10-Q 1 d65339.txt BODY OF FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2006 ------------------- Commission file number 000-23904 --------------------- SLADE'S FERRY BANCORP. ------------------------------------ (Exact name of registrant as specified in its character) Massachusetts 04-3061936 ------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 100 Slade's Ferry Avenue 02726 Somerset, Massachusetts ---------------------------------- ---------------------------------------- (Zip code) (Address of principal executive offices) (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, 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in rule 12b-2 of the Exchange Act. (Check one): Large Accelerated Filer [ ] Accelerated Filer [ ] Non Accelerated Filer [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) 4,171,990 outstanding shares as of July 31, 2006. -------------------------------------------------------------------------------- TABLE OF CONTENTS PART I ITEM 1 - Financial Statements (Unaudited)........................................................... 3 * Consolidated Balance Sheets - June 30, 2006 and December 31, 2005 * Consolidated Statements of Income - Six Months Ended June 30, 2006 and 2005 * Consolidated Statements of Income - Three Months Ended June 30, 2006 and 2005 * Consolidated Statement of Changes in Stockholder's Equity - Six Months Ended June 30, 2006 * Consolidated Statements of Cash Flows - Six Months Ended June 30, 2006 and 2005 * Notes to Consolidated Financial Statements ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 13 ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk................................. 36 ITEM 4 - Controls and Procedures.................................................................... 38 PART II ITEM 1 - Legal Proceedings.......................................................................... 39 ITEM 1A - Risk Factors.............................................................................. 39 ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds................................ 39 ITEM 3 - Defaults Upon Senior Securities............................................................ 40 ITEM 4 - Submission of Matters to a Vote of Security Holders........................................ 40 ITEM 5 - Other Information.......................................................................... 40 ITEM 6 - Exhibits................................................................................... 40
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ITEM 1 FINANCIAL STATEMENTS SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, 2006 December 31, 2005 ------------- ----------------- Assets (In thousands) Cash and due from banks $ 22,319 $ 17,782 Interest-bearing demand deposits with other banks 970 36 Federal funds sold 6,200 2,200 -------- -------- Cash and cash equivalents 29,489 20,018 Interest-bearing certificates of deposit with other banks 100 100 Securities available for sale 88,744 94,298 Securities held to maturity (fair value approximates of $26,275 as of June 30, 2006 and $28,858 as of December 31, 2005) 27,235 29,306 Federal Home Loan Bank stock, at cost 6,304 6,304 Loans, net of allowance for loan losses of $4,366 at June 30, 2006 and $4,333 at December 31, 2005 426,678 409,610 Premises and equipment, net 5,746 5,917 Goodwill 2,173 2,173 Accrued interest receivable 2,091 2,298 Bank-owned life insurance 12,097 11,884 Deferred tax assets, net 2,846 2,089 Other assets 1,850 1,917 -------- -------- $605,353 $585,914 ======== ======== Liabilities and Stockholders' Equity Deposits: Noninterest-bearing $ 80,710 $ 80,705 Interest-bearing 349,358 335,141 -------- -------- Total deposits 430,068 415,846 Short-term borrowings 10,000 7,000 Long-term borrowings 93,043 100,865 Subordinated debentures 10,310 10,310 Due to broker 9,509 -- Accrued expenses and other liabilities 2,575 3,038 -------- -------- Total liabilities 555,505 537,059 Stockholders' equity: Common stock, par value $0.01 per share; authorized 10,000,000 shares; issued and outstanding 4,164,042 shares at June 30, 2006 and 4,132,200 shares at December 31, 2005 42 41 Additional paid-in capital 31,608 31,014 Retained earnings 19,782 18,998 Accumulated other comprehensive loss (1,484) (1,198) Unearned compensation (100) -- -------- -------- Total stockholders' equity 49,848 48,855 -------- -------- $605,353 $585,914 ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
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SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Six Months Ended June 30, 2006 2005 ---- ---- (In thousands, except per share data) Interest and dividend income: Interest and fees on loans $ 13,120 $ 10,993 Interest and dividends on securities: Taxable 2,550 2,430 Tax-exempt 134 175 Interest on federal funds sold 64 157 Other interest 18 11 ---------- ---------- Total interest and dividend income 15,886 13,766 Interest expense: Interest on deposits 4,167 2,616 Interest on Federal Home Loan Bank advances 2,365 1,985 Interest on subordinated debentures 394 291 ---------- ---------- Total interest expense 6,926 4,892 ---------- ---------- Net interest and dividend income 8,960 8,874 Provision for loan losses 39 65 ---------- ---------- Net interest income, after provision for loan losses 8,921 8,809 Noninterest income: Service charges on deposit accounts 659 420 Gain on sales of assets -- 51 Gain (loss) on sales and calls of available-for-sale securities, net (169) 17 Increase in cash surrender value of life insurance policies 213 258 Other income 546 363 ---------- ---------- Total noninterest income 1,249 1,109 Noninterest expense: Salaries and employee benefits 4,398 4,095 Occupancy and equipment expense 983 809 Professional fees 800 614 Marketing expense 187 328 Other expense 1,334 1,091 ---------- ---------- Total noninterest expense 7,702 6,937 ---------- ---------- Income before income taxes 2,468 2,981 Provision for income taxes 935 1,033 ---------- ---------- Net income $ 1,533 $ 1,948 ========== ========== Earnings per share: Basic $ 0.37 $ 0.48 ========== ========== Diluted $ 0.37 $ 0.47 ========== ========== Average common shares outstanding: Basic 4,151,091 4,094,939 ========== ========== Diluted 4,168,271 4,123,796 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
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SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended June 30, 2006 2005 ---- ---- (In thousands, except per share data) Interest and dividend income: Interest and fees on loans $ 6,685 $ 5,727 Interest and dividends on securities: Taxable 1,217 1,199 Tax-exempt 65 84 Interest on federal funds sold 53 92 Other interest 10 7 ---------- ---------- Total interest and dividend income 8,030 7,109 Interest expense: Interest on deposits 2,256 1,457 Interest on Federal Home Loan Bank advances 1,209 1,074 Interest on subordinated debentures 170 155 ---------- ---------- Total interest expense 3,635 2,686 ---------- ---------- Net interest and dividend income 4,395 4,423 Provision for loan losses -- 15 ---------- ---------- Net interest income, after provision for loan losses 4,395 4,408 Noninterest income: Service charges on deposit accounts 352 212 Gain on sales of assets -- 11 Gain (loss) on sales and calls of available-for-sale securities, net (172) 15 Increase in cash surrender value of life insurance policies 106 111 Other income 260 191 ---------- ---------- Total noninterest income 546 540 Noninterest expense: Salaries and employee benefits 2,287 2,120 Occupancy and equipment expense 490 400 Professional fees 388 307 Marketing expense 109 229 Other expense 678 566 ---------- ---------- Total noninterest expense 3,952 3,622 ---------- ---------- Income before income taxes 989 1,326 Provision for income taxes 363 478 ---------- ---------- Net income $ 626 $ 848 ========== ========== Earnings per share: Basic $ 0.15 $ 0.21 ========== ========== Diluted $ 0.15 $ 0.21 ========== ========== Average common shares outstanding: Basic 4,156,481 4,112,969 ========== ========== Diluted 4,170,610 4,132,712 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
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SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) Accumulated Shares of Additional Other Common Common Paid-in Retained Comprehensive Unearned Stock Stock Capital Earnings Loss Compensation Total ----------------------------------------------------------------------------------------------- (In thousands, except per share data) Balance at December 31, 2005 4,132,200 $ 41 $31,014 $18,998 $(1,198) $ - $48,855 Comprehensive income: Net income - - - 1,533 - - 1,533 Other comprehensive loss - - - - (286) - (286) ------- Comprehensive income 1,247 ------- Issuance of common stock 16,842 - 302 - - - 302 Stock options exercised 28,000 1 304 - - 305 Tax benefit of stock options exercised - - 82 - - 82 Stock-based compensation - - 136 - - 136 Purchase of treasury stock (13,000) - (230) - - (230) Unearned compensation - - - - - (100) (100) Dividends declared ($.18 per share) - - - (749) - - (749) ----------------------------------------------------------------------------------------------- Balance at June 30, 2006 4,164,042 $ 42 $31,608 $19,782 $(1,484) $(100) $49,848 =============================================================================================== The accompanying notes are an integral part of these consolidated financial statements.
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SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, ------------------------- 2006 2005 ---- ---- (In thousands) Cash flows from operating activities: Net income $ 1,533 $ 1,948 Adjustments to reconcile net income to net cash provided by operating activities: Amortization, net of accretion of securities 65 152 Loss (gain) on sales and calls of available-for-sale securities, net 169 (17) Change in net deferred loan fees (10) 40 Provision for loan losses 39 65 Deferred tax provision (benefit) (491) 127 Depreciation and amortization 439 392 Gain on sale of assets -- (51) Increase in cash surrender value of life insurance (213) (246) Stock-based compensation 136 -- Net change in: Other assets 67 146 Accrued interest receivable 224 (214) Other liabilities (463) 512 -------- -------- Net cash provided by operating activities 1,495 2,854 -------- -------- Cash flows from investing activities: Activity in available-for-sale securities: Purchases (6,440) (20,769) Sales 15,196 1,826 Maturities, calls and paydowns 5,611 6,548 Activity in held-to-maturity securities: Maturities, calls and paydowns 2,046 4,256 Purchases of Federal Home Loan Bank stock -- (1,255) Loan principal originations, net (17,097) (29,200) Recoveries of loans previously charged off, net -- 57 Capital expenditures (268) (1,046) Proceed from sale of property and equipment -- 28 Proceeds from sale of investment real estate -- 653 Redemption of life insurance policy -- 120 -------- -------- Net cash used in investing activities (952) (38,782) -------- -------- The accompanying notes are an integral part of these consolidated financial statements.
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SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) Six Months Ended June 30, ------------------------- 2006 2005 ---- ---- (In thousands) Cash flows from financing activities: Net increase (decrease) in noninterest-bearing deposits $ 5 $ (2,639) Net increase in interest-bearing deposits 14,217 9,372 Short-term advances from Federal Home Loan Bank 43,000 -- Long-term advances from Federal Home Loan Bank -- 20,000 Payments on Federal Home Loan Bank short-term advances (40,000) -- Payments on Federal Home Loan Bank long-term advances (7,822) (208) Proceeds from issuance of common stock 302 316 Stock options exercised 305 316 Purchase of treasury stock (230) -- Unearned compensation (100) -- Dividends paid (749) (738) -------- -------- Net cash provided by financing activities 8,928 26,419 -------- -------- Net increase (decrease) in cash and cash equivalents 9,471 (9,509) Cash and cash equivalents at beginning of period 20,018 35,194 -------- -------- Cash and cash equivalents at end of period $ 29,489 $ 25,685 ======== ======== Supplemental disclosures: Interest paid $ 7,105 $ 4,772 Income taxes paid $ 475 $ 883 Non-cash disclosure: Due to broker $ 9,509 $ -- The accompanying notes are an integral part of these consolidated financial statements.
8 SLADE'S FERRY BANCORP. AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) June 30, 2006 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 six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. 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 for the year ended December 31, 2005. 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, 2005, except for the adoption of Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, ("SFAS 123 (R)" or the "Statement") effective January 1, 2006 applicable to the Company's stock-based employee compensation plans. See Note C. The consolidated financial statements include the accounts of Slade's Ferry Bancorp., its wholly-owned subsidiary, Slade's Ferry Trust Company (the "Bank") and the Bank's wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation. The Company accounts for its wholly-owned subsidiary, Slade's Ferry Statutory Trust I, using the equity method. Slade's Ferry Statutory Trust I, a subsidiary of the Company, was formed on March 17, 2004 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 subsidiary has not been included in the consolidated financial statements. Slade's Ferry Loan Company was dissolved in early 2005. NOTE C - STOCK BASED COMPENSATION --------------------------------- The Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, ("SFAS 123(R)" or the "Statement") effective January 1, 2006 applicable to the Company's stock-based employee compensation plans. The Company's stock-based compensation plans are described in Note 15 to the Company's consolidated financial statements included in its Form 10-K for the year ended December 31, 2005. No changes have been made to the plans during the six months ended June 30, 2006. In accordance with SFAS No. 123(R), for the six months ended June 30, 2006, the Company has expensed, on a straight line basis, the previously unrecognized compensation costs related to the non-vested portion of awards granted and outstanding as of January 1, 2006 based on the grant-date fair value of those awards as calculated under the original provisions of Statement No. 123. Fair value has been determined using Black-Scholes option-pricing 9 model. Compensation costs are now being recognized over the period the employee is required to provide services to obtain the award. The impact of adopting SFAS No. 123(R) was a reduction of income before income taxes of $136,000 and a reduction of net income by $98,000 for the six months ended June 30, 2006. Basic and diluted earnings per share were reduced by $0.02 and $0.03 per share, respectively. The impact of adopting SFAS No. 123(R) was a reduction of income before income taxes of $70,000 and a reduction of net income of $51,000 for the three months ended June 30, 2006. Basic and diluted earnings per share were reduced by $0.01 per share. Prior to the adoption of SFAS No. 123(R), the Company accounted for the plans under the recognition and measurement principles of Accounting Principle Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Accordingly, no stock-based employee compensation cost was reflected in net income, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. A summary of the status of the Company's stock option plans (shares in thousands) are presented below: Stock Options Outstanding --------------------------- Shares Available Weighted-Average Options for Grant Shares Exercise Price ------- ---------------- ------ ---------------- Balance at December 31, 2005 164 255 $15.92 Granted (8) 8 18.40 Stock options exercised - (28) 10.89 Shares vested - - - Forfeited or expired - (4) 14.18 --- --- Balance at June 30, 2006 156 231 === === The weighted-average grant-date fair value of options granted during the six months ended June 30, 2006 was $18.40. The total intrinsic value of options exercised during the six months ended June 30, 2006 was $325,000. A summary of options outstanding (shares in thousands) at June 30, 2006 is as follows: Stock Options ----------------------------- Outstanding Exercisable ----------- ----------- Total number of shares 231 203 Weighted average exercise price $ 18.18 $ 18.03 Aggregate intrinsic value (in thousands) $ 4,198 $ 3,360 Weighted average remaining contractual term (in months) 11 11 10 The fair value of each option award is estimated on the date of grant based on a number of factors including volatilities, dividends, and expected terms. Listed below is a summary of the factors we employed: June 30, 2006 ------------- Expected volatility 24% - 33% Weighted-average volatility 29% Expected dividends 1.90% Expected term (in years) 5 - 10 Risk-free rate 3.98% - 5.22% 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(R), "Accounting for Stock-Based Compensation," to stock-based employee compensation for the three and six months ended June 30, 2005. [OBJECT OMITTED]]
Three Months Ended Six Months Ended June 30, June 30, 2005 2005 ------------------ ---------------- (In thousands, except per share data) Net income, as reported $ 848 $1,948 Deduct: stock-based employee compensation expense determined under fair value method, net of related tax effects 26 63 ----- ------ Net income, pro forma $ 822 $1,885 ===== ====== Earnings per share - basic As reported $0.21 $0.48 ===== ====== Pro forma $0.20 $0.46 ===== ====== Earnings per share - assuming dilution As reported $0.21 $0.47 ===== ====== Pro forma $0.20 $0.46 ===== ======
11 NOTE D - PENSION PLAN --------------------- The components of net periodic pension expense (income) are as follows:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2006 2005 2006 2005 ---- ---- ---- ---- (In thousands) Interest cost $ 16 $ 21 $ 33 $ 43 Expected return on plan assets (29) (37) (58) (74) Settlements 133 - 133 - Recognized net actuarial loss 8 9 15 17 ---- ---- ---- ---- Net periodic benefit expense (income) $128 $ (7) $123 $(14) ==== ==== ==== ====
The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2005 that it expects to make no contributions to the plan in 2006. 12 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 $605.4 million, consolidated net loans and leases of $426.7 million, consolidated deposits of $430.1 million and consolidated shareholders' equity of $49.8 million as of June 30, 2006. 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 our 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 "Company" refer to Slade's Ferry Bancorp. and its consolidated subsidiary, unless the context otherwise requires. 13 CRITICAL ACCOUNTING POLICIES ---------------------------- Our significant accounting policies are incorporated by reference to Note 1 to our Consolidated Financial Statements filed within Form 10-K for the year ended December 31, 2005. In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and other-than-temporary impairment losses. Allowance for loan losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. Other than temporary impairment. In estimating other-than-temporary-impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2006 AND DECEMBER 31, 2005 ------------------------------------------------------------------------ GENERAL ------- Total assets increased by $19.5 million, or 3.3%, from $585.9 million at December 31, 2005 to $605.4 million at June 30, 2006. Total net loans increased by $17.1 million, or 4.2%, from $409.6 million to $426.7 million. Deposits increased by $14.2 million, or 3.4%, from $415.8 million to $430.1 million. The increase in deposits was partially offset by a decrease in Federal Home Loan Bank advances of $4.8 million. CASH AND CASH EQUIVALENTS ------------------------- Cash and cash equivalents increased by $9.5 million, from $20.0 million at December 31, 2005 to $29.5 million at June 30, 2006. This increase was due primarily to uninvested proceeds from an investment exchange at June 30, 2006 (see "Investment Portfolio", below). INVESTMENT PORTFOLIO -------------------- The main objectives of our investment portfolio are to achieve a competitive rate of return over a reasonable time period and to provide liquidity. 14 Our total investment portfolio decreased from $129.9 million at December 31, 2005 to $122.3 million at June 30, 2006, a decrease of 5.9%. The decrease is the result of sales, maturities, calls and paydowns of certain state and municipal obligations and mortgage-backed securities. Those funds were used to provide liquidity for current loan growth. An overriding investment strategy is to allow the investment portfolio to decrease through normal paydowns and maturities and reinvest these funds into higher yielding loans or investments. At June 30, 2006, the portfolio duration was approximately 3.1 years which was within our investment policy limit of 5 years. We do not purchase investments with imbedded derivative characteristics, or free-standing derivative instruments such as swaps, options, or futures. SECURITIES AVAILABLE FOR SALE Securities not designated as held-to-maturity are designated as available for sale. Although we do not anticipate the sale of these securities, the designation as available for sale allows the flexibility to alter the investment strategy and sell these securities when conditions warrant. Additionally, marketable equity securities that have no maturity date must be designated as available-for-sale. These securities are carried at fair value. The available-for-sale securities portfolio includes obligations and mortgage-backed securities of government-sponsored enterprises, corporate debt and equity securities. Available-for-sale securities decreased from $94.3 million at December 31, 2005 to $88.7 million at June 30, 2006. On June 20, 2006, the Board of Directors approved a strategy to restructure the available-for-sale investment portfolio through the sale of approximately $14.5 million of low-yielding obligations of government-sponsored enterprises. Realized losses amounted to $176,000 or 1.2% of the underlying cost basis of these securities. All purchases and sales relating to this reinvestment strategy were reflected in the financial statements as of June 30, 2006. The following table shows the amortized cost basis and fair value of securities available for sale at June 30, 2006 and December 31, 2005.
June 30, 2006 December 31, 2005 ---------------------- --------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- ----- --------- ----- (In thousands) Debt Securities: Government-sponsored enterprises $34,450 $33,504 $50,443 $49,581 Corporate 9,517 9,057 9,564 9,014 Mortgage-backed 42,640 41,867 31,574 31,232 ------- ------- ------- ------- Total debt securities 86,607 84,428 91,581 89,827 ------- ------- ------- ------- Marketable equity securities 3,306 3,151 3,426 3,271 Mutual funds 1,215 1,165 1,205 1,200 ------- ------- ------- ------- Total securities available for sale $91,128 $88,744 $96,212 $94,298 ======= ======= ======= =======
15 SECURITIES HELD TO MATURITY The held-to-maturity portfolio consists of mortgage-backed securities and securities issued by states and municipalities. These securities are carried at amortized cost. Held-to-maturity securities decreased from $29.3 million at December 31, 2005 to $27.2 million at June 30, 2006. Management has designated these mortgage-backed securities to secure advances from the FHLB. We have the positive intent and ability to hold these securities to maturity. The following table shows the amortized cost basis and fair value of securities held to maturity at June 30, 2006 and December 31, 2005.
June 30, 2006 December 31, 2005 ---------------------- --------------------- Amortized Fair Amortized Fair Cost Value Cost Value --------- ----- --------- ----- (In thousands) State and municipal obligations $ 6,098 $ 6,164 $ 6,766 $ 6,892 Mortgage-backed securities 21,137 20,111 22,540 21,966 ------- ------- ------- ------- Total securities held to maturity $27,235 $26,275 $29,306 $28,858 ======= ======= ======= =======
LOANS ----- Our loan portfolio consists primarily of residential and commercial real estate loans, construction and land development loans, commercial loans, home equity lines of credit and consumer loans originated primarily in our market area. There are no foreign loans outstanding. Interest rates charged on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and the rates offered by the our competitors. Total net loans were 70.5% of total assets at June 30, 2006, as compared to 69.9% of total assets at December 31, 2005. MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING We originate multi-family and commercial real estate loans that are generally secured by five or more unit apartment buildings and properties used for business purposes, such as small office buildings, restaurants or retail facilities. Loans secured by multi-family and commercial real estate properties generally involve larger principal amounts and a greater degree of risk than one-to-four family residential mortgage loans. Because payments on loans secured by multi-family and commercial real estate properties are often dependent on successful operation or management of the properties, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. We seek to minimize these risks through our underwriting standards. Multi-family and commercial real estate loans totaled $211.3 million and comprised 49.0% of the total gross loan portfolio at June 30, 2006. At December 31, 2005, the multi-family and commercial real estate loan portfolio totaled $213.8 million, or 51.6% of total gross loans. 16 RESIDENTIAL LENDING We currently offer fixed-rate, one-to-four family mortgage loans with terms from 10 to 30 years and a number of adjustable-rate mortgage ("ARM") loans with terms of up to 30 years and interest rates that adjust every one or three years from the outset of the loan. We generally underwrite our residential real estate loans to comply with secondary market standards established by the Federal National Mortgage Association. Although loans are underwritten to standards that make them readily saleable, we have not chosen to sell these loans. Rather, we maintain them in our portfolio, consistent with our income and interest rate risk management targets. Residential real estate loans totaled $127.0 million and comprised 29.4% of the total gross loan portfolio at June 30, 2006. At December 31, 2005, the residential real estate loan portfolio totaled $120.3 million, or 29.1% of total gross loans. Due to competitive pricing, our residential loan portfolio continues to increase. COMMERCIAL LOANS Commercial business loans consist of loans and lines 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 the invoice date. Commercial loans totaled $50.0 million and comprised 11.6% of the total gross loan portfolio at June 30, 2006. At December 31, 2005, the commercial loan portfolio totaled $38.1 million, or 9.2% of total gross loans. With the implementation of our loan portfolio management team, our commercial loan officers are able to concentrate their efforts on this aspect of business development. CONSTRUCTION LENDING Fixed-rate construction loans are originated for the development of one-to-four family residential properties. Although we do not generally make loans secured by raw land, our policies permit the origination of such loans. Construction loan proceeds are disbursed periodically in increments as construction progresses and as inspections by an independent construction specialist warrant. Construction and land development loans totaled $23.3 million and comprised 5.4% of total gross loan portfolio at June 30, 2006. At December 31, 2005, the construction and land development loans totaled $21.5 million or 5.2% of total gross loans. Again with the implementation of our loan portfolio management team, our commercial loan officers are able to manage their efforts on business development. HOME EQUITY LINES OF CREDIT Home equity lines of credit are secured by second mortgages on owner-occupied, one-to-four family residences located in our primary market area. Interest rates on our home equity lines of credit are generally indexed to the Wall Street Journal Prime Rate and adjust on a monthly basis. Home equity lines of credit totaled $17.1 million and comprised 4.0% of the total gross loan portfolio at June 30, 2006. At December 31, 2005, home equity lines of credit totaled $17.9 million, or 4.3% of total gross loans. 17 CONSUMER LENDING Consumer loans secured by rapidly depreciable assets such as recreational vehicles and automobiles entail greater risks than one-to-four family residential mortgage loans. 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. Consumer loans are both secured and unsecured borrowings. Consumer loans totaled $2.7 million and comprised 0.6% of the total gross loan portfolio at June 30, 2006. At December 31, 2005, the consumer loans totaled $2.6 million, or 0.6% of total gross loans. The following table summarizes our loan portfolio by category at June 30, 2006 and December 31, 2005.
Percentage June 30, 2006 December 31, 2005 Increase/(Decrease) ------------- ----------------- ------------------- (Dollars in thousands) Real estate mortgage loans: Commercial $211,280 $213,815 -1.19% Residential 126,943 120,345 5.48% Construction and land development 23,359 21,490 8.70% Home equity lines of credit 17,122 17,915 -4.43% Commercial, financial and agricultural 50,015 38,111 31.24% Consumer loans 2,671 2,623 1.83% -------- -------- ------ Total loans 431,390 414,299 4.13% Less: Allowance for loan losses (4,366) (4,333) 0.76% Net deferred loan fees (346) (356) -2.81% -------- -------- ------ Loans, net $426,678 $409,610 4.17% ======== ======== ======
The increases in the loan portfolio are the result of the continued demand by small businesses for commercial and industrial loans and the normal origination process for residential loans. These increases were partially offset by a weaker overall general market environment relating to commercial real estate and home equity lines of credit. The following table presents information with respect to non-performing loans at the dates indicated.
At June 30, 2006 At December 31, 2005 ---------------- -------------------- (Dollars in thousands) Non-accrual loans $ 441 $ 906 Loans 90 days or more past due and still accruing - - ------- ------- Total non-performing loans $ 441 $ 906 ======= ======= Percentage of non-accrual loans to total loans 0.10% 0.22% Percentage of allowance for loan losses to non-accrual loans 990.02% 478.26%
18 The $441,000 in non-accrual loans as of June 30, 2006 consists of $402,000 of commercial real estate loans, $34,000 of residential real estate loans and $5,000 of consumer loans. There were no restructured or impaired loans included in non-accrual loans for the six months ended June 30, 2006. It is our policy to manage our loan portfolio in order to recognize problem loans at an early stage and thereby minimize loan losses. Loans are considered delinquent when any payment of principal or interest is one month or more past due. We generally commence collection procedures when accounts are 15 days past due. Generally, when a loan becomes past due 90 days or more, management discontinues the accrual of interest and reverses previously accrued interest, unless the credit is well-secured and in process of collection. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. When a loan, or any portion of a loan, is determined to be uncollectible, it is charged off to the Allowance for Loan Losses. If applicable, any real estate securing the loan is acquired through foreclosure, and recorded as Other Real Estate Owned at the then fair market value, and thereby reducing the amount required to be charged against the Allowance for Loan Losses. Management defines non-performing loans to include non-accrual loans, loans past due 90 days or more and still accruing, and restructured loans not performing in accordance with amended terms. 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. For loans that are classified as impaired an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loans is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. We do not separately identify consumer 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. 19 ANALYSIS OF ALLOWANCE FOR LOAN LOSSES The table below illustrates the changes in the Allowance for Loan Losses for the periods indicated. Six Months Ended June 30, ------------------------- 2006 2005 ---- ---- (Dollars in thousands) Balance at beginning of period $4,333 $4,101 Charge-offs: Real estate mortgage loans: Commercial - - Residential - - Home equity lines of credit - - Commercial, financial and agricultural loans - - Consumer 6 - ------ ------ 6 - ------ ------ Recoveries: Real estate mortgage loans: Commercial - - Residential - - Home equity lines of credit - 16 Commercial, financial and agricultural loans - 32 Consumer - 9 ------ ------ - 57 ------ ------ Net loan recoveries (charge-offs) (6) 57 Provision for loan losses 39 65 ------ ------ Balance at end of period $4,366 $4,223 ====== ====== Allowance for loan losses as a percent of loans 1.02% 1.08% ====== ====== Ratio of net loan recoveries (charge-offs) to average loans outstanding 0.00% -0.01% ====== ====== The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific, general and unallocated components. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. 20 As the composition of the loan portfolio gradually changes and diversifies from higher credit risk weighted loans, such as commercial real estate and commercial, to residential and home equity loans, a lower overall reserve allowance rate will be required. After thorough review and analysis of the adequacy of the loan loss allowance, management determined a provision for losses of $39,000 was required for the six months ended June 30, 2006 as compared to a provision of $65,000 for the six months ended June 30, 2005. The allowance for loan losses as a percentage of total loans outstanding declined from 1.05% at December 31, 2005 to 1.01% at June 30, 2006. The decline in the provision for loan losses in 2006, as compared to the same period in 2005, was primarily attributable to refinements in calculating the risk components inherent in our loan portfolio. These refinements in the allocated risk factors attributable to all loan pools were finalized in the second quarter of 2006. This table below shows an allocation of the allowance for loan losses at the dates indicated. The unallocated portion of the allowance for loan losses is reflected in the allocation for real estate mortgage loans.
June 30, 2006 December 31, 2005 ------------------------------------------------------------------ Percent of Loans in Percent of Loans Each Category to in Each Category Amount Total Loans Amount to Total Loans ------ ------------------- ------ ---------------- (Dollars in thousands) Commercial $ 775 11.6% $ 905 9.2% Real estate construction 247 5.4% 248 5.2% Real estate mortgage 3,157 82.4% 3,056 85.0% Consumer 187 0.6% 124 0.6% ------------------------ ------------------------ $4,366 100.0% $4,333 100.0% ======================== ========================
21 DEPOSITS -------- We continue our efforts to competitively price deposit products and develop and maintain relationship banking with our customers. The flow of deposits is influenced significantly by general economic conditions, changes in money market rates, prevailing interest rates and competition from local branches of nationwide and regional banks as well as local banks and credit unions. Our total deposits increased from $415.8 million at December 31, 2005 to $430.1 million at June 30, 2006, an increase of $14.2 million or 3.4%. The increase in total deposits was primarily attributable to increases in term deposits. A $10.0 million certificate of deposit from the Commonwealth of Massachusetts that is to be used to assist in promoting job growth through loans to qualifying small businesses, and other reinvestments from lower-yielding deposit products made up the majority of this increase. The following table presents deposits by category at June 30, 2006 and December 31, 2005.
Percentage June 30, 2006 December 31, 2005 Increase/(Decrease) ------------------------------------------------------------ (Dollars in thousands) Demand deposits $ 80,710 $ 80,705 0.01% NOW 53,118 55,493 -4.28% Regular and other savings 82,288 87,146 -5.57% Money market deposits 27,595 29,835 -7.51% -------- -------- ---- Total non-certificate accounts 243,711 253,179 -3.74% -------- -------- ---- Term certificates less than $100,000 120,723 116,861 3.30% Term certificates of $100,000 or more 65,634 45,806 43.29% -------- -------- ---- Total certificate accounts 186,357 162,667 14.56% -------- -------- ---- Total deposits $430,068 $415,846 3.42% ======== ======== ====
BORROWINGS ---------- Short- and long-term advances from the Federal Home Loan Bank of Boston totaling $103.0 million at June 30, 2006, as compared to $107.9 million at December 31, 2005, a decrease of $4.8 million or 4.5%. Our strategy is to utilize advances from the Federal Home Loan Bank in conjunction with the investment portfolio runoffs to fund loans as required. There was no change in the balance of our subordinated debentures. 22 COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED ------------------------------------------------------------ JUNE 30, 2006 AND 2005 ---------------------- GENERAL ------- Net income decreased from $1.9 million or $0.47 per share on a diluted basis, for the six months ended June 30, 2005 to $1.5 million or $0.37 per share on a diluted basis, for the six months ended June 30, 2006, a decrease of 21.30%. Net interest and dividend income increased by $86,000 or 1.00%, from $8.9 million to $9.0 million when comparing the six months ended June 30, 2005 and 2006. Over the same period, the provision for loan losses decreased from $65,000 to $39,000. Non-interest income increased by $140,000 or 12.62% from $1.1 million to $1.2 million for the six months ended June 30, 2005 and 2006. Non-interest expenses increased by $765,000 or 11.03%, from $6.9 million for the six months ended June 30, 2005 to $7.7 million for the six months ended June 30, 2006. INTEREST INCOME --------------- Our operating performance is dependent on net interest and dividend income, the difference between interest and dividend income earned on loans and investments and interest expense paid on deposits and borrowed funds. The level of net interest income and dividend income is significantly impacted by factors such as economic conditions, interest rates, asset/liability management, and strategic planning. Interest and dividend income increased by $2.1 million or 15.40%, to $15.9 million for the six months ended June 30, 2006 from $13.8 million for the six months ended June 30, 2005. This increase is attributable to the growth in the loan portfolio and higher yields on loans. The average balance of loans increased by $35.5 million or 9.23% and the yield on the loan portfolio increased from 5.76% for the six months ended June 30, 2005 to 6.30% for the six months ended June 30, 2006. The increase was principally the result of a greater volume and higher rates earned on commercial and real estate loans reflecting current market conditions. Interest and dividends on investments decreased by $29,000, on a fully taxable equivalent basis, for the six months ended June 30, 2006 compared to the six months ended June 30, 2005, respectively. The decrease was due to a combination of higher rates and reduced average balances, and the lack of a second quarter dividend declaration by the Federal Home Loan Bank of Boston. Based on preliminary information from the Federal Home Loan Bank, it is expected that this dividend will be declared in the third quarter of 2006. INTEREST EXPENSE ---------------- Total interest expense increased by $2.0 million or 41.58%, from $4.9 million for the six months ended June 30, 2005 to $6.9 million for the six months ended June 30, 2006. Market interest rates and our own deposit rates have also increased. Interest on deposits increased by $1.6 million or 59.29% when comparing the six months ended June 30, 2006 and 2005. In response to competitive pressures and the rising rate environment, we raised rates on certain deposit products with the most significant increases in certificate of deposit and certain money-market based products. As a result of the rate increases, the weighted average cost of deposits increased from 1.66% for the six months ended June 30, 2005 to 2.49% for the six months ended June 30, 2006. Interest expense associated with the Federal Home Loan Borrowings increased by $380,000 due to a combination of rate increases and volume increases related to the need to fund loan growth. Interest expense associated with subordinated debentures increased by $103,000, the result of increased market interest rates. The debentures carry an adjustable rate of interest tied to the three-month LIBOR rate. 23 NET INTEREST MARGIN ------------------- As a result of the current interest rate environment and our corresponding rate increases on deposit accounts, the net interest margin has compressed 15 basis points from 3.46% for the six months ended June 30, 2005 to 3.31% at June 30, 2006. The compression in net interest margin was mostly due to the rise in short term rates and the prolonged flatness of the yield curve, which has reduced the gap between short and intermediate-term interest rates and the spread between what banks earn on loans and securities and pay on deposits and borrowings. PROVISION FOR LOAN LOSSES ------------------------- After thorough review and analysis of the adequacy of the loan loss reserve, management deemed it prudent to provide $39,000 for possible loan losses for the six months ended June 30, 2006 compared to $65,000 for possible loan losses for the six months ended June 30, 2005. The decline in the provision for loan losses in 2006 was attributable to continued improvements in the overall loan quality, combined with the refinements made in the allocated risk factors attributable to all components of our loan portfolio, during the six months ended June 30, 2006, as compared to the same period in 2005. 24 The following table sets forth our average assets, liabilities, and stockholders' equity, interest income earned and interest paid, average rates earned and paid, net interest spread and the net interest margin for the six months ended June 30, 2006 and 2005. Average balances reported are daily averages.
Six Months Ended June 30, ------------------------------------------------------------------------------------ 2006 2005 ---------------------------------------- ---------------------------------------- Average Interest Average Average Interest Average Balance Income/Expense Rate Balance Income/Expense Rate ---------------------------------------- ---------------------------------------- Assets: (Dollars in thousands) ------ Interest earning assets (2) Loans: Commercial $ 44,416 $ 1,658 7.53% $ 30,272 $ 907 6.04% Commercial real estate 228,745 7,319 6.45% 220,402 6,561 6.00% Residential real estate 144,352 4,066 5.68% 131,579 3,457 5.30% Consumer 2,557 77 6.07% 2,312 68 5.93% ----------------------- ----------------------- Total loans 420,070 13,120 6.30% 384,565 10,993 5.76% Federal funds sold 2,738 64 4.71% 12,606 157 2.51% Taxable debt securities 109,752 2,394 4.40% 106,927 2,235 4.21% Tax-exempt debt securities (1) 6,260 208 6.69% 8,127 271 6.72% Marketable equity securities 4,355 74 3.43% 4,809 83 3.48% FHLB stock 6,304 82 2.62% 5,485 112 4.12% Other investments 650 18 5.58% 775 11 2.86% ----------------------- ----------------------- Total interest earning assets 550,129 15,960 5.85% 523,294 13,862 5.34% Allowance for loan losses (4,358) ------- (4,163) ------- Deferred loan fees (330) (401) Cash and due from banks 12,951 18,311 Other assets 26,229 25,575 -------- -------- $584,621 $562,616 ======== ======== Liabilities and Stockholders' Equity: Interest bearing liabilities Savings accounts $ 83,637 $ 529 1.28% $ 91,619 $ 468 1.03% NOW accounts 56,715 361 1.28% 48,242 231 0.97% Money market accounts 26,898 258 1.93% 37,311 218 1.18% Time deposits 169,791 3,019 3.59% 141,333 1,699 2.42% FHLB advances 110,998 2,365 4.30% 104,460 1,985 3.83% Subordinated debt 10,310 394 7.71% 10,310 291 5.69% ----------------------- ----------------------- Total interest bearing liabilities 458,349 6,926 3.05% 433,275 4,892 2.28% Demand deposits 73,868 ------- 79,334 ------- Other liabilities 842 2,594 -------- -------- Total liabilities 533,059 515,203 Total stockholders' equity 51,562 47,413 -------- -------- $584,621 $562,616 ======== ======== Net interest income $ 9,034 $ 8,970 ======= ======= Net interest spread 2.80% 3.06% ==== ==== Net interest margin 3.31% 3.46% ==== ==== (1) On a fully taxable basis based on tax rate of 35.0% for 2006 and 2005. Interest income on investments and net interest income includes a fully taxable equivalent adjustment of $74,000 in 2006 and $96,000 in 2005. (2) Average balance includes non-accruing loans. The effect of including such loans, although not material, is to reduce the average rate earned on the Company's loans.
25 The following table presents the changes in components of net interest income for the six months ended June 30, 2006 and 2005, which are the result of changes in interest rates and the changes that the result of changes in volume of the underlying asset or liability. Changes that are attributable to the changes in both rate and volume have been allocated equally to rate and volume. Six Months Ended June 30, 2006 vs. 2005 Increase (Decrease) --------------------------------- Total Due to Due to Change Volume Rate --------------------------------- (In thousands) Commercial loans $ 751 $ 492 $ 259 Commercial real estate 758 255 503 Residential real estate 609 349 260 Consumer loans 9 7 2 Federal funds sold (93) (177) 84 Taxable debt securities 159 60 99 Tax-exempt debt securities (63) (62) (1) Marketable equity securities (9) (8) (1) FHLB Stock (30) 14 (44) Other investments 7 (3) 10 -------------------------------- Total interest income 2,098 927 1,171 -------------------------------- Savings accounts 61 (46) 107 NOW accounts 130 45 85 Money market accounts 40 (80) 120 Time deposits 1,320 391 929 FHLB advances 380 129 251 Subordinated debt 103 - 103 -------------------------------- Total interest expense 2,034 439 1,595 -------------------------------- Net interest income $ 64 $ 488 $ (424) ================================ NON-INTEREST INCOME ------------------- Non-interest income increased from $1.1 million for the six months ended June 30, 2005 to $1.2 million for the six months ended June 30, 2006, an increase of $140,000 or 12.6%. Service charges on deposit accounts increased by $239,000 or 56.9% from $420,000 for the six months ended June 30, 2005 to $659,000 for the six months ended June 30, 2006. This was the result of an increase in overdraft fees with the implementation of an overdraft protection program partially offset by a decrease in service charges on checking accounts. For the six months ended June 30, 2006, and in accordance with the previously-mentioned investment portfolio restructuring strategy, we recognized losses on the sale of securities, including certain low-yielding investments in order to acquire higher yielding assets, in the amount of $169,000 when compared to a gain of $17,000 for the six months ended June 30, 2005. Cash surrender value increases pertaining to bank-owned life insurance policies decreased $45,000 to $213,000 for the six months ended June 30, 2006 from $258,000 for the six months ended June 30, 2005. Additionally, other income increased from $363,000 for the six months ended June 30, 2005 to $546,000 for the six months ended June 30, 2006, primarily as a result of increased commissions earned on the sale of non-deposit investment products, combined with increased volumes in official check fees and debit card income. 26 NON-INTEREST EXPENSE -------------------- Non-interest expense increased from $6.9 million for the six months ended June 30, 2005 to $7.7 million for the six months ended June 30, 2006, an increase of $765,000 or 11.0%. Salaries and employee benefits increased by $303,000 or 7.4%, from $4.1 million for the six months ended June 30, 2005 to $4.4 million for the six months ended June 30, 2006. The increase in salaries and benefits includes the adoption of SFAS 123(R) effective January 1, 2006 applicable to the Company's stock-based employee compensation plan which resulted in the recognition of $136,000 in expense, and settlement accounting recognized on the Bank's defined benefit pension plan totaling $133,000. Occupancy and equipment expense for the six months ended June 30, 2006 increased $174,000 to $983,000 as compared to $809,000 for the six months ended June 30, 2005. The increase was the result of additional depreciation expense incurred from both the Assonet branch that was opened April 2005 and the upgrade in software associated with the modernization of teller and platform systems. Professional fees increased $186,000 due primarily to the outsourcing of our internal audit function commencing January 1, 2006 and consultations regarding accounting and regulatory matters. Marketing expense decreased $141,000 to $187,000 for the six months ended June 30, 2006 from $328,000 for the six months ended June 30, 2005 which is attributable to the timing of certain advertising and community sponsorship initiatives in 2006. Other expense increased $243,000 or 22.3% from $1.1 million for the six months ended June 30, 2005 to $1.3 million for the six months ended June 30, 2006. This increase was due to the increased volume of internet banking and cash management fees, increased postage cost, the outsourcing of our courier service, and the increase of meetings and committee fees for two additional Board members when compared to June 30, 2005. PROVISION FOR INCOME TAXES -------------------------- Income before income taxes was $3.0 million for the six months ended June 30, 2005 as compared to $2.5 million for the six months ended June 30, 2006. Provision for income taxes totaled $1.0 million and $935,000 for the six months ended June 30, 2005 and 2006, respectively, representing effective tax rates of 34.65% and 37.88%, respectively. The increase in the overall tax rate was due to a decline in income for the Bank's subsidiaries which are taxed at a lower state tax rate, a decline in federally exempt municipal income and a decrease in cash surrender value of life insurance, which is tax-exempt income, recognized in the six months ended June 30, 2006 compared to 2005. 27 COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED -------------------------------------------------------------- JUNE 30, 2006 AND 2005 ---------------------- GENERAL ------- Net income decreased from $848,000 or $0.21 per share on a diluted basis, for the three months ended June 30, 2005 to $626,000 or $0.15 per share on a diluted basis, for the three months ended June 30, 2006, a decrease of 26.2%. Net interest and dividend income remained stable when comparing the three months ended June 30, 2005 and 2006. The provision for loan losses decreased by $15,000 for the three months ended June 30, 2006. Non-interest income increased by $6,000 or 1.1% from $540,000 to $546,000 for the three months ended June 30, 2005 and 2006. Non-interest expense increased by $330,000 or 9.1%, from $3.6 million for the three months ended June 30, 2005 to $4.0 million for the three months ended June 30, 2006. INTEREST INCOME --------------- Our operating performance is dependent on net interest and dividend income, the difference between interest and dividend income earned on loans and investments and interest expense paid on deposits and borrowed funds. The level of net interest income and dividend income is significantly impacted by factors such as economic conditions, interest rates, asset/liability management, and strategic planning. Interest and dividend income increased by $921,000 or 13.0%, from $7.1 million for the three months ended June 30, 2005 to $8.0 million for the three months ended June 30, 2006. This increase can be attributed to both the growth in the loan portfolio as well as an increase in yields on loans. The average balance of loans increased by $29.6 million or 7.52% and an increase in yield on the loan portfolio from 5.84% for the three months ended June 30, 2005 to 6.34% for the three months ended June 30, 2006. The increase was the result of a greater volume and higher rates earned on commercial and real estate loans reflecting current market conditions. Interest and dividends on investments decreased by $45,000, on a fully taxable equivalent basis, for the three months ended June 30, 2006 compared to the three months ended June 30, 2005. The decrease was due to a combination of higher rates off set by a reduction in average balances, and the lack of a second quarter dividend declaration by the Federal Home Loan Bank of Boston. Preliminary indications from the Federal Home Loan Bank are that this dividend will be declared in the third quarter of 2006. INTEREST EXPENSE ---------------- Total interest expense increased by $949,000 or 35.33%, from $2.7 million for the three months ended June 30, 2005 to $3.6 million for the three months ended June 30, 2006. In response to competitive pressures and the rising rate environment, we raised rates on certain deposit products with the most significant increases in certificate of deposit and certain money-market based products. As a result of the rate increases, the weighted average cost of deposits increased from 1.82% for the three months ended June 30, 2005 to 2.65% for the three months ended June 30, 2006. The interest expense on Federal Home Loan Bank borrowings increased $135,000 during this same time period due primarily to associated rate increases. Interest expense associated with subordinated debentures increased by $15,000, the result of increased market interest rates. The debentures carry an adjustable rate of interest tied to the three-month LIBOR rate. 28 NET INTEREST MARGIN ------------------- As a result of the current interest rate environment and our corresponding rate increases on deposit accounts, the net interest margin has compressed 14 basis points from 3.36% for the three months ended June 30, 2005 to 3.22% at June 30, 2006. The compression in net interest margin was mostly due to the rise in short term rates and the prolonged flatness of the yield curve, which has reduced the gap between short and intermediate-term interest rates and the spread between what banks earn on loans and securities and pay on deposits and borrowings. PROVISION FOR LOAN LOSSES ------------------------- After thorough review and analysis of the adequacy of the loan loss reserve, management deemed it prudent to provide no provision for possible loan losses for the three months ended June 30, 2006 compared to $15,000 for possible loan losses for the three months ended June 30, 2005. The decline in the provision for loan losses in 2006 was attributable to continued improvements in the overall loan quality, combined with refinements made in the allocated risk factors attributable to all components of our loan portfolio, during the three months ended June 30, 2006, as compared to the same period in 2005. 29 The following table sets forth our average assets, liabilities, and stockholders' equity, interest income earned and interest paid, average rates earned and paid, net interest spread and the net interest margin for the three months ended June 30, 2006 and 2005. Average balances reported are daily averages.
Three Months Ended June 30, -------------------------------------------------------------------------------------- 2006 2005 ----------------------------------------- ----------------------------------------- Average Interest Average Average Interest Average Balance Income/Expense Rate Balance Income/Expense Rate ----------------------------------------- ----------------------------------------- Assets: (Dollars in thousands) ------ Interest earning assets (2) Loans: Commercial $ 46,111 $ 885 7.70% $ 32,019 $ 491 6.15% Commercial real estate 228,558 3,710 6.51% 224,863 3,414 6.09% Residential real estate 145,725 2,051 5.65% 134,281 1,786 5.33% Consumer 2,565 39 6.10% 2,225 36 6.49% --------------------------- ------------------------- Total loans 422,959 6,685 6.34% 393,388 5,727 5.84% Federal funds sold 4,387 53 4.85% 13,051 92 2.83% Taxable debt securities 108,068 1,182 4.39% 107,093 1,113 4.17% Tax-exempt debt securities (1) 6,099 102 6.68% 7,787 129 6.66% Marketable equity securities 4,344 35 3.23% 4,653 23 1.98% FHLB stock 6,304 - 0.00% 5,905 63 4.28% Other investments 650 10 6.17% 799 7 3.51% --------------------------- ------------------------- Total interest earning assets 552,811 8,067 5.85% 532,676 7,154 5.39% ---------- --------- Allowance for loan losses (4,373) (4,205) Deferred loan fees (310) (486) Cash and due from banks 13,932 18,115 Other assets 26,432 25,057 ---------- ---------- $ 588,492 $ 571,157 ========== ========== Liabilities and Stockholders' ----------------------------- Equity: Interest bearing liabilities Savings accounts $ 82,199 $ 272 1.33% $ 93,492 $ 264 1.13% NOW accounts 57,648 188 1.31% 26,789 151 2.26% Money market accounts 25,709 149 2.32% 56,829 99 0.70% Time deposits 175,539 1,647 3.76% 144,393 943 2.62% FHLB advances 110,802 1,209 4.38% 110,118 1,074 3.91% Subordinated debt 10,310 170 6.61% 10,310 155 6.03% --------------------------- ------------------------- Total interest bearing liabilities 462,207 3,635 3.15% 441,931 2,686 2.44% ---------- --------- Demand deposits 73,494 79,401 Other liabilities 707 2,388 ---------- ---------- Total liabilities 536,408 523,720 Total stockholders' equity 52,084 47,437 ---------- ---------- $ 588,492 $ 571,157 ========== ========== Net interest income $ 4,432 $ 4,468 =========== ========= Net interest spread 2.70% 2.95% ======= ======= Net interest margin 3.22% 3.36% ======= ======= (1) On a fully taxable basis based on tax rate of 35.0% for 2006 and 2005. Interest income on investments and net interest income includes a fully taxable equivalent adjustment of $37,000 in 2006 and $45,000 in 2005. (2) Average balance includes non-accruing loans. The effect of including such loans, although not material, is to reduce the average rate earned on the Company's loans.
30 The following table presents the changes in components of net interest income for the three months ended June 30, 2006 and 2005, which are the result of changes in interest rates and the changes that the result of changes in volume of the underlying asset or liability. Changes that are attributable to the changes in both rate and volume have been allocated equally to rate and volume.
Three Months Ended June 30, 2006 vs. 2005 Increase (Decrease) -------------------------------------------- Total Due to Due to Change Volume Rate -------------------------------------------- (In thousands) Commercial loans $ 395 $ 251 $ 144 Commercial real estate 296 57 239 Residential real estate 265 157 108 Consumer loans 3 5 (2) Federal funds sold (39) (83) 44 Taxable debt securities 69 10 59 Tax-exempt debt securities (28) (28) - Marketable equity securities 12 (2) 14 FHLB Stock (63) 2 (65) Other investments 3 (2) 5 --------------------------------------------- Total interest income 913 367 546 --------------------------------------------- Savings accounts 8 (35) 43 NOW accounts 37 137 (100) Money market accounts 50 (117) 167 Time deposits 704 233 471 FHLB advances 135 7 128 Subordinated debt 15 - 15 --------------------------------------------- Total interest expense 949 225 724 --------------------------------------------- Net interest income $ (36) $ 142 $ (178) =============================================
NON-INTEREST INCOME ------------------- Non-interest income increased from $540,000 for the three months ended June 30, 2005 to $546,000 for the three months ended June 30, 2006, an increase of $6,000 or 1.11%. Increases in service charges on deposit accounts and increases in the volumes of official check fees and debit card income were offset primarily by recognized losses on the sale of securities, including certain low-yielding investments in order to acquire higher yielding assets, in accordance with the previously-mentioned investment portfolio restructuring strategy. NON-INTEREST EXPENSE -------------------- Non-interest expense increased from $3.6 million for the three months ended June 30, 2005 to $4.0 for the three months ended June 30, 2006, an increase of $330,000 or 9.11%. Salaries and employee benefits increased by $167,000 or 7.88%, from $2.1 million for the three months ended June 30, 2005 to $2.3 million for the three months ended June 30, 2006. The increase in salaries and benefits includes the adoption of SFAS 123(R) effective January 1, 2006 applicable to the Company's stock-based employee compensation plan which resulted in the recognition of $71,000 in expense and settlement accounting recognized on the Bank's defined benefit pension plan totaling $133,000, which were partially offset by other reductions in salary expense with associated benefit costs due to outsourcing initiatives. Occupancy and equipment expense for the three months 31 ended June 30, 2006 increased $90,000 to $490,000 as compared to $400,000 for the three months ended June 30, 2005. The increase was the result of additional depreciation expense incurred from both the Assonet branch that was opened April 2005 and the upgrade in software associated with the modernization of teller and platform systems. Professional fees increased $81,000 as a result of outsourcing the internal audit function commencing January 1, 2006. Marketing expense decreased $120,000 to $109,000 for the three months ended June 30, 2006 from $229,000 for the three months ended June 30, 2005 which is attributable to the timing of certain advertising and community sponsorship initiatives in 2006. Other expense increased $112,000 or 19.79% from $566,000 for the three months ended June 30, 2005 to $678,000 for the three months ended June 30, 2006. The increase in other expense was due to the recognition of $42,000 of losses due to implementation of an overdraft protection program combined with expenses attributable to the increased volumes of internet banking and cash management fees, postal cost increases, the outsourcing of our courier service, and the increase of meetings and committee fees for two additional Board of Director members when compared to the three months ended June 30, 2005. PROVISION FOR INCOME TAXES -------------------------- Income before income taxes was $1.3 million for the three months ended June 30, 2005 as compared to $1.0 million for the three months ended June 30, 2006. Provision for income taxes totaled $478,000 and $363,000 million for the three months ended June 30, 2005 and 2006, respectively, representing effective tax rates of 36.05% and 36.70%, respectively. The increase in the overall tax rate was due to a decline in income for the Bank's subsidiaries which are taxed at a lower state tax rate, a decline in federally exempt municipal income and a decrease in the cash surrender value of life insurance, which is tax-exempt income, recognized in the three months ended 2006 compared to 2005. 32 LIQUIDITY --------- Our principal sources of funds are customer deposits, amortization and payoff of existing loan principal, and sales, amortization 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. The Bank also may draw on lines of credit at the FHLB or the Federal Reserve Board (the "FRB"), 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. Management seeks to promote deposit growth while controlling the cost of funds. Sales-oriented programs to attract new depositors and the cross-selling of various products to its existing customer base are currently in place. Management reviews, on an ongoing basis, possible new products, with particular attention to products and services, which will aid in retaining our base of lower-costing deposits. Maturities and sales of investment securities provide us with liquidity. Our policy of purchasing shorter-term debt securities reduces market risk in the bond portfolio while providing significant cash flow. For the six months ended June 30, 2006, cash flow from maturities of securities was $7.7 million and the proceeds from sales of securities totaled $15.1 million. In comparison maturities of securities aggregated $10.8 million, and the proceeds from sales of securities aggregated $1.8 million for the six months ended June 30, 2005. Purchases of securities for the six months ended June 30, 2006 totaled $6.4 million without the due to broker amount reflected on the June 30, 2006 balance sheet as compared to $20.8 million at June 30, 2005. Amortization and pay-offs of the loan portfolio also provide us with significant liquidity. Traditionally, amortization and pay-offs are reinvested into loans. We have also used borrowed funds as a source of liquidity. At June 30, 2006, the Bank's outstanding borrowings from the Federal Home Loan Bank of Boston were $103.0 million. The Bank has the capacity to borrow in excess of additional $40.0 million at the Federal Home Loan Bank. Loan originations for the six months ended June 30, 2006 totaled $58.4 million. Commitments to originate loans at June 30, 2006 were $6.5 million, excluding unadvanced construction funds totaling $16.6 million, unadvanced commercial lines of credit totaling $18.2 million and unadvanced home equity lines totaling $16.7 million. Management believes that adequate liquidity is available to fund loan commitments utilizing deposits, loan amortization, maturities of securities, or borrowings. Liquidity declined marginally during the six months ended June 30, 2006 due primarily to a greater reliance on Federal Home Loan Bank borrowings. CAPITAL ------- At June 30, 2006, our total shareholders' equity was $49.8 million, an increase of $993,000 from $48.9 million at December 31, 2005. Additions to shareholders' equity consisted primarily of net income of $1.5 million for the six months ended June 30, 2006. In addition, there were 16,842 shares issued at a value of $302,000, pursuant to our Dividend Reinvestment Program, in lieu of cash dividends or for optional cash contributions. Furthermore, stock option exercises resulted in the issuance of 28,000 shares common stock at a value of $305,000, including a tax benefit compensation expense of $82,000 and stock-based compensation of $136,000. These additions were offset by dividends declared of $749,000, the purchase of treasury stock of $230,000, the contribution of $100,000 to a trust for the purchase of our common stock and an accumulated other comprehensive loss of $286,000. 33 In May 2006, the Board authorized the purchase of 50,000 shares of common stock to be held in trust for future restricted stock awards under the 2004 Equity Incentive Plan. The $100,000, which is reflected on our balance sheet as unearned compensation under stockholder's equity has been contributed to the trust to fund the purchase of some of these shares. No shares have been awarded to date. Under the requirements for Risk Based and Leverage Capital of the federal banking agencies, a minimum level of capital will vary among banks based on safety and soundness of operations. Risk Based Capital ratios are calculated with reference to risk-weighted assets, which include both on and off balance sheet exposure. In addition to meeting the required levels, the Company's and the Bank's capital ratios met the criteria of the well-capitalized category established by the federal banking agencies at June 30, 2006 and at December 31, 2005. The Tier I Capital leverage ratio and Tier I Capital to risk weighted assets ratio for Slade's Ferry Bancorp are 10.11% and 14.97%, respectively, at June 30, 2006. Slade's Ferry Bancorp's Tier I Capital leverage ratio and Tier I Capital to risk weighted assets ratio at December 31, 2005 were 10.07% and 14.66%, respectively. The Tier I Capital leverage ratio and Tier I Capital to risk weighted assets ratio for the Bank are 8.73% and 12.00%, respectively, at June 30, 2006. The Bank's Tier I Capital leverage ratio and Tier I Capital to risk weighted assets ratio at December 31, 2005 were 8.56% and 12.51%, respectively. 34 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 are material to investors. 35 ITEM 3 QUANTATIVE 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 the 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 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 200 basis point increase and decrease in interest rate shocks. The interest rate movements used assume an instant and parallel change in interest rates and no implementation of any strategic plans are made in response to the change in rates. Prepayment speeds for loans are based on median dealer forecasts for each interest rate scenario. The Board of Directors has established a risk limit of a 5.00% change in net interest income for each 100 basis point shift in market interest rates. The limit 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 change in basis points for the next twelve months, assuming an immediate change in interest rates set forth below: Rate Change Estimated Exposure as a Percentage Change (Basis Points) of Net Interest Income (Basis Points) ------------------------------------------------------------------------------- +200 -10.90% (19) -200 2.77% 6 36 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. Rate Change Economic Value Change from (Basis Points) of Equity Flat Rates ------------------------------------------------------------------------------- Flat 12.97% N/A +200 11.55% -1.42% -200 13.07% 0.10% 37 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 of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures. 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 June 30, 2006 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 officer and principal financial officer, as appropriate to allow timely decisions regarding disclosure. In connection with the rules regarding disclosure and control procedures, we intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. (b) Changes in Internal Controls 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. 38 PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS None. ITEM 1A RISK FACTORS There have been no material changes to the risk factors that are included in our Annual Report on Form 10-K for the year ended December 31, 2005 that could affect our business, results of operations or financial condition. ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This table provides certain information with respect to our purchase of our common stock during the three months ended June 30, 2006.
--------------------------------------------------------------------------------------------------------------------------- (c) Total Number of Shares (d) Maximum Number (or (a) Total Purchased as Part Approximate Dollar Value) Number of (b) Average of Publicly of Shares that may yet be Shares Price Paid Announced Plans or Purchased under the Plans Period Purchased per Share Programs or Programs (1) --------------------------------------------------------------------------------------------------------------------------- April 1, 2006 through April 30, 2006 - N/A - N/A --------------------------------------------------------------------------------------------------------------------------- May 1, 2006 through May 31, 2006 6,000 (2) $ 17.40 - N/A --------------------------------------------------------------------------------------------------------------------------- June 1, 2006 through June 30, 2006 5,000 (2) $ 17.01 - N/A --------------------------------------------------------------------------------------------------------------------------- Total 11,000 $ 17.22 - N/A --------------------------------------------------------------------------------------------------------------------------- (1) On July 18, 2006 the Company announced a stock repurchase plan pursuant to which the Company may repurchase up to 208,036 shares of its outstanding common stock. The shares shown in this table were not repurchased pursuant to this plan. (2) These shares were purchased privately negotiated sales.
39 ITEM 3 DEFAULTS UPON SENIOR SECURITIES None. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of the Company's Shareholders was held on May 17, 2006 with the following mater being voted upon and with the indicated results: ELECTION OF DIRECTORS FOR TERMS EXPIRING IN 2009 Votes -------------------------------- Nominee For Withheld ------------------------------------- --------- -------- Peter G. Collias 3,008,394 30,212 Melvyn A. Holland 2,995,917 42,689 Jean F. MacCormack 3,010,035 28,571 Shaun O'Hearn, Sr. 2,998,389 40,217 Carl Ribeiro 3,011,199 27,407 William J. Sullivan 2,997,201 41,405 ITEM 5 OTHER INFORMATION None. ITEM 6 EXHIBITS Exhibits: See exhibit index. 40 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) August 11, 2006 /s/ Mary Lynn D. Lenz ------------------------------ -------------------------------------- (Date) Mary Lynn D. Lenz President and Chief Executive Officer August 11, 2006 /s/ Deborah A. McLaughlin ------------------------------- -------------------------------------- (Date) Deborah A. McLaughlin Executive Vice President Chief Financial Officer and Chief Operations Officer 41
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 (3) of Slade's Ferry Bank 10.1 Slade's Ferry Bancorp. 1996 Stock Option Plan, as amended (4) 10.2 Supplemental Executive Retirement Agreement between Slade's Ferry Bancorp. (5) and Manuel J. Tavares 10.3 Form of Director Supplemental Retirement Program Director Agreement, (6) Exhibit 1 thereto (Slade's Ferry Trust Company Director Supplemental Retirement Program Plan) and Endorsement Method Split Dollar Plan Agreement thereunder. 10.4 Form of Directors' Paid-up Insurance Policy (part of the Director Supplemental (7) Retirement Program). 10.5 Supplemental Executive Retirement Agreement between Slade's Ferry Bancorp. (8) and Mary Lynn D. Lenz 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 (1) Incorporated by reference to the Registrant's Registration Statement on Form SB-2 filed with the Commission on April 14, 1997. (2) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on June 22, 2006. (3) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on December 21, 2004. (4) Incorporated by reference to the Registrant's Form 10-Q/A for the quarter ended June 30, 1999. (5) Incorporated by reference to the Registrant's Form 10-K/ASB for the fiscal year ended December 31, 1996. (6) Incorporated by reference to Exhibit 10 to the Registrant's Form 10-Q/A for the quarter ended March 31, 1999. (7) Incorporated by reference to Exhibit 10 to the Registrant's Form 10-Q/ASB for the quarter ended June 30, 1998. 42 (8) Incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-Q/A for the quarter ended March 31, 2003. (9) Incorporated by reference to Exhibit 10.11 to the Registrant's Form 10-Q/A for the quarter ended June 30, 2004. (10) Incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-Q/A for the quarter ended September 30, 2004. (11) Incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-Q/A for the quarter ended September 30, 2004. (12) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on January 13, 2005. (13) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on January 14, 2005. (14) Incorporated by reference to Appendix C to the Registrant's Proxy Statement filed on April 9, 2004. (15) Incorporated by reference to the Registrant's Form 10-K for the fiscal year ended December 31, 2003.
43