Held-To-Maturity ------------------ -------------------------- Fair Amortized Fair Value Cost Basis Value ----------- ----------- ----------- Due within one year $ 713,357 $ 2,703,809 $ 2,738,213 Due after one year through five years 28,170,383 5,807,889 6,156,441 Due after five years through ten years 498,846 1,526,582 1,624,760 Due after ten years 1,261,241 1,331,388 Mortgage-backed securities 14,479,729 881 911 ----------- ----------- ----------- $43,862,315 $11,300,402 $11,851,713 =========== =========== ===========
During 2003, proceeds from sales of available-for-sale securities amounted to $864,217. Gross realized gains and gross realized losses on those sales amounted to $12,528 and $10,584, respectively. 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. The tax expense applicable to these net realized gains amounted to $1,529, $245,565 and $6,112 for the years ended December 31, 2003, 2002 and 2001, respectively. There were no securities of issuers whose aggregate carrying amount exceeded 10% of stockholders' equity as of December 31, 2003. Total carrying amounts of $18,089,060 and $2,657,945 of debt securities were pledged to secure treasury tax and loan, trust department and public funds on deposit, and Federal Home Loan Bank advances as of December 31, 2003 and 2002, respectively. The aggregate fair value and unrealized losses of securities that have been in a continuous unrealized-loss position for less than twelve months and for twelve months or more, and are not other than temporarily impaired, are as follows as of December 31, 2003:
Less than 12 Months 12 Months or Longer Total ------------------------- ------------------------ ------------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Losses Value Losses Value Losses ----------- ---------- ---------- ---------- ---------- ----------- Debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies $20,579,620 $350,469 $ $ $20,579,620 $350,469 Mortgage-backed securities 750,335 3,389 750,335 3,389 Marketable equity securities 196,230 13,196 1,351,487 332,110 1,547,717 345,306 ----------- -------- ---------- -------- ----------- --------- Total temporarily impaired securities $21,526,185 $367,054 $1,351,487 $332,110 $22,877,672 $699,164 =========== ======== ========== ======== =========== ========
The investments in the Company's investment portfolio that are temporarily impaired as of December 31, 2003 consist of both debt securities guaranteed or issued by government agencies with strong credit ratings, and common stock securities issued by U.S. corporations. The unrealized losses associated with debt securities issued by government agencies are attributable to changes in market interest rates, the principal is not at risk at this point since the Company does not anticipate selling any of these impaired securities in the near future. Equity securities are reviewed for impairment by examining several factors used in evaluating whether the decline in fair value below its cost represents an "other than temporary" decline in value, such as financial condition, near term prospects, credit deterioration of the issuer, rating downgrades, business segment dynamics, extent to which the market value is less than cost, length of time held, and buy/hold/sell F-18 recommendations of investment advisors or market analyst. Based on the Bank's December 31, 2003 quarterly review of securities in the investment portfolio, management deemed securities with unrealized losses as of year end 2003 to be temporarily impaired. NOTE 4 - LOANS - -------------- Loans consisted of the following as of December 31:
2003 2002 ------------ ------------- Commercial, financial and agricultural $ 33,980,019 $ 30,454,898 Real estate - construction and land development 10,346,259 14,077,763 Real estate - residential 147,177,989 90,330,046 Real estate - commercial 140,571,818 122,931,918 Consumer 3,961,487 6,881,094 Nonprofit 9,154 293,202 Other 47,586 42,757 ------------ ------------ 336,094,312 265,011,678 Allowance for loan losses (4,154,394) (4,854,388) Unearned income (443,393) (341,234) ------------ ------------ Net loans, carrying amount $331,496,525 $259,816,056 ============ ============
Certain directors and executive officers of the Company and companies in which they have significant ownership interest were customers of the Bank during 2003. Total loans to such persons and their companies amounted to $6,795,087 as of December 31, 2003. During the year ended December 31, 2003, $12,114,926 of advances were made and principal payments totaled $11,310,296. Changes in the allowance for loan losses were as follows for the years ended December 31:
2003 2002 2001 ---------- ---------- ---------- Balance at beginning of period $4,854,388 $5,484,519 $4,776,360 Loans charged off (210,799) (382,528) (100,662) (Benefit) provision for loan losses (602,326) (310,000) 750,000 Recoveries of loans previously charged off 113,131 62,397 58,821 ---------- ---------- ---------- Balance at end of period $4,154,394 $4,854,388 $5,484,519 ========== ========== ==========
The following table sets forth information regarding nonaccrual loans and accruing loans 90 days or more overdue as of December 31:
2003 2002 -------- -------- Nonaccrual loans $407,363 $635,227 ======== ======== Accruing loans which are 90 days or more overdue $ 0 $ 7,747 ======== ========
F-19 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:
2003 2002 ------------------------- ------------------------- Recorded Related Recorded Related Investment Allowance Investment Allowance In Impaired For Credit In Impaired For Credit Loans Losses Loans Losses ----------- ---------- ----------- ---------- Loans for which there is a related allowance for credit losses $1,858,135 $275,071 $2,497,626 $477,124 Loans for which there is no related allowance for credit losses 106,656 0 ---------- -------- ---------- -------- Totals $1,964,791 $275,071 $2,497,626 $477,124 ========== ======== ========== ======== Average recorded investment in impaired loans during the year ended December 31 $2,193,189 $3,283,438 ========== ========== Related amount of interest income recognized during the time, in the year ended December 31, that the loans were impaired Total recognized $ 124,281 $ 254,159 ========== ========== Amount recognized using a cash-basis method of accounting $ 30,000 $ 99,081 ========== ==========
NOTE 5 - PREMISES AND EQUIPMENT - ------------------------------- The following is a summary of premises and equipment as of December 31:
2003 2002 ----------- ----------- Land $ 1,710,368 $ 1,710,368 Buildings 6,968,527 6,955,758 Furniture and equipment 5,054,017 4,677,474 Leasehold improvements 383,436 383,436 ----------- ----------- 14,116,348 13,727,036 Accumulated depreciation and amortization (8,221,612) (7,659,157) ----------- ----------- $ 5,894,736 $ 6,067,879 =========== ===========
NOTE 6 - DEPOSITS - ----------------- The aggregate amount of time deposit accounts in denominations of $100,000 or more as of December 31, 2003 and 2002 was $25,430,252 and $27,915,361, respectively. For time deposits as of December 31, 2003, the scheduled maturities for each of the following five years ended December 31, and thereafter, are: 2004 $109,309,905 2005 12,620,680 2006 6,634,448 2007 25,399 2008 1,014,311 Thereafter 44,944 ------------ Total $129,649,687 ============
F-20 Deposits from related parties held by the Company as of December 31, 2003 and 2002 amounted to $2,723,564 and $2,286,572, respectively. 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, 2003, and thereafter, are summarized as follows:
AMOUNT ------ 2004 $ 8,644,736 2005 8,371,809 2006 8,397,481 2007 10,919,369 2008 6,876,379 Thereafter 17,265,090 ----------- $60,474,864 ===========
Interest rates on FHLB advances ranged from 1.08 percent to 7.72 percent. At December 31, 2003, the weighted average interest rate on FHLB advances was 3.95 percent. As of December 31, 2003, a $3,000,000 advance from the FHLB maturing in January 2015 is redeemable at par at the option of the FHLB on January 7, 2004 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 - INCOME TAXES - --------------------- The components of income tax expense are as follows for the years ended December 31:
2003 2002 2001 ---------- ---------- ---------- Current: Federal $ 498,670 $ 920,469 $1,513,874 State 1,195,622 97,047 80,191 ---------- ---------- ---------- 1,694,292 1,017,516 1,594,065 ---------- ---------- ---------- Deferred: Federal 309,650 79,782 (162,866) State 93,762 36,885 (56,212) Change in the valuation allowance (87,988) 23,045 ---------- ---------- ---------- 315,424 116,667 (196,033) ---------- ---------- ---------- Total income tax expense $2,009,716 $1,134,183 $1,398,032 ========== ========== ==========
F-21 The reasons for the difference between the tax at the statutory federal income tax rate and the effective tax rate are summarized as follows for the years ended December 31:
2003 2002 2001 ------ ------ ------ % 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 (7.4) (8.5) (6.5) Dividends received deduction (.4) (.6) (.4) Unallowable expenses .4 .6 .7 Amortization of goodwill 1.7 State tax, net of federal tax benefit 5.7 2.2 .3 Additional state tax, net of federal tax benefit due to REIT dividend deduction settlement 12.4 Change in valuation allowance (1.9) .5 ---- ---- ---- Effective tax rates 42.8% 27.7% 30.3% ==== ==== ====
The Company had gross deferred tax assets and gross deferred tax liabilities as follows as of December 31:
2003 2002 ---------- ----------- Deferred tax assets: Allowance for loan losses $1,567,133 $1,853,640 Deferred loan fees 189,949 144,487 Interest on non-performing loans 67,005 124,928 Accrued employee benefits 120,712 198,896 Deferred compensation 33,065 56,034 Writedown of securities 52,941 52,941 Minimum pension liability adjustment 412,891 162,267 Net unrealized holding loss on available-for-sale equity securities 54,937 248,513 Other adjustments 292 670 ---------- ---------- Gross deferred tax assets 2,498,925 2,842,376 Valuation allowance (69,719) (154,814) ---------- ---------- 2,429,206 2,687,562 ---------- ---------- Deferred tax liabilities: Accelerated depreciation (233,247) (208,833) Prepaid pensions (94,574) (116,204) Discount accretion (1,563) (1,434) Deferred gain on stock conversion (2,317) (2,317) Net unrealized holding gain on available-for-sale debt securities (101,292) (509,051) ---------- ---------- Gross deferred tax liabilities (432,993) (837,839) ---------- ---------- Net deferred tax assets $1,996,213 $1,849,723 ========== ==========
REIT Dividend Deduction Settlement - ---------------------------------- Slade's Ferry Preferred Capital Corporation ("SFPCC"), a subsidiary of the Bank, was established in 1999 as a Massachusetts-chartered real estate investment trust ("REIT"). The Bank received dividends from SFPCC. On March 5, 2003, the Commonwealth of Massachusetts enacted tax legislation which denied the dividends received deduction for dividends received from real estate investment trusts retroactively to 1999. The additional state tax liability created by the new law for the Bank would have been $1,763,580 plus previously assessed interest of $257,954 for the calendar years 1999 through 2002. F-22 On June 20, 2003, the Bank and its subsidiary real estate investment trust, SFPCC, entered into an agreement with the Massachusetts Department of Revenue (the "DOR") settling the dispute concerning the dividends received deduction through calendar year 2002 claimed or to be claimed by the Bank. Under the agreement, the Bank agreed to pay and the DOR agreed to abate 50% of all tax and interest assessed or unassessed relating to the REIT dividend deduction. Therefore, the previously unrecorded tax liability of $881,790, interest of $128,977 and federal and state tax benefits of $352,599 were recognized during the year ended December 31, 2003. NOTE 9 - 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. The following tables set forth information about the plan as of December 31 and the years then ended:
2003 2002 ----------- ---------- Change in projected benefit obligation: Benefit obligation at beginning of year $ 1,189,808 $1,125,986 Interest cost 107,472 70,896 Service cost 14,227 Actuarial loss 743,424 106,111 Expected distributions (298,533) (113,185) ----------- ---------- Benefit obligation at end of year 1,756,398 1,189,808 ----------- ---------- Change in plan assets: Plan assets at estimated fair value at beginning of year 672,631 830,561 Correction of prior period 138,583 Employer contribution 150,000 Actual return on plan assets (40,952) (44,745) Benefits paid (298,533) (113,185) ----------- ---------- Fair value of plan assets at end of year 621,729 672,631 ----------- ---------- Funded status at end of year (1,134,669) (517,177) Unrecognized net actuarial loss 1,321,204 680,356 Unrecognized prior service cost 47,541 34,365 Unamortized net obligation existing at date of adoption of SFAS No. 87 78,358 86,365 ----------- ---------- Net amount recognized $ 312,434 $ 283,909 =========== ========== Amounts recognized in the balance sheet consist of: Prepaid benefit cost $ 312,434 $ 283,909 Accrued benefit liability (1,134,669) (517,177) Intangible asset 125,899 120,730 Accumulated other comprehensive loss before income tax benefit 1,008,770 396,447 ----------- ---------- Net amount recognized $ 312,434 $ 283,909 =========== ==========
The accumulated benefit obligation for all defined benefit pension plans was $1,756,398 and $1,189,808 at December 31, 2003 and 2002, respectively. The discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0% for 2003 and 2002. The expected long-term rate of return on assets was 8.0% for 2003 and 7.0% for 2002. F-23 The discount rate is based on investment yields available on high quality long-term corporate bonds. Several indices are taken into account, with the 10+ year, highest quality corporate bonds (as reported on the last business day of the year in the Wall Street Journal) given the most weight. The preliminary top of the range of acceptable discount rates is determined by adding .5% to .75% to this rate (the 10+ year, highest quality corporate bonds rate). This may then be adjusted to take into account the discount rate employed one year earlier plus any movement in the key index. The yield for the 10+ year, highest quality corporate bonds as of December 31, 2003 was 5.75%, resulting in a top rate in the acceptable range of 6.25% to 6.50%. This yield was 5.76% one year earlier. Since the index was virtually unchanged from a year ago and the discount rate then employed (7.00%) is outside of the current acceptable range, there is no need to further restrict the acceptable range. A discount rate of 6.25% was selected. The expected long-term rate of return on plan assets reflects management's expectations of long-term average rates of returns on funds invested to provide benefits included in the projected benefit obligations. The expected rate of return is based on the outlook for inflation, fixed income returns, and equity returns, which in turn is based upon historical returns and asset allocation. Applying the actual allocation percentages to the anticipated rate of return results in an overall long-term rate of return assumption of 8.00%. Components of net periodic benefit cost:
2003 2002 2001 -------- ------- ------- Interest cost on benefit obligation $107,472 $70,896 $77,745 Expected return on assets (58,897) (44,514) (61,105) 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 78,069 25,855 18,277 -------- ------- ------- Net periodic benefit cost $121,475 $47,068 $29,748 ======== ======= =======
Plan Assets The Company's pension plan asset allocations by asset category are as follows:
Plan Assets at December 31, ------------------------------------------ Asset Category 2003 Percent 2002 Percent - -------------------------- -------- ------- -------- ------- Equity securities $419,589 67.49% $363,125 53.99% Debt securities 202,140 32.51 206,071 30.63 U.S. Government securities 103,435 15.38 -------- ------ -------- ------ Total $621,729 100.00% $672,631 100.00% ======== ====== ======== ======
The investment portfolio serves as the primary source of earnings for the defined pension plan and provides the plan with a source of liquidity. Over the past few years, the value of the assets in the plan have declined in line with the performance of the financial markets generally. As funds are available to invest, the Bank obtains the recommendation from investment advisors regarding the best, suitable type of security to purchase. Debt investment purchases will be undertaken with the ability and intent to hold the security to its stated maturity, or in the case of equity securities, viewed as a long-term hold (Foundation type stock). Securities may be sold from time to time prior to maturity should liquidity requirements necessitate the sale. The plan assets are primarily debt and equity securities. The weighted- average target asset allocations of the plan are 66% in equity securities 33% in debt securities, and 1% in cash. Cash contributions to the pension plan will remain at $150,000 for 2004, the same amount contributed in 2003. F-24 Securities of the Company included in plan assets as of December 31, 2003 and 2002 consist of 3,730 shares of Slade's Ferry Bancorp. common stock with a market value of $83,925 (13.50 percent of Plan assets) and $49,833 (7.41 percent of Plan assets), respectively. The Company has a 401(k) retirement plan. Employees who attain age 21 and complete three months of service are eligible for participation in the 401(k) portion of the plan. The Company contributes a discretionary amount to be allocated to eligible participants. Current contributions vest fully after six 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, $20,000 and $17,500 for the years ended December 31, 2003, 2002 and 2001, respectively. Employees who attain age 21 and complete one year of service (1,000 hours) are also eligible to receive profit sharing contributions under the 401(k) plan. The Company contributes amounts at the Company's discretion. Cost recognized by the Company for profit-sharing amounted to $300,000 for the years ended December 31, 2003, 2002 and 2001. In March of 2003 the Company entered into a Change-in-Control Agreement (the "Agreement") with the President of the Bank. Under the Agreement, the President is entitled to severance benefits upon a change-in-control as defined in the Agreement. The severance benefits include, among other things, 2.99 times the amount of the average annual W-2 compensation over the prior five years, and other retirement benefits for 36 months. NOTE 10 - 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, 2003:
2004 $ 66,509 2005 45,826 2006 7,830 -------- Total minimum lease payments $120,165 ========
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 $123,717 for 2003, $123,857 for 2002 and $126,256 for 2001. NOTE 11 - 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 F-25 of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include secured interests in mortgages, accounts receivable, inventory, property, plant and equipment and income-producing properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. As of December 31, 2003 and 2002, the maximum potential amount of the Company's obligation was $113,900 and $636,400, respectively, for financial and standby letters of credit. The Company's outstanding letters of credit generally have a term of less than one year. If a letter of credit is drawn upon, the Company may seek recourse through the customer's underlying line of credit. If the customer's line of credit is also in default, the Company may take possession of the collateral, if any, securing the line of credit. Of the total standby letters of credit outstanding as of December 31, 2003, $53,900 are secured by deposits of 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:
2003 2002 ---------------------------- ---------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ ------------ ------------ Financial assets: Cash and cash equivalents $ 22,705,909 $ 22,705,909 $ 34,716,536 $ 34,716,536 Interest bearing time deposits with other banks 200,000 200,000 200,000 200,000 Available-for-sale securities 47,162,852 47,162,852 65,907,926 65,907,926 Held-to-maturity securities 11,300,402 11,851,713 13,696,254 14,262,405 Federal Home Loan Bank stock 3,023,800 3,023,800 1,013,400 1,013,400 Loans, net 331,496,525 331,997,000 259,816,056 261,470,000 Accrued interest receivable 1,497,104 1,497,104 1,492,591 1,492,591 Financial liabilities: Deposits 333,144,817 333,634,000 335,632,532 336,950,000 FHLB advances 60,474,864 63,347,750 19,185,338 22,389,000
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. F-26 The notional amounts of financial instrument liabilities with off-balance sheet credit risk are as follows as of December 31:
2003 2002 ----------- ----------- Commitments to originate loans $12,233,805 $10,047,203 Standby letters of credit 113,900 636,400 Unadvanced portions of loans: Consumer loans (including credit card loans and student loans) 50,000 323,438 Commercial real estate loans 200,279 257,913 Home equity loans 16,438,715 6,751,986 Commercial loans 11,233,045 15,481,747 Construction loans 6,015,585 8,223,751 ----------- ----------- $46,285,329 $41,722,438 =========== ===========
There is no material difference between the notional amounts and the estimated fair values of the off-balance sheet liabilities. NOTE 12 - 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 13 - 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, 2003 Basic EPS Net income and income available to common stockholders $2,687,886 3,969,737 $.68 Effect of dilutive securities, options 39,414 ---------- --------- Diluted EPS Income available to common stockholders and assumed conversions $2,687,886 4,009,151 $.67 ---------- --------- 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 ========== =========
F-27 NOTE 14 - 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. 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 provided, 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 on March 10, 2003. Under the revised agreement, the Bank agreed to address and implement certain plans, procedures, and policies. These included 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 was required to maintain a seven (7) percent Tier 1 leverage capital ratio. On January 22, 2004, the Bank received notification that the FDIC with concurrence from the Commissioner's Office have terminated the aforementioned Memorandum of Understanding. 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, 2003, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2003, 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. F-28 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, 2003: Total Capital (to Risk Weighted Assets): Consolidated $44,510 13.64% $26,113 > or = 8.0% N/A N/A Slade's Ferry Trust Company 37,384 11.48 26,057 > or = 8.0 $32,571 > or = 10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated 40,429 12.39 13,056 > or = 4.0 N/A N/A Slade's Ferry Trust Company 33,312 10.23 13,028 > or = 4.0 19,542 > or = 6.0 Tier 1 Capital (to Average Assets): Consolidated 40,429 9.33 17,335 > or = 4.0 N/A N/A Slade's Ferry Trust Company 33,312 7.75 17,198 > or = 4.0 21,498 > or = 5.0 As of December 31, 2002: Total Capital (to Risk Weighted Assets): Consolidated $41,540 14.84% $22,291 > or = 8.0% N/A N/A Slade's Ferry Trust Company 35,240 12.63 22,208 > or = 8.0 $27,760 > or = 10.0% Tier 1 Capital (to Risk Weighted Assets): Consolidated 38,040 13.59 11,146 > or = 4.0 N/A N/A Slade's Ferry Trust Company 31,753 11.38 11,104 > or = 4.0 16,656 > or = 6.0 Tier 1 Capital (to Average Assets): Consolidated 38,040 9.48 16,053 > or = 4.0 N/A N/A Slade's Ferry Trust Company 31,753 8.00 15,868 > or = 4.0 19,835 > or = 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, 2003 the Bank would be restricted from declaring dividends in an amount greater than approximately $11,327,000 as such declaration would decrease capital below the Bank's required minimum level of regulatory capital. F-29 NOTE 15 - STOCK OPTION PLAN - --------------------------- As of December 31, 2003 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 become exercisable upon grant. 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 $78,417 and $66,437 in stock appreciation paid in 2003 and 2002, respectively, to participants who surrendered their options. 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, 2003, 2002 and 2001: dividend yield of 2.3 percent in 2003, 3.2 percent in 2002 and 3.5 percent in 2001; expected volatility of 28 percent in 2003, 30 percent in 2002 and 23 percent in 2001; risk-free interest rate of 2.85 percent in 2003, 5 percent in 2002 and 4.93 percent in 2001; and expected lives of 5 years in 2003, 5 years in 2002 and 5 years in 2001. 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:
2003 2002 2001 ---------------------------- ---------------------------- ---------------------------- Weighted-Average Weighted-Average Weighted-Average Options Shares Exercise Price Shares Exercise Price Shares Exercise Price ------- ------ ---------------- ------ ---------------- ------ ---------------- Outstanding at beginning of year 164,588 $12.12 170,628 $11.41 135,345 $11.85 Granted 47,970 15.91 28,000 14.15 43,500 9.50 Exercised (8,355) 11.23 (9,712) 8.48 0 0 Forfeited (24,413) 16.19 (10,300) 13.01 0 0 Surrendered for stock appreciation value (18,600) 10.11 (14,028) 9.50 (8,217) 8.48 ------- ------- ------- Outstanding at end of year 161,190 12.90 164,588 12.12 170,628 11.41 ======= ======= ======= Options exercisable at year-end 161,190 164,588 170,628 Weighted-average fair value of options granted during the year $3.56 $3.59 $1.85
F-30 The following table summarizes information about fixed stock options outstanding as of December 31, 2003:
Options Outstanding and Exercisable ------------------------------------------------------------------------ Weighted-Average Number Remaining Weighted-Average Exercise Price Outstanding Contractual Life Exercise Price -------------- ----------- ---------------- ---------------- $ 9.50 28,000 2.36 years $ 9.50 10.00 28,000 1.36 years 10.00 12.86 29,400 0.36 years 12.86 14.15 28,000 3.36 years 14.15 14.59 32,000 4.36 years 14.59 18.55 15,790 4.75 years 18.55 161,190 2.63 years 12.90
NOTE 16 - 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. This Corporation was dissolved effective December 16, 2003 and is no longer in existence. The assets and liabilities were transferred to Slade's Ferry Trust Company. NOTE 17 - RECLASSIFICATION - -------------------------- Certain amounts in the prior year have been reclassified to be consistent with the current year's statement presentation. NOTE 18 - 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-31 SLADE'S FERRY BANCORP. ---------------------- (Parent Company Only) CONDENSED FINANCIAL STATEMENTS ------------------------------
Balance sheets December 31, 2003 2002 ---- ---- ASSETS - ------ Cash $ 4,113,203 $ 2,091,213 Investments in available-for-sale securities (at fair value) 3,279,977 4,517,685 Investment in subsidiary, Slade's Ferry Trust Company 35,636,224 34,913,985 Premises and equipment 5,043 Accrued interest receivable 20,216 32,178 Other assets 7,076 561,054 ----------- ----------- Total assets $43,056,696 $42,121,158 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Due to subsidiary $ 66,191 $ 453,414 Other liabilities 248,364 500,740 ----------- ----------- Total liabilities 314,555 954,154 ----------- ----------- Stockholders' equity: Common stock, par value $.01 per share; authorized 10,000,000 shares; issued and outstanding 3,995,857.1 shares in 2003 and 3,937,762.9 shares in 2002 39,959 39,378 Paid-in capital 28,609,206 27,693,199 Retained earnings 14,698,595 13,445,335 Accumulated other comprehensive loss (605,619) (10,908) ----------- ----------- Total stockholders' equity 42,742,141 41,167,004 ----------- ----------- Total liabilities and stockholders' equity $43,056,696 $42,121,158 =========== =========== Statements of income Years Ended December 31, 2003 2002 2001 ---- ---- ---- Dividends from subsidiary $1,400,000 $1,400,000 $1,685,000 Interest and dividends on securities: Taxable 130,553 200,692 223,801 Other interest income 120 413 10,315 Gain on sale of available-for-sale securities, net 89,861 Management fee income from subsidiary 317,815 541,065 393,408 ---------- ---------- ---------- Total income 1,848,488 2,232,031 2,312,524 ---------- ---------- ---------- Salaries and employee benefits 245,000 576,782 368,405 Shareholder relations expense 69,735 45,140 75,743 Other expense 131,303 258,145 68,408 ---------- ---------- ---------- Total expense 446,038 880,067 512,556 ---------- ---------- ---------- Income before income tax expense (benefit) and equity in undistributed net income of subsidiary 1,402,450 1,351,964 1,799,968 Income tax expense (benefit) 8,329 (17,769) 48,421 ---------- ---------- ---------- Income before equity in undistributed net income of subsidiary 1,394,121 1,369,733 1,751,547 Equity in undistributed net income of subsidiary 1,293,765 1,595,819 1,458,706 ---------- ---------- ---------- Net income $2,687,886 $2,965,552 $3,210,253 ---------- ---------- ----------
F-32 SLADE'S FERRY BANCORP. ---------------------- (Parent Company Only) Years Ended December 31, 2003, 2002 and 2001 --------------------------------------------
Statements of cash flows 2003 2002 2001 ---- ---- ---- Net income $ 2,687,886 $ 2,965,552 $ 3,210,253 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net income of subsidiary (1,293,765) (1,595,819) (1,458,706) (Accretion) amortization of securities, net (3,202) 1,066 (1,562) Gain on sales of available-for-sale securities, net (89,861) Depreciation and amortization 5,043 5,246 5,071 (Increase) decrease in due from subsidiary (473,776) 10,380 217,987 Decrease (increase) in interest receivable 11,962 28,643 (13,021) Decrease (increase) in income taxes receivable 433,866 (434,229) (77,353) Decrease (increase) in prepaid expenses 1,677 (874) 993 Decrease in other assets 1,062 Deferred tax expense (benefit) 33,185 (36,354) 328 Decrease in taxes payable (199,864) (Decrease) increase in accrued expenses (124,353) 35,554 1,115 Increase in due to subsidiary 86,553 379,224 63,810 (Decrease) increase in other liabilities (10,700) 96,528 6,300 Stock issued in exchange for stock appreciation 12,711 ----------- ----------- ----------- Net cash provided by operating activities 1,354,376 1,377,767 1,756,413 ----------- ----------- ----------- Cash flows from investing activities: Purchases of available-for-sale securities (4,297,000) (6,517,023) (4,257,414) Proceeds from maturities of available-for-sale securities 5,500,000 3,450,000 2,900,000 Proceeds from sales of available-for-sale securities 3,421,905 Capital expenditures (2,099) ----------- ----------- ----------- Net cash provided by (used in) investing activities 1,203,000 354,882 (1,359,513) ----------- ----------- ----------- Cash flows from financing activities: Net proceeds from issuance of common stock 796,180 814,425 877,582 Proceeds from exercise of stock options 93,850 82,358 Dividends paid (1,425,416) (1,401,403) (1,644,158) ----------- ----------- ----------- Net cash used in financing activities (535,386) (504,620) (766,576) ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 2,021,990 1,228,029 (369,676) Cash and cash equivalents at beginning of year 2,091,213 863,184 1,232,860 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 4,113,203 $ 2,091,213 $ 863,184 =========== =========== =========== Supplemental disclosure: Income taxes (received) paid $ (458,722) $ 452,814 $ 325,310
The parent only statements of changes in stockholders' equity are identical to the consolidated statements of changes in stockholders' equity for the years ended December 31, 2003, 2002 and 2001, and therefore are not reprinted here. F-33 NOTE 20 - Quarterly Results of Operations (UNAUDITED) - ----------------------------------------------------- Summarized quarterly financial data for 2003 and 2002 follows:
(In thousands, except earnings per share) 2003 Quarters Ended --------------------------------------------- March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- Interest and dividend income $5,061 $5,143 $5,118 $5,295 Interest expense 1,545 1,554 1,499 1,475 ------ ------ ------ ------ Net interest and dividend income 3,516 3,589 3,619 3,820 Provision (benefit) for loan losses 141 (680) (63) Other income 474 535 581 623 Other expense 3,227 3,207 3,181 3,047 ------ ------ ------ ------ Income before income taxes 622 1,597 1,019 1,459 Income tax expense (benefit) 1,314 (12) 319 388 ------ ------ ------ ------ Net (loss) income $ (692) $1,609 $ 700 $1,071 ====== ====== ====== ====== Basic (loss) earnings per common share $(0.18) $ 0.41 $ 0.18 $ 0.27 ====== ====== ====== ====== (Loss) earnings per common share assuming dilution $(0.17) $ 0.40 $ 0.17 $ 0.27 ====== ====== ====== ====== (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 ====== ====== ====== ======
The quarterly results of operations above for the period ended March 31, 2003 and June 30, 2003 have been revised from that previously reported to remove the extraordinary item. The extraordinary item treatment previously presented was revised, and its individual components were presented as part of income from continuing operations within income tax expense and other expense. Prior to the revision, Other expense for the three months ended March 31, 2003 and June 30, 2003 was $3,000,246 and $3,304,802, respectively; Income before income taxes and extraordinary item for the three months ended March 31, 2003 and June 30, 2003 was $848,918 and $1,499,981, respectively; and Income tax expense (benefit) for the three months ended March 31, 2003 and June 30, 2003 was $256,032 and $517,183, respectively. F-34 SLADE'S FERRY BANCORP. AND SUBSIDIARY BOARD OF DIRECTORS - --------------------------- Slade's Ferry Bancorp. - Slade's Ferry Trust Company Thomas B. Almy Architect - Retired Peter G. Collias, Esquire Clerk/Secretary of Bancorp and Bank Law Office of Peter G. Collias Melvyn A. Holland Treasurer - Retired 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 & Company Insurance Agency Inc 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, Sr. Chairman of the Board of Bancorp Chairman of the Board of Bank 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 Vice Chairman of Bancorp President Quequechan Management Corp. OFFICERS - -------- Slade's Ferry Bancorp. Kenneth R. Rezendes, Sr. Chairman of the Board David F. Westgate Vice Chairman Mary Lynn D. Lenz President/Chief Executive Officer Deborah A. McLaughlin Chief Operations Officer/Chief Financial Officer/ Manuel J. Tavares Vice President EXECUTIVE MANAGEMENT Slade's Ferry Trust Company Mary Lynn D. Lenz President Chief Executive Officer Paula Botelho Vice President/Chief Credit Officer Steven M. Damiani Sr. Vice President/Investment Services Deborah A. McLaughlin Chief Operations Officer Chief Financial Officer Kerri A. Pigott Sr. Vice President Donna Sosnowski Senior Vice President Manuel J. Tavares Senior Vice President OFFICERS Slade's Ferry Trust Company James H. Amidon Vice President/Quality Control Isola A. Anctil Assistant Vice President Assistant Clerk/Secretary Maria C. Barbosa Vice President Edward Bernardo, Jr. Vice President/Treasurer Rose M. Berry Assistant Vice President Kelli A. Bienvenue Assistant Treasurer Catherine Blakey Assistant Vice President Michelle Caron Assistant Treasurer Peter G. Collias Corporate Secretary Judy L. Correia Assistant Treasurer Sandra Curtis Compliance Review Officer Nicole Dion Assistant Vice President Suzanne L. Enck Assistant Treasurer Tyler Foster Vice President Joseph J. Ganem Vice President Arthur R. Gauthier Vice President Elaine M. Guillemette Assistant Vice President Cecelia M. Machado Senior Vice President/Auditor Carol A. Martin Senior Vice President John P. McMahon Assistant Treasurer Jay M. Moniz Technology Officer Lynn A. Motta Vice President Charlotte C. Nadeau Assistant Vice President Jeannine M. Paliotti Vice President Michelle Rivera Assistant Treasurer Joanne Sandner Assistant Treasurer Deborah A. Silvia Assistant Vice President Nancy E. Stokes Vice President Mary M. Sullivan Vice President Richard Van Blarcom Vice President Donna M. Vieira Assistant Treasurer CORPORATE HEADQUARTERS Slade's Ferry Bancorp. 100 Slade's Ferry Avenue Somerset, Massachusetts 02726 Tel. (508) 675-2121 Fax (508) 675-1751 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 LOAN PRODUCTION OFFICE Slade's Ferry Loan Co. 3280 Post 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 Atty. Richard Schaberg Thacher Proffitt & Wood, LLP 1700 Pennsylvania Ave Washington DC 20006 Tel. (202) 347-8400 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 2003, with the Securities and Exchange Commission may be obtained on our website at www.sladesferry.com under Shareholder Information or without charge by writing to: Shareholder Services Edward Bernardo, Jr., Treasurer Slade's Ferry Bancorp. 100 Slade's Ferry Avenue Somerset, MA 02726 INVESTOR SERVICES Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016-3572 Tel. (800) 368-5948 Web site: www.rtco.com ANNUAL MEETING The Annual Meeting of Stockholders of Slade's Ferry Bancorp. will be held at 10:00 a.m. on May 10, 2004 at The Cultural Center, 205 South Main Street, Fall River, 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 Registrar and Transfer Company, Investor Services at (800) 368-5948. 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. as amended (1) 3.2 Bylaws of Slade's Ferry Bancorp. as amended (2) 4.1 Articles of Incorporation of Slade's Ferry Bancorp. (see Exhibit 3.1) (1) 4.2 Bylaws of Slade's Ferry Bancorp. as amended (see Exhibit 3.2) (2) 10.1 Slade's Ferry (formerly Weetamoe) Bancorp. (3) 1996 Stock Option Plan as amended 10.2 Noncompetition Agreement between Slade's Ferry (4) Trust 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 (2) 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 (9) James D. Carey 10.11 Supplemental Executive Retirement Agreement between (10) Slade's Ferry Bancorp and Mary Lynn D. Lenz. 10.14 Change-in-Control Severance Agreement between (10) Slade's Ferry Bancorp, Slade's Ferry Trust Company and Mary Lynn D. Lenz 10.15 Confidentiality and Non-Solicitation Agreement between (10) Slade's Ferry Bancorp and Mary Lynn D. Lenz 14 Code of Conduct and Ethics 21 List of subsidiaries of Slade's Ferry Bancorp. (11) X-1 23 Consent of Independent Public Accounts 31.3 Rule 13a-14(a)/15d-14(a) Certification of the CEO 31.4 Rule 13a-14(a)/15d-14(a) Certification of the CFO 32.3 Section 1350 Certification of the CEO 32.4 Section 1350 Certification of the CFO - -------------------- Incorporated by reference to the Registrant's Registration Statement on Form SB-2 filed with the Commission on April 14, 1997. Incorporated by reference to the Registrant's Form 10-KSB for the fiscal year ended December 31, 1996. Incorporated by reference to the Registrant's Form 10-QSB for the quarter ended March 31, 1996. Incorporated by reference to the Registrant's Registration Statement on Form S-4 File No. 33-32131. Incorporated by reference to the Registrant's Form 10-KSB for the fiscal year ended December 31, 1994. Incorporated by reference to the Registrant's Form 10-Q for the quarter ended March 31, 1999. Incorporated by reference to the Registrant's Form 10-QSB for the quarter ended June 30, 1998. Incorporated by reference to the Registrant's Form 10-Q for the quarter ended June 30, 2000. Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2002. Incorporated by reference to the Registrant's Form 10-Q for the quarter ended March 31, 2003. Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 1999.
X-2 EX-14 3 slad-k14.txt EXHIBIT 14 Exhibit 14 Slade's Ferry Bancorp Code of Conduct and Ethics Policy Statement - ---------------- It is the policy of Slade's Ferry Bancorp and each of its affiliates ("the Company") that the Company's affairs shall be conducted in accordance with the highest standards of integrity and business ethics. The Company is committed to conducting its business in strict accordance with all applicable federal, state and local laws and regulations consistent with the highest standards of ethical business conduct. All directors, officers and employees of the Company are obligated to conduct themselves in a lawful and ethical manner and must not compromise these standards under any circumstances. Each person has an affirmative duty to promote and advance the interests of the Company. Each person has a fundamental duty to avoid placing him or herself in a position which creates, or which leads to, or could lead to, a conflict of interest or the appearance of a conflict of interest. The Company requires ethical behavior of its directors, officers and employees. Officers and employees are encouraged to talk with their supervisor, manager or other appropriate personnel when in doubt about a best course of action in a particular situation from an ethical perspective. Officers and employees are also encouraged to report violations of laws, regulations or this Code of Conduct and Ethics ("Code") using the processes described in this Code. The Company will not permit retaliation against any individual for reports made in good faith. Purpose - ------- The Board of Directors of the Company has adopted this Code to: a. Promote honest and ethical conduct, including fair dealing and the ethical handling of conflicts of interest; b. Promote full, fair accurate, timely and understandable disclosure; c. Promote compliance with applicable laws and governmental rules and regulations; d. Ensure the protection of the Company's legitimate business interests, including corporate opportunities, assets and confidential information; and e. Deter wrongdoing. The purpose of this Code is to provide a framework for the conduct expected of all officers, directors and employees of the Company. It is expected that all such persons shall be familiar with the Code and that such persons will not violate the specific guidelines nor conduct themselves in any manner which violates the spirit of the Code. 1 HONEST AND CANDID CONDUCT All directors, officers and employees owe a duty to the Company to act with integrity. Integrity requires, among other things, being honest and candid. Deceit and subordination of principle are inconsistent with integrity. All directors, officer and employees must: a. Act with integrity, including being honest and candid while still maintaining the confidentiality of information where required or consistent with the Company's policies; b. Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting or omitting material facts or allowing independent judgment to be compromised; c. Observe both the form and spirit of laws and governmental rules and regulations, accounting standards and Company policies; and d. Adhere to a high standard of business ethics. Senior management of the Company shall: a. Encourage and reward professional integrity in all aspects of the Company's finance and accounting departments, by eliminating inhibitions and barriers to responsible behavior, such as coercion, fear or reprisal, or alienation from the Company itself; and b. Provide a mechanism for members of the finance and accounting departments to inform senior management of deviations in practice from policies and procedures governing honest and ethical behavior. CONFLICTS OF INTEREST General Policy - All directors, officers and employees of the Company, or persons who have the power to direct the Company's management or policies or who otherwise owe a fiduciary duty to the Company, shall not advance their own personal or business interests, or those of others with whom such persons have a personal or business relationship, at the expense of the Company or in conflict with any obligation owed to the Company. These persons have a fundamental duty to avoid conflicts of interest or potential conflicts of interest with the Company. For example, directors and employees may refer potential borrowers to the Slade's Ferry Trust Company (the "Bank") but must not imply to either the Bank staff or the borrower that preferential treatment will be given. The following additional examples of conflicts are provided to clarify the scope of this Code provision, but are not intended to describe all situations that might be covered by this provision: 2 a. A person who owes a fiduciary duty to the Bank receives money or other benefits from a third party in return for the Bank granting a loan to or purchasing property from the third party; b. A third party makes a payment or provides employment to a spouse, child, parent, sibling or business partner of an officer, director, employee or affiliated person of the Company to influence the Bank's decision on a loan or other benefit to the third party; c. An officer, director, employee or other person who owes a fiduciary duty to the Company advocates a transaction between the Bank and a company in which such person owns stock or serves as an officer or director, at the expense of the Company. It is impossible to outline every factual circumstance involving the possible application of this policy. Every position in the Company involves a degree of trust and responsibility which would be compromised if an employee were to solicit or receive personal advantage by reason of his/her position in the Company or by reason of the Company's relationship with a client, customer or supplier. What is required is a constant awareness of the policy and the exercise of good judgment in each particular situation. Affiliated Persons - For purposes of the Code, affiliated person includes a director, officer or controlling person of the Company, or a member of the immediate family of such person, as well as any company controlled by such person. Immediate family member includes a spouse, father, mother, children, brothers, sisters and grandchildren; the father, mother, brothers and sisters of such person's spouse; and the spouse of a child, brother or sister of such person. Questions Regarding the Code - Directors, officers and other employees should address any questions about their responsibilities under this Code to their supervisor or the ethics compliance officer designated by the Nominating/Corporate Governance Committee of the Board of Directors to administer this Code ("Compliance Officer"). Report All Conflicts - In the event that a situation arises which is or appears to be a conflict, the person(s) involved must report the situation to their immediate supervisor or the Compliance Officer in accordance with the procedures described under Code Administration and Enforcement. Policies Related to the Conflicts of Interest Policy - - ------------------------------------------------------ Receipt of Gifts and Related Items - No director, officer or employee of the Company shall seek or accept, directly or indirectly, any gift, other than a nominal gift, from any individual, corporation or other business entity doing or seeking to do business with the Company, or participate in a transaction with an affiliated person, without the prior disclosure to and approval of the Company, as provided in this Code. Any director, officer or employee who is offered or receives a gift from a customer must disclose that fact to his/her immediate supervisor or the Compliance Officer for a determination as to whether the director or employee may retain the gift consistent with applicable laws and the provisions of this Code. Business with Affiliates and Relatives - Employment of the Company by other parties, especially those with a relationship the Company, or the making of any gift or provision of any 3 service to the Company to influence the Company's decision whether to employ an immediate family member of such person is prohibited. No directors, officers or other employees of the Company shall conduct the Company business with any corporation or other business entity in which he/she or any of his/her relatives has an ownership or other interest without the prior approval of the Company. Borrowing from a Client or Customer - No director, officer or employee of the Company shall borrow money or any other item of more than nominal value from any present or potential client, customer or supplier of the Company without the prior approval of the Company. Compensation - Compensation to directors and employees of the Company must not exceed what is reasonable and commensurate with their individual duties and responsibilities. Separate Identities - The Company and each affiliate shall maintain separate corporate identities. Each affiliate shall maintain accounts, bookkeeping, insurance policies and other aspects of its operations separate from those of the Company, and in other respects present itself to the public as an entity separate from the Company. Usurpation of Corporation Opportunity - Neither an affiliate of the Company or any of its officers or directors, may usurp any corporate opportunity that properly belongs to the Company, unless the board of directors knowingly elects not to avail itself of such opportunity and such person's participation is approved in advance by the board. Usurpation of a corporate opportunity involves taking advantage of an opportunity that the Company may without any legal or other impediment, undertake for its own benefit. This includes (a) taking for themselves personally opportunities that are discovered through the use of corporate property, information or position; (b) using corporate property, information or position for personal gain; and (c) competing with the company. Usurpation of a corporate opportunity is deemed to be a breach of fiduciary duty. If an affiliate of the Company is deemed to have usurped a corporate opportunity of the Company, the usurping affiliate shall immediately disgorge all profits gained to the Company. In addition, it is the policy of the Company that all of its affiliates, including directors and officers, take all steps necessary to avoid the appearance of usurping a corporate opportunity. No director or executive officer may appropriate a corporate opportunity, without the consent of the Board. Referrals between Affiliates - Any referral arrangements between the Company Bank and an affiliate shall comply Section 23B of the Federal Reserve Act, and its implementing regulations, all regulatory policies governing uninsured product sales by affiliates, and any applicable anti- tying restrictions under federal banking law and regulations, and should be fully disclosed to customers. PERSONAL FINANCES AND TRANSACTIONS WITH the Company General - All directors, officers and employees are expected to conduct their personal affairs in a manner which does not jeopardize the Company's standing in the community. While the Company has the utmost respect for the privacy and other personal rights, the Company also 4 realizes that the improper handling of personal finances could undermine the credibility of an employee or director and that a precarious financial position could be thought to influence actions or judgments of such persons in their official capacity. Accordingly, it is the Company's policy to encourage all directors, officers and employees of the Company to manage their personal finances in a manner that (a) will not undermine their credibility with respect to the Company or its business, (b) will not have a detrimental affect on the exercise of their judgment on the Company- related business matters and (c) will not otherwise adversely affect or influence their conduct or actions made in their official capacity. Any loan or other transaction described in this section involving an officer, director, employee, affiliate or affiliated person of the Company must receive the prior approval of the Company in accordance with the procedures under Code Administration and Enforcement. If the transaction involves a director, the Board of Directors must approve the transaction with the interested director abstaining from the vote. Loans from the Company - It shall be unlawful for the Company, directly or indirectly, including through any subsidiary to extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit in the form of a personal loan to or for any director or executive officer unless permitted by law. An extension of credit maintained by the Company on July 31, 2002 shall not be subject to this provision provided that there is no material modification to any term of any such extension of credit on or after that date. Provided, however, that this restriction does not apply to any loan made or maintained by the Company Bank, if the loan is subject to the insider lending restrictions of section 22(h) of the Federal Reserve Act, and its implementing regulations. Among other things, these regulations require that specified transactions be on terms and under circumstances, including credit standards, that are substantially the same, or at least as favorable to the Company Bank, as those prevailing for comparable transactions with unaffiliated persons and companies. All loans with affiliates or affiliated persons of the Company must comply with applicable individual loan and aggregate loan limitations. Other Transactions Involving Directors, Officers, Employees, Affiliates and Affiliated Persons - Purchasing assets or services from the Company and selling assets or services to the Company are prohibited transactions without the prior approval of the Company. Reimbursement of Employee Expenses - No director, officer or employee shall use the Company's petty cash or other funds on hand for personal uses. All expenses incurred during the course of business must conform to the Company's Employee-Related Expense Policy. The Company will only support memberships in those organizations as outlined in the aforementioned policy. BOARD CONSIDERATION OF TRANSACTIONS BY MANAGEMENT As stated above, an individual shall not advance their own personal or business interests, or those of others with whom they have a personal or business relationship, at the expense of the Company. If such officer or director has an interest in a matter or transaction before the board of directors, such individual must disclose to the board all material nonprivileged information relevant to the board's decision on the matter or transaction, including: (a) the existence, nature and extent of their interest; and (b) the facts known to the individual as to the matter or 5 transaction under consideration. The individual shall also refrain from participating in the discussion of the matter or transaction and recuse himself from voting on the matter or transaction (if such individual is a director). If the matter or transaction is approved by the board, it must also be approved by the Audit Committee in accordance with the charter of the Audit Committee. CONFIDENTIALITY Prohibition on Disclosure and Use - Any information regarding the Company's business (defined herein as "Confidential Information") is confidential, must not be released to the public (except as authorized herein) and must not be used for the personal gain or purposes of any individual or group. Confidential Information includes, but is not limited to, customer account information and proprietary information about the business of the Company or its affiliates, including what is commonly known as "insider" information. Directors, officers and other employees should consult with the Compliance Officer or independent legal counsel with any questions regarding whether specific information is insider information. All directors, affiliated persons, persons owing a fiduciary duty, officers and other employees of the Company or any of its affiliates are prohibited from disclosing or releasing any Confidential Information in the possession of the Company. Confidential Information may be disclosed only as follows: (1) to public agencies regarding the scope of activity of the employee's department (e.g., financial and/or lobbying reports required under state or federal law); (2) to investigative agencies, after notification to and receipt of the concurrence of legal counsel of the Company; or (3) as required by law, e.g., subpoena, only after notification to and receipt of the concurrence of legal counsel of the Company. Such persons may not buy or sell, directly or indirectly, or through family members, friends or otherwise, any securities of the Company while in possession of insider information. In addition, such persons may not reveal any such information to family members or friends who may act upon such information in purchasing or selling securities of the Company or any of its affiliates. Such persons should refer to the Company's securities trading policy for guidance on trading securities of the Company or any of its affiliates in compliance with applicable laws and regulations, regardless of whether any trading of such securities would be on the basis of insider information. The improper disclosure or use of Confidential Information concerning the Company or anyone with whom we deal with may jeopardize the Company's financial well-being and standing in the community and could subject the person responsible for the improper disclosure or misuse of information to civil and criminal prosecution and penalties, including imprisonment and fines. 6 OUTSIDE EMPLOYMENT AND OTHER ACTIVITIES Outside Employment - All directors, officers and employees of the Company shall consult with their immediate supervisor or the Compliance Officer before accepting any directorship, officership, offer of outside employment, etc. in an outside corporation or other business entity, especially where the corporation or entity does business or is likely to do business the Company. All directors, officers, employees and affiliated persons of the Company and its affiliates shall manage their outside employment and other activities in accordance with all applicable laws, regulations and policy statements, including policies prohibiting the usurpation of corporate opportunities. This regulation provides, among other things, that officers, directors, and other persons who have the power to direct the management or policies of a savings association, or otherwise owe a fiduciary duty to a savings association, may not take advantage of corporate opportunities belonging to the Company. Political Activities - the Company shall not make political contributions. The Company's premises and property shall not be used for any form of electioneering. Directors, officers and employees may, however, participate and/or contribute to the political process as concerned individuals, through means which would include voting and the contribution of their own time and money, and participation in or contributions to political action committees. Civic Activities - the Company accepts responsibility as a member of the communities in which our offices are located to contribute to programs for civic, cultural and social betterment. Directors, officers and employees are encouraged to exercise the rights and duties of citizens and to participate in local, civic and charitable activities. In some cases, however, it is improper for a an officer, director or employee to serve as a member, director, officer or employee of a municipal corporation, agency, school board, library board or similar organization. All officers, directors and employees should consult with the Compliance Officer before engaging in any outside activity that is likely to present a conflict under this Code or interfere with the performance of any duties owed to the Company. It should be clear whether the employee or director is acting as a representative of the Company or in their individual capacity. SAFEGUARDING OF ASSETS AND INSTITUTIONAL PROPERTY It is the responsibility of all employees, officers and directors of the Company to safeguard the property and assets of the Company. Damaging the Company's or a customer's property or records or violating the confidentiality of such records is prohibited. Theft, carelessness and waste have a direct impact on the Company's profitability. All property and assets of the Company should only be used for legitimate corporate purposes. Internal accounting controls, record keeping policies, securities and investment policies, loan policies and underwriting standards and auditing policies have been established and disseminated by the Company to meet its business needs as well as the requirements of applicable laws and regulations. Any questions should be directed to the Compliance Officer. 7 PRESERVATION AND ACCURACY OF RECORDS Whenever an employee, officer or director becomes aware of an investigation which affects the Company, he or she shall immediately notify the Company's President and Chief Executive Officer. Notwithstanding any the Company records retention guidelines, under no circumstances shall any records known to be the subject of or germane to any anticipated, threatened or pending law suit or governmental or regulatory investigation or case filed in bankruptcy be removed, concealed or destroyed. For purposes of this section, "records" means any of hard copy, paper documents and electronic records, including but not limited to, e-mail, voicemail, and the contents of hard discs. Furthermore, all audit and audit review work papers shall be retained as required, in accordance with the rules promulgated by the Securities and Exchange Commission ("SEC") under the Sarbanes-Oxley Act of 2002. Officers and employees shall always adhere to established accounting rules and audit controls. All records shall accurately reflect transactions in a timely manner. Incorrect or misleading entries shall be corrected immediately. Falsification of records or transactions shall be grounds for termination. In accordance with the rules promulgated by the SEC under the Sarbanes- Oxley Act of 2002, it shall be unlawful for any officer or director of the Company or any other person acting under the direction thereof, to take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the Company's financial statements for the purpose of rendering such financial statements materially misleading. FAIR DEALING Each officer and employee must endeavor to deal fairly with the Company's customers, suppliers, competitors and other employees. No officer or employee shall take unfair advantage of anyone through manipulation, concealment, abuse of privileged or confidential information, misrepresentation of material fact, or any other unfair-dealing practice. COMPLIANCE WITH LAWS AND REGULATIONS All directors, officers and employees of the Company shall carry out their responsibilities in accordance with all applicable laws, regulations and policy statements, including all applicable federal and state criminal laws governing fraud, bribery, embezzlement, conversion and conflicts of interest. Officers and directors must conduct their business affairs in a manner consistent with applicable safety and soundness standards and the requirements of this Code. It is against Company policy and in many circumstances illegal for a director, officer or employee to profit from undisclosed information relating to the Company or any other company. Any director, officer or employee may not purchase or sell any of the Company's securities while in possession of material non-public information relating to the Company. Also, any director, officer of employee may not purchase or sell securities of any other company while in possession of any material non-public information relating to that company. Any director, officer or employee who is uncertain about the legal rules involving a purchase or sale of any Company securities or any securities in companies that he or she is familiar with as a result of his 8 or her work for the Company, should consult with the Compliance Officer or with his or her own legal advisor before making any such purchase or sale. DISCLOSURE Each director, officer and employee who is involved in the Company's disclosure process is required to be familiar with and comply with the Company's disclosure controls and procedures and internal controls over financial reporting, to the extent relevant to his or her area of responsibility, so that the Company's public reports and documents filed with the SEC comply in all material respects with the applicable federal securities laws and SEC rules. In addition, each such person having direct or supervisory authority regarding these SEC filings or the Company's other public communications concerning its general business, results, financial condition and prospects should, to the extent appropriate within his of her are of responsibility, consult with other Company officers and employees and take other appropriate steps regarding these disclosures with the goal of making full, fair, accurate, timely and understandable disclosure. Each director, officer or employee who is involved in the Company's disclosure process, must: a. Familiarize himself or herself with the disclosure requirements applicable to the Company as well as the business and financial operations of the Company. b. Not knowingly misrepresent, or cause others to misrepresent, facts about the Company to others, whether within or outside the Company, including to the Company's independent auditors, governmental regulators and self-regulatory organizations. c. Perform responsibilities with a view to causing reports and documents filed with, or submitted to the SEC and in other public communications made by the Company, to contain disclosure of information which is full, fair, accurate, timely and understandable. d. Properly review and critically analyze proposed disclosure for accuracy and completeness (or, where appropriate, delegate this task to others). CODE ADMINISTRATION AND ENFORCEMENT Administration Responsibility - The Audit Committee is responsible for administering and enforcing this Code, conducting Code-related training, maintaining all Code-related records and investigating and resolving all Code-related matters. Code-related matters include, but are not limited to, conflicts, receiving or giving gifts, conducting business with affiliates or affiliated persons, borrowing from a customer, client or supplier, taking loans from or conducting other transactions with or involving the Company or affiliated persons, purchasing or selling assets to or from the Company or affiliated persons and outside employment (including certain civic activities), all as described in this Code, and any questions regarding the scope of this Code or compliance herewith including any violations or alleged violations of any provision of this Code. 9 Responsibility to Report Code-Related Matters - All persons subject to this Code must report Code-related matters in accordance with the procedures set forth herein. All officers and employees must promptly make reports of any Code-related matters to their immediate supervisor or to the Compliance Officer. All supervisors receiving such reports must promptly advise the Compliance Officer, even if such supervisor has reason to believe that the Compliance Officer has already been advised. The President of the Company, the Chairman of the Board of Directors and each director of the Company must promptly make reports of any Code-related matters to the Compliance Officer. General Procedures for Resolving All Code-Related Matters - If the Compliance Officer is unable to promptly resolve a Code-related matter consistent with this Code and applicable laws and regulations, the Compliance Officer shall promptly confer with the Audit Committee. If the Compliance Officer and the Audit Committee are unable to promptly resolve the matter to their mutual satisfaction consistent with this Code and applicable laws and regulations, the Compliance Officer and the Audit Committee shall promptly confer with the Chairman of the Board of Directors to determine a mutually satisfactory resolution. The Chairman of the Board of Directors may confer with the full Board of Directors on any Code- related matter. Permissible Transactions with the Company and Other Matters Not Involving a Code Violation - The Compliance Officer shall promptly review all reports of Code-related matters seeking the Company's permission to conduct a permissible transaction or involving any other matter not apparently involving or alleging a violation of any Code provision. The Compliance Officer shall confer with the appropriate officers of the Company to determine if the requested transaction or other matter complies with all applicable laws, regulations and policies. If deemed necessary by the Compliance Officer, the Compliance Officer shall seek the advice of legal counsel to the Company. The Compliance Officer or his or her designee shall promptly advise the filer of the request as to the Company's determination. Investigation and Resolution of All Code Violations - The Compliance Officer shall promptly investigate all violations or alleged violations of any provision of this Code (a violation or alleged violation of this Code is referred to as "Code Violation"). Where deemed appropriate by the Compliance Officer, the Compliance Officer shall promptly report any Code Violation to the Audit Committee of the Board of Directors and with any recommendations for resolution, in accordance with the investigation and referral procedures described herein. Upon learning of a Code Violation, the Company, through the Compliance Officer or other employee, will take appropriate action to resolve the Code Violation. Such resolution may involve disciplinary actions or other sanctions including termination of employment. The Company shall take all reasonable steps to respond to any offense and prevent its recurrence. Investigation and Referral Procedures for Code Violations - Any report of a Code-related matter involving a Code Violation shall promptly be investigated by the Compliance Officer (or his or her designee approved by the full Board of Directors). To encourage employees to fulfill their obligations to the Company, a procedure has been established under which any director or employee, suspecting that a Code Violation has been or is being committed, may report the facts 10 in a manner that will safeguard the person's identity to the fullest extent practicable and protect the reporting person against retribution.(1) The procedure for making such a report is as follows: 1. Any person who becomes aware of a past or present Code Violation shall promptly report the facts and circumstances to his or her immediate supervisor, or to the Compliance Officer. If a supervisor has been advised of a Code Violation, the supervisor shall promptly report the matter to the Compliance Officer. 2. The Compliance Officer (or his or her designee approved by the full Board of Directors) shall promptly conduct an investigation into the reported Code Violation without disclosing the identity of the reporting person and prepare a report that will not identify the reporting person. The Compliance Officer shall also present the facts and circumstances in the report in a manner that will protect, to the greatest extent possible, the anonymity of the reporting person without omitting material details. Where a violation of law is alleged or appears possible based on the facts and circumstances reported, the Compliance Officer shall promptly consult with the Company's legal counsel in strict confidence. 3. The Compliance Officer shall promptly resolve the Code Violation consistent with this Code and applicable laws and regulations. 4. If the Compliance Officer is not able to promptly resolve the Code Violation, the Compliance Officer shall promptly confer with the Audit Committee of the Company and provide the Audit Committee with a copy of the investigation report. The Compliance Officer and the Audit Committee shall promptly verify the conclusions in the investigation report, if necessary, and resolve the Code Violation consistent with this Code and applicable laws and regulations. 5. If the Compliance Officer and the Audit Committee are not able to promptly resolve the Code Violation to their mutual satisfaction, the Compliance Officer and the Audit Committee shall promptly confer with the full Board of Directors and provide a copy of the investigation report. The Compliance Officer, Audit Committee and the Board of Directors shall promptly verify the conclusions in the investigation report, if necessary, and resolve the Code Violation consistent with this Code and applicable laws and regulations. 6. The Compliance Officer or any other person selected by the Audit Committee, in consultation with the Nominating/Corporate Governance Committee and the Board of Directors, shall promptly disclose any alleged impermissible, illegal or criminal conduct to the OTS, OCC, FDIC, FRB and any other federal or state regulatory and law enforcement agencies with jurisdiction over the matter in a manner that will ensure confidentiality and protect all applicable privileges to the greatest extent practicable. The Company shall fully cooperate with such authorities to bring those responsible for the impermissible, illegal or criminal conduct to justice. ___________________ (1) The Sarbanes-Oxley Act of 2002 requires that the Company Audit Committee establish procedures for confidential, anonymous submission of employee concerns regarding questionable accounting or auditing matters. Employee complaints and reports of this nature shall be handled under the procedures established by the Audit Committee. 11 7. In the event that legal proceedings are brought, the reporting person may be required to be formally interviewed and to testify, just as any other person having knowledge of the relevant facts and circumstances would be required. However, the Company shall protect the identity of the reporting person to the greatest extent practicable. Directors, officers or employees who willfully fail to report a Code Violation or who fail to cooperate in an investigation of a Code Violation will be subject to disciplinary action, possibly including termination of employment. Request for Waivers - A waiver of a provision of this Code shall be requested whenever there is a reasonable likelihood that a contemplated action will violate the Code. The procedure for requesting a waiver is as follows: If the request under consideration relates to an executive officer or director, the determination with respect to the waiver shall be made by the Audit Committee, in consultation with the Compliance Officer as the Audit Committee deems appropriate, and submitted to and approved by the Board. If the request under consideration relates to any other employee, the determination shall be made by the employee's immediate supervisor, in consultation with the Compliance Officer unless such request is quantitatively or qualitatively material or outside the ordinary course of business, in which case such determination shall be made by the Audit Committee. The decision with respect to the waiver request shall be documented and forwarded to the Compliance Officer for filing and retention, with a copy to the Audit Committee. All waivers of this Code (other than those approved by the Audit Committee) shall be promptly reported by the Compliance Officer to the Audit Committee. Waivers will not be granted except under extraordinary or special circumstances. To the extent determined to be required or appropriate by the Company's Board of Directors in consultation with the Compliance Officer and/or the Company's legal counsel, waivers shall be publicly disclosed on a timely basis, including pursuant to applicable securities laws and stock exchange listing requirements. Sanctions for Code Violations - Failure to comply with the policies in this Code will result in disciplinary action, ranging from a reprimand to dismissal and possible civil and criminal prosecution. Disciplinary actions will be pursued by the Company against all of the following: (a) any director or employee violating this Code; (b) any director or employee deliberately withholding information regarding a Code Violation; (c) the manager or supervisor of a person who has committed an act under (a) or (b), in circumstances where such violation reflected poor supervision or lack of diligence; and (d) any director or employee who retaliates, directly or indirectly, against any employee who reports a suspected Code Violation. In addition, Code Violations may expose the offending director or employee and the Company to monetary 12 damages, regulatory penalties and criminal sanctions. the Company will ensure that all disciplinary actions taken to enforce this Code are applied consistently and in accordance with all applicable laws and regulations. CODE-RELATED TRAINING In addition to discharging the responsibilities described elsewhere in this Code, the Compliance Officer shall: a. Ensure that copies of this Code are distributed to all existing and newly hired or appointed officers, directors and employees of the Company and all existing and newly hired or appointed directors and officers of the Company's affiliates. The Compliance Officer also shall ensure that all compliance materials related to this Code are distributed to all existing and newly hired management, administrative and professional personnel of the Company and its affiliates. b. Develop, review and, as required, update on a continuing basis this Code and any related compliance programs and policies. c. Assist in the formulation and review of auditing procedures to confirm compliance with this Code. INITIAL AND PERIODIC REVIEW AND CERTIFICATION OF COMPLIANCE The Company will maintain a copy of this Code as part of its permanent corporate records. The Compliance Officer will maintain written records of any reports, disclosures or investigations made under this Code and resolutions of any such matters. Initial Review - All directors, officers and employees of the Company shall be provided a copy of this Code as soon as practicable after its approval by the Board of Directors or at the time of (or as soon as practicable after) the person's initial association or employment with the Company. All such persons will certify that they have read this Code and that any questions regarding this Code have been answered by the Compliance Officer or other the Company representative to their satisfaction. Annual Review - All directors and officers of the Company must review a copy of this Code annually for as long as this Code remains in effect and sign a certification at such time that they are not aware of any then- existing Code Violation or any Code Violation occurring since the person's last annual certification. MAINTENANCE OF CODE-RELATED RECORDS Copies of initial and annual certifications will be kept by the Company in each person's official personnel records and duplicate copies of all certifications shall be kept in separate, secure files maintained by the Compliance Officer. The Compliance Officer shall separately maintain and secure the certifications and all other records, documents and other information relating to this Code and its administration and make 13 such records, documents and other information promptly available to authorized representatives of the applicable federal banking agency. The Compliance Officer also will make such records, documents and other information promptly available to members of the Audit Committee of the Board of Directors, the President of the Company and the Chairman of the Board to assist them in executing their responsibilities under this Code and under other applicable laws and regulations. 14 Certification Of Compliance With Code Of Ethics I hereby certify to the Audit Committee of Slade's Ferry Bancorp that: 1. I have read the Code of Ethics of Slade's Ferry Bancorp ("Code") at least once during the past 12 months and understand my responsibility to comply with the principles and policies contained in the Code. I recognize that my failure to comply with such principles and policies will be cause for severe disciplinary action or termination of my employment. 2. Except as stated in paragraph 3, immediately below: (a) To the best of my knowledge, I and members of my immediate family, do not have any interest which might be deemed to be a conflict of interest under the Code; (b) To my knowledge, I have not violated any federal, state, local or foreign law in connection with the Company's business; and (c) I am not aware of any Company activities which violate the Code. Exceptions to the above should be noted below: I hereby certify that the above statements are, to the best of my knowledge and belief, true and accurate. ______________________________ Date ____________________ (Signature of Employee) ______________________________ (Please Print your full name above) ______________________________ (Title) 15 EX-23 4 sla-k23.txt EXHIBIT 23 Exhibit 23 ---------- [LOGO] SHATSWELL, MACLEOD & COMPANY, P.C. ---------------------------------- CERTIFIED PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference of our report dated January 13, 2004 (except for Note 14 as to which the date is January 22, 2004) with respect to the consolidated balance sheets of Slade's Ferry Bancorp. and Subsidiary as of December 31, 2003 and 2002, 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, 2003 which report appears in the Annual Report on Form 10-K for the year ended December 31, 2003 of Slade's Ferry Bancorp. /S/Shatswell, MacLeod & Company, P.C. Shatswell, MacLeod & Company, P.C. West Peabody, Massachusetts March 24, 2004 83 PINE STREET WEST PEABODY, MASSACHUSETTS 01960-3635 TELEPHONE (978) 535-0206 FACSIMILE (978) 535-9908 smc@shatswell.com www.shatswell.com EX-31 5 slak311.txt EXHIBIT 31.1 Exhibit 31.1 ------------ 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 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 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures {as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)} for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the issuer's internal control over financial reporting; and 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 29, 2004 /s/ Mary Lynn D. Lenz - -------------------- --------------------- President/Chief Executive Officer EX-31 6 slak312.txt EXHIBIT 31.2 Exhibit 31.2 ------------ CERTIFICATIONS I, Deborah A. McLaughlin, certify that: 1. I have reviewed this annual report on Form 10-K of Slade's Ferry Bancorp.; 2. Based on my knowledge, this 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 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures {as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)} for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the issuer's internal control over financial reporting; and 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 and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 29, 2004 /s/ Deborah A. McLaughlin - -------------------- ------------------------- Chief Financial Officer/ Chief Operations Officer EX-32 7 slak321.txt EXHIBIT 32.1 Exhibit 32.1 ------------ STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, Mary Lynn D. Lenz, is the President and Chief Executive Officer of Slade's Ferry Bancorp. (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Annual Report on Form 10-K for the year ended December 31, 2003 (the "Report"). By execution of this statement, I certify that: A) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and B) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. DATE: March 29, 2004 /s/ MARY LYNN D. LENZ - -------------------- --------------------- MARY LYNN D. LENZ PRESIDENT AND CHIEF EXECUTIVE OFFICER EX-32 8 slak322.txt EXHIBIT 32.2 Exhibit 32.2 ------------ STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, Deborah A. McLaughlin, is the Chief Financial Officer and Chief Operating Officer of Slade's Ferry Bancorp. (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Annual Report on Form 10-K for the year ended December 31, 2003 (the "Report"). By execution of this statement, I certify that: A) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and B) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. DATE: MARCH 29, 2004 DEBORAH A. MCLAUGHLIN - -------------------- --------------------- CHIEF FINANCIAL OFFICER/ CHIEF OPERATING OFFICER -----END PRIVACY-ENHANCED MESSAGE-----