-----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, Dugyay9H3KLZeawCuvRLK0kEeOLUO12xPUwGT33wq35FkHlK33df78ylXbCHXdUE NAd9SmVb8KR0jGigoh+GlQ== 0000910647-05-000241.txt : 20050815 0000910647-05-000241.hdr.sgml : 20050815 20050815165702 ACCESSION NUMBER: 0000910647-05-000241 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20050815 DATE AS OF CHANGE: 20050815 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-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-23904 FILM NUMBER: 051027552 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-Q/A 1 slad-qa3.txt BODY OF FORM 10Q/A FOR THE THIRD QUARTER UNITED STATES SECURITIES AND EXCHANGE COMMISION Washington, D.C. 20549 FORM 10-Q/A QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarter ended September 30, 2004 ------------------ Commission file number 000-23904 --------- SLADE'S FERRY BANCORP. -------------------------------------------------------- (Exact name of registrant as specified in its character) Massachusetts 04-3061936 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 100 Slade's Ferry Avenue Somerset, Massachusetts 02726 - ---------------------------------------- ---------------------- (Address of principal executive offices) (Zip code) (508)-675-2121 ---------------------------------------------------- (Registrant's telephone number, including area code) Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------------ ------------ Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No X ------------ ------------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date: Common stock ($0.01 par value) 4,067,848 shares as of October 31, 2004. ----------------------------------------------------------------------- TABLE OF CONTENTS Part I EXPLANATORY NOTE 2 ITEM 1 - Financial Statements of Slade's Ferry Bancorp. and Subsidiary 3 Condensed Consolidated Balance Sheets - September 30, 2004 (Unaudited) and December 31, 2003 Condensed Consolidated Statements of Income and Expense (Unaudited) - Nine Months Ended September 30, 2004 and 2003 Condensed Consolidated Statements of Income and Expense (Unaudited) - Three Months Ended September 30, 2004 and 2003 Condensed Consolidated Statement of Changes in Stockholders' Equity (Unaudited) - Nine Months Ended September 30, 2004 and 2003 Condensed Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended September 30, 2004 and 2003 Notes to Condensed Consolidated Financial Statements (Unaudited) ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 13 ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk 29 ITEM 4 - Controls and Procedures 30 Part II ITEM 1 - Legal Proceedings 31 ITEM 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 31 ITEM 3 - Defaults upon Senior Securities 31 ITEM 4 - Submission of Matters to a Vote of Security Holders 31 ITEM 5 - Other Information 31 ITEM 6 - Exhibits 32 1 EXPLANATORY NOTE We announced in a Form 8-K filed on July 19, 2005, that in May 2005, a financial reporting error relating to our pension plan that affects our previously filed financial statements was discovered. The pension plan commenced on January 1, 1969 and was frozen on December 31, 1997. In May of 2005, we began exploring alternatives with respect to possibly liquidating the pension plan. At that time, we discovered that the amount of our prepaid benefit cost had been overstated (and our pension expense had been cumulatively understated) since fiscal year 1996. Such misstatements related to (1) the failure to use settlement accounting for significant lump sum distributions, as required by FASB Statement No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefit, and (2) the understatement of the projected benefit obligation prior to 2003. This Form 10-Q/A is being filed to amend and restate the financial statements and related information contained in our Form 10-Q for the period ended September 30, 2004. The table below shows the cumulative effect of the defined benefit pension plan adjustment to retained earnings and accumulated other comprehensive income (loss) as of December 31, 2003 and 2002, and the impact on net income and earnings per share for the three and nine months ended September 30, 2004 and 2003.
At December 31, --------------------------- 2003 2002 ----------- ----------- Retained earnings, as previously reported $14,698,595 $13,445,335 Cumulative decrease to retained earnings (398,337) (394,095) ----------- ----------- Retained earnings, as restated $14,300,258 $13,051,240 =========== =========== Accumulated other comprehensive loss as previously reported $ (605,619) $ (10,908) Cumulative increase (decrease) in accumulated other comprehensive loss 193,223 (149,918) ----------- ----------- Accumulated other comprehensive loss, as restated $ (412,396) $ (160,826) =========== ===========
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ------------------------- 2004 2003 2004 2003 ---------- -------- ---------- ---------- Net income, as previously reported $1,071,213 $699,345 $2,318,930 $1,616,861 Increase (decrease) to pension expense (8,877) (85,743) 54,386 (14,932) Net deferred tax effect 3,633 35,095 (22,260) 6,112 ---------- -------- ---------- ---------- (Decrease) increase to net income 5,244 50,648 (32,126) 8,820 ---------- -------- ---------- ---------- Net income, as restated $1,076,457 $749,993 $2,286,804 $1,625,681 ========== ======== ========== ========== Earnings per share, as previously reported: Basic $ 0.26 $ 0.18 $ 0.57 $ 0.40 Diluted $ 0.26 $ 0.17 $ 0.57 $ 0.41 Earnings per share, as restated: Basic $ 0.27 $ 0.19 $ 0.57 $ 0.41 Diluted $ 0.26 $ 0.19 $ 0.56 $ 0.41
2 PART I ITEM 1 Financial Statements - -------------------- SLADE'S FERRY BANCORP. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) September 2004 December 31, 2003 -------------- ----------------- Assets - ------ Cash and due from banks $ 20,507,497 $ 18,428,932 Interest bearing demand deposits with other banks - 213,438 Money market mutual funds - 63,539 Federal Home Loan Bank overnight deposit 1,000,000 - Federal funds sold 5,000,000 4,000,000 ------------ ------------ Cash and cash equivalents 26,507,497 22,705,909 Interest bearing time deposits with other bank 100,000 200,000 Investments in available-for-sale securities (at fair value) 84,329,600 47,162,852 Investments in held-to-maturity securities (fair values of $41,140,312 as of September 31, 2004 and $11,851,713 as of December 31, 2003) 40,631,411 11,300,402 Federal Home Loan Bank stock 4,204,300 3,023,800 Loans, net of allowance for loan losses $4,102,567 at September 30, 2004 and $4,154,394 at December 31, 2003 362,389,567 331,496,525 Premises and equipment 5,844,940 5,894,736 Goodwill 2,173,368 2,173,368 Accrued interest receivable 2,037,264 1,497,104 Cash surrender value of life insurance 11,473,825 10,980,879 Deferred taxes 2,097,060 2,138,336 Other assets 1,205,078 659,791 ------------ ------------ Total assets $542,993,910 $439,233,702 ============ ============ Liabilities and Stockholders' Equity - ------------------------------------ Deposits: $403,454,662 $333,144,817 Federal Home Loan Bank advances 80,388,352 60,474,864 Subordinated debentures 10,310,000 - Other liabilities 3,665,999 3,076,994 ------------ ------------ Total liabilities 497,819,013 396,696,675 Stockholders' equity: Common stock, par value $.01 per share; authorized 10,000,000 shares; issued and outstanding 4,060,049 shares on September 30, 2004 and 3,995,857 shares at December 31, 2003 40,601 39,959 Paid-in capital 29,816,333 28,609,206 Retained earnings 15,495,017 14,300,258 Accumulated other comprehensive income (loss) (177,054) (412,396) ------------ ------------ Total stockholders' equity 45,174,897 42,537,027 ------------ ------------ Total liabilities and stockholders' equity $542,993,910 $439,233,702 ============ ============ Investment securities held-to-maturity have a fair market value of $41,140,312 as of September 30, 2004 and $11,851,713 as of December 31, 2003. Securities classified as available-for-sale are stated at fair value with any unrealized gains or losses reflected as an adjustment in Stockholders' Equity, net of tax effect.
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 SLADE'S FERRY BANCORP. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE (Unaudited) NINE MONTHS ENDED SEPTEMBER 30,
2004 2003 ----------- ----------- Interest and dividend income: Interest and fees on loans $15,061,034 $12,928,787 Interest and dividends on investments 2,206,021 2,258,138 Other interest 220,044 135,253 ----------- ----------- Total interest and dividend income 17,487,099 15,322,178 Interest expense: Interest on deposits 3,726,333 3,538,854 Interest on Federal Home Loan Bank advances 1,800,220 1,059,978 Interest on subordinated debentures 236,126 - ----------- ----------- Total interest expense 5,762,679 4,598,832 ----------- ----------- Net interest and dividend income 11,724,420 10,723,346 Provision for loan losses 376,215 (539,357) ----------- ----------- Net interest and dividend income after provision for loan losses 11,348,205 11,262,703 Noninterest income: Service charges on deposit accounts 404,129 429,266 Overdraft service charges 403,602 410,788 Gain (loss) on sales and calls of available-for-sale securities, net 46,298 1,944 Gain (loss) on sale of loans 195,817 (115,792) Increase in cash surrender value of life insurance policies 357,946 318,405 Other income 568,355 430,816 ----------- ----------- Total noninterest income 1,976,147 1,475,427 Noninterest expense: Salaries and employee benefits 6,027,104 5,728,779 Occupancy expense 599,518 710,580 Equipment expense 417,887 398,971 Stationary and supplies 176,783 164,337 Professional fees 779,085 780,640 Marketing expense 409,637 310,058 Other expense 1,484,305 1,391,228 ----------- ----------- Total noninterest expense 9,894,319 9,484,593 ----------- ----------- Income before income taxes 3,430,033 3,253,537 Income taxes 1,143,229 1,627,856 ----------- ----------- Net income (1) $ 2,286,804 $ 1,625,681 =========== =========== Earnings per common share - basic $ 0.57 $ 0.41 =========== =========== Earnings per common share - diluted $ 0.56 $ 0.41 =========== =========== Average common shares outstanding - basic 4,038,499 3,963,167 =========== =========== Average common shares outstanding - diluted 4,086,415 3,994,511 =========== =========== Dividend declared per share $ 0.27 $ 0.27 =========== =========== Comprehensive income (2) $ 2,522,147 $ 1,317,965 =========== =========== - -------------------- The year to date results of operations for the period ended September 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 reclassed to income tax expense in the amount of $529,191, and included in other expense is interest of $128,977. See Footnote 20 to the Company's audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2003 filed with the U.S. Securities and Exchange Commission. Calculated using the change in accumulated other comprehensive income (loss) for the period and net income for the period.
4 SLADE'S FERRY BANCORP. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND EXPENSE (Unaudited) THREE MONTHS ENDED SEPTEMBER 30,
2004 2003 ----------- ----------- Interest and dividend income: Interest and fees on loans $ 5,194,000 $ 4,419,503 Interest and dividends on investments 998,496 671,857 Other interest 57,509 26,873 ----------- ----------- Total interest and dividend income 6,250,005 5,118,233 Interest expense: Interest on deposits 1,279,272 1,090,910 Interest on Federal Home Loan Bank advances 627,084 408,772 Interest on subordinated debentures 118,203 - ----------- ----------- Total interest expense 2,024,559 1,499,682 ----------- ----------- Net interest and dividend income 4,225,446 3,618,551 Provision for loan losses - - ----------- ----------- Net interest and dividend income after provision for loan losses 4,225,446 3,618,551 Noninterest income: Service charges on deposit accounts 132,295 151,072 Overdraft service charges 148,815 147,662 Gain (loss) on sales and calls of available-for-sale securities, net 6,994 42,862 Gain (loss) on sale of loans 195,817 (12,258) Increase in cash surrender value of life insurance policies 100,183 102,065 Other income 228,628 137,763 ----------- ----------- Total noninterest income 812,732 569,166 Noninterest expense: Salaries and employee benefits 1,944,972 1,919,939 Occupancy expense 179,326 225,567 Stationary and supplies 138,190 143,949 Equipment expense 66,975 50,055 Professional fees 302,470 238,964 Marketing expense 211,169 80,441 Other expense 618,461 424,376 ----------- ----------- Total noninterest expense 3,461,563 3,083,291 ----------- ----------- Income before income taxes 1,576,615 1,104,426 Income taxes 500,158 354,433 ----------- ----------- Net income $ 1,076,457 $ 749,993 =========== =========== Earnings per common share - basic $ 0.27 $ 0.19 =========== =========== Earnings per common share - diluted $ 0.26 $ 0.19 =========== =========== Average common shares outstanding - basic 4,058,086 3,976,557 =========== =========== Average common shares outstanding - diluted 4,101,223 4,022,804 =========== =========== Dividend declared per share $ 0.09 $ 0.09 =========== =========== Comprehensive income (1) $ 1,821,723 $ 228,627 =========== =========== - -------------------- Calculated using the change in accumulated other comprehensive income (loss) for the period and net income (loss) for the period.
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (Unaudited)
Accumulated Other Common Paid-in Retained Comprehensive Stock Capital Earnings (Loss) Income Total ------------------------------------------------------------------------ Balance, December 31, 2003, as previously reported $39,959 $28,609,206 $14,698,595 $(605,619) $42,742,141 Cumulative effect relating to pension plan adjustment - - (398,337) 193,223 (205,114) ------------------------------------------------------------------------ Balance, December 31, 2003, as restated 39,959 28,609,206 14,300,258 (412,396) 42,537,027 Comprehensive income: Net income - - 2,286,804 Other comprehensive income 235,342 Comprehensive income 2,522,146 Issuance of common stock from dividend reinvestment plan 210 461,770 - - 461,980 Stock issuance relating to optional cash contribution plan 44 88,920 - - 88,964 Stock options exercised 422 531,510 - - 531,932 Tax benefit of stock options - 157,261 - - 157,261 Retirement of 3,412 shares of common stock (34) (32,334) - - (32,368) Dividends declared ($.09 per share) - - (1,092,045) - (1,092,045) ------------------------------------------------------------------------ Balance, September 30, 2004 $40,601 $29,816,333 $15,495,017 $(177,054) $45,174,897 ======================================================================== Accumulated Other Common Paid-in Retained Comprehensive Stock Capital Earnings (Loss) Income Total ------------------------------------------------------------------------ Balance, December 31, 2002, as previously reported $39,378 $27,693,199 $13,445,335 $ (10,908) $41,167,004 Cumulative effect relating to pension plan adjustment (394,095) (149,918) (544,013) ------------------------------------------------------------------------ Balance, December 31, 2002, as restated 39,378 27,693,199 13,051,240 (160,826) 40,622,991 Comprehensive income: Net income 1,625,681 Other comprehensive income (307,716) Comprehensive income 1,317,965 Issuance of common stock from dividend reinvestment plan 338 509,423 509,761 Stock issuance relating to optional cash contribution plan 70 104,444 104,514 Stock options exercised 10 9,490 9,500 Dividends declared ($.09 per share) (1,071,017) (1,071,017) ------------------------------------------------------------------------ Balance, September 30, 2003 $39,796 $28,316,556 $13,605,904 $(468,542) $41,493,715 ========================================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 6 SLADE'S FERRY BANCORP. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, (Unaudited)
2004 2003 ----------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,286,804 $ 1,625,681 Adjustments to reconcile net income to net cash provided by operating activities: Amortization, net of accretion of securities 122,013 156,662 Gains on sales of available-for-sale securities, net (46,298) (1,944) (Gains)losses on sale of loans (195,817) 115,792 Change in unearned income 170,038 35,935 Provision (benefit) for loan losses 376,215 (539,357) Depreciation and amortization 482,745 473,251 Increase in cash surrender value of life insurance policies (357,946) (318,405) Decrease in taxes receivable 57,986 215,024 Deferred tax (benefit) expense (25,323) 59,053 (Increase) decrease in other assets (501,688) 47,739 Increase in prepaid expenses (20,214) (39,605) Increase in interest receivable (540,160) (18,907) Increase (decrease) in other liabilities 363,928 (13,265) Increase in accrued expenses 96,433 120,183 Increase in interest payable 41,439 11,111 Increase in community investment fund (10,069) 0 Decrease in minority interest 0 (3,500) ----------------------------- Net cash provided by operating activities 2,300,086 1,925,448 ----------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of interest-bearing time deposits with other banks 100,000 0 Purchases of available-for-sale securities (48,903,948) (29,246,394) Proceeds from sales of available-for-sale securities 624,977 0 Proceeds from maturities and calls of available-for-sale securities 11,348,091 41,882,767 Purchases of held-to-maturity securities (31,428,123) (4,926,305) Proceeds from maturities of held-to-maturity securities 2,097,540 6,463,543 Purchase of Federal Home Loan Bank stock (1,180,500) (1,092,000) Loan originations and principal collections, net (39,533,350) (53,473,842) Recoveries of loans previously charged off 91,609 90,927 Proceeds from sales of loans 8,198,263 1,862,319 Capital expenditures (432,949) (396,642) Investment in life insurance policies (135,000) (950,500) ----------------------------- Net cash used in investing activities (99,153,390) (39,786,127) -----------------------------
The accompanying notes are an integral part of these condensed consolidated financial statements. 7 SLADE'S FERRY BANCORP. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- (Unaudited) (Continued)
2004 2003 ----------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in demand deposits, NOW, and savings accounts 53,411,595 18,164,159 Net increase (decrease) in time deposits 16,898,250 (7,567,685) Proceeds from long term Federal Home Loan Bank advances 24,000,000 22,920,823 Payments on Federal Home Loan Bank long-term advances (262,512) 0 Net change in short-term advances from Federal Home Loan Bank (3,824,000) 0 Proceeds from issuance of subordinated debentures 10,310,000 0 Proceeds from issuance of common stock 550,947 623,775 Stock options exercised 689,190 0 Retired common stock shares (32,368) 0 Dividends paid (1,086,210) (1,067,257) ----------------------------- Net cash provided by financing activities 100,654,892 33,073,815 ----------------------------- Net increase (decrease) in cash and cash equivalents 3,801,588 (4,786,864) Cash and cash equivalents at beginning of year 22,705,909 34,716,536 ----------------------------- Cash and cash equivalents at the end of period $ 26,507,497 $ 29,929,672 ============================= SUPPLEMENTAL DISCLOSURES: Interest paid $ 5,721,240 $ 4,587,721 Income taxes paid (received) $ 1,104,441 $ 824,588
The accompanying notes are an integral part of these condensed consolidated financial statements. 8 SLADE'S FERRY BANCORP. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 2004 Note A - Basis of Presentation - ------------------------------ The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and the instructions to Form 10-Q and, accordingly, do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of the management of Slade's Ferry Bancorp. (the "Company"), all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine and three month periods ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. Note B - Accounting Policies - ---------------------------- The accounting principles followed by Slade's Ferry Bancorp. and subsidiary and the methods of applying these principles which materially affect the determination of financial position, results of operations, or changes in financial position are consistent with those used for the year ended December 31, 2003. The consolidated financial statements of Slade's Ferry Bancorp. include its wholly-owned subsidiary, Slade's Ferry Trust Company, and its subsidiaries, Slade's Ferry Realty Trust, Slade's Ferry Securities Corporation, Slade's Ferry Securities Corporation II and Slade's Ferry Loan Company. All significant intercompany balances have been eliminated. Note C - Stock Based Compensation - --------------------------------- At September 30, 2004, the Company has a stock-based employee compensation plan. 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 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.
3 Months Ended September 30, 9 Months Ended September 30, 2004 2003 2004 2003 ------------------------------------------------------------ Net income, as reported $1,076,457 $749,993 $2,286,804 $1,625,681 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 0 0 87,438 55,967 ------------------------------------------------------- Pro forma net income $1,076,457 $749,993 $2,199,366 $1,569,714 ======================================================= Earnings per share: Basic - as reported $ 0.27 $ 0.19 $ 0.57 $ 0.41 Basic - pro forma $ 0.27 $ 0.19 $ 0.54 $ 0.40 Diluted - as reported $ 0.26 $ 0.19 $ 0.56 $ 0.41 Diluted - pro forma $ 0.26 $ 0.19 $ 0.54 $ 0.39
9 Note D - Pension Benefits - ------------------------- The net periodic benefit cost is summarized below:
Nine months ended September 30, Three months ended September 30, 2004 2003 2004 2003 ------------------------------------------------------------------- Interest cost $ 79,158 $ 80,643 $ 26,386 $ 26,881 Expected return on plan assets (80,724) (35,901) (26,908) (11,967) Settlement charge 98,250 105,047 39,968 - Recognized net actuarial (gain) loss 31,761 25,404 10,587 8,468 Net periodic benefit cost (income) $128,445 $175,193 $ 50,033 $ 23,382 ========================================================
The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2003 that it expected employer pension plan contributions to be $150,000 in 2004. This contribution was made in September 2004. Note E - Impact of New Accounting Standards - ------------------------------------------- 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 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 September 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 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 10 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 did not 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. In December 2003, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 03-3 ("SOP 03-3") "Accounting for Certain Loans or Debt Securities Acquired in a Transfer." SOP03-3 requires loans acquired through a transfer, such as a business combination, where there are differences in expected cash flows and contractual cash flows due in part to credit quality be recognized at their fair value. The excess of contractual cash flows over expected cash flows is not to be recognized as an adjustment of yield, loss accrual, or valuation allowance. Valuation allowances cannot be created nor "carried over" in the initial accounting for loans acquired in a transfer on loans subject to SFAS 114, "Accounting by Creditors for Impairment of a Loan." This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004, with early adoption encouraged. The Bank/Company/Corporation does not believe the adoption of SOP 03-3 will have a material impact on the Bank's/Company's/Corporation's financial position or results of operations. On March 9, 2004, the SEC issued Staff Accounting Bulletin 105, "Application of Accounting Principles to Loan Commitments," ("SAB 105") to inform registrants of the Staff's view that the fair value of the recorded loan commitments should not consider the expected future cash flows related to the associated servicing of the future loan. The provisions of SAB 105 must be applied to loan commitments accounted for as derivatives that are entered into after March 31, 2004. The Staff will not object to the application of existing accounting practices to loan commitments accounted for as derivatives that are entered into on or before March 31, 2004, with appropriate disclosures. The Company records the value of its mortgage loan commitments at fair market value for mortgages it intends to sell, and does not currently include, and was not including, the value of mortgage servicing or any other internally-developed intangible assets in the valuation of its mortgage loan commitments. Therefore, the adoption of SAB 105 did not have an impact on the Company's financial condition or results of operations. At its March 2004 meetings, the Emerging Issues Task force ("EITF") revisited EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments" (EITF No. 03-1). 11 Effective with reporting periods beginning after June 15, 2004, companies carrying certain types of debt and equity securities whose amortized cost is higher than the securities' fair values will have to use more detailed criteria to evaluate whether to record a loss and will have to disclose additional information about unrealized losses. The Company has reviewed the revised EITF No. 03-1 and plans to implement these additional procedures effective with the quarter beginning on July 1, 2004. Even though as of June 30, 2004 most of the unrealized losses on the Company's investments and mortgage-backed securities were deemed temporary, at this time the Company can not determine whether the adoption of this new issuance will have an impact on the Company's financial position and results of operations, as the extent of any impact will vary due to the fact that the model calls for many judgements and additional evidence gathering at each securities valuation date. 12 ITEM 2 Management's Discussion and Analysis of Financial Condition and - --------------------------------------------------------------- Results of Operations - --------------------- This Form 10-Q/A 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. Such statements may be identified by words such as "believes," "will," "expects," "project," "may," "developments," "strategic," "launching," "opportunities," "anticipates," "estimates," "intends," "plans," "targets" and similar expressions. These statements are based upon the current beliefs and expectations of Slade's Ferry Bancorp.'s management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements as a result of numerous factors. The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements: (1) enactment of adverse government regulation; (2) competitive pressures among depository and other financial institutions may increase significantly and have an effect on pricing, spending, third-party relationships and revenues; (3) the strength of the United States economy in general and specifically the strength of the New England economies may be different than expected, resulting in, among other things, a deterioration in overall credit quality and borrowers' ability to service and repay loans, or a reduced demand for credit, including the resultant effect on the Bank's loan portfolio, levels of charge-offs and non-performing loans and allowance for loan losses; (4) changes in the interest rate environment may reduce interest margins and adversely impact net interest income; and (5) changes in assumptions used in making such forward-looking statements. Should one or more of these risks materialize or should underlying beliefs or assumptions prove incorrect, Slade's Ferry Bancorp.'s actual results could differ materially from those discussed. All subsequent written and oral forward-looking statements attributable to Slade's Ferry Bancorp. or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements set forth above. Slade's Ferry Bancorp. does not intend or undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made. Slade's Ferry Bancorp. (the "Company," "us," or "we"), a business corporation organized under the laws of the Commonwealth of Massachusetts, serves as the holding company for Slade's Ferry Trust Company (the "Bank") and its subsidiaries. Our common stock is quoted on the Nasdaq Small Cap Market under the symbol "SFBC." Unless the context otherwise requires, all references herein to the Company include the Company, the Bank and its subsidiaries on a consolidated basis. Critical Accounting Policies Our significant accounting policies are described in Note 2 to our Consolidated Financial Statements filed within form 10-K for the year ended December 31, 2003. In preparing financial information, management is required to make significant judgements, estimates, and assumptions that impact the reported amounts of certain assets, liabilities, revenues and expenses. The accounting principles followed by us and the methods of applying these principles conform to accounting principles generally accepted in the United States, and general banking practices. We consider the following to be our 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 judgement. The allowance for loan losses is established through a charge or credit to the provision for loan losses, and is based on our 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. Such evaluation includes a formal analysis that 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 portfolio migration information. Although we use 13 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 judgements and projections may change in the future. Changes in factors or assumptions used by us 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 Company to recognize adjustments to the allowance based on their judgements and projections. Accounting for Acquisitions and Review of Goodwill. The Bank completed an acquisition in 1996 and used the purchase method of accounting. For acquisitions under this method, assets acquired and liabilities assumed were recorded 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 an impairment charge when it believes an investment security 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 impaired on an "other than temporary" basis, 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. Management utilizes the asset and liability method for 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. We 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 judgement in evaluating the amount and timing of recognition of the resulting deferred tax assets and liabilities, including projections of future taxable income. These judgements are estimates and assumptions and are reviewed on a continuing basis. Comparison of Financial Condition at September 30, 2004 and December 31, 2003 Total Assets. Total assets increased by $103.8 million, or 23.6%, from $439.2 million at December 31, 2003 to $543.0 million at September 30, 2004. Net loans increased from $331.5 million at December 31, 2003 to $362.4 million at September 30, 2004, while investments increased from $57.7 million to $125.1 million during the same time period. Asset growth was funded predominantly by deposit growth of $70.3 million. In addition, the Bank participated in a trust preferred offering which raised gross proceeds in the amount of $10.3 million in March 2004, providing the Company with additional regulatory capital that will be used to fund continued growth of the institution. The remainder of the growth was funded by the net increase in advances from the Federal Home Loan Bank of Boston (the "FHLB"), totaling $19.9 million. These advances were made in accordance with the Bank's strategic initiatives. Cash and Cash Equivalents. Cash and cash equivalents increased by $3.8 million, from $22.7 million as of year-end 2003 to $26.5 million at September 30, 2004. Cash and cash equivalents, for purposes of reporting cash flows, includes cash, amounts due from banks, interest-bearing demand deposits with other banks, federal funds sold, overnight deposit with the FHLB and money market mutual funds. 14 Investments. Total investments, excluding FHLB stock and interest-bearing time deposits with other banks, increased by $66.5 million from $58.6 million at December 31, 2003 to $125.0 million at September 30, 2004. Investments in both the "Held to Maturity" and Available for Sale portfolios increased with the inflow of funds from deposits and borrowed funds. Certain of these securities are viewed as temporary, with the funds waiting to be deployed as loans. The main objectives of the investment portfolio are (1) to provide adequate liquidity to meet reasonable declines in deposits and any anticipated increases in the loan portfolio; (2) to provide safety of principal and interest; (3) to generate earnings adequate to provide a stable income; and (4) to fit within the overall asset/liability management objectives of the Company. The Company has not purchased investments with off-balance sheet characteristics, such as swaps, options, futures, and other hedging activities; nor has it purchased collateral mortgage obligations. In accordance with Statement of Financial Accounting Standards No. 115, entitled "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"), the investment portfolio is segregated into a "Held-to- Maturity" category and an "Available-for-Sale" category as defined by SFAS No. 115. The designation is determined at the time of purchase. Neither the Company nor the Bank maintains any securities as "Held for Trading". The Held-to-Maturity category consists of securities issued by states and municipalities of the United States and political subdivisions of states and mortgage-backed securities issued by federal agencies. The Company has the positive intent and ability to hold these securities to maturity. In managing the Held-to-Maturity portfolio, the Company seeks to maximize its return and maintain consistency to meet short and long term liquidity forecasts by purchasing securities with maturities laddered within a short- term period of 1-3 years, a mid-term period of 3-5 years, and mortgage- backed securities with weighted average lives of up to 71/2 years. Investment Securities Held-to-Maturity are carried at amortized cost on the balance sheet, and are summarized as follows as of September 30, 2004:
Amortized Gross Unrealized Gross Unrealized (Dollars In Thousands) Cost Basis Holding Gains Holding Losses Fair Value - ------------------------------------------------------------------------------------------------------------- U. S. Treasury securities and obligations of U. S. Government Corporations and Agencies $ 9,195 $407 $ 0 $ 9,602 Mortgage-backed securities 30,105 102 0 30,207 Other debt securities 1,331 0 0 1,331 - ------------------------------------------------------------------------------------------------------------ Total $40,631 $509 $ 0 $41,140 ============================================================================================================
Securities in the Available-for-Sale category are securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. These securities may be sold in response to interest rate changes, liquidity needs or other factors. Any unrealized gain or loss, net of taxes, for the Available-for-Sale securities is reflected in Stockholders' Equity as a separate component. 15 Investments in Available-for-Sale securities are carried at fair value on the balance sheet and are summarized as follows as of September 30, 2004:
Gains in Losses in Accumulated Accumulated Other Other Amortized Comprehensive Comprehensive (Dollars In Thousands) Cost Basis Income Income Fair Value - -------------------------------------------------------------------------------------------------- Debt Securities issued by the U. S. Treasury and other U. S. Government Corporations and Agencies $40,993 $ 187 $229 $40,951 Marketable Equity Securities 3,936 218 415 3,739 Mortgage-backed Securities 29,522 607 110 30,019 Corporate Debt Securities 9,488 133 0 9,621 - ------------------------------------------------------------------------------------------------- Total $83,939 $1,145 $754 $84,330 =================================================================================================
Securities of the U.S. Treasury, U.S. Government corporations and agencies, and mortgage-backed securities have little or no credit risk, other than being sensitive to changes in interest rates, and if held-to-maturity, these securities will mature at par. The Company amortizes premiums and accretes discounts over the life of the securities. Corporate and municipal bonds are subject to credit risk. Accordingly, the Company's investment policy requires that these securities meet minimum credit quality standards. Specifically, Moody's or Standard and Poor's must rate the securities as "investment grade" before being considered for investment. Securities that subsequently fall below investment grade are evaluated on a case by case basis by both management and the Finance and Investment Committee of the Board of Directors. Marketable equity securities have an even greater risk as they are subject to market fluctuations. Marketable equity securities are constantly monitored and evaluated to determine their suitability for sale, retention in the portfolio, or possible writedowns due to impairment issues. Market risk is controlled by limiting the total amount invested into marketable equity securities, and by maintaining a diversified mix of securities across various industry sectors. It is the Company's policy not to invest in equity securities that are not traded actively on a national exchange. At September 30, 2004, the amount invested in marketable equity securities was 3.0% of the total market value of the investment portfolio and was distributed over various industry sectors. The Company holds certain securities in two subsidiary corporations designated as Massachusetts Securities Corporations. These corporations are afforded a beneficial state tax rate, 1.34%, as compared to the regular Massachusetts Bank tax rate of 10.50%, provided that the principal and interest remains held within the securities corporations. Earnings distributed to the Bank or the Company from the securities corporations would be subject to state taxation as dividend income to the Bank or the Company, and securities transferred to the Bank or the Company would be transferred at fair value, subject to taxes on any gains realized. The two Massachusetts Securities Corporations hold securities totaling $56.2 million. Certain securities have been pledged by the Bank as collateral to secure FHLB borrowings. 16 Loans. The following table shows the amount of loans by category at September 30, 2004 and December 31, 2003.
(In Thousands) September 30, 2004 December 31, 2003 - ----------------------------------------------------------------------------- Residential real estate $172,743 $147,178 Commercial real estate 140,640 140,572 Commercial 28,483 33,980 Construction and land development 22,479 10,346 Consumer 2,680 3,961 Other 81 57 - ------------------------------------------------------------------------ Total gross loans 367,106 336,094 Allowance for loan losses (4,103) (4,154) Unearned income (613) (443) - ------------------------------------------------------------------------ Net loans $362,390 $331,497 ========================================================================
Total gross loans increased by $31.0 million, or 9.2%, from $336.1 million at December 31, 2003, to $367.1 million at September 30, 2004. Residential mortgage and home equity loans increased by $25.5 million, to $172.7 million as of September 30, 2004, compared to $147.2 million at year-end 2003. Commercial real estate loans remained constant at $140.6 million. Construction and land development loans increased by $12.1 million to $22.5 million at September 30, 2004, compared to $10.3 million reported at year- end 2003. The commercial and consumer portions of the Bank's portfolio decreased by $5.5 million and $1.3 million respectively from December 31, 2003 to September 30, 2004. Changes in the loan portfolio mix are indicative of the Bank's increased emphasis on the origination of residential real estate loans, both first mortgages and equity lines of credit, as a means of diversification and credit risk management. Consistent with this emphasis, residential real estate and home equity loans represent 47.1% of total loans as of September 30, 2004 compared to 43.8% as of December 31, 2003. Commercial real estate loans represent 38.3% of the total loans as of September 30, 2004, as compared to 41.8% as of December 31, 2003. These loans are collateralized by various types of commercial properties, without any predominant type of property or concentration of credit in any one industry. INFORMATION WITH RESPECT TO NONACCRUAL AND PAST DUE LOANS AT SEPTEMBER 30, 2004 AND 2003 AND DECEMBER 31, 2003 AND 2002
At September 30, At December 31, - -------------------------------------------------------------------------------------------------- (Dollars In Thousands) 2004 2003 2003 2002 - -------------------------------------------------------------------------------------------------- Nonaccrual Loans $ 218 $ 637 $ 407 $ 635 Loans 90 days or more past due and still accruing 173 13 0 8 Real estate acquired by foreclosure or substantively repossessed 0 0 0 0 Percentage of nonaccrual loans to total gross loans 0.06% 0.20% 0.12% 0.24% Percentage of nonaccrual loans, restructured loans, and real estate acquired by foreclosure or substantively repossessed to total assets 0.07% 0.15% 0.09% 0.16% Percentage of allowance for loan losses to nonaccrual loans 1,882.11% 687.28% 1,020.64% 764.19%
Non-performing 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. Non- performing assets as a total decreased by $16,000, from $407,000 on December 31, 2003 to $391,000 as of September 30, 2004. 17 The $218,000 in nonaccrual loans as of September 30, 2004 consists of $73,000 of real estate mortgages, $100,000 attributed to commercial loans and $45,000 of consumer loans. There were no restructured loans included in nonaccrual loans for the first nine months of 2004. The percentage of nonaccrual loans to total gross loans decreased from 0.12% reported at the year-end 2003 to 0.06% at September 30, 2004 due to a decrease in the nonaccrual category and the increase in the total loan portfolio. The percentage of nonaccrual loans, restructured loans and real estate acquired by foreclosure or substantively repossessed to total assets decreased to 0.07% at September 30, 2004 from 0.09% reported at year-end 2003 due to the decrease in nonaccrual loans.. As noted above, subsequent to the Balance Sheet date these loans have been paid or sold. The percentage of allowance for loan losses to nonaccrual loans increased to 1,882.11% at September 30, 2004 from 1,020.64% at year end 2003 due to a decrease in nonaccrual loans. INFORMATION WITH RESPECT TO INTEREST ON NONACCRUAL AND PAST DUE LOANS AT SEPTEMBER 30, 2004 AND 2003 AND DECEMBER 31, 2003 AND 2002
At September 30, At December 31, - ------------------------------------------------------------------------------------ (In Thousands) 2004 2003 2003 2002 - ------------------------------------------------------------------------------------ Nonaccrual Loans $218 $637 $407 $635 Interest income that would have been recorded during the period under original terms 21 30 41 303 Interest income recorded during the period 42 18 30 121
The Company stops accruing interest on a loan once it becomes past due 90 days or more unless there is adequate collateral and the financial condition of the borrower is sufficient. When a loan is placed on nonaccrual status, all previously accrued but unpaid interest is reversed and charged against current income. Interest is thereafter recognized in that category only when payments are received and the loan becomes current. Loans in the nonaccrual category will remain in that category until the possibility of collection no longer exists, the loan is paid off, or the loan becomes current. When a loan is determined to be uncollectible, it is then charged off against the allowance for loan losses. Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" ("SFAS No. 114") 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 SFAS No. 115. SFAS No.114 requires that impaired loans be valued at the present value of expected future cash flows discounted at the loan's effective interest rate or as a practical expedient, at the loan's observable market value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer and residential loans for impairment disclosures. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principle or interest when due according to the contractual terms of the loan agreement. At September 30, 2004 there were $120,000 of loans which we had determined to be impaired, with a related allowance for credit losses of $6,000. In addition, principal reductions, loan payoffs, charged off balances, loan upgrades, and a change in our impairment identification methodology are other factors resulting in a decrease of impaired loans. There were no other loans classified for regulatory purposes as of September 30, 2004 that we expect will materially impact future operating results, liquidity or capital resources. 18 ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Nine Months Year Ended Ended September 30, December 31, - ---------------------------------------------------------------------------------------------- (Dollars In Thousands) 2004 2003 2003 - ---------------------------------------------------------------------------------------------- Balance at January 1 $4,154 $4,854 $4,854 - ------------------------------------------------------------------------------------------ Charge-offs: Commercial (62) 0 (10) Commercial real estate (425) 0 0 Residential real estate (18) (10) (169) Construction and land development (4) 0 0 Consumer (11) (18) (32) Other 0 0 0 - ------------------------------------------------------------------------------------------ Total charge-offs (520) (28) (211) - ------------------------------------------------------------------------------------------ Recoveries: Commercial 57 51 55 Commercial real estate 0 0 0 Residential real estate 25 29 44 Construction and land development 0 0 0 Consumer 10 11 14 Other 0 0 0 - ------------------------------------------------------------------------------------------ Total recoveries 92 91 113 - ------------------------------------------------------------------------------------------ Net (charge-offs) recoveries (428) 63 (98) - ------------------------------------------------------------------------------------------ Provision (benefit) charged to (increasing) operations 376 (539) (602) - ------------------------------------------------------------------------------------------ Balance at end of period $4,102 $4,378 $4,154 ========================================================================================== Ratio of net charge-offs to average loans outstanding (0.15%) (0.01%) (0.03%)
The Bank maintains an allowance for loan losses at a level that is sufficient to absorb the projected credit losses associated with its loan portfolio. Projected credit losses reflect consideration of all significant factors that affect repayment as of the evaluation date. Projected losses on loan categories 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. 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 the Bank's market area, and various other external and internal factors. The allowance for loan losses is maintained at a level that management considers adequate to absorb estimated losses within the Bank's loan portfolio. The assessment of the adequacy of the allowance for loan losses is reviewed annually by an independent loan review consultant, our independent auditors, and regulatory agencies. The allowance for loan losses at September 30, 2004 was $4.1 million, compared to $4.2 million at year-end 2003. The allowance for loan losses as a percentage of outstanding loans was 1.13% at September 30, 2004, and 1.25% at December 31, 2003. The decrease in the allowance is related to sale of certain loans, which were previously identified as problem credits. Accordingly, these loans were allocated an elevated level of loan loss reserve. Gains on the sale of these loans totaled $196,000 in 2004. In the nine months ended September 30, 2003, the Company realized losses on sales of problem loans totaling $116,000. As the composition of the Bank's loan portfolio gradually changes and diversifies from higher credit risk weighted loans, such as commercial real estate and commercial and industrial loans, to residential and home equity loans, management believes that a smaller reserve allowance will be required. During the first three 19 quarters of 2004, due to the continued changes in the loan portfolio, stronger underwriting guidelines, the sales of loans previously deemed substandard, and overall improvement in credit quality of existing loans, management believes that the level of overall credit risk embedded in the loan portfolio decreased. Charge-offs of loans were $211,000 for the year ended December 31, 2003, $520,000 for the nine months ended September 30, 2004, and $28,000 for the nine months ended September 30, 2003. Recoveries of loans previously charged off totaled $113,000 for the year ended December 31, 2003, $92,000 for the nine months ended September 30, 2004, and $91,000 for the nine months ended September 30, 2003. Management believes that the allowance for loan losses of $4.1 million as of September 30, 2004 is adequate to cover potential losses in the loan portfolio, based on current information available to us. The following table shows an allocation of the allowance for loan losses as of the end of each of the periods indicated.
September 30, 2004 December 31, 2003 -------------------------------------------------------- Percent of Percent of Loans in Each Loans in Each Category to Category to Amount Total Loans Amount Total Loans -------------------------------------------------------- (Dollars In Thousands) Commercial (5) $ 456(1) 7.76% $ 943(1) 10.11% Residential real estate 416(2) 47.06 323(2) 43.79 Commercial real estate 3,045(3) 38.31 2,748(3) 41.83 Construction and land development 121 6.12 52 3.08 Consumer 64(4) .73 80(4) 1.17 Other - .02 8 .02 ---------------------------------------------------- $4,102 100.00% $4,154 100.00% ==================================================== - -------------------- Includes amounts specifically reserved for impaired loans of $0 as of September 30, 2004 and $251,280 as of December 31, 2003 as required by SFAS No. 114. Includes amounts specifically reserved for impaired loans of $3,533 as of September 30, 2004 and $13,979 as of December 31, 2003 as required by SFAS No. 114. Includes amounts specifically reserved for impaired loans of $0 as of September 30, 2004 and $9,642 as of December 31, 2003 as required by SFAS No. 114. Includes amounts specifically reserved for impaired loans of $0 as of September 30, 2004 and $170 as of December 31, 2003 as required by SFAS No. 114. Includes commercial, financial, agricultural and nonprofit loans.
Commercial real estate loans represent 38.31% of gross loans as of September 30, 2004. Residential real estate, including home equity loans, represents 47.06% of gross loans. The Company requires a loan to value ratio of 80% in both commercial and residential mortgages. Residential real estate loans secured by a first mortgage can be written with a loan-to-value ratio of 95% with private mortgage insurance. These mortgages are secured by real properties that have a readily ascertainable appraised value. Generally, commercial real estate loans have a higher degree of credit risk than residential real estate loans because they depend primarily on the cash flows from rental or operation of the underlying collateral. When granting these loans, we evaluate the financial condition of the borrower, the location of the real estate, the quality of management, and general economic and competitive conditions. When granting a residential mortgage, we review the property securing the loan, the borrower's repayment history on past debts and the 20 borrower's ability to meet existing obligations and payments on the proposed loans. Real estate construction loans comprise both residential and commercial construction loans throughout our market area. Commercial loans consist of loans predominantly collateralized by inventory, furniture and fixtures, and accounts receivable. In assessing the collateral for this type of loan, we apply 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 7.8% of the loan portfolio as of September 30, 2004, compared to 10.1% at December 31, 2003. Consumer loans are both secured and unsecured borrowings and, at September 30, 2004, represents only 0.7% of the total loan portfolio, compared to 1.2% at December, 2003. 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. We endeavor 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 Liabilities. Total liabilities increased from $396.7 million on December 31, 2003 to $497.8 million at September 30, 2004. This increase is mainly attributable to a $70.3 million increase in deposits throughout the year, a net increase in FHLB advances of $19.9 million, and the issuance of $10.3 million of subordinated debentures in March 2004. Deposits. Total deposits at September 30, 2004 were $403.5 million, an increase of $70.3 million or 21.1%, as compared to $333.1 million at December 31, 2003. Savings deposit balances and money market accounts increased by $43.2 million during the first nine months of 2004. This increase is mainly attributable to the addition of a market-rate savings product. Term certificates of deposit as of September 30, 2004 increased by $17.3 million when compared to December 31, 2003. The Bank's marketing programs, particularly in early 2004, were targeted to attracting and cementing multiple account relationships with more affluent customers. The Bank continues to offer a full range of deposit products to customers of all income levels. The following table shows the amount of deposits at the end of September 30, 2004 and December 31, 2003.
(In Thousands) September 30, 2004 December 31, 2003 ------------------ ----------------- Noninterest-bearing $ 77,182 $ 73,254 Interest-bearing 326,273 259,891 -------- -------- $403,455 $333,145 ======== ========
FHLB Advances. Total borrowed funds were $80.4 million at September 30, 2004, as compared to $60.5 million at December 31, 2003, an increase of $19.9 million. In accordance with the Bank's strategic plan, FHLB advances of varying terms, totaling $29.8 million were drawn during the nine months ended September 30, 2004. A total of $24.0 million of these advances funded the purchase of investment securities in the third quarter of 2004, in order to "pre-fund" or replace expected loan origination during the third and fourth quarters of 2004. Maturing advances totaling $9.6 million were repaid during the nine months ended September 30, 2004, and principal totaling $0.3 million was repaid on amortizing advances during the same time frame. During the next twelve months, FHLB advances totaling $5 million will mature. Management believes that there will be adequate liquidity on hand to repay these advances on schedule. Subordinated Debentures. On March 17, 2004, Slade's Ferry Capital Trust I (the "Trust"), a Connecticut Statutory trust formed by the Company, completed the sale of $10.0 million of floating rate trust preferred securities (liquidation amount of $1,000 per security) in a private placement as part of a pooled trust preferred 21 securities transaction. The Trust also issued common securities to the Company and used the net proceeds from the offering to purchase a like amount of floating rate junior subordinated deferrable interest debentures of the Company. The subordinated debentures are the sole assets of the Trust. The Company contributed $10 million of the proceeds from the sale of the subordinated debentures to the Bank as Tier I Capital to support the Bank's growth. Total expenses associated with the offering approximating $140,000 at March 31, 2004 are included in other assets and are being amortized on a straight-line basis over the life of the subordinated debentures. The trust preferred securities accrue and pay distributions quarterly on March 17, June 17, September 17 and December 17 of each year, commencing on June 17, 2004, at a floating rate of 3-Month LIBOR plus 2.79% of the stated liquidation amount of $1,000 per trust preferred security. At September 30, 2004, this rate was 4.68%. The Company has fully and unconditionally guaranteed all of the obligations of the Trust, including the semi-annual distributions and payments on liquidation or redemption of the trust preferred securities. The trust preferred securities are mandatorily redeemable upon the maturing of the subordinated debentures on March 17, 2034 or upon earlier redemption as provided in the Indenture. The Company has the right to redeem the subordinated debentures, in whole or in part, on or after March 17, 2009 at par value, plus any accrued but unpaid interest to the redemption date. Redemption may occur prior to March 17, 2009 under certain conditions, at a premium to par value. Stockholders' Equity. Total stockholders' equity increased by $2.7 million, from $42.5 million as reported on December 31, 2003, to $45.2 million as of September 30, 2004. A portion of this increase resulted from net income of $2.3 million, net change in comprehensive income totaling $0.2 million and dividend reinvestments and option exercises totaling $1.3 million, partially offset by dividends declared of $1.1 million. 22 Results of Operations Nine-month period ended September 30, 2004 compared to the nine-month period ended September 30, 2003. The Company's operating performance is dependent on net interest and dividend income, which is the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowed funds. The level of net interest income achieved is significantly impacted by several factors such as economic conditions, interest rates, asset/liability management, and corporate tax and strategic planning. The year-to-date results of operations nine months ended September 30, 2003 have been revised from that previously reported to reclassify the extraordinary item. The extraordinary item treatment previously presented in Form 10-Q for the quarter ended September 30, 2003 was revised, and its individual components were reclassified to other expense and income taxes. See Footnote 20 to the Company's audited consolidated financial statements included in the Company's annual report on Form 10-K for the year ended December 31, 2003 filed with the U.S. Securities and Exchange Commission. The Company's net income for the nine months ended September 30, 2004 was $2,286,804 or $0.56 per share diluted, as compared to $1,625,681 for the nine months ended September 30, 2003 or $0.41 per share diluted. Total interest and dividend income for the nine-month period ended September 30, 2004 increased by $2,164,921 or 14.1%, to $17,487,099, as compared to $15,322,178 recorded during the same period in 2003. Interest and fees on loans increased $2,132,247, or 16.5%, from $12,928,787 for the nine months ended September 30, 2003 to $15,061,034 for the nine months ended September 30, 2004. The change was attributable to increases in the levels of both the commercial and residential loan portfolios. As previously discussed, the portfolio growth is the result of increased focus on expansion of the Bank's loan portfolio, leveraging the Bank's excess capital. Interest and dividend income on investments, federal funds sold, and other interest remained relatively constant, increasing by a total of $32,674 when comparing the nine months ended September 30, 2004 and 2003. Although balances increased, the yields on this group of assets, taken as a whole, decreased, as a large portion was held in the liquidity portfolio of overnight investments, in anticipation of deployment as loans or longer-term securities. Total interest expense increased from $4,598,832 for the nine months ended September 30, 2003 to $5,762,679 for the nine months ended September 30, 2004, an increase of 25.3%. This increase was primarily attributable to the growth in Federal Home Loan Bank advances in 2004 as well as the issuance of subordinated debt in March, 2004. Interest on deposits increased by $187,479. This increase resulted from increased deposit volume and is partially offset by reduced market interest rates. The net interest margin decreased by 33 basis points from 3.78% reported at September 30, 2003 to 3.45% as of September 30, 2004. The Bank, like other financial institutions, has experienced margin compression because of the extended periods of low market interest rates. The Company records a provision for loan losses as a charge against earnings to fund the allowance for loan losses. Management maintains the allowance for loan losses at a level that it believes is adequate to absorb losses inherent within the loan portfolio. Management reviews the adequacy of the allowance for loan losses on a monthly basis and reports changes in the allowance to the Board of Directors. In determining the appropriate level of the allowance for loan losses, management considers past and anticipated loss experience, prevailing economic conditions, evaluations of underlying collateral, and the volume of the loan portfolio and balance of non- performing and classified loans. The Bank's provision for loan losses for the nine months ended September 30, 2004 totaled $376,215, compared to a benefit to earnings of $539,357 for the nine months ended September 30, 2003. The benefit recorded in 2003 was the result of the Bank's successful and continuing efforts to improve the credit quality of its loan portfolio. During 2004, the Bank sold additional non-performing loans, enabling the Bank to reduce its allowance for loan losses and recognize gains on certain loans. Management believes that the loan sales have improved overall loan quality. 23 Total non-interest income increased by $500,720 or 34.0%, from $1,475,427 for the nine months ended September 30, 2003, to $1,976,147 for the nine months ended September 30, 2004. The increase is primarily the result of an increase of $311,609 in gain on sale of loans. Gains recognized on sales of non-performing loans totaled $195,817 for the nine months ended September 30, 2004, as compared to a loss on sales of loans totaling $115,792 for the nine months ended September 30, 2003. Service and overdraft charges on deposit accounts decreased slightly by $32,323, when comparing the nine months ended 2004 and 2003. The proliferation of "free" checking accounts in the Bank's market area has resulted in the Bank's offering and promoting these accounts. The income realized through the increase in cash surrender value of bank owned life insurance policies associated with both the directors' and executive officers' life insurance programs increased by $39,541 over the same time frame. Other income increased by $137,539 when compared to the first nine months of 2003, primarily the result of increased commissions on sales of non-deposit investment products. Other income consists of commissions derived from sale of non-deposit investment income, safe deposit rental, ATM and debit card fees. Total non-interest expense increased from $9,484,593 for the nine months ended September 30, 2003 to $9,894,319 for the nine months ended September 30, 2004, an increase of 4.3%. Salaries and employee benefits increased by $298,324, or 5.2%, from $5,728,779 during the first nine months of 2003, to $6,027,104 million during the same period in 2004. The increase was attributable to additions in staff to support consumer lending activities, sales incentive commissions paid for achieving sales production targets and general salary increases due to annual performance reviews. Occupancy expense totaled $599,518 for the nine months ended September 30, 2004, compared to $710,580 for the nine months ended September 30, 2003. The decrease was achieved through closing a branch office in Swansea, Massachusetts during 2003. Two additional branches were closed in October 2004. Management believes that these closings will afford additional cost savings in the future. These savings will be partially offset by the costs associated with the opening and operation of a new branch in Assonet, Massachusetts, which is expected to be open in early 2005. Equipment expenses increased by $18,916, or 4.8% from $398,971 for the first nine months of 2003 to $417,887 for the same period in 2004. The Company, during 2003 and early 2004, made significant technology investments, adding the infrastructure to support internet banking functions and a more active call center, as well as increased levels of back room automation. Equipment expenses have increased based on the costs necessary to support the technology and depreciation and amortization of hardware and software. The expenses for stationery and supplies increased by 7.6% from $164,337 for the nine months ended September 30, 2003 to $176,783 for the nine months ended September 30, 2004. The increase is attributable to the support of new marketing initiatives, as well as increases in the general price levels due to inflation. These costs are partially offset by new inventory control procedures initiated in 2004 and the closing of the Swansea branch office in late 2003. Professional fees remained relatively constant, decreasing form $780,640 for the nine months ended September 30, 2003 to $779,085 for the nine months ended September 30, 2004. Although constant, management believes, that in the short term, these costs will increase, based on the anticipated costs of implementation of the internal controls provisions of section 404 of the Sarbanes-Oxley Act. Marketing expenses attributed to production and media costs, print advertising, and other direct marketing increased by $99,579 to $409,637 for the nine months ended September 30, 2004, from $310,058 for the same period in 2003. The increase in marketing costs is attributed to the introduction of internet banking, cash management, and a host of new relationship-based deposit products. 24 The following table sets forth the primary components of other expenses. This table reflects an increase of $194,085 to $424,376 from $618,461 for the three month period ending September 30, 2004 and an increase of $93,077 to $1,391,228 from $1,484,305 for the nine month period ending September 30, 2004 when compared to the same periods in 2003.
Three Months Nine Months ------------------------------------------------------------------------- 2004 2003 Variance 2004 2003 Variance ------------------------------------------------------------------------- Communications/postage $ 91,631 $ 83,383 $ 8,248 $ 263,404 $ 251,341 $ 12,063 Committee fees 60,062 40,750 19,312 183,212 123,650 59,562 Interest expense (associated with REIT tax treatment) 0 0 0 0 128,977 (128,977) Other various expenses 466,768 300,243 166,525 1,037,689 887,260 150,429 ------------------------------------------------------------------------- Other expense total $618,461 $424,376 $194,085 $1,484,305 $1,391,228 $ 93,077 =========================================================================
Income before income taxes totaled $3,430,034 for the nine months ended September 30, 2004, an increase of $176,497, or 5.42% as compared to $3,253,537 for the nine months ended September 30, 2003. Applicable taxes decreased by $484,627 to $1,143,229 for the nine months ended September 30, 2004, as compared to $1,627,856 for the nine months ended September 30, 2003. The 2003 presentation includes income taxes related to the dissolution of the REIT totaling $529,133. 25 Three Month Period Ended September 30, 2004 Compared to the Three Month Period Ended September 30, 2003. Net income for the three months ended September 30, 2004 totaled $1,076,457, or $0.26 per share diluted, as compared to $749,993, or $0.19 per share diluted for the three months ended September 30, 2003. Total interest and dividend income increased by $1,131,772, or 22.1%, from $5,118,233 for the three months ended September 30, 2003 to $6,250,005 for the three months ended September 30, 2004. Interest and fees on loans increased by $729,497 or 16.5%, from $4,419,503 for the three months ended September 30, 2003 to $5,149,000 for the three months ended September 30, 2004. This increase was the result of the growth in the Bank's loan portfolio. Interest and dividends on investments increased from $671,857 for the three months ended September 30 2003 to $998,496 for the corresponding period in 2004. The increase, totaling $326,639, or 48.6%, is the result of the deployment of excess liquidity, raised in the deposit campaign and through pre-funding planned loan originations into the investment portfolio. Other interest, primarily interest on federal funds sold and other cash equivalents, totaled $57,509 for the three months ended September 30, 2004, an increase of $30,636 when comparing to the three months ended September 30, 2003. This increase is the result of the cash flows from the deposit campaign being temporarily parked in short-term investments until such time as the funds could be deployed in a fashion consistent with the Company's strategic goals. Total interest expense increased from $1,499,682 for the three months ended September 20, 2003 to $2,024,559, an increase of $524,877 or 35.0%. The increase is the result of increased levels of deposits, particularly from the deposit promotions in early 2004, increased levels of borrowing from the FHLB during 2004, and the issue of subordinated debt in March 2004. Total interest on deposits increased by $188,362, or 17.3%, as the Bank's highly successful deposit campaign in early 2004 led to a 22% increase in deposits. These deposits were raised predominantly in the month of January 2004. Interest on FHLB advances increased by $218,312 as a result of the expanded use of this wholesale funding opportunity. Borrowings during the three months ended September 30, 2004 have been utilized to pre-fund anticipated loan growth in late 2004 and 2005. Net interest income increased from $3,618,551 for the three months ended September 30, 2003 to $4,225,446 for the three months ended September 30, 2004, an increase of $606,895 or 16.8%. Total non-interest income increased by $243,566, to a total of $812,732 for the three months ending September 30, 2004, as compared to $569,166 for the three months ended September 30, 2003; an increase of 42.8%. The increase is primarily attributable to a gain recognized on the sale of loans totaling $195,817, compared with losses of $12,558 recognized in the three months ended September 30, 2003. Also contributing to the increase was an increase in investment and insurance commissions (included in other income) of $97,376. The increase is partially offset by decreases in deposit and overdraft charges, totaling $17,624, and decreases in securities gains totaling $35,868. Total non-interest expenses, made up of various noninterest expenses, increased by $378,272 from $3,083,291 for the three month period ended September 30, 2003 to $3,461,563 for the three month period ended September 30, 2004. The increase can be attributed to increases in marketing expenses as the Bank more actively promoted its internet banking and relationship- based deposit products. Marketing costs increased from $80,441 for the three months ended September 30, 2003 to $211,169 for the three months ended September 30, 2004. Professional fees also increased as the Company incurred additional legal costs associated with general corporate matters. As indicated above, other expenses also increased by a total of $194,085. Salaries and employee benefits remained relatively constant, increasing by $25,033, from $1,919,939 for the three months ended September 30, 2003 to $1,944,972 for the three months ended September 30, 2004. Cost savings from staff attrition and the closing of one branch in late 2003 offset the increases in salaries and benefits costs arising from promotions and performance reviews. These increases are partially offset by decreases in occupancy and equipment charges totaling $52,000. 26 Liquidity and Capital Resources Liquidity is defined as the ability to meet current and future funding requirements. The primary objective of the Company's liquidity management program is to maintain a balance between sources and uses of funds to meet the Company's cash flow needs in an economical and expedient manner. The Company's cash flow needs require the availability of cash to meet the withdrawal demands of customers and the credit commitments to borrowers. In assessing the appropriate level of liquidity, we consider deposit levels, lending funding requirements and investment maturities in light of prevailing economic conditions. Through this assessment, we manage our liquidity level to optimize earnings and respond to fluctuations in customer borrowing needs and cash withdrawals from deposit accounts. Our principal 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. Customer deposits represent the Company's principal source of funds. Deposits are obtained from consumers and commercial customers within our community reinvestment area, being Bristol County, Massachusetts and several abutting towns in Rhode Island. The Bank does not currently solicit or accept brokered deposits. The level of interest rates, economic conditions, and the attractiveness of competing deposits and other investment alternatives influence deposit flows. The Bank has the ability to borrow funds for liquidity purposes from correspondent banks, the FHLB, 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 approximately $19.9 million from December 31, 2003 to September 30, 2004. During 2003, we took advantage of the favorable 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 September 30, 2004, we had approximately $13.2 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 and overnight deposits with the FHLB. An appropriate level of Federal Funds Sold is maintained to meet loan commitments, anticipated loan growth and deposit forecasts. Funds exceeding this level are then used to purchase investment securities that are suitable in yields and maturities for the investment portfolio. Liquidity during the first nine months of 2004 was primarily provided by a net increase in deposits of $70.3 million, trust preferred securities of $10.3 million, and proceeds from maturities, sales and calls of securities totaling $14.1 million. These were offset by purchases of securities of $80.3 million and net loan originations totaling $39.5 million. Other factors affecting liquidity included cash provided by other operating activities and cash used in financing activities as indicated in the consolidated statements of cash flows. At September 30, 2004 the Bank had firm commitments to lend totaling $20.3 million, as well as commitments on outstanding construction and commercial loans and lines of credit totaling $16.1 million and commitments on existing equity lines of credit totaling $19.0 million. Management believes that there is adequate liquidity available to fund these commitments. Total stockholders' equity was $45.2 million at September 30, 2004, as compared to $42.5 million at December 31, 2003, an increase of $2.6 million. The increase was a combination of several factors, including nine months earnings of $2.3 million and transactions originating through the Company's Dividend 27 Reinvestment Program whereby 4,225 shares were issued for optional cash contributions of $89,000 and 20,989 shares were issued in lieu of cash dividend payments of $462,000. There were also stock options exercised resulting in the issuance of common stock totaling $532,000, including a tax benefit of $157,000. These additions were offset by dividends declared of $1.1 million. Capital also increased as a result of a decrease in the accumulated other comprehensive 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, 2003, the Available-for-Sale portfolio had unrealized losses, net of taxes, of $9,740, and on September 30, 2004, as a result of the change in market values, the portfolio had unrealized gains, net of taxes, of $225,602. There was no change in the minimum pension liability adjustment of $402,652, net of taxes, recorded 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 bank regulatory agencies as of September 30, 2004. At September 30, 2004 the actual total Risk Based Capital of the Bank was $44,741,000 for Tier 1 Capital, exceeding the minimum requirements of $14,402,000 by $30,339,000. Total Capital of $48,843,000 exceeded the minimum requirements of $28,803,000 by $20,040,000 and Leverage Capital of $44,741,000 exceeded the minimum requirements of $20,652,000 by $24,089,000. In addition to the "minimum" capital requirements, "well capitalized" standards have also been established by the Federal Banking Regulators. The table below illustrates the capital ratios of the Company and the Bank on September 30, 2004 and at December 31, 2003.
Well September 30, 2004 December 31, 2003 Capitalized ------------------ ----------------- Requirement Bancorp Bank Bancorp Bank ------------------------------------------------------ Total Capital (to Risk Weighted Assets) > or = 10% 15.83% 13.57% 13.58% 11.42% Tier 1 Capital (to Risk Weighted Assets) > or = 6% 11.83% 12.43% 12.33% 10.17% Leverage Capital (to Average Assets) > or = 5% 8.26% 8.67% 9.28% 7.70%
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 which was originally entered into in 2000, and revised in March of 2003. As a result of the improved condition and operation of the Bank, the informal agreement was terminated effective January 22, 2004. Off-Balance Sheet Arrangements Neither the Company, nor the Bank have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. 28 ITEM 3 Quantitative and Qualitative Disclosures About Market Risk - ---------------------------------------------------------- Interest Rate Risk The Company's net income is largely dependent on its net interest income, the difference between the yield on its interest-earning assets and the cost of its interest-bearing liabilities. Volatility in market interest rates requires the Company to manage interest rate risk that arises from the differences in the timing of repricing of assets and liabilities. Management considers interest rate risk, the exposure of earnings to adverse movements in interest rates, to be a significant market risk as it could potentially have an affect on our financial condition and results of operation. The Company's objective is to control interest rate risk and control the vulnerability of its net interest margin to changes in interest rates by managing the relationship of interest-earning assets and interest-bearing liabilities. The interest rate risk is managed by periodic review and evaluation of the risk potential in certain balance sheet accounts, and determining the level of risk considered appropriate for our level of capital. This, in conjunction with certain assumptions and other related factors, such as anticipated changes in interest rates, liquidity requirements, performance objectives and strategic plans, provides management a means of evaluating interest rate risk. The Finance and Investment Committee; comprised of designated executive management and directors, is responsible for managing and monitoring interest rate risk. The Committee reviews the Company's interest rate risk position with the Board of Directors at least quarterly, including the impact changes in interest rates would have on net interest income, and the maintenance of interest rate risks within approved guidelines. The Company quantifies its interest rate risk exposure using a sophisticated income 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 rates, projected net interest income over the next twelve months should not decline by more than 5%. The simulation model generally utilizes a 300 basis point shift in interest rates, both upward and downward. However, because of the existing low interest rate environment in effect with the average Federal Funds overnight rate trading below 1.75%, the simulation model only reduces rates downward by 75 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 interest rates. Prepayment speeds for loans are based on median dealer forecasts for each for each loan type in a given interest rate scenario. The following table reflects our estimated exposure as a percentage of estimated net interest income for the next twelve months, assuming an immediate change in interest rates as set forth below:
Estimated Exposure as a Percentage Rate Change of Net Interest Income (Basis Points) September 30, 2004 ----------------------------------------------------- +300 (14.16)% -75 (0.85)%
The model used to monitor earnings-at-risk provides management a measurement tool to assess the effect of changes in interest rates on our current and future earnings. The limit we established provides an internal tolerance level to control interest rate risk exposure. 29 ITEM 4 Controls and Procedures - ----------------------- As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company's management conducted an evaluation with the participation of the Company's Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the Company's disclosure controls and procedures, as of the end of the last fiscal quarter. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of September 30, 2004 to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms and (ii) accumulated and communicated to the Company's management, including its principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. We intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and we may from time to time make changes to the disclosure controls and procedures to enhance their effectiveness and to ensure that our systems evolve with our business. In designing and evaluating the Company's disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. There has been no change 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. 30 PART II Other Information ITEM 1 Legal Proceedings - ----------------- None. ITEM 2 Changes in Securities, Use of Proceeds and Issuer Purchases - ----------------------------------------------------------- of Equity Securities - -------------------- During the three months ended September 30, 2004, the Company did not repurchase any of its common stock. The Company currently does not have a stock repurchase program in place. ITEM 3 Defaults Upon Senior Securities - ------------------------------- None. ITEM 4 Submission of Matters to a Vote of Security Holders - --------------------------------------------------- None. ITEM 5 Other Information - ----------------- None. 31 ITEM 6 Exhibits - -------- (1) Exhibit 11.1 - Computation of Per Share Earnings (2) Exhibit 31.1 - Rule 13a-14(a)/15d-14(a) Certification of the CEO (3) Exhibit 31.2 - Rule 13a-14(a)/15d-14(a) Certification of the CFO (4) Exhibit 32.1 - Section 1350 Certification of the CEO (5) Exhibit 32.2 - Section 1350 Certification of the CFO 32 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. ------------------------------------- (Registrant) August 15, 2005 /s/ Mary Lynn D. Lenz - ------------------- ------------------------------------- (Date) (Signature) Mary Lynn D. Lenz President/Chief Executive Officer August 15, 2005 /s/ Deborah A. McLaughlin - ------------------- ------------------------------------- (Date) (Signature) Deborah A. McLaughlin Executive Vice President Chief Operating Officer/ Chief Financial Officer EXHIBIT INDEX Exhibit No. Description Item - ----------- ----------- ---- 3.1 Amended and Restated Articles of Incorporation of Slade's Ferry Bancorp. (1) 3.2 Amended and Restated Bylaws of Slade's Ferry Bancorp. (2) 3.3 Articles of Amendment to the Amended and Restated Articles of Incorporation of Slade's Ferry Bank (3) 10.1 Slade's Ferry Bancorp. 1996 Stock Option Plan, as amended (4) 10.2 Supplemental Executive Retirement Agreement between Slade's Ferry Bancorp. and Manuel J. Tavares (5) 10.3 Form of Director Supplemental Retirement Program Director Agreement, Exhibit 1 thereto (Slade's Ferry Trust Company Director Supplemental Retirement Program Plan) and Endorsement Method Split Dollar Plan Agreement thereunder. (6) 10.4 Form of Directors' Paid-up Insurance Policy (part of the Director Supplemental Retirement Program). (7) 10.5 Supplemental Executive Retirement Agreement between Slade's Ferry Bancorp. and Mary Lynn D. Lenz (8) 10.6 Employment Agreement between Slade's Ferry Bancorp. and Mary Lynn D. Lenz (9) 10.7 Employment Agreement between Slade's Ferry Bancorp. and Deborah A. McLaughlin (10) 10.8 Employment Agreement between Slade's Ferry Bancorp. and Manuel J. Tavares (11) 10.9 Form Change of Control Agreement (12) 10.10 Severance Pay Plan (13) 10.11 Slade's Ferry Bancorp 2004 Equity Incentive Plan (14) 11.1 Statement Regarding Computation of Per Share Earnings 14.1 Code of Ethics (15) 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-Q filed with the Commission on May 12, 2005. Incorporated by reference to the Registrant's Form 8-K filed with the Commission on December 21, 2004. Incorporated by reference to the Registrant's Form 10-Q/A for the quarter ended June 30, 1999. Incorporated by reference to the Registrant's Form 10-K/ASB for the fiscal year ended December 31, 1996. Incorporated by reference to Exhibit 10 to the Registrant's Form 10-Q/A for the quarter ended March 31, 1999. Incorporated by reference to Exhibit 10 to the Registrant's Form 10-Q/ASB for the quarter ended June 30, 1998. Incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-Q/A for the quarter ended March 31, 2003. Incorporated by reference to Exhibit 10.11 to the Registrant's Form 10-Q/A for the quarter ended June 30, 2004. Incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-Q/A for the quarter ended September 30, 2004. Incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-Q/A for the quarter ended September 30, 2004. Incorporated by reference to the Registrant's Form 8-K filed with the Commission on January 13, 2005. Incorporated by reference to the Registrant's Form 8-K filed with the Commission on January 14, 2005. Incorporated by reference to Appendix C to the Registrant's Proxy Statement filed on April 9, 2004 Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2003. EX-11 2 slaqa3-11.txt EXHIBIT 11.1 Exhibit 11.1 ------------ SLADE'S FERRY BANCORP. AND SUBSIDIARY COMPUTATION OF PER SHARE EARNINGS (Unaudited)
Nine months ended Three months ended September 30 September 30 2004 2003 2004 2003 ------------------------ ------------------------ Net income $2,286,804 $1,625,681 $1,076,457 $ 749,993 ========== ========== ========== ========== Average shares outstanding 4,038,499 3,963,167 4,058,086 3,976,557 ========== ========== ========== ========== Basic earnings per share $ 0.57 $ 0.41 $ 0.27 $ 0.19 ========== ========== ========== ========== Average shares outstanding 4,038,499 3,963,167 4,038,499 3,963,167 Net effect dilutive stock options 47,196 31,344 43,137 46,247 ---------- ---------- ---------- ---------- Adjusted shares outstanding 4,086,415 3,994,511 4,101,223 4,022,804 ========== ========== ========== ========== Diluted earnings per share $ 0.56 $ 0.41 $ 0.26 $ 0.19 ========== ========== ========== ==========
EX-31 3 slaqa3-311.txt EXHIBIT 31.1 Exhibit 31.1 ------------ CERTIFICATIONS I, Mary Lynn D. Lenz, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A 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 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 registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the 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: August 15, 2005 /s/ Mary Lynn D. Lenz ----------------------- ------------------------------------ President/Chief Executive Officer EX-31 4 slaqa3-312.txt EXHIBIT 31.2 Exhibit 31.2 ------------ CERTIFICATIONS I, Deborah A. McLaughlin, certify that: 1. I have reviewed this quarterly report on Form 10-Q/A 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 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 registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the 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: August 15, 2005 /s/ Deborah A. McLaughlin ----------------------- ------------------------------------ Executive Vice President Chief Financial Officer/ Chief Operations Officer EX-32 5 slaqa3-321.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 Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2004 (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: August 15, 2005 /S/ MARY LYNN D. LENZ ---------------------- ------------------------------------ MARY LYNN D. LENZ PRESIDENT AND CHIEF EXECUTIVE OFFICER EX-32 6 slaqa3-322.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 Quarterly Report on Form 10-Q/A for the quarter ended September 30, 2004 (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: August 15, 2005 /S/ DEBORAH A. MCLAUGHLIN ----------------------- ------------------------------------ DEBORAH A. MCLAUGHLIN Executive Vice President Chief Financial Officer/Chief Operating Officer -----END PRIVACY-ENHANCED MESSAGE-----