-----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, UmROPGDWqic/HN7o4xLnJAkw6rv5DNOUCrduhvznCVL/692hHYbxA6fxI3I0+ing vM3rTXYqU1c0DqZ3wnSayg== 0000910647-05-000302.txt : 20051114 0000910647-05-000302.hdr.sgml : 20051111 20051114151633 ACCESSION NUMBER: 0000910647-05-000302 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 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 SEC ACT: 1934 Act SEC FILE NUMBER: 000-23904 FILM NUMBER: 051200771 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 1 slad-q3.txt BODY OF FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF ----- THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended September 30, 2005 ---------------------- 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 (I.R.S. Employer of 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) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (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 check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X ------------ ----------- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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) 4,131,887 shares as of October 31, 2005. ----------------------------------------------------------------------- TABLE OF CONTENTS Part I ITEM 1 - Consolidated Financial Statements of Slade's Ferry Bancorp. and Subsidiary (Unaudited) 2 Consolidated Balance Sheets - September 30, 2005 and December 31, 2004 Consolidated Statements of Income - Three Months Ended September 30, 2005 and 2004 Consolidated Statements of Income - Nine Months Ended September 30, 2005 and 2004 Consolidated Statement of Changes in Stockholders' Equity - Nine Months Ended September 30, 2005 and 2004 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2005 and 2004 Notes to Consolidated Financial Statements ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 11 ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk 33 ITEM 4 - Controls and Procedures 35 Part II ITEM 1 - Legal Proceedings 36 ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds 36 ITEM 3 - Defaults upon Senior Securities 36 ITEM 4 - Submission of Matters to a Vote of Security Holders 36 ITEM 5 - Other Information 36 ITEM 6 - Exhibits 36 1 PART I ITEM 1 FINANCIAL STATEMENTS SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands) September 30, 2005 December 31, 2004 - ------------------------------------------------------------------------------------------------------------- Assets - ------ Cash and due from banks $ 21,037 $ 15,984 Interest-bearing deposits with other banks 110 410 Federal Home Loan Bank overnight deposit - 5,000 Federal funds sold - 13,800 -------- -------- Cash and cash equivalents 21,147 35,194 Interest-bearing time deposits with other bank 100 100 Investments in available-for-sale securities (at fair value) 99,213 83,882 Investments in held-to-maturity securities (fair values of $32,137 as of September 30, 2005 and $38,112 as of December 31, 2004) 32,226 37,773 Federal Home Loan Bank stock 6,304 4,650 Loans, net of allowance for loan losses of $4,274 at September 30, 2005 and $4,101 at December 31, 2004 395,673 362,265 Premises and equipment 6,072 5,527 Goodwill 2,173 2,173 Accrued interest receivable 2,276 1,969 Cash surrender value of life insurance 11,779 11,548 Deferred taxes 1,614 1,180 Other assets 2,242 3,137 -------- -------- Total assets $580,819 $549,398 ======== ======== Liabilities and Stockholders' Equity - ------------------------------------ Deposits: Noninterest-bearing $ 78,781 $ 80,232 Interest-bearing 326,558 319,673 -------- -------- Total deposits 405,339 399,905 Federal Home Loan Bank advances 113,774 90,286 Subordinated debentures 10,310 10,310 Other liabilities 2,926 2,296 -------- -------- Total liabilities 532,349 502,797 Stockholders' equity: Common stock, par value $0.01 per share; authorized 10,000,000 shares; issued and outstanding 4,124,353 shares on September 30, 2005 and 4,068,423 shares on December 31, 2004 41 41 Paid-in capital 30,869 29,976 Retained earnings 18,197 16,459 Accumulated other comprehensive income (loss) (637) 125 -------- -------- Total stockholders' equity 48,470 46,601 -------- -------- Total liabilities and stockholders' equity $580,819 $549,398 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 2 SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended September 30, (Dollars in thousands, except per share data) 2005 2004 - --------------------------------------------------------------------------------------------------- Interest and dividend income: Interest and fees on loans $ 5,943 $ 5,194 Interest and dividends on securities 1,471 998 Interest on federal funds sold 41 57 Other interest 7 1 ---------- ---------- Total interest and dividend income 7,462 6,250 ---------- ---------- Interest expense: Interest on deposits 1,672 1,280 Interest on Federal Home Loan Bank advances 1,142 627 Interest on subordinated debentures 166 118 ---------- ---------- Total interest expense 2,980 2,025 ---------- ---------- Net interest and dividend income 4,482 4,225 Provision for loan losses 44 - ---------- ---------- Net interest and dividend income, after provision for loan losses 4,438 4,225 ---------- ---------- Noninterest income: Service charges on deposit accounts 81 132 Overdraft service charges 122 149 Gain on sales and calls of available-for-sale securities, net 10 7 Gain on sale of loans 50 196 Gain (loss) on sale of other assets (1) - Increase in cash surrender value of life insurance policies 106 100 Other income 234 229 ---------- ---------- Total noninterest income 602 813 ---------- ---------- Noninterest expense: Salaries and employee benefits 2,148 1,945 Occupancy expense 251 179 Equipment expense 193 67 Professional fees 372 302 Marketing expense 162 211 Other expense 556 758 ---------- ---------- Total noninterest expense 3,682 3,462 ---------- ---------- Income before income taxes 1,358 1,576 Income taxes 458 500 ---------- ---------- Net income $ 900 $ 1,076 ========== ========== Earnings per common share - basic $ 0.22 $ 0.27 ========== ========== Earnings per common share - diluted $ 0.22 $ 0.26 ========== ========== Average common shares outstanding - basic 4,122,631 4,058,086 ========== ========== Average common shares outstanding - diluted 4,145,566 4,101,223 ========== ========== Dividends declared per share $ 0.09 $ 0.09 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 3 SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Nine Months Ended September 30, (Dollars in thousands, except per share data) 2005 2004 - -------------------------------------------------------------------------------------------------- Interest and dividend income: Interest and fees on loans $ 16,937 $ 15,061 Interest and dividends on securities 4,075 2,206 Interest on federal funds sold 198 218 Other interest 18 2 ---------- ---------- Total interest and dividend income 21,228 17,487 ---------- ---------- Interest expense: Interest on deposits 4,288 3,727 Interest on Federal Home Loan Bank advances 3,127 1,800 Interest on subordinated debentures 457 236 ---------- ---------- Total interest expense 7,872 5,763 ---------- ---------- Net interest and dividend income 13,356 11,724 Provision for loan losses 109 376 ---------- ---------- Net interest and dividend income, after provision for loan losses 13,247 11,348 ---------- ---------- Noninterest income: Service charges on deposit accounts 272 404 Overdraft service charges 351 404 Gain on sales and calls of available-for-sale securities, net 27 46 Gain on sales of loans 50 196 Gain on sale of other assets 51 - Increase in cash surrender value of life insurance policies 363 358 Other income 597 568 ---------- ---------- Total noninterest income 1,711 1,976 ---------- ---------- Noninterest expense: Salaries and employee benefits 6,243 6,027 Occupancy expense 702 599 Equipment expense 551 418 Professional fees 986 779 Marketing expense 490 410 Other expense 1,647 1,661 ---------- ---------- Total noninterest expense 10,619 9,894 ---------- ---------- Income before income taxes 4,339 3,430 Income taxes 1,491 1,143 ---------- ---------- Net income $ 2,848 $ 2,287 ========== ========== Earnings per common share - basic $ 0.69 $ 0.57 ========== ========== Earnings per common share - diluted $ 0.69 $ 0.56 ========== ========== Average common shares outstanding - basic 4,104,304 4,038,499 ========== ========== Average common shares outstanding - diluted 4,132,128 4,086,415 ========== ========== Dividends declared per share $ 0.27 $ 0.27 ========== ==========
4 SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (Unaudited)
Accumulated Other Common Paid-in Retained Comprehensive (Dollars in thousands, except per share data) Stock Capital Earnings Income (Loss) Total - ----------------------------------------------------------------------------------------------------- Balance, December 31, 2004 $41 $29,976 $16,459 $ 125 $46,601 Comprehensive income: Net income - - 2,848 - 2,848 Other comprehensive loss - - - (762) (762) ------- Comprehensive income 2,086 ------- Issuance of common stock from dividend reinvestment plan - 428 - - 428 Stock issuance relating to optional cash contribution plan - 54 - - 54 Stock options exercised - 316 - - 316 Tax benefit of stock options - 95 - - 95 Dividends declared ($.27 per share) - - (1,110) - (1,110) --------------------------------------------------- Balance, September 30, 2005 $41 $30,869 $18,197 $(637) $48,470 =================================================== Accumulated Other Common Paid-in Retained Comprehensive (Dollars in thousands, except per share data) Stock Capital Earnings Income (Loss) Total - ----------------------------------------------------------------------------------------------------- Balance, December 31, 2003 $40 $28,609 $14,300 $(412) $42,537 Comprehensive income: Net income - - 2,287 - 2,287 Other comprehensive income - - - 235 235 ------- Comprehensive income 2,522 ------- Issuance of common stock from dividend reinvestment plan - 462 - - 462 Stock issuance relating to optional cash contribution plan - 89 - - 89 Stock options exercised 1 531 - - 532 Tax benefit of stock options - 157 - - 157 Retirement of 3,412 shares of common stock - (32) - - (32) Dividends declared ($.27 per share) - - (1,092) - (1,092) --------------------------------------------------- Balance, September 30, 2004 $41 $29,816 $15,495 $(177) $45,175 ===================================================
The accompanying notes are an integral part of these consolidated financial statements. 5 SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended September 30, (Dollars in thousands) 2005 2004 - -------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 2,848 $ 2,287 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of securities, net of accretion 202 122 Gain on sales and calls of available-for-sale securities, net (27) (46) Change in unearned income 3 170 Provision for loan losses 109 376 Deferred tax expense 127 132 Depreciation and amortization 604 483 Gain on sale of property and equipment (11) - Gain on sale of investment real estate (40) - Gain on sale of loans (50) (196) Increase in cash surrender value of life insurance policies (351) (358) Decrease (increase) in other assets 282 (465) Increase in interest receivable (307) (540) Increase in community investment fund - (10) Increase in other liabilities 630 502 -------- -------- Net cash provided by operating activities 4,019 2,457 -------- -------- Cash flows from investing activities: Decrease in interest bearing time deposits with other banks - 100 Purchases of available-for-sale securities (27,665) (48,904) Proceeds from sales of available-for-sale securities 2,263 625 Proceeds from maturities of available-for-sale securities 8,811 11,348 Purchases of held-to-maturity securities - (31,428) Proceeds from maturities of held-to-maturity securities 5,404 2,098 Purchases of Federal Home Loan Bank stock (1,654) (1,181) Loan originations and principal collections, net (33,584) (39,533) Recoveries of loans previously charged off 64 92 Capital expenditures (1,167) (433) Proceeds from sale of property and equipment 29 - Proceeds from sale of investment real estate 653 - Proceeds from sales of loans - 8,198 Proceeds from sale of charged-off loan 50 - Investment in life insurance policies - (135) Redemption of life insurance policy 120 - -------- -------- Net cash used in investing activities (46,676) (99,153) -------- --------
(Continued) The accompanying notes are an integral part of these consolidated financial statements. 6 SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Concluded)
Nine Months Ended September 30, (Dollars in thousands) 2005 2004 - -------------------------------------------------------------------------------------------------- Cash flows from financing activities: Net increase (decrease) in non-interest bearing deposits (1,451) 3,929 Net increase in interest-bearing deposits 6,885 66,381 Short-term advances from Federal Home Loan Bank 10,800 - Long-term advances from Federal Home Loan Bank 33,000 24,000 Payments on Federal Home Loan Bank long-term advances (12,312) (263) Payments on Federal Home Loan Bank short-term advances (8,000) (3,824) Proceeds from issuance of common stock 482 551 Stock options exercised 316 532 Retirement of shares of common stock - (32) Dividends paid (1,110) (1,086) Proceeds from issuance of subordinated debentures - 10,310 -------- -------- Net cash provided by financing activities 28,610 100,498 -------- -------- Net increase (decrease) in cash and cash equivalents (14,047) 3,802 Cash and cash equivalents at beginning of year 35,194 22,706 -------- -------- Cash and cash equivalents at end of period $ 21,147 $ 26,508 ======== ======== Supplemental disclosures: Interest paid $ 4,772 $ 4,587 Income taxes paid $ 883 $ 825
The accompanying notes are an integral part of these consolidated financial statements. 7 SLADE'S FERRY BANCORP. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) September 30, 2005 Note A - Basis of Presentation - ------------------------------ The accompanying unaudited 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 months ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. The year-end consolidated financial data was derived from audited financial statements, but does not include all disclosures required by GAAP. This form 10-Q should be read in conjunction with the Company's Annual Report filed on Form 10-K/A for the year ended December 31, 2004. 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, 2004. 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. Slade's Ferry Loan Company was dissolved in May 2005. All significant intercompany balances have been eliminated. Slade's Ferry Statutory Trust I, a subsidiary of the Company, was formed to sell capital securities to the public through a third party trust pool. In accordance with Financial Accounting Standards Board ("FASB") Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"), the Company's investment in this subsidiary is presented on the equity method of accounting in the consolidated financial statements. Note C - Stock Based Compensation - --------------------------------- The Company has a stock-based employee compensation plan. The Company accounts for the plan under the recognition and measurement principles of Accounting Principle Board ("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. 8 The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") Statement No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation.
Nine Months Ended Three Months Ended September 30, September 30, (Dollars in thousands, except per share data) 2005 2004 2005 2004 - -------------------------------------------------------------------------------------------- Net income, as reported $2,848 $2,287 $ 900 $1,076 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects 99 88 31 - --------------------------------------- Pro forma net income $2,749 $2,199 $ 869 $1,076 ======================================= Earnings per share: Basic - as reported $ 0.69 $ 0.57 $0.22 $ 0.27 Basic - pro forma $ 0.67 $ 0.54 $0.21 $ 0.27 Diluted - as reported $ 0.69 $ 0.56 $0.22 $ 0.26 Diluted - pro forma $ 0.67 $ 0.54 $0.21 $ 0.26
Note D - Pension Benefits - ------------------------- The following summarizes the net periodic benefit cost for the periods presented:
Nine Months Ended September 30, Three Months Ended September 30, (Dollars in thousands) 2005 2004 2005 2004 - ----------------------------------------------------------------------------------------------------- Interest cost $ 64 $ 79 $ 21 $ 26 Expected return on plan assets (111) (81) (37) (27) Settlement charge 167 98 167 40 Recognized net actuarial loss 26 32 9 11 ------------------ ----------------- Net periodic benefit cost $ 146 $ 128 $160 $ 50 =================== =================
The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2004 that it expects to make no contributions to the plan in 2005. Note E - Impact of New Accounting Standards - ------------------------------------------- In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"). This Statement revises FASB Statement No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related implementation guidance. SFAS 123R requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. It establishes fair value as the measurement objective in accounting for share- based payment arrangements and requires all entities to apply a fair-value based measurement method in accounting for share-based payment transactions with employees except for equity instruments held by employee share 9 ownership plans. The Company will adopt SFAS 123R effective January 1, 2006. The Company does not believe the adoption of this Statement will have a material impact on the Company's financial position or results of operations. 10 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Slade's Ferry Bancorp, a Massachusetts corporation, is a bank holding company headquartered in Somerset, Massachusetts with consolidated assets of $580.8 million, consolidated net loans of $395.7 million, consolidated deposits of $405.3 million and consolidated shareholders' equity of $48.5 million as of September 30, 2005. We conduct our business principally through our wholly-owned subsidiary, Slade's Ferry Trust Company (referred to herein as the "Bank"), a Massachusetts-chartered trust company. Our common stock is quoted on the NASDAQ Capital Market under the symbol "SFBC." Forward-looking Statements - -------------------------- This Form 10-Q 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," "could," "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. As used throughout this report, the terms "we," "our," "us," or the "Bank" or the "Company" refer to Slade's Ferry Bancorp and its consolidated subsidiaries. 11 Critical Accounting Policies - ---------------------------- Our significant accounting policies are incorporated by reference from Note 3 to our Consolidated Financial Statements filed within Form 10-K/A for the year ended December 31, 2004. In preparing financial information, management is required to make significant judgments, estimates, and assumptions that impact the reported amounts of certain assets, liabilities, revenues and expenses. The accounting principles we follow 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. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon our periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision, as more information becomes available. Other than temporary impairment. We record an impairment charge when we believe an investment experiences a decrease in value that is other than temporary. In making a decision whether an investment is permanently impaired, we review current and forecasted information about the underlying investment that is available, applicable industry data, and analysts' reports. When an investment is deemed to be permanently impaired, it is written down to current fair market value. Future adverse changes in economic and market conditions, deterioration in credit quality, and continued poor financial results of underlying investments or other factors could result in further losses that may not be reflected in an investment's current book value that could result in future write-down charges due to impairment. Deferred tax estimates. We use 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 also assess the probability that deferred tax assets will be recovered from future taxable income, and establish a valuation allowance for any assets determined not likely to be recovered. Management exercises judgment in evaluating the amount and timing of recognition of the resulting deferred tax assets and liabilities, including projections of future taxable income. These judgments are estimates and assumptions and are reviewed on a continuing basis. 12 Comparison of Financial Condition at September 30, 2005 and December 31, 2004 - ----------------------------------------------------------------------------- General - ------- Total assets increased by $31.4 million, or 5.7%, from $549.4 million at December 31, 2004 to $580.8 million at September 30, 2005. The increase is primarily the result of growth in the loan portfolio, which increased by $33.5 million or 9.2%, from $362.3 million (net of allowance for loan losses) to $395.7 million. The total investment securities portfolio increased $11.4 million, or 9.0%, from $126.4 million at December 31, 2004 to $137.8 million at September 30, 2005. The increase in loans and the investment portfolio was partially offset by a decrease in cash and cash equivalents of $14.1 million. During the same time period, deposits increased by $5.4 million, or 1.4%, from $399.9 million to $405.3 million, while advances from the Federal Home Loan Bank of Boston (the "FHLB") increased by $23.5 million or 26.0%. The growth in deposits and the additional FHLB advances were used to fund our loan and investment growth during the year. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents decreased by $14.1 million, from $35.2 million at December 31, 2004 to $21.1 million at September 30, 2005. Our federal funds sold balance at the end of December 2004 was abnormally high due to anticipated runoff from a retail promotion in the first quarter of 2005 and the election to invest excess cash into the bond and loan portfolios. The deployment of this excess cash represented an opportunity to enhance income, while remaining within our interest rate risk guidelines. Management reviews the levels of cash and cash equivalents daily in order to maintain a mix of short-term investments, investment securities and loans that allows us to optimize interest income while remaining within our interest rate risk limits. Investment Portfolio - -------------------- Total investments, excluding Federal Home Loan Bank stock, increased by $9.8 million from $121.7 million reported at December 31, 2004 to $131.5 million at September 30, 2005, an increase of $9.8 million or 8.0%. The main objectives of the investment portfolio are to provide adequate liquidity to meet reasonable declines in deposits and any anticipated increases in the loan portfolio, to provide safety of principal and interest, to generate earnings adequate to provide a stable income, and to fit within our overall asset/liability management objectives. We do not currently purchase free standing derivative instruments, such as swaps, options or futures. Among other investment criteria, it is management's goal to maintain a total bond portfolio duration of less than five years. At September 30, 2005, the portfolio duration was estimated at 3.09 years. We primarily utilize U.S. Government agency securities and agency-insured, mortgage-backed securities as investment vehicles for the investment portfolio. High-quality corporate bonds and municipal securities are purchased when an exceptional opportunity to enhance investment yields arises. Purchases of these investments are limited to securities that carry a rating of "Baa1" (Moody's) or "BBB+" (Standard and Poor's), in order to control credit risk. Additionally, we maintain a small portfolio of marketable equity securities. We utilize both a "held-to-maturity" portfolio and an "available-for-sale" portfolio, as defined in Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", to manage investments. Our investment policy requires Board approval before a trading account can be established. The held-to-maturity portfolio was originally established for holding high-yielding municipal securities. 13 During 2004, certain mortgage-backed securities designated as collateral for FHLB advances were also designated as held-to-maturity. Management has the ability and intent to hold these securities to their contractual maturity. Securities Held-to-Maturity - --------------------------- The following table presents the amortized cost, unrealized gains and losses, and fair value of our portfolio of investment securities held-to- maturity at September 30, 2005:
Amortized Gross Unrealized Gross Unrealized (Dollars in thousands) Cost Basis Gains Losses Fair Value - ------------------------------------------------------------------------------------------------------------- Debt securities issued by states of the United States and political subdivisions of the states $ 7,702 $199 $ 7 $ 7,894 Federal agency mortgage-backed securities 24,524 - 281 24,243 -------------------------------------------------------------- Total $32,226 $199 $288 $32,137 ==============================================================
The following table presents the amortized cost, unrealized gains and losses, and fair value of our portfolio of investment securities held-to- maturity at December 31, 2004:
Amortized Gross Unrealized Gross Unrealized (Dollars in thousands) Cost Basis Gains Losses Fair Value - ------------------------------------------------------------------------------------------------------------- Debt securities issued by states of the United States and political subdivisions of the states $ 8,588 $340 $ - $ 8,928 Federal agency mortgage-backed securities 29,185 15 16 29,184 --------------------------------------------------------------- Total $37,773 $355 $ 16 $38,112 ===============================================================
Securities Available-for-Sale - ----------------------------- Securities in the available-for-sale portfolio are securities that we intend 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. The available-for-sale portfolio consists primarily of federal agency obligations, agency-insured mortgage-backed securities, and high-quality corporate bonds. We also have a portfolio of common and preferred marketable equity securities. The equity securities carry a greater level of risk as they are subject to market fluctuations. These securities are constantly monitored and evaluated to determine their suitability for sale, retention in the portfolio, or possible write-downs due to impairment issues. We minimize risk by limiting the total amount invested in marketable equity securities. At September 30, 2005, the amount invested in marketable equity securities was 3.2% of the total market value of our investment portfolio and was distributed over various industry sectors. The change in unrealized losses in the available-for-sale portfolio was reflective of the interest rate environment and not credit related. 14 The following table presents the amortized cost, unrealized gains and losses, and fair value of our portfolio of investment securities available- for-sale at September 30, 2005:
Amortized Gross Unrealized Gross Unrealized (Dollars in thousands) Cost Basis Gains Losses Fair Value - ------------------------------------------------------------------------------------------------------------- Debt securities issued by the U.S. Treasury and other U.S. Government corporations and agencies $ 51,934 $ - $ 617 $51,317 Federal agency mortgage-backed securities 33,894 146 142 33,898 Corporate debt securities 9,787 49 239 9,597 Mutual funds 1,215 - 5 1,210 Marketable equity securities 3,390 123 322 3,191 -------------------------------------------------------------- Total $100,220 $318 $1,325 $99,213 ==============================================================
The following table presents the amortized cost, unrealized gains and losses, and fair value of our portfolio of investment securities available for sale at December 31, 2004:
Amortized Gross Unrealized Gross Unrealized (Dollars in thousands) Cost Basis Gains Losses Fair Value - ------------------------------------------------------------------------------------------------------------- Debt securities issued by the U.S. Treasury and other U.S. Government corporations and agencies $41,419 $ 73 $286 $41,206 Federal agency mortgage-backed securities 27,804 468 65 28,207 Corporate debt securities 9,364 149 29 9,484 Mutual funds 1,217 17 - 1,234 Marketable equity securities 3,859 203 311 3,751 ------------------------------------------------------------- Total $83,663 $910 $691 $83,882 =============================================================
Loans - ----- The loan portfolio consists of loans originated primarily in our market area. There are no foreign loans outstanding. The interest rates we charge on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and the rates offered by our competitors. Total net loans increased from 65.9% of total assets at December 31, 2004, to 68.1% of total assets at September 30, 2005. 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 8.2% of our loan portfolio as of September 30, 2005. 15 Construction loans are used to finance either the development of raw land in anticipation of further improvement or the actual construction of improvements on previously developed land for both commercial and residential purposes. Prior to construction advances, an independent inspector evaluates work progress. Construction loans represent 4.8% of the loan portfolio as of September 30, 2005. Commercial real estate loans represent 52.9% of total loans as of September 30, 2005 while residential real estate, including home equity loans, represents 33.6% of total loans. We require a loan-to-value ratio of 80% in both commercial and residential mortgages. These mortgages are secured by real properties, which have a readily ascertainable appraised value. Generally, commercial real estate loans have a higher degree of credit risk than residential real estate loans because they depend primarily on unit supply and demand, economic conditions and indicators. 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 borrower's repayment history on past debt and assess the borrower's ability to meet existing obligations and payments on the proposed loan. Real estate construction loans comprise both residential and commercial construction loans throughout our market area. Home equity loans are generally revolving lines of credit and are typically secured by second mortgages on one-to-four family owner-occupied properties with maturities up to twenty years. During the first ten years, only interest payments are required. For the remaining ten years, payments are converted to principal and interest. Home equity lines of credit represent 5.2% of our loan portfolio as of September 30, 2005. Consumer loans are both secured and unsecured borrowings and, at September 30, 2005 represent only .6% of our total loan portfolio. These loans have a higher degree of risk than residential mortgage loans. The underlying collateral of a secured consumer loan tends to depreciate in value. Consumer loans are typically made based on the borrower's ability to repay the loan through continued financial stability. 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 loan. The following table shows the amount of loans by category at September 30, 2005 and December 31, 2004.
Percentage (Dollars in thousands) September 30, 2005 December 31, 2004 Increase/(Decrease) - ----------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural $ 32,851 $ 26,606 23.47% Real estate - construction and land development 19,114 24,240 (21.15)% Real estate - residential 113,674 97,496 16.59% Real estate - commercial 211,653 192,822 9.77% Home equity lines of credit 20,658 23,131 (10.69)% Consumer 2,439 2,510 (2.83)% -------------------------------------------------- Total loans 400,389 366,805 9.16% Allowance for loan losses (4,274) (4,101) 4.22% Unearned income (442) (439) 0.68% -------------------------------------------------- Net loans, carrying amount $395,673 $362,265 9.22% ==================================================
The increases in the loan portfolio are the result of the normal origination process. We have been successful in both retention of existing loans and the origination of new loans, particularly commercial and commercial real estate loans. 16 The following table presents information with respect to non-accrual and past due loans during the periods indicated.
(Dollars in thousands) At September 30, 2005 At December 31, 2004 - ---------------------------------------------------------------------------------------------------------------------- Nonaccrual loans $1,142 $ 506 Interest income that would have been recorded during the period under original terms 32 67 Interest income recorded during the period 27 44 Loans 90 days or more past due and still accruing - - Real estate acquired by foreclosure or substantively repossessed - - Percentage of nonaccrual loans to total gross loans 0.29% 0.01% Percentage of nonaccrual loans, restructured loans, and real estate acquired by foreclosure or substantively repossessed to total assets 0.20% 0.13% Percentage of allowance for loan losses to nonaccrual loans 374.26% 810.47%
The $1.1 million in non-accrual loans as of September 30, 2005 consists of $867,000 of commercial real estate loans and $275,000 of residential real estate mortgages. There were no restructured loans included in non-accrual loans for the first nine months of 2005. We stop accruing interest on a loan once it becomes past due 90 days unless there is adequate collateral and the financial condition of the borrower is sufficient. When a loan is placed on non-accrual status, all previously accrued but unpaid interest is reversed and charged against current income. Interest is thereafter recognized only when payments are received and the loan is no longer past due. Loans in the non-accrual 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 the lower of cost or fair value. 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 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, 2005 there was $59,200 of loans which we have determined to be impaired, with a related allowance for loan losses of $2,600. 17 Analysis of Allowance for Loan Losses The table below illustrates the changes in the Allowance for Loan Losses for the periods indicated.
Nine Months Ended September 30, (Dollars in thousands) 2005 2004 ------------------------------------------------------------------------------------ Balance at beginning of period $4,101 $4,154 Charge-offs: Commercial, financial and agricultural - (62) Real estate - construction and land development - (4) Real estate - residential - (18) Real estate - commercial - (425) Home equity lines of credit - - Consumer - (11) ----------------- Total charge-offs - (520) ----------------- Recoveries: Commercial, financial and agricultural 39 57 Real estate - construction and land development - - Real estate - residential - - Real estate - commercial - 8 Home equity lines of credit 16 17 Consumer 9 10 ----------------- Total recoveries 64 92 ----------------- Net (charge-offs) or recoveries 64 (428) Provision charged to operations 109 376 ----------------- Balance at end of period $4,274 $4,102 ================= Allowance for loan losses as a percent of loans at end of period 1.07% 1.12% Ratio of net recoveries (charge-offs) to average loans outstanding 0.01% (0.15)%
We maintain an allowance for possible losses that are inherent in the loan portfolio. The allowance for loan losses is increased by provisions charged to operations based on the estimated loan loss exposure inherent in the portfolio. Management uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: an analysis of individual loans deemed to be impaired in accordance with the terms of Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan", general loss allocations for various loan types based on loss experience factors and other qualitative factors, and an unallocated allowance which is maintained based on management's assessment of many factors including the risk characteristics of the portfolio, concentrations of credit, economic conditions that may effect borrowers' ability to pay, and trends in loan delinquencies and charge-offs. Realized losses, net of recoveries, are charged directly to the allowance. While management uses the currently available information in establishing the allowance for loan losses, adjustments to the allowance may be necessary if future economic conditions differ from the assumptions used in making the evaluation. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Due to stronger underwriting guidelines and the loan sale in the third quarter of 2004 of loans previously deemed non-performing, the overall credit risk profile of our loan portfolio has improved, allowing a lesser provision for loan losses in 2005. Management assesses the allowance for loan losses on a monthly basis. 18 After a thorough review and analysis of the adequacy of the loan loss allowance, we recorded a provision for loan losses of $109,000 for the nine months ended September 30, 2005, compared to a provision of $376,000 for the nine months ended September 30, 2004. The decreased provision is primarily the result of the enhanced credit quality achieved with the actions taken in 2004. As a result of the provision, together with net recoveries of charged- off loans, the allowance for loan losses increased from $4.1 million, or 1.1% of total gross loans at December 31, 2004 to $4.3 million, or 1.1% of total gross loans at September 30, 2005. Management believes that the allowance for loan losses of $4.3 million at September 30, 2005 is adequate to cover potential losses in the loan portfolio, based on current information available to management. This table shows an allocation of the allowance for loan losses as of the dates indicated.
September 30, 2005 December 31, 2004 ----------------------------- ----------------------------- Percent of Loans Percent of Loans in Each Category in Each Category (Dollars in thousands) Amount to Total Loans Amount to Total Loans - --------------------------------------------------------------------------------------------------------------- Commercial, financial and agricultural(5) 511(1) 8.20% $ 743(1) 7.26% Real estate construction and land development 100 4.77% 236 6.62% Real estate - residential 466(2) 33.56% 421(2) 32.87% Real estate - commercial 3,146 52.86% 2,568 52.57% Consumer (3) 51(4) 0.61% 133(4) 0.68% --------------------------------------------------------- $4,274 100.00% $4,101 100.00% ========================================================= - -------------------- Includes amounts specifically reserved for impaired loans of $0 at September 30, 2005, and $271,000 at December 31, 2004 as required by Financial Accounting Standard No. 114 Includes amounts specifically reserved for impaired loans of $2,600 at September 30, 2005, and $0 at December 31, 2004 as required by Financial Accounting Standard No. 114 Includes consumer and other loans. Includes amounts specifically reserved for impaired loans of $0 at September 30, 2005 and $76,000 at December 31, 2004 as required by Financial Accounting Standard No. 114 Includes commercial, financial, agricultural and nonprofit loans.
Deposits - -------- Total deposits at September 30, 2005 were $405.3 million, an increase of $5.4 million, or 1.4%, when compared to total deposits of $399.9 million at December 31, 2004. The following table presents deposits by category at September 30, 2005 and December 31, 2004.
Percentage (Dollars in thousands) September 30, 2005 December 31,2004 Increase/(Decrease) - ---------------------------------------------------------------------------------------- Demand deposits $ 78,781 $ 80,232 (1.81)% NOW 52,234 42,881 21.81% Savings 93,983 89,809 4.65% Money market 29,489 38,518 (23.44)% Certificates of deposit 150,852 148,465 1.61% ------------------------------------------------ Total deposits $405,339 $399,905 1.36% ================================================
19 Deposits in our market area have become extremely competitive. We had approximately $30 million in premium-rate certificates of deposit that matured in January 2005. Although we elected not to price the renewals at a premium, we maintained approximately $15 million of these certificates of deposit in the first quarter of 2005. We offered additional premium-rate certificates and our Coastal Savings account, which pays a market-based interest rate designed to fill the needs of high-balance customers, was promoted in order to fund a portion of the loan growth experienced during 2005. The increase in savings deposits is primarily the result of increased promotion of the Coastal Savings account. NOW accounts have increased due to growth in our portfolio of municipal NOW accounts, as well as from new account openings from our "Bank at Work" program, which is an effort to broaden our deposit base by cross selling relationship products. During the third quarter of 2005, a new business money-market account was created, in order to slow the run-off of money market accounts and service the needs of high-balance business customers. Federal Home Loan Bank Advances and Subordinated Debentures - ----------------------------------------------------------- We supplement deposit growth with a borrowing program from the Federal Home Loan Bank of Boston (the "FHLB"), which utilizes advances from the FHLB to fund loan originations and, upon occasion, securities purchases. Management selects borrowing terms that will create an acceptable spread to the assets being funded at terms that meet our interest rate risk guidelines. Advances from the FHLB totaled $113.8 million at September 30, 2005, as compared to $90.3 million at December 31, 2004, an increase of $23.5 million or 26.0%. These incremental borrowings funded the growth in the loan portfolio, particularly in the first quarter of 2005. In March 2004, we issued $10.3 million in subordinated debentures. The debentures mature in 2034 and carry an adjustable interest rate equivalent to the three-month LIBOR plus 279 basis points. The rate adjusts every three months based on the change in the LIBOR rate. At September 30, 2005, the interest rate on the subordinated debentures was 6.7%. Current bank and bank holding company regulations view these debentures as "tier 2 capital." As such, we may leverage this regulatory capital in order to expand our franchise or otherwise enhance our earnings by investing these funds in higher yielding loans. 20 Comparison of Results of Operations for the Three Months Ended September 30, - ---------------------------------------------------------------------------- 2005 and 2004 - ------------- General - ------- Net income decreased from $1.1 million or $0.27 per share basic and $0.26 per share diluted, for the three months ended September 30, 2004 to $900,000 or $0.22 per share basic and diluted, for the three months ended September 30, 2005, a decrease of 16.4%. Net interest and dividend income increased by $257,000 or 6.1%, from $4.2 million to $4.5 million when comparing the three months ended September 30, 2005 and 2004. This increase is primarily the result of our asset growth during 2004 and early 2005 and the deployment of deposit funds garnered in early 2004 into loans and investment securities. Over the same period, the provision for loan losses increased from $0 to $44,000, based on the net increase in the loan portfolio. Non-interest income decreased from $813,000 for the three months ended September 30, 2004 to $602,000 for the three months ended September 30, 2005, while non- interest expenses increased from $3.5 million to $3.7 million for the same period. Interest Income - --------------- Total interest and dividend income increased from $6.3 million for the three months ended September 30, 2004 to $7.5 million for the three months ended September 30, 2005, an increase of $1.2 million or 19.4%. This increase is the result of increases in the levels of both loans and investment securities. Increases in market interest rates, and consequently, our loan rates, also contributed to the increase in interest income. Interest on loans increased from $5.2 million for the three months ended September 30, 2004 to $5.9 million for the three months ended September 30, 2005, an increase of $749,000 or 14.4%. Indicative of the rate increases, the average yield on loans increased from 5.6% for the three months ended September 30, 2004 to 5.9% for the three months ended September 30, 2005. Interest and dividends on investment securities increased from $1.0 million for the three months ended September 30, 2004 to $1.5 million for the three months ended September 30, 2005, an increase of $473,000 or 47.4%. Interest on federal funds sold decreased by $16,000, the result of deploying excess cash in our loan and investment portfolios instead of federal funds. All other interest, consisting of interest bearing deposits in other banks, increased by $6,000 for the three months ended September 30, 2005. Interest Expense - ---------------- Total interest expense increased by $955,000 or 47.2%, from $2.0 million for the three months ended September 30, 2004 to $3.0 million for the three months ended September 30, 2005. This increase was based on management's strategies for additional FHLB borrowings to invest in higher earning assets. Market interest rates and our own deposit rates have also increased. Interest on deposits increased by $392,000 or 30.6% when comparing the three months ended September 30, 2005 and 2004. The increase is attributed primarily to increases in the interest rates offered on selected deposit products. In response to competitive pressures and the rising rate environment, we raised certificate of deposit rates and certain money-market based deposit rates. As a result of the rate increases, the weighted average cost of deposits increased from 1.55% for the three months ended September 30, 2004 to 2.04% for the three months ended September 30, 2005. Interest expense associated with subordinated debentures increased by $48,000, the result of increased market interest rates. The debentures carry an adjustable rate of interest tied to the three-month LIBOR rate. 21 The following table sets forth our average assets, liabilities, and stockholders' equity, interest income earned and interest paid, average rates earned and paid, and net interest spread and the net interest margin for the three months ended September 30, 2005, and 2004. Average balances reported are daily averages.
Three Months Ended September 30, 2005 2004 -------------------------------------- -------------------------------------- Average Interest Average Average Interest Average (Dollars in thousands) Balance Income/Expense Rate Balance Income/Expense Rate - ----------------------------------------------------------------------------------------------------------------------- Assets: Interest-earning assets Commercial loans $ 33,618 $ 597 7.05% $ 30,776 $ 437 5.65% Commercial real estate 223,813 3,450 6.12% 214,315 3,186 5.91% Residential real estate 138,309 1,858 5.33% 118,110 1,530 5.15% Consumer loans 2,306 38 6.54% 3,006 41 5.43% ------------------------------------ ------------------------------------ Total loans 398,046 5,943 5.92% 366,207 5,194 5.64% Federal funds sold 4,916 41 3.31% 18,952 57 1.20% Taxable debt securities 120,487 1,284 4.23% 81,295 832 4.07% Tax-exempt debt securities 7,703 83 4.27% 9,420 101 4.27% Marketable equity securities 4,021 38 3.75% 5,036 37 2.92% FHLB stock 6,188 66 4.23% 3,320 28 3.36% Other investments 1,184 7 2.35% 280 1 1.42% ------------------------------------ ------------------------------------ Total interest-earning assets 542,545 7,462 5.46% 484,510 6,250 5.13% Allowance for loan losses (4,228) (4,437) Unearned income (383) (506) Cash and due from banks 14,734 17,469 Other assets 26,650 26,457 -------- -------- Total assets $579,318 $523,493 ======== ======== Liabilities & Stockholders' equity: Savings accounts $ 95,498 $ 304 1.26% $ 92,717 $ 249 1.07% NOW accounts 48,786 146 1.19% 44,067 86 0.78% Money market accounts 30,028 101 1.33% 39,867 128 1.28% Time deposits 150,647 1,121 2.95% 150,191 817 2.16% FHLB advances 114,025 1,142 3.97% 60,880 627 4.10% Subordinated debt 10,310 166 6.43% 10,310 118 4.55% ------------------------------------ ------------------------------------ Total interest-bearing liabilities 449,294 2,980 2.63% 398,032 2,025 2.02% Demand deposits 79,441 78,326 Other liabilities 2,119 2,033 -------- -------- Total liabilities 530,854 478,391 Stockholders' equity 48,464 45,102 -------- -------- Total liabilities & stockholders' equity $579,318 $523,493 ======== ======== Net interest income $4,481 $4,225 ====== ====== Net interest spread 2.82% 3.11% Net interest margin 3.28% 3.46%
22 The following table presents the changes in components of net interest income resulting from changes in interest rates and changes in volume of the underlying asset or liability for the three months ended September 30, 2005 and 2004. Changes that are attributable to changes in both rate and volume have been allocated equally to rate and volume. Net Interest Income - Changes Due to Volume and Rate
Three Months Ended September 30, 2005 vs. 2004 Increase / (Decrease) Total Due to Due to (Dollars in thousands) Change Volume Rate - --------------------------------------------------------------------- Commercial loans $ 160 $ 45 $ 115 Commercial real estate 264 144 120 Residential real estate 328 266 62 Consumer loans (3) (11) 8 Federal funds sold (16) (80) 64 Taxable debt securities 451 409 42 Tax-exempt securities (18) (18) - Marketable equity securities 1 (9) 10 FHLB stock 38 27 11 Other investments 6 4 2 ------------------------------ Total Interest Income 1,211 777 434 ------------------------------ Savings accounts 55 8 47 NOW accounts 60 12 48 Money market accounts (28) (32) 4 Time deposits 304 3 301 FHLB advances 515 540 (25) Subordinated debt 49 - 49 ------------------------------ Total Interest Expense 955 531 424 ------------------------------ Net Interest Income $ 256 $ 246 $ 10 ==============================
Provision for Loan Losses - ------------------------- Management assesses the allowance for loan losses on a monthly basis. A provision was made during the third quarter of 2005 and 2004 to adequately absorb any credit risk remaining in the portfolio. Our provision during the three months ended September 30, 2005 was $44,000 due to loan growth, compared to $0 for the three months ended September 30, 2004. The sale of non performing loans during the three months ended September 30, 2004 offset any need for a provision during the three months ended September 30, 2004. Non-Interest Income - ------------------- Total non-interest income decreased by $211,000 or 26.0% from $813,000 for the three months ended September 30, 2004 to $602,000 for the three months ending September 30, 2005. The decrease is primarily the result of a decrease in gains recognized on a sale of non-performing loans, from $196,000 for the three months ended September 30, 2004 to $50,000 for the three months ended September 30, 2005. 23 Service charges on deposit accounts decreased from $132,000 for the three months ended September 30, 2004 to $81,000 for the three months ended September 30, 2005, a decrease of $51,000 or 38.6%. This decrease is the result of the introduction of free checking account products. In response to competitive pressure, we offered and promoted free checking accounts and realized a significant shift of accounts into this product, resulting in decreased fee income. We also realized a decrease in overdraft fees from $149,000 for the three months ended September 30, 2004 to $122,000 for the three months ended September 30, 2005, a decrease of $27,000 or 14.8%. Gains on sales of securities were $10,000 and $7,000, respectively for the three months ended September 30, 2005 and 2004. The securities gains realized during both periods were the result of sales of marketable equity securities. Increases in cash surrender values of bank-owned life insurance policies increased from $100,000 for the three months ended September 30, 2004 to $106,000 for the three months ended September 30, 2005, an increase of $6,000 or 6.0%. Other income increased from $229,000 for the three months ended September 30, 2004 to $234,000 for the three months ended September 30, 2005. This increase is primarily the result of increased volume of ATM and debit card fees from $60,000 for the three months ended September 30, 2004 to $72,000 for the three months ended September 30, 2005. Non-Interest Expenses - --------------------- Total non-interest expense increased from $3.5 million for the three months ended September 30, 2004, to $3.7 million reported for the three months ended September 30, 2005, an increase of $220,000 or 6.4%. Salaries and employee benefits increased by $203,000, or 10.4%, from $1.9 million for the three months ended September 30, 2004, to $2.1 million for the three months ended September 30, 2005. The increase was attributable to settlement accounting recognized on the Bank's defined benefit pension plan totaling $167,000, general salary increases and increased staffing as a result of the new Assonet branch. These costs were partially offset by decreases in staff as a result of outsourcing the facilities management and courier functions. Occupancy expense reflects an increase as a result of the fees paid to the facilities management contractor, and other expenses reflect an increase as a result of fees paid to the new courier service. Occupancy expense totaled $251,000 for the three months ended September 30, 2005, compared to $179,000 for the three months ended September 30, 2004, an increase of $72,000, or 40.2%. Cost savings realized from closing branches in 2004 have been offset by costs associated with opening the new Assonet branch in March 2005. Additionally, outsourcing the facilities maintenance function has resulted in increased occupancy costs. Savings in salaries and employee benefits will offset this expense. Equipment expenses increased from $67,000 to $193,000, respectively, for the three months ended September 30, 2005 and 2004. This increase was due to our initiative to modernize the teller and platform systems. We believe that the investment in equipment and software will ultimately result in more efficient customer service. Professional fees increased from $302,000 for the three months ended September 30, 2004 to $372,000 for the three months ended September 30, 2005, an increase of 23.2%. The increase is the result of increased accounting and consulting costs associated with the restatement of certain financial statements. Marketing expenses attributed to production and media costs, print advertising, and other direct marketing decreased from $211,000 for the three months ended September 30, 2004 to $162,000 for the three months ended September 30, 2005, a decrease of $49,000 or 23.2%. The decrease is the result of decreased use of print media to promote deposit products during the third quarter of 2005. Other expenses decreased by $202,000 from $758,000 for the three months ended September 30, 2004 to $556,000 for the three months ended September 30, 2005, a decrease of 26.7%. In the third quarter of 2004, an expense of $178,000 was recognized relating to a change in accounting for the Company's supplemental pension plan for directors. The expense recognized in the third quarter of 2005 was $11,000. Cost savings 24 were also realized from the installation of teller and platform automation systems which are designed to make both the account opening process and transaction processing more efficient. We believe that the efficiencies created by converting these systems will ultimately lead to improved customer service. Income Taxes - ------------ Income before taxes decreased from $1.6 million for the three months ended September 30, 2004, to $1.4 million for the three months ended September 30, 2005, a decrease of $218,000, or 13.8%. Applicable income taxes totaled $458,000 for the three months ended September 30, 2005, reflecting an effective tax rate of 33.7%, compared to income taxes of $500,000 for the three months ended September 30, 2004, reflecting an effective tax rate of 31.7%. 25 Comparison of Results of Operations for the Nine Months Ended September 30, - --------------------------------------------------------------------------- 2005 and 2004 - ------------- General - ------- Our operating performance is dependent on net interest and dividend income, the difference between interest income earned on loans and investments and interest expense paid on deposits and borrowed funds. Net interest income is significantly impacted by several factors such as economic conditions, interest rates, asset/liability management, and strategic planning. Net income increased from $2.3 million or $0.57 per share, basic, and $0.56 per share, diluted, for the nine months ended September 30, 2004 to $2.8 million or $0.69 per share, basic and diluted, for the nine months ended September 30, 2005, an increase of 24.5%. Net interest and dividend income increased by $1.6 million or 13.9%, from $11.7 million to $13.4 million when comparing the nine months ended September 30, 2005 and 2004. This increase is primarily the result of asset growth and the deployment of deposit funds garnered in early 2004 into loans and investment securities. Over the same period, the provision for loan losses decreased from $376,000 to $109,000, as enhanced loan quality has enabled us to reduce the levels of provisions taken. Non-interest income decreased by $265,000 while non-interest expense increased by $725,000 for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2005. Interest and Dividend Income - ---------------------------- Total interest and dividend income increased by $3.7 million or 21.4%, from $17.5 million for the nine months ended September 30, 2004 to $21.2 million for the nine months ended September 30, 2005. This increase is the result of increases in the levels of both loans and investment securities. Interest and fees on loans increased from $15.1 million for the nine months ended September 30, 2004 to $16.9 million for the nine months ended September 30, 2005, an increase of 12.5%. The increase is the result of portfolio growth, as well as the effect of increasing market interest rates. Indicative of the increase in market interest rates, the average yield on loans increased from 5.7% for the nine months ended September 30 2004 to 5.8% for the nine months ended September 30, 2005. As a result of the portfolio growth experienced in late 2004 and 2005, interest and dividends on investment securities increased by $1.9 million, or 84.7%, from $2.2 million to $4.1 million, for the nine months ended September 30, 2004 compared to $4.1 million for the nine months ended September 30, 2005. All other interest decreased by $4,000. The yield on earning assets increased from 5.0% for the nine months ended September 30, 2004 to 5.4% for the nine months ended September 30, 2005, due principally to market interest rate increases and purchases of investment securities with higher yields. Interest Expense - ---------------- Total interest expense increased by $2.1 million or 36.6%, from $5.8 million for the nine months ended September 30, 2004 to $7.9 million for the nine months ended September 30, 2005. This increase was based on management's strategies for additional FHLB borrowings to invest in higher earning assets. Market interest rates and our own deposit rates have also increased. The weighted average cost of interest-earning funds was 2.4% for the nine months ended September 30, 2005, compared with 2.0% for the nine months ended September 30, 2004. Interest expense on deposits increased by $561,000 or 15.1%, from $3.7 million for the nine months ended September 30, 2004 to $4.3 million for the nine months ended September 30, 2005. We have increased certain interest rates in response to increases in market interest rates and corresponding increases in deposit interest rates offered by our competitors, in order to continue to fund loan growth. As a result of these rate increases, 26 the weighted average cost of deposits increased from 1.2% for the nine months ended September 30, 2004 to 1.3% for the nine months ended September 30, 2005. Interest on FHLB advances increased from $1.8 million for the nine months ended September 30, 2004 to $3.1 million for the nine months ended September 30, 2005, an increase of $1.3 million or 73.7%. Management took advantage of low interest rates from the FHLB to fund a leverage strategy in September 2004. Additionally, we used borrowings to fund a substantial portion of our loan growth in 2005. During the period of low interest rates, we utilized longer-term advances to fund loan originations in order to control interest rate risk. Indicative of these low rates, the average rate paid on FHLB advances decreased from 4.1% for the nine months ended September 30, 2004 to 3.9% for the nine months ended September 30, 2005. Interest on subordinated debentures increased from $236,000 for the nine months ended September 30, 2004 to $457,000 for the nine months ended September 30, 2005. The increase is the result of a full nine months' interest being accrued on the subordinated debentures in 2005, as opposed to the previous year since the debentures were issued in March of 2004. Additionally, the interest rate on the debentures is variable, resetting quarterly at the three-month LIBOR rate plus 279 basis points. Accordingly, the average interest cost of the subordinated debentures increased from 3.9% for the nine months ended September 30, 2004 to 5.9% for the nine months ended September 30, 2005. 27 The following table sets forth our average assets, liabilities, and stockholders' equity, interest income earned and interest paid, average rates earned and paid, and net interest spread and the net interest margin for the nine months ended September 30, 2005, and 2004. Average balances reported are daily averages.
Nine Months Ended September 30, 2005 2004 -------------------------------------- -------------------------------------- Average Interest Average Average Interest Average (Dollars in thousands) Balance Income/Expense Rate Balance Income/Expense Rate - ----------------------------------------------------------------------------------------------------------------------- Assets: Interest earning assets Commercial loans $ 31,397 $ 1,504 6.40% $ 32,680 $ 1,296 5.30% Commercial real estate 220,750 10,038 6.08% 205,137 9,339 6.08% Residential real estate 133,893 5,288 5.28% 113,414 4,282 5.04% Consumer loans 2,279 107 6.28% 3,470 144 5.54% ------------------------------------------------------------------------------ Total loans 388,319 16,937 5.83% 354,701 15,061 5.67% Federal funds sold 10,021 198 2.64% 34,700 219 0.84% Taxable debt securities 111,464 3,517 4.22% 59,576 1,745 3.91% Tax-exempt debt securities 7,985 258 4.32% 9,900 319 4.30% Marketable equity securities 4,681 121 3.46% 4,134 82 2.65% FHLB stock 5,721 179 4.18% 3,124 60 2.57% Other investments 775 18 3.11% 279 1 0.48% ------------------------------------------------------------------------------ Total interest-earning assets 528,966 21,228 5.36% 466,414 17,487 5.01% ------- ------- Allowance for loan losses (4,185) (4,400) Unearned income (394) (462) Cash and due from banks 16,539 18,598 Other assets 26,281 24,989 -------- -------- Total assets $567,207 $505,139 ======== ======== Liabilities & Shareholders' equity: Savings accounts $ 92,926 $ 772 1.11% $ 86,468 $ 623 0.96% NOW accounts 48,422 377 1.04% 41,919 238 0.76% Money market accounts 34,858 320 1.23% 36,283 384 1.41% Time deposits 144,474 2,819 2.61% 152,550 2,481 2.17% FHLB advances 107,697 3,127 3.88% 58,237 1,800 4.13% Subordinated debt 10,310 457 5.93% 8,018 236 3.93% ------------------------------------------------------------------------------ Total interest-bearing liabilities 438,687 7,872 2.40% 383,475 5,763 2.01% ------- ------- Demand deposits 78,579 77,327 Other liabilities 2,229 2,221 -------- -------- Total liabilities 519,495 463,023 Shareholders' equity 47,712 42,116 -------- -------- Total liabilities & shareholders' equity $567,207 $505,139 ======== ======== Net interest income $13,356 $11,724 ======= ======= Net interest spread 2.97% 3.00% Net interest margin 3.38% 3.36%
28 The following table presents the changes in components of net interest income resulting from changes in interest rates and changes in volume of the underlying asset or liability for the nine months ended September 30, 2004 and 2005. Changes that are attributable to changes in both rate and volume have been allocated equally to rate and volume. Net Interest Income - Changes Due to Volume and Rate
Nine Months Ended September 30, 2005 vs. 2004 Increase / (Decrease) Total Due to Due to (Dollars in thousands) Change Volume Rate --------------------------------------------------------------- Commercial loans $ 208 $ (57) $ 265 Commercial real estate 699 706 (7) Residential real estate 1,006 789 217 Consumer loans (37) (53) 16 Federal funds sold (21) (322) 301 Taxable debt securities 1,772 1,577 195 Tax-exempt securities (61) (62) 1 Marketable equity securities 39 12 27 FHLB stock 119 66 53 Other investments 17 7 10 ------------------------------- Total Interest Income 3,741 2,663 1,078 ------------------------------- Savings accounts 149 50 99 NOW accounts 139 44 95 Money market accounts (64) (14) (50) Time deposits 337 (146) 483 FHLB advances 1,327 1,481 (154) Subordinated debt 221 84 137 ------------------------------- Total Interest Expense 2,119 1,499 610 ------------------------------- Net Interest Income $1,632 $1,164 $ 468 ===============================
Provision for Loan Losses - ------------------------- The provision for loan losses is a charge against earnings that increases that increases the allowance for loan losses. The allowance for loan losses is maintained at a level that is deemed adequate to absorb losses inherent within the loan portfolio. In determining the appropriate level of the allowance for loan losses, management takes into consideration past and anticipated loss experience, prevailing economic conditions, evaluations of underlying collateral, and the volume of the loan portfolio and balance of nonperforming and classified loans. The allowance for loan losses is assessed on a monthly basis. The provision was $109,000 during the nine months ended September 30, 2005, compared to $376,000 for the nine months ended September 30, 2004. We reduced the level of the provision because of the overall enhancement in credit quality achieved through tighter underwriting standards and the sale of non-performing loans in late 2004. 29 Non-Interest Income - ------------------- Total non-interest income decreased by $265,000 or 13.4% from $2.0 million for the nine months ended September 30, 2004 to $1.7 million for the six months ending September 30, 2005. Service charges on deposit accounts decreased from $404,000 for the nine months ended September 30, 2004 to $272,000 for the nine months ended September 30, 2005. This decrease is the result of the introduction of free checking account products. In response to competitive pressure, we offered and promoted free checking accounts and realized a significant shift of accounts into this product, resulting in decreased fee income. We also realized a decrease in overdraft fees of $53,000 when comparing the two periods. In March 2005, we realized a $40,000 gain on the sale of a building that formerly housed a branch office and in May 2005, two bank-owned vehicles were sold at a gain of $11,000. Gains on sales of securities decreased from $46,000 for the nine months ended September 30, 2004 to $27,000 for the nine months ended September 30, 2005. The gains realized in both periods relate to sales of marketable equity securities held in the available-for-sale portfolio. During the third quarter of 2004, the Bank realized gains of $196,000 on the sale of non-performing loans. During the third quarter of 2005, a $50,000 gain was realized due to a loan sale of commercial real estate. Increases in cash surrender values of bank-owned life insurance policies increased from $358,000 for the nine months ended September 30, 2004 to $363,000 for the nine months ended September 30, 2005. Other income increased from $568,000 for the nine months ended September 30, 2004 to $597,000 for the nine months ended September 30, 2005, an increase of $29,000 or 5.1%. This increase is the result of increased volume of ATM and debit card use totaling $40,000, offset by decreases in commissions earned on non-deposit investment products and decreases in various customer service fees. Non-Interest Expense - -------------------- Total non-interest expense increased from $9.9 million recorded for the nine months ended September 30, 2004, to $10.6 million for the nine months ended September 30, 2005, an increase of 7.3%. Salaries and employee benefits increased from $6.0 million to $6.2 million, an increase of $216,000 or 3.6%. The increase is the primarily the result of the recognition in September 2005 of settlement accounting associated with the Bank's defined benefit pension plan totaling $167,000. Salary increases in 2005 were offset by increased levels of deferred loan origination costs in accordance with the terms of Statement of Financial Accounting Standards No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases", which is applicable to both the incremental direct costs incurred in originating a loan and internally incurred costs that are directly related to a loan or loan commitment activity, as well as the outsourcing of facilities management and courier functions which are reflected in occupancy and other expense, respectively. Occupancy expense totaled $702,000 for the nine months ended September 30, 2005, compared to $599,000 for the nine months ended September 30, 2004, an increase of 17.2%. Cost savings realized from closing branches in 2004 have been offset by costs associated with opening the new Assonet branch in March 2005. Additionally, during the second quarter of 2005 we outsourced our facilities maintenance. The fees associated with facilities maintenance are charged to occupancy expense. Equipment expenses increased from $418,000 for the nine months ended September 30, 2004 to $551,000 for the nine months ended September 30, 2005, an increase of 31.8%. The increase was due to modernization of and investments in teller and platform systems initiatives that we believe will ultimately result in a more efficient customer service. Professional fees increased from $779,000 for the nine months ended September 30, 2004 to $986,000 for the nine months ended September 30, 2005, an increase of 26.6%. The increase is the result of accounting and 30 consulting costs associated with our restatement of certain financial statements and related information totaling $171,000. Marketing expenses attributed to production and media costs, print advertising, and other direct marketing increased by $80,000, or 19.5%, to $490,000 for the nine months ended September 30, 2005, from $410,000 for nine months ended September 30, 2004. As we continue to launch new deposit products and services, such as the Coastal Savings account and the Bank at Work Program, we expect marketing costs to rise. All other expenses decreased by $14,000 when comparing the nine months ended September 30, 2005 and 2004, primarily the result of decreased expenses relating to a change in accounting for the Company's supplemental pension plan for directors. These expenses were $193,000 for the nine months ended September 30, 2004 as compared with $34,000 for the nine months ended September 30, 2005. These savings were offset by software maintenance costs and computer services, primarily associated with the teller and platform automation project, which increased by $63,000, increases in internet banking costs totaling $88,000, as the internet banking activity commenced in June 2004 and has increased during 2005, and increases in ATM costs totaling $21,000. ATM cost increases have been offset by increases in ATM and debit card fees earned, as ATM activity has increased with the opening of the Assonet branch. We believe that ATMs and internet banking are essential relationship banking services, the costs of which must be absorbed, as we, like our competitors, do not charge for internet banking or ATM activity within our own ATM network. We expect increases in other expenses due to courier costs to be offset by savings in salaries and employee benefits, resulting from the outsourcing of the courier function. Income Taxes - ------------ Income before taxes increased from $3.4 million for the nine months ended September 30, 2004, to $4.3 million for the nine months ended September 30, 2005, an increase of $909,000, or 26.5%. Applicable income taxes totaled $1.5 million for the nine months ended September 30, 2005, reflecting an effective tax rate of 34.4%, compared to income taxes of $1.1 million for the nine months ended September 30, 2004, reflecting an effective tax rate of 33.3%. Liquidity - --------- Our principal sources of funds are customer deposits, amortization and payoff of existing loan principal, and sales or maturities of various investment securities. The Bank is a voluntary member of the Federal Home Loan Bank of Boston (the "FHLB") and as such, may take advantage of the FHLB's borrowing programs to enhance liquidity and leverage its favorable capital position. We may also draw on lines of credit at the FHLB or the Federal Reserve Board, and enter into repurchase or reverse repurchase agreements with authorized brokers. These various sources of liquidity are used to fund withdrawals, new loans, and investments. We seek to promote deposit growth while controlling cost of funds. Sales- oriented programs to attract new depositors and the cross-selling of various products to our existing customer base are currently in place. Management reviews, on an ongoing basis, possible new products, with particular attention paid to products and services designed to retain our base of lower-costing deposits. Total deposits increased by $5.4 million, or 1.4% during the nine months ended September 30, 2005. We have also used borrowed funds as a source of liquidity. At September 30, 2005, the Bank's outstanding borrowings from the FHLB were $113.8 million. We have the capacity to borrow in excess of an additional $43 million from the FHLB. Maturities and sales of investment securities provide us with significant liquidity. Our policy of purchasing shorter-term debt securities reduces market risk in the bond portfolio while providing significant cash flow. 31 For the nine months ended September 30, 2005, cash flow from maturities and principal payments on securities were $14.2 million, proceeds from sales of securities totaled $2.3 million, compared to maturities of securities of $13.4 million, and proceeds from sales of securities of $625,000 for the nine months ended September 30, 2004. Cash flow not invested into loans was reinvested into the securities portfolio. Purchases of securities for the nine months ended September 30, 2005 totaled $27.7 million as compared to $80.3 million at September 30, 2004. Indicative of the short-term nature of the portfolio, the overall investment portfolio duration was 3.09 years. Maturities in the bond portfolio are staggered in order to provide a steady source of liquidity. Additionally, a significant portion of the portfolio is invested into mortgage backed securities. These longer-term investments have monthly principal and interest payments, which enhance liquidity. Amortization and pay-offs of the loan portfolio also provide us with significant liquidity. Traditionally, amortization and pay-offs are reinvested into loans. Loan originations for the nine months ended September 30, 2005 totaled $93.5 million. Excess liquidity is invested into the securities portfolio or into federal funds sold and overnight investments at the FHLB. Commitments to originate loans at September 30, 2005 were $20.5 million, excluding unadvanced construction funds totaling $7.1 million, unadvanced commercial lines of credit totaling $14.6 million, unadvanced commercial real estate loans totaling $1.8 million and unadvanced home equity lines totaling $16.1 million. Management believes that adequate liquidity is available to fund loan commitments utilizing deposits, loan amortization, maturities of securities, or borrowings. Capital - ------- At September 30, 2005, our total stockholders' equity was $48.5 million an increase of $1.9 million from $46.6 million at December 31, 2004. The increase in capital was due to a combination of several factors. Additions consisted of 2005 net income of $2.8 million, transactions originating through the Dividend Reinvestment Program whereby 2,881 shares were issued for optional cash contributions of $54,000 and 23,049 shares were issued in lieu of $428,000 in cash dividend payments. There were also stock options exercised resulting in the issuance of common stock totaling $411,000, including a tax benefit. These additions were offset by dividends declared of $1.1 million and comprehensive loss of $762,000. 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, Slade's Ferry Bancorp's and the Bank's capital ratios meet the criteria of the well-capitalized category established by the federal banking agencies as of September 30, 2005 and at December 31, 2004. The Tier I Capital leverage ratio and Tier I Capital to risk weighted assets ratio for Slade's Ferry Bancorp are 10.01% and 14.52%, respectively, for the nine months ended September 30, 2005. Slade's Ferry Bancorp's Tier I Capital leverage ratio and Tier I Capital to risk weighted assets ratio for the year ended December 31, 2004 are 10.21% and 14.71%, respectively. The Tier I Capital leverage ratio and Tier I Capital to risk weighted assets ratio for Slade's Ferry Trust Company are 8.47% and 12.34%, respectively, for the nine months ended September 30, 2005. Slade's Ferry Trust Company's Tier I Capital leverage ratio and Tier I Capital to risk weighted assets ratio for the year ended December 31, 2004 are 8.67% and 12.56%, respectively. Off-Balance Sheet Arrangements - ------------------------------ We do not 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. 32 ITEM 3 QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We consider interest rate risk to be a significant market risk as it could potentially have an effect on our financial condition and results of operation. The definition of interest rate risk is the exposure of our earnings to adverse movements in interest rates, arising from the differences in the timing of repricing of assets and liabilities; the differences in the various pricing indices inherent in our assets and liabilities; and the effects of overt and embedded options in our assets and liabilities. Our Asset/Liability Committee, comprised of executive management, is responsible for managing and monitoring interest rate risk, and reviewing with the Board of Directors, at least quarterly, the interest rate risk positions, the impact changes in interest rates would have on net interest income, and the maintenance of interest rate risk exposure within approved guidelines. The potentially volatile nature of market interest rates requires us to manage interest rate risk on an active and dynamic basis. Our objective is to reduce and control the volatility of its net interest income to within tolerance levels established by the Board of Directors, by managing the relationship of interest-earning assets and interest-bearing liabilities. In order to manage this relationship, the Asset/Liability Committee utilizes an income simulation model to measure the net interest income at risk under differing interest rate scenarios. Additionally, the Committee uses Economic Value of Equity ("EVE") analysis to measure the effects of changing interest rates on the market values of rate-sensitive assets and liabilities, taken as a whole. The Board of Directors and management believe that static measures of timing differences, such as "gap analysis", do not accurately assess the levels of interest rate risk inherent in our balance sheet. Gap analysis does not reflect the effects of overt and embedded options on net interest income, given a shift in interest rates, nor does it take into account basis risk, the risk arising from using various different indices on which to base pricing decisions. The income simulation model currently utilizes a 300 basis point increase in interest rates and a 200 basis point decrease in rates. Due to the existing low interest rate environment in effect with the average Federal Funds overnight trading at approximately 3.50% at September 30, 2005, the simulation model only reduces rates downward by 200 basis points. The interest rate movements used assume an instant and parallel change in interest rates and no implementation of any strategic plans are made in response to the change in rates. Prepayment speeds for loans are based on median dealer forecasts for each interest rate scenario. Our Board of Directors has established a risk limit of a 5.00% change in net interest income for each 100 number basis point shift in market interest rates. The limit established by the Board provides an internal tolerance level to control interest rate risk. We are within our policy-mandated risk limit for net interest income at risk. The following table reflects our estimated exposure as a percentage of net interest income and the dollar impact for the next twelve months, assuming an immediate change in interest rates set forth below:
Estimated Exposure as a Percentage Rate Change of Net Interest Income (Basis Points) September 30, 2005 ---------------------------------------------------- +300 (7.26%) -200 (2.84%)
33 Additionally we use the model to estimate the effects of changes in interest rates on our EVE. EVE represents our theoretical market value, given the rate shocks applied in the model. The Board of Directors has established a risk limit for EVE which provides that the EVE will not fall below 6.00%, the FDIC's minimum capital level to be classified as "well capitalized". We are within our risk limit for EVE. The following table presents the changes in EVE given rate shocks.
Change from Rate Change Estimated Exposure as a Percentage of Flat Rates (Basis Points) Net Interest Income (Basis Points) ------------------------------------------------------------------------- FLAT 13.74% N/A +300 11.96% (178) -200 11.57% (217)
34 ITEM 4 CONTROLS AND PROCEDURES (a) Evaluation of disclosure 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, 2005 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. (b) Changes in internal controls over financial reporting. There were no changes in the Company's internal controls over financial reporting identified in connection with the Company's evaluation of its disclosure controls and procedures that occurred during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 35 PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS None. ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During the nine months ended September 30, 2005, 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. ITEM 6 EXHIBITS See exhibit index. 36 SIGNATURES - ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SLADE'S FERRY BANCORP. ------------------------------------- (Registrant) Date: November 14, 2005 /s/ Mary Lynn D. Lenz --------------------- ------------------------------------- Mary Lynn D. Lenz President/Chief Executive Officer Date: November 14, 2005 /s/ Deborah A. McLaughlin --------------------- ------------------------------------- Deborah A. McLaughlin Executive Vice President Chief Operating Officer/ Chief Financial Officer 37 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 September 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 September 30, 1998. 38 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 September 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. 39 EX-11 2 sla3-11.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, (Dollars in thousands, except for per share data) 2005 2004 2005 2004 - ------------------------------------------------------------------------------------------------------ Net income $ 2,848 $ 2,287 $ 900 $ 1,076 ========== ========== ========== ========== Average shares outstanding 4,104,304 4,038,499 4,112,631 4,058,086 ========== ========== ========== ========== Basic earnings per share $ 0.69 $ 0.57 $ 0.22 $ 0.27 ========== ========== ========== ========== Average shares outstanding 4,104,304 4,038,499 4,122,631 4,058,086 ========== ========== ========== ========== Net effect dilutive stock options 27,824 47,196 22,935 43,137 ========== ========== ========== ========== Adjusted shares outstanding 4,132,128 4,085,695 4,145,566 4,101,223 ========== ========== ========== ========== Diluted earnings per share $ 0.69 $ 0.56 $ 0.22 $ 0.26 ========== ========== ========== ==========
EX-31 3 sla3-311.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 of Slade's Ferry Bancorp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-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 quarterly 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 registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter 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 officers 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 data; 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: November 14, 2005 /s/ Mary Lynn D. Lenz ---------------------- ------------------------------------ Mary Lynn D. Lenz President/Chief Executive Officer EX-31 4 sla3-312.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 of Slade's Ferry Bancorp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-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 quarterly 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 registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter 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 officers 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 data; 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: November 14, 2005 /s/ Deborah A. McLaughlin ---------------------- ------------------------------------ Deborah A. McLaughlin Executive Vice President Chief Financial Officer/ Chief Operations Officer EX-32 5 sla3-321.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 for the quarter ended September 30, 2005 (the "Report"). By execution of this statement, I certify that: 1) 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 2) 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: November 14, 2005 /s/ Mary Lynn D. Lenz ---------------------- --------------------------------------- Mary Lynn D. Lenz President/Chief Executive Officer EX-32 6 sla3-322.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 for the quarter ended September 30, 2005 (the "Report"). By execution of this statement, I certify that: 1) 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 2) 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: November 14, 2005 /s/ Deborah A. McLaughlin ---------------------- ------------------------------------ Deborah A. McLaughlin Executive Vice President Chief Financial Officer/ Chief Operations Officer -----END PRIVACY-ENHANCED MESSAGE-----