-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QM+yASHCWuZjAapvsz8St18l53kG2mgCUhyAqHEktzPTh5TrB5UG57JUiQ7dy3on 4vPId4FsIIRtLvShrY5eZQ== 0000950156-07-000508.txt : 20070814 0000950156-07-000508.hdr.sgml : 20070814 20070814160900 ACCESSION NUMBER: 0000950156-07-000508 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20070814 DATE AS OF CHANGE: 20070814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SLADES FERRY BANCORP CENTRAL INDEX KEY: 0000857499 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 043061936 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23904 FILM NUMBER: 071055236 BUSINESS ADDRESS: STREET 1: 100 SLADES FERRY AVE STREET 2: PO BOX 390 CITY: SOMERSET STATE: MA ZIP: 02726 BUSINESS PHONE: 5086757894 MAIL ADDRESS: STREET 1: 100 SLADE FERRY AVE STREET 2: P O BOX 390 CITY: SOMERSET STATE: MA ZIP: 02726 FORMER COMPANY: FORMER CONFORMED NAME: WEETAMOE BANCORP DATE OF NAME CHANGE: 19940502 10-Q 1 slades-10q_67947.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 quarterly period ended June 30, 2007 ----------------- 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) 4,001,353 outstanding shares as of July 31, 2007. ---------------------------------------------------- 1 TABLE OF CONTENTS Part I ITEM 1 - Financial Statements (Unaudited) 3 * Consolidated Balance Sheets - June 30, 2007 and December 31, 2006 * Consolidated Statements of Income - Three Months Ended June 30, 2007 and 2006 * Consolidated Statements of Income - Six Months Ended June 30, 2007 and 2006 * Consolidated Statement of Changes in Stockholders' Equity - Six Months Ended June 30, 2007 * Consolidated Statements of Cash Flows - Six Months Ended June 30, 2007 and 2006 * Notes to Consolidated Financial Statements ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations 12 ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk 31 ITEM 4 - Controls and Procedures 33 Part II ITEM 1 - Legal Proceedings 34 ITEM 1A- Risk Factors 34 ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds 34 ITEM 3 - Defaults Upon Senior Securities 35 ITEM 4 - Submission of Matters to a Vote of Security Holders 35 ITEM 5 - Other Information 35 ITEM 6 - Exhibits 35 2
ITEM 1 FINANCIAL STATEMENTS SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, 2007 December 31, 2006 ------------- ----------------- Assets (In thousands) - ------ Cash and due from banks $ 12,569 $ 19,448 Interest-bearing deposits with other banks 1,648 1,007 Federal funds sold 25,585 1,900 -------- -------- Cash and cash equivalents 39,802 22,355 Interest-bearing certificates of deposit with other banks 100 100 Securities available for sale 102,227 105,603 Securities held to maturity (fair value approximates $21,060 as of June 30, 2007 and $24,219 as of December 31, 2006) 21,781 24,623 Federal Home Loan Bank stock, at cost 7,312 6,856 Loans, net of allowance for loan losses of $4,296 at June 30, 2007 and $4,385 at December 31, 2006 429,773 422,370 Premises and equipment, net 6,710 5,587 Goodwill 2,173 2,173 Accrued interest receivable 2,269 2,311 Bank-owned life insurance 12,537 12,317 Deferred tax asset, net 2,191 2,039 Other assets 1,445 1,426 -------- -------- $628,320 $607,760 ======== ======== Liabilities and Stockholders' Equity - ------------------------------------ Deposits: Noninterest-bearing $ 73,715 $ 79,101 Interest-bearing 351,933 344,905 -------- -------- Total deposits 425,648 424,006 Long-term borrowings 137,867 119,058 Subordinated debentures 10,310 10,310 Due to broker 985 - Accrued expenses and other liabilities 2,747 3,141 -------- -------- Total liabilities 577,557 556,515 Stockholders' equity: Common stock, par value $0.01 per share; authorized 10,000,000 shares; issued and outstanding 4,028,228 shares at June 30, 2007 and 4,102,242 shares at December 31, 2006 40 41 Additional paid-in capital 30,447 31,444 Retained earnings 22,018 21,111 Accumulated other comprehensive loss (630) (464) Unearned compensation (1,112) (887) -------- -------- Total stockholders' equity 50,763 51,245 -------- -------- $628,320 $607,760 ======== ======== The accompanying notes are an integral part of these consolidated financial statements.
3
SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended June 30, 2007 2006 ---- ---- (In thousands, except per share data) Interest and dividend income: Interest and fees on loans $ 7,152 $ 6,685 Interest and dividends on securities: Taxable 1,548 1,217 Tax-exempt 45 65 Interest on federal funds sold 179 53 Other interest 15 10 ---------- ---------- Total interest and dividend income 8,939 8,030 ---------- ---------- Interest expense: Interest on deposits 2,702 2,256 Interest on Federal Home Loan Bank advances 1,650 1,209 Interest on subordinated debentures 214 170 ---------- ---------- Total interest expense 4,566 3,635 ---------- ---------- Net interest and dividend income 4,373 4,395 Provision for loan losses - - ---------- ---------- Net interest income, after provision for loan losses 4,373 4,395 ---------- ---------- Noninterest income: Service charges on deposit accounts 353 352 Gain (loss) on sales and calls of available-for-sale securities, net 78 (172) Increase in cash surrender value of life insurance policies 114 106 Other income 271 260 ---------- ---------- Total noninterest income 816 546 ---------- ---------- Noninterest expense: Salaries and employee benefits 2,016 2,287 Occupancy and equipment expense 506 490 Professional fees 317 388 Marketing expense 272 109 Data processing 276 118 Other expense 603 560 ---------- ---------- Total noninterest expense 3,990 3,952 ---------- ---------- Income before income taxes 1,199 989 Provision for income taxes 407 363 ---------- ---------- Net income $ 792 $ 626 ========== ========== Earnings per share: Basic $ 0.20 $ 0.15 ========== ========== Diluted $ 0.20 $ 0.15 ========== ========== Average common shares outstanding: Basic 4,047,215 4,156,481 ========== ========== Diluted 4,050,359 4,170,610 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
4
SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Six Months Ended June 30, 2007 2006 ---- ---- (In thousands, except per share data) Interest and dividend income: Interest and fees on loans $ 14,074 $ 13,120 Interest and dividends on securities: Taxable 3,130 2,550 Tax-exempt 95 134 Interest on federal funds sold 215 64 Other interest 25 18 ---------- ---------- Total interest and dividend income 17,539 15,886 ---------- ---------- Interest expense: Interest on deposits 5,391 4,167 Interest on Federal Home Loan Bank advances 3,169 2,365 Interest on subordinated debentures 425 394 ---------- ---------- Total interest expense 8,985 6,926 ---------- ---------- Net interest and dividend income 8,554 8,960 Provision for loan losses - 39 ---------- ---------- Net interest income, after provision for loan losses 8,554 8,921 ---------- ---------- Noninterest income: Service charges on deposit accounts 681 659 Gain (loss) on sales and calls of available-for-sale securities, net 139 (169) Increase in cash surrender value of life insurance policies 220 213 Other income 502 546 ---------- ---------- Total noninterest income 1,542 1,249 ---------- ---------- Noninterest expense: Salaries and employee benefits 4,013 4,398 Occupancy and equipment expense 998 983 Professional fees 592 800 Marketing expense 328 187 Data processing 573 199 Other expense 1,042 1,135 ---------- ---------- Total noninterest expense 7,546 7,702 ---------- ---------- Income before income taxes 2,550 2,468 Provision for income taxes 885 935 ---------- ---------- Net income $ 1,665 $ 1,533 ========== ========== Earnings per share: Basic $ 0.41 $ 0.37 ========== ========== Diluted $ 0.41 $ 0.37 ========== ========== Average common shares outstanding: Basic 4,063,511 4,151,091 ========== ========== Diluted 4,067,344 4,168,271 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
5
SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Six Months Ended June 30, 2007 (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, 2006 4,102,242 $41 $31,444 $21,111 $(464) $ (887) $51,245 Comprehensive income: Net income - - - 1,665 - - 1,665 Other comprehensive loss - - - - (166) - (166) ------- Comprehensive income 1,499 ------- Issuance of common stock 15,665 - 275 - - - 275 Stock options exercised 18,000 - 254 - - 254 Tax benefit of stock options exercised - - 19 - - 19 Stock-based compensation - - 91 - - 91 Purchase of treasury stock (94,956) (1) (1,636) - - (1,637) Purchase of stock for award plan (12,723) - - - - (225) (225) Dividends declared ($.18 per share) - - - (758) - - (758) ----------------------------------------------------------------------------------------- Balance at June 30, 2007 4,028,228 $40 $30,447 $22,018 $(630) $(1,112) $50,763 ========================================================================================= The accompanying notes are an integral part of these consolidated financial statements.
6
SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, ------------------------- 2007 2006 ---- ---- (In thousands) Cash flows from operating activities: Net income $ 1,665 $ 1,533 Adjustments to reconcile net income to net cash provided by operating activities: Amortization, net of accretion of securities 7 65 (Gain) loss on sales and calls of available-for-sale securities, net (139) 169 Amoritization of net deferred loan fees (16) (10) Provision for loan losses - 39 Deferred tax benefit (4) (409) Depreciation and amortization 425 439 Gain on sale of assets (3) - Increase in cash surrender value of life insurance (220) (213) Stock-based compensation 91 136 Excess tax benefits from stock-based compensation (19) (82) Net change in: Other assets (19) 67 Accrued interest receivable 42 224 Other liabilities (461) (463) --------- -------- Net cash provided by operating activities 1,349 1,495 --------- -------- Cash flows from investing activities: Activity in available-for-sale securities: Purchases (6,668) (6,440) Sales 975 15,196 Maturities, calls and pay-downs 9,902 5,611 Activity in held-to-maturity securities: Maturities, calls and pay-downs 2,795 2,046 Purchases of Federal Home Loan Bank stock (456) - Loan originations, net of principal payments (7,298) (17,097) Recoveries of loans previously charged off, net (22) - Capital expenditures (1,568) (268) Proceeds from sale of property and equipment 23 - --------- -------- Net cash used in investing activities (2,317) (952) --------- -------- The accompanying notes are an integral part of these consolidated financial statements.
7
SLADE'S FERRY BANCORP. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) Six Months Ended June 30, ------------------------- 2007 2006 ---- ---- (In thousands) Cash flows from financing activities: Net increase (decrease) in noninterest-bearing deposits $ (5,386) $ 5 Net increase in interest-bearing deposits 7,028 14,217 Short-term advances from Federal Home Loan Bank 280,315 43,000 Long-term advances from Federal Home Loan Bank 25,000 - Payments on Federal Home Loan Bank short-term advances (280,315) (40,000) Payments on Federal Home Loan Bank long-term advances (6,191) (7,822) Proceeds from issuance of common stock 275 302 Stock options exercised 254 305 Excess tax benefits from stock-based compensation 19 82 Purchase of treasury stock (1,601) (230) Unearned compensation (225) (100) Dividends paid on common stock (758) (749) --------- -------- Net cash provided by financing activities 18,415 9,010 --------- -------- Net increase in cash and cash equivalents 17,447 9,471 Cash and cash equivalents at beginning of period 22,355 20,018 --------- -------- Cash and cash equivalents at end of period $ 39,802 $ 29,489 ========= ======== Supplemental disclosures: Interest paid $ 9,263 $ 7,105 Income taxes paid $ 947 $ 475 Non-cash disclosure: Due to broker $ 985 $ 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, 2007 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, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. 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, 2006. 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, 2006, except for the adoption of Financial Accounting Standards Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN48), effective January 1, 2007. See Note C. The consolidated financial statements include the accounts of the Company, 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 other wholly-owned subsidiary, Slade's Ferry Statutory Trust I, using the equity method. Note C - Recent Accounting Pronouncements - ----------------------------------------- The Company adopted FIN 48 effective January 1, 2007, which clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements in accordance with FASB Statement No. 109, "Accounting for Income Taxes". FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. Management has evaluated FIN 48 and determined that there is no impact on the Company's consolidated financial statements. 9 Note D - Pension Plan - --------------------- The components of net periodic pension expense cost are as follows:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2007 2006 2007 2006 ---- ---- ---- ---- (In thousands) Interest cost $ 12 $ 16 $ 23 $ 33 Service cost and expenses 6 - 13 - Expected return on plan assets (19) (29) (39) (58) Settlements - 133 38 133 Recognized net actuarial loss 4 8 8 15 ---- ---- ---- ---- $ 3 $128 $ 43 $123 ==== ==== ==== ====
The Company previously disclosed in its consolidated financial statements for the year ended December 31, 2006 that it expects to make no contributions to the plan in 2007. Note E - 2004 Equity Incentive Plan - ----------------------------------- Stock options granted under the Slade's Ferry Bancorp. 2004 Equity Incentive Plan (the "2004 Plan") may be either incentive stock options or non-qualified stock options. The exercise price for incentive stock options granted to employees shall not be less than 100 percent of the fair market value at grant date. No stock option shall be exercisable more than 10 years after the date the stock option is granted. The 2004 Plan also provides for the granting of Unrestricted Stock Awards, Restricted Stock Awards, or Deferred Stock Awards. At June 30, 2007, no stock awards had been granted. A summary of options under the 2004 Plan as of June 30, 2007, and changes during the six months then ended, (shares in thousands) is presented below:
Weighted Average Remaining Contractual Aggregate Weighted Average Term Intrinsic Shares Exercise Price (in years) Value ------ ---------------- ----------- --------- Outstanding at January 1, 2007 231 $18.18 Granted 10 16.59 Exercised (18) 14.15 Forfeited - - Expired (19) 18.06 --- ------ --- ----- Outstanding at June 30, 2007 204 18.47 4.2 $ - === ====== === ===== Exercisable at June 30, 2007 189 $18.37 4.2 $ - --- ------ --- -----
10 On July 17, 2007, the Compensation Committee of the Company's Board of Directors (the "Committee") approved the granting of (1) 24,000 Incentive Stock Options to purchase shares of Company common stock, of which 8,000 vest immediately, 8,000 vest on May 31, 2008 and 8,000 vest on May 31, 2009, and (2) 32,000 Restricted Stock Awards, of which 6,500 vest on September 1, 2007, 6,500 vest on May 31, 2008, 12,500 vest on May 31, 2009 and 6,500 vest on May 31, 2010. On August 9, 2007, the Committee granted 29,000 Restricted Stock Awards, of which 7,250 vest each August 31, 2008, 2009, 2010 and 2011. Note F - Comprehensive Income - ----------------------------- Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The components of other comprehensive loss and related tax effects are as follows:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2007 2006 2007 2006 ---- ------- ----- ----- (In thousands) Unrealized gains (losses) on securities available for sale $148 $(1,153) $(393) $(629) Reclassification adjustment for losses (gains) realized in income (78) 172 139 169 ---- ------- ----- ----- Net unrealized gains (losses) 70 (981) (254) (460) Tax effect (24) 360 88 174 ---- ------- ----- ----- Net-of-tax amount $ 46 $ (621) $(166) $(286) ==== ======= ===== =====
The components of accumulated other comprehensive loss, included in stockholders' equity, are as follows: June 30, December 31, 2007 2006 ------ ------ (In thousands) Net unrealized losses on securities available for sale $(675) $(380) Tax effect 268 139 ----- ----- Net-of-tax amount (407) (241) ----- ----- Unrecognized net actuarial loss pertaining to defined benefit plan (377) (377) Tax effect 154 154 ----- ----- Net-of-tax amount (223) (223) ----- ----- $(630) $(464) ===== ===== 11 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 $628.3 million, consolidated net loans and leases of $429.8 million, consolidated deposits of $425.6 million and consolidated shareholders' equity of $50.8 million as of June 30, 2007. 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 listed in 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 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, 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 context otherwise requires. 12 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, 2006. 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, 2007 and December 31, 2006 - ------------------------------------------------------------------------ General - ------- Total assets increased from $607.8 million at December 31, 2006 to $628.3 million at June 30, 2007. Total net loans increased by $7.4 million, from $422.4 million to $429.8 million. Deposits increased from $424.0 million at December 31, 2006 to $425.6 million at June 30, 2007. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents increased by $17.4 million, from $22.4 million at December 31, 2006 to $39.8 million at June 30, 2007. The increase is due to increased federal funds sold, which management intends to be used to fund loan growth and maturing certificates of deposit. 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. Our total investment portfolio decreased from $137.1 million at December 31, 2006 to $131.3 million at June 30, 2007, a decrease of $5.8 million, or 4.2%. The decrease is the result of the maturity, calls and paydowns of certain state and municipal obligations and mortgage-backed securities. Those funds were used to provide liquidity for current loan growth. The current investment strategy is to reduce the investment portfolio through normal paydowns and maturities and reinvest these funds into higher yielding loans. Our investment policy 13 also permits investments in mortgage-backed securities, usually having a longer weighted average life. Our investment policy, however, limits the duration of the aggregate investment portfolio to 5 years. At June 30, 2007, the portfolio duration was 3.5 years. We do not purchase investments with imbedded derivative characteristics, or free-standing derivative instruments such as swaps, options, or futures. Securities Held to Maturity The held-to-maturity portfolio consists of mortgage-backed securities and securities issued by states and municipalities. Held-to-maturity securities decreased from $24.6 million at December 31, 2006 to $21.8 million at June 30, 2007. Management has designated the 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, 2007 and December 31, 2006. June 30, 2007 December 31, 2006 -------------------- ------------------- Amortized Fair Amortized Fair Cost Value Cost Value -------------------- ------------------- (In thousands) State and municipal obligations $ 4,229 $ 4,266 $ 5,001 $ 5,069 Mortgage-backed securities 17,552 16,794 19,622 19,150 ------- ------- ------- ------- Total securities held to maturity $21,781 $21,060 $24,623 $24,219 ======= ======= ======= ======= 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 us the flexibility to alter our investment strategies 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. 14 The following table shows the amortized cost basis and fair value of securities available for sale at June 30, 2007 and December 31, 2006. June 30, 2007 December 31, 2006 -------------------- ------------------- Amortized Fair Amortized Fair Cost Value Cost Value -------------------- ------------------- (In thousands) Debt Securities: Government-sponsored enterprises $ 29,474 $ 29,136 $ 34,462 $ 33,957 Corporate 9,174 9,079 9,221 9,080 Mortgage-backed 59,730 59,247 57,946 57,980 -------- -------- -------- -------- Total debt securities 98,378 97,462 101,629 101,017 Marketable equity securities 3,309 3,587 3,139 3,389 Mutual funds 1,215 1,178 1,215 1,197 -------- -------- -------- -------- Total securities available for sale $102,902 $102,227 $105,983 $105,603 ======== ======== ======== ======== Loans - ----- Our loan portfolio consists primarily of residential, multi-family and commercial real estate, construction and land development, commercial, and consumer loans and home equity lines of credit 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 our competitors. Total net loans were 68.4% of total assets at June 30, 2007, as compared to 69.5% of total assets at December 31, 2006. 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. These loans 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 $208.3 million and comprised 48.0% of total gross loans at June 30, 2007. At December 31, 2006, the multi-family and commercial real estate loan portfolio totaled $209.2 million, or 49.0% of total gross loans. 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 loans with terms of up to 30 years and interest rates which 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 salable, we have not chosen to sell these loans, rather to maintain them in portfolio, consistent with our income and interest rate risk management targets. 15 Residential real estate loans totaled $133.0 million and comprised of 30.6% of total gross loans at June 30, 2007. At December 31, 2006, residential real estate loans totaled $132.4 million, or 31.0% of total gross loans. Commercial Loans The commercial loan portfolio consists 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 invoice date. Commercial loans totaled $48.2 million and comprised 11.1% of total gross loans at June 30, 2007. At December 31, 2006, the commercial loan portfolio totaled $47.7 million, or 11.2% of total gross loans. 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. In addition, the Company has commercial construction loans that consist primarily of owner occupied commercial real estate, new and rehabilitation multi-family residential, assisted living and nursing home facilities. Construction loans totaled $27.9 million and comprised 6.4% of total gross loans at June 30, 2007. At December 31, 2006, the construction loan portfolio totaled $21.0 million or 4.9% of total gross loans. The increase is due to several new loans and an advance in the commercial construction category. As of December 31, 2006, residential construction loans were $3.9 million, while commercial construction loans were $17.1 million. As of June 30, 2007, residential construction loans were $3.2 million, while commercial construction loans were $24.7 million. 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. Our home equity lines of credit generally have interest rates, indexed to the Wall Street Journal Prime Rate, that adjust on a monthly basis. Home equity lines of credit totaled $14.2 million and comprised 3.3% of total gross loans at June 30, 2007. At December 31, 2006, the home equity line of credit portfolio totaled $13.9 million, or 3.3% of total gross loans. 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 at June 30, 2007 and $2.8 million at December 31, 2006 or 0.6% of total gross loans at both dates. 16 The following table summarizes our loan portfolio by category at June 30, 2007 and December 31, 2006.
Percentage June 30, 2007 December 31, 2006 Increase/(Decrease) ------------- ----------------- ------------------- (Dollars in thousands) Real estate mortgage loans: Multi-Family and Commercial $208,278 $209,172 -0.43% Residential 132,955 132,381 0.43% Construction 27,894 20,988 32.90% Home equity lines of credit 14,186 13,917 1.93% Commercial 48,222 47,736 1.02% Consumer 2,723 2,766 -1.55% -------- -------- ------ Total loans 434,258 426,960 1.71% Less: Allowance for loan losses (4,296) (4,385) -2.03% Net deferred loan fees (189) (205) -7.80% -------- -------- ------ Loans, net $429,773 $422,370 1.75% ======== ======== ======
The increases in the loan portfolio are the result of increased demand for construction loans. The following table presents information with respect to non-performing loans as of the dates indicated.
June 30, 2007 December 31, 2006 ------------- ----------------- (Dollars in thousands) Non-accrual loans $1,699 $600 Loans 90 days or more past due and still accruing 1 - ------ ---- Total non-performing loans $1,700 $600 ====== ==== Percentage of non-accrual loans to total gross loans 0.39% 0.14% Percentage of allowance for loan losses to non-accrual loans 252.7% 730.8%
The $1.7 million in non-accrual loans as of June 30, 2007 consists of $1.1 million of commercial real estate loans, $463,000 of residential real estate loans, and $157,000 of consumer loans. The increase in non-accrual loans is due primarily to one commercial loan with an outstanding balance of $1,000,000, which management reviewed and determined not to be impaired as of June 30, 2007. There were no restructured loans included in non-accrual loans at June 30, 2007. 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 the 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 is determined to be uncollectible, it is charged to the allowance for loan losses or, if applicable, any real estate that is securing the loan is acquired through foreclosure, and recorded as other real estate owned at the lower of cost or net realizable value. 17 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. At June 30, 2007, there were $444,000 of loans which we have determined to be impaired, with no related allowance for loan losses. These loans are 90 days past due, and were, therefore, not accruing at June 30, 2007. These loans were individually evaluated for impairment. No specific allowance for loan losses was allocated to these loans based on the impairment analysis. 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, ------------------------- 2007 2006 ------ ------ (Dollars in thousands) Balance at beginning of period $4,385 $4,333 Charge-offs: Real estate mortgage loans: Multi-family and commercial - - Residential (25) - Home equity lines of credit - - Commercial - - Consumer - (6) ------ ------ (25) (6) ------ ------ Recoveries: Real estate mortgage loans: Multi-family and commercial 3 - Residential - - Home equity lines of credit - - Commercial - - Consumer - - ------ ------ 3 - ------ ------ Net loan charge-offs (22) (6) Provision for loan losses - 39 Transfer of off-balance sheet credit exposures to other liabilities (67) - ------ ------ Balance at end of period $4,296 $4,366 ====== ====== Allowance for loan losses as a percent of loans 0.99% 1.02% ====== ====== Ratio of net loan charge-offs to average loans outstanding (0.01)% 0.00% ====== ====== 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. The specific component relates to loans that are classified as impaired. For such loans, 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 18 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. The Company maintains a reserve for potential credit risk related to off balance sheet lines of credit. The Company monitors changes to outstanding lines and adjusts the reserve when appropriate. Prior to December 31, 2006, the reserve was included as a component of the allowance. Effective January 1, 2007, the amount is included as "Other Liabilities" in accordance with generally accepted accounting principles and Financial Institution Letter (FIL) 105-2006, which was issued in December 2006. No reserve adjustment was recorded for the quarter ending June 30, 2007. As the composition of the loan portfolio changes and diversifies, a different allowance level may be required. After thorough review and analysis of the adequacy of the loan loss allowance, management determined no provision for losses was required for the three months ended June 30, 2007, unchanged from the three months ended June 30, 2006. The provision for the six months ended June 30, 2006 was $39,000, with no provision recorded for the six months ended June 30, 2007. In 2007, a review of the allowance for loan losses resulted in a reallocation of the allowance based on qualitative factor analysis, the introduction of commercial loan risk ratings in the analysis, and the transfer of the off-balance-sheet component of the allowance to other liabilities. The allowance for loan losses as a percentage of total loans outstanding declined from 1.03% at December 31, 2006 to .99% at June 30, 2007. This decrease can be attributed to an overall improvement in the credit quality of existing loans which results in a decrease in the degree of credit risk embedded in the loan portfolio. This table below shows an allocation of the allowance for loan losses at the dates indicated. June 30, 2007 December 31, 2006 ----------------------- ------------------------ Percent of Percent of Loans in Each Loans in Each Category to Category to Amount Total Loans Amount Total Loans ------ ------------- ------ ------------- (Dollars in thousands) Commercial $ 716 11.1% $ 718 11.2% Real estate construction 278 6.4% 260 4.9% Real estate mortgage 3,133 81.9% 3,181 83.3% Consumer 169 0.6% 226 0.6% ------ ----- ------ ----- $4,296 100.0% $4,385 100.0% ====== ===== ====== ===== 19 Deposits - -------- We solicit deposits from our primary market area using rates and services designed to appeal to customers across a broad spectrum of ages and income levels. We compete for deposit customers with community banks and credit unions, as well as local branches of regional and national banks. Our total deposits increased from $424.0 million at December 31, 2006 to $425.6 million at June 30, 2007, an increase of $1.6 million. The Company obtained brokered certificates of deposit during the quarter to offset a decline in our lower cost deposit products. Customers have shown a preference for higher rate money market products compared to lower rate savings and certificates of deposits. As a result, outstanding brokered certificates of deposit totaled $23.3 million as of June 30, 2007. The following table presents deposits by category at June 30, 2007 and December 31, 2006.
Percentage June 30, 2007 December 31, 2006 Increase/(Decrease) ------------- ----------------- ------------------- (Dollars in thousands) Demand deposits $ 73,715 $ 79,101 -6.81% NOW 53,547 55,071 -2.77% Regular and other savings 69,340 77,189 -10.17% Money market deposits 38,478 24,021 60.18% -------- -------- ------ Total non-certificate accounts 235,080 235,382 -0.13% -------- -------- ------ Term certificates of $100,000 or greater 63,271 66,894 -5.42% Term certificates less than $100,000 103,980 121,730 -14.58% Brokered term certificates 23,317 - - -------- -------- ------ Total certificate accounts 190,568 188,624 1.03% -------- -------- ------ Total deposits $425,648 $424,006 0.39% ======== ======== ======
Long Term Borrowings - -------------------- Long-term borrowings consist of advances from the Federal Home Loan Bank which totaled $137.9 million at June 30, 2007, as compared to $119.1 million at December 31, 2006, an increase of $18.8 million or 15.8%. Management's strategy is to utilize advances from the Federal Home Loan Bank and brokered certificates of deposit, in conjunction with investment portfolio maturities and repayments, to fund loan growth and deposit runoff. 20 Comparison of Results of Operations for the Three Months Ended June 30, 2007 - ---------------------------------------------------------------------------- and 2006 - -------- General - ------- Net income increased from $626,000, or $0.15 per share on a diluted basis, for the three months ended June 30, 2006 to $792,000, or $0.20 per share on a diluted basis, for the three months ended June 30, 2007, an increase of 26.5%. Net interest and dividend income decreased by $22,000, or 1%, to $4.4 million when comparing the three months ended June 30, 2006 and 2007. No provision for loan losses was recorded for the three months ended June 30, 2007 or 2006. Non-interest income increased by $270,000 or 49.5% from $546,000 to $816,000 for the three months ended June 30, 2006 and 2007, respectively. Non-interest expense increased by $38,000, or 1%, to $4.0 million for the three months ended June 30, 2007. Interest Income - --------------- Our operating performance is dependent on net interest and dividend income, the difference between interest and dividend income we earn on loans and investments and interest expense we pay 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 $909,000 or 11.3%, from $8.0 million for the three months ended June 30, 2006 to $8.9 million for the three months ended June 30, 2007. This increase is principally attributed to growth in the loan portfolio, as the average balance of loans increased by $12.9 million or 3.1%, as well as a higher yield on the loan portfolio which increased from 6.34% for the three months ended June 30, 2006 to 6.58% for the three months ended June 30, 2007. Also, interest and dividends on investments increased by $437,000 for the three months ended June 30, 2007 compared to the three months ended June 30, 2006, respectively. The increase in interest and dividends on investments and Federal Funds sold reflected a higher yield on the components of the investment portfolio combined with an increase in the average balance of the portfolio for the three months ended June 30, 2007 compared to the same period in 2006. The Company also received a FHLB dividend of $115,000 in the second quarter of 2007, while no dividend was received in the second quarter of 2006. Interest Expense - ---------------- Total interest expense increased by $931,000 or 25.6%, from $3.6 million for the three months ended June 30, 2006 to $4.6 million for the three months ended June 30, 2007. The increase is primarily due to the migration of deposits to higher cost certificates of deposit when comparing average balances at June 30, 2006 and 2007, combined with management's strategy to utilize FHLB advances and brokered certificates of deposit to supplement deposit runoff experienced in 2007. Market interest rates and our own deposit rates have also increased. Interest on deposits increased by $446,000 or 19.8% when comparing the three months ended June 30, 2007 and 2006. As a result of the rate increases, the weighted average cost of deposits increased from 2.65% for the three months ended June 30, 2006 to 3.16% for the three months ended June 30, 2007. Net Interest Margin - ------------------- As a result of the current interest rate environment and our rate increases on deposit accounts, the net interest margin has compressed 19 basis points from 3.22% for the three months ended June 30, 2006 to 3.03% for the three months ended June 30, 2007. The compression in net interest margin was mostly due to balance sheet growth in an environment with an inverted yield curve and the corresponding compressed margins on loans and investments, combined with intense competition for deposits and increased wholesale funding costs. 21
The following table sets forth our average assets, liabilities, and stockholders' equity, interest earned and interest paid, average rates earned and paid, net interest spread and the net interest margin for the three months ended June 30, 2007, and 2006. Average balances reported are daily averages. Three Months Ended June 30, ----------------------------------------------------------------------------------- 2007 2006 --------------------------------------- --------------------------------------- Average Interest Average Average Interest Average Balance Income/Expense Rate Balance Income/Expense Rate --------------------------------------- --------------------------------------- Assets: (Dollars in thousands) - ------- Interest earning assets (1) Loans: Commercial $ 51,517 $ 1,095 8.53% $ 46,111 $ 885 7.70% Commercial real estate 231,534 3,866 6.70% 228,558 3,710 6.51% Residential real estate 150,110 2,150 5.74% 145,725 2,051 5.65% Consumer 2,741 41 6.00% 2,565 39 6.10% ----------------------- ----------------------- Total loans 435,902 7,152 6.58% 422,959 6,685 6.34% Federal funds sold 13,259 179 5.40% 4,387 53 4.85% Taxable debt securities 115,220 1,399 4.87% 108,068 1,182 4.39% Tax-exempt debt securities (2) 4,230 71 6.71% 6,099 102 6.68% Marketable equity securities 4,589 35 3.06% 4,344 35 3.23% FHLB stock 7,254 115 6.36% 6,304 - 0.00% Other investments 650 15 9.23% 650 10 6.17% ----------------------- ----------------------- Total interest earning assets 581,104 8,966 6.19% 552,811 8,067 5.85% ------- ------- Allowance for loan losses (4,306) (4,373) Deferred loan fees (189) (310) Cash and due from banks 15,663 13,932 Other assets 25,046 26,432 -------- -------- $617,318 $588,492 ======== ======== Liabilities and Stockholders'Equity: - ------------------------------------ Interest bearing liabilities Savings accounts $ 70,725 $ 233 1.32% $ 82,199 $ 272 1.33% NOW accounts 53,597 180 1.35% 57,648 188 1.31% Money market accounts 31,195 226 2.91% 25,709 149 2.32% Time deposits 186,721 2,063 4.43% 175,539 1,647 3.76% FHLB advances 137,887 1,650 4.80% 110,802 1,209 4.38% Subordinated debt 10,310 214 8.29% 10,310 170 6.61% ----------------------- ----------------------- Total interest bearing liabilities 490,435 4,566 3.73% 462,207 3,635 3.15% ------- ------- Demand deposits 74,108 73,494 Other liabilities 2,353 707 -------- -------- Total liabilities 566,896 536,408 Total stockholders' equity 50,422 52,084 -------- -------- $617,318 $588,492 ======== ======== Net interest income $ 4,400 $ 4,432 ======= ======= Net interest spread 2.45% 2.70% ==== ==== Net interest margin 3.03% 3.22% ==== ==== (1) 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. (2) On a fully taxable basis based on a tax rate of 35.0% for 2007 and 2006. Interest income on investments and net interest income includes a fully taxable equivalent adjustment of $25,000 in 2007 and $37,000 in 2006. 22
The following table presents the changes in components of net interest income for the three months ended June 30, 2007 and 2006, 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, 2007 vs. 2006 Increase (Decrease) --------------------------------- Total Due to Due to Change Volume Rate --------------------------------- (In thousands) Commercial loans $ 210 $ 109 $ 101 Commercial real estate 156 49 107 Residential real estate 99 62 37 Consumer loans 2 3 (1) Federal funds sold 126 114 12 Taxable debt securities 217 83 134 Tax-exempt debt securities (31) (31) - Marketable equity securities - 2 (2) FHLB Stock 115 8 107 Other investments 5 - 5 ----------------------------- Total interest income 899 399 500 ----------------------------- Savings accounts (39) (38) (1) NOW accounts (8) (13) 5 Money market accounts 77 36 41 Time deposits 416 114 302 FHLB advances 441 310 131 Subordinated debt 44 - 44 ----------------------------- Total interest expense 931 409 522 ----------------------------- Net interest income $ (32) $ (10) $ (22) ============================= Provision for Loan Losses - ------------------------- 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. In 2007, a review of the allowance for loan losses resulted in a reallocation of the allowance based on qualitative factor analysis, the introduction of commercial loan risk ratings in the analysis, and the transfer of the off- balance-sheet component of the allowance to other liabilities. Management concluded that no provision for loan losses was required for the three months ended June 30, 2007. No provision for loan losses was recorded for the three months ended June 30, 2006. 23 Non-Interest Income - ------------------- Non-interest income increased from $546,000 for the three months ended June 30, 2006 to $816,000 for the three months ended June 30, 2007, an increase of $270,000 or 49.5%. The gain on the sale of available-for-sale securities changed from a loss of $172,000 for the three months ended June 30, 2006 to a gain of $78,000 for the three months ended June 30, 2007, an increase of $250,000. In 2007, after reviewing the investment market and the investment portfolio, management determined that the sale of certain securities to realize market appreciation was appropriate. In June 2006, the Company restructured the investment portfolio by selling $14.5 million of low-yielding obligations of government sponsored enterprises, resulting in realized losses of $176,000. Other income increased from $260,000 for the three months ended June 30, 2006 to $271,000 for the three months ended June 30, 2007, an increase of 3.8%, due to growth in ATM and debit card income. Non-Interest Expense - -------------------- Non-interest expense increased by $38,000 to $4.0 million for the three months ended June 30, 2007 compared to the three months ended June 30, 2006, an increase of 1%. Salaries and employee benefits decreased by $271,000 or 11.8%, from $2.3 million for the three months ended June 30, 2006 to $2.0 million for the three months ended June 30, 2007. The decrease in salaries and benefits was primarily attributable to staff reductions and a reduction in pension expense on a comparable three month basis. Staff reductions resulted primarily from outsourcing the Company's core item processing, back office proof operations and internal audit in 2006. Pension expense decreased due to $133,000 of expense for settlement accounting recognized on the Bank's defined benefit pension plan in 2006. See Note E to the consolidated financial statements included herein for stock-based compensation awards that will increase compensation expense in periods subsequent to June 30, 2007. Also see Part II, Item 5-Other Information, for new defined contribution supplemental executive retirement plans that will increase benefits expense in periods subsequent to June 30, 2007. Professional fees decreased $71,000 as a result of the non-recurrence of various accounting and regulatory matters that occurred during the three months ended June 30, 2006. Marketing expense increased $163,000 to $272,000 for the three months ended June 30, 2007 from $109,000 for the three months ended June 30, 2006. This increase is attributable to expenses related to the Bank's rebranding initiative and the launch of a new deposit product during the quarter ended June 30, 2007. Data processing expenses increased $158,000 from $118,000 for the three months ended June 30, 2006 to $276,000 for the three months ended June 30, 2007. The increase was primarily due to expenses associated with outsourced core processing, item processing and statement rendering functions that were done in-house during the same period of 2006. Other expenses increased $43,000 or 7.7% from $560,000 for the three months ended June 30, 2006 to $603,000 for the three months ended June 30, 2007, due to.general cost increases for these items. Provision for Income Taxes - -------------------------- Income before income taxes was $989,000 for the three months ended June 30, 2006 as compared to $1.2 million for the three months ended June 30, 2007. The provision for income taxes totaled $407,000 and $363,000 for the quarters ended June 30, 2007 and 2006, respectively, representing effective tax rates of 34.0% and 36.7%, respectively. The lower effective tax rate is due primarily to an increase in investment income at the Company's securities corporations, which receive favorable state tax rates. 24 Comparison of Results of Operations for the Six Months Ended June 30, 2007 - -------------------------------------------------------------------------- and 2006 - -------- General - ------- Net income increased from $1.5 million, or $0.37 per share on a diluted basis, for the six months ended June 30, 2006 to $1.7 million, or $0.41 per share on a diluted basis, for the six months ended June 30, 2007, an increase of 8.6%. Net interest and dividend income decreased by $406,000, or 4.5%, to $8.6 million when comparing the six months ended June 30, 2006 and 2007. No provision for loan losses was recorded for the six months ended June 30, 2007 while $39,000 was recorded for the same six month period in 2006. Non-interest income increased by $293,000 or 23.5% from $1.2 million to $1.5 million for the six months ended June 30, 2006 and 2007, respectively. Non-interest expense decreased by $156,000, or 2.0%, to $7.55 million for the six months ended June 30, 2007, from $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 we earn on loans and investments and interest expense we pay 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 $1.7 million or 10.4%, from $15.9 million for the six months ended June 30, 2006 to $17.5 million for the six months ended June 30, 2007. This increase is principally attributed to both growth in the loan portfolio, as the average balance of loans increased by $13.5 million or 3.2%, as well as a higher yield on the loan portfolio which increased from 6.30% for the six months ended June 30, 2006 to 6.55% for the six months ended June 30, 2007. These increases were related principally to commercial and total real estate loans reflecting current market conditions. Also, interest and dividends on investments and Federal Funds sold increased by $692,000 for the six months ended June 30, 2007 compared to the six months ended June 30, 2006. The increase in interest and dividends on investments reflected a higher yield on the components of the investment portfolio combined with an increase in the average balance of the portfolio for the six months ended June 30, 2007 compared to the same period in 2006. In addition, dividends received from the FHLB increased by $149,000 for the six months ended June 30, 2007 compared to the same period in 2006. Interest Expense - ---------------- Total interest expense increased by $2.1 million or 29.7%, from $6.9 million for the six months ended June 30, 2006 to $9.0 million for the six months ended June 30, 2007. The increase is due to both increased deposit and borrowing levels and higher interest rates. Management's strategy is to utilize FHLB advances and brokered certificates of deposit to supplement deposit runoff experienced in 2007. Market interest rates and our own deposit rates have also increased. Interest on deposits increased by $1.2 million or 29.4% when comparing the six months ended June 30, 2007 and 2006. As a result of the rate increases, the weighted average cost of deposits increased from 2.29% for the six months ended June 30, 2006 to 3.15% for the six months ended June 30, 2007. Net Interest Margin - ------------------- As a result of the current interest rate environment and our rate increases on deposit accounts, the net interest margin has compressed 30 basis points from 3.31% for the six months ended June 30, 2006 to 3.0% at June 30, 2007. The compression in net interest margin was mostly due to balance sheet growth in an environment with an inverted yield curve and the corresponding compressed margins on loans and investments, combined with intense competition for deposits and increased wholesale funding costs. 25
The following table sets forth our average assets, liabilities, and stockholders' equity, interest earned and interest paid, average rates earned and paid, net interest spread and the net interest margin for the six months ended June 30, 2007, and 2006. Average balances reported are daily averages. Six Months Ended June 30, ----------------------------------------------------------------------------------- 2007 2006 --------------------------------------- --------------------------------------- Average Interest Average Average Interest Average Balance Income/Expense Rate Balance Income/Expense Rate --------------------------------------- --------------------------------------- Assets: (Dollars in thousands) - ------- Interest earning assets (1) Loans: Commercial $ 52,326 $ 2,135 8.23% $ 44,416 $ 1,658 7.53% Commercial real estate 228,512 7,572 6.68% 228,745 7,319 6.45% Residential real estate 149,954 4,285 5.76% 144,352 4,066 5.68% Consumer 2,737 82 6.04% 2,557 77 6.07% ------------------------------------- ------------------------------------- Total loans 433,529 14,074 6.55% 420,070 13,120 6.30% Federal funds sold 8,066 215 5.38% 2,738 64 4.71% Taxable debt securities 117,065 2,829 4.87% 109,752 2,394 4.40% Tax-exempt debt securities (2) 4,401 146 6.70% 6,260 208 6.69% Marketable equity securities 5,381 70 2.62% 4,355 74 3.43% FHLB stock 7,074 231 6.59% 6,304 82 2.62% Other investments 650 25 7.76% 650 18 5.58% ------------------------------------- ------------------------------------- Total interest earning assets 576,166 17,590 6.16% 550,129 15,960 5.85% ------- ------- Allowance for loan losses (4,345) (4,358) Deferred loan fees (202) (330) Cash and due from banks 15,475 12,951 Other assets 23,903 26,229 -------- -------- $610,997 $584,621 ======== ======== Liabilities and Stockholders' Equity: - ------------------------------------- Interest bearing liabilities Savings accounts $ 72,742 $ 497 1.38% $ 83,637 $ 529 1.28% NOW accounts 53,800 359 1.35% 56,715 361 1.28% Money market accounts 27,892 373 2.70% 26,898 258 1.93% Time deposits 187,439 4,162 4.48% 169,791 3,019 3.59% FHLB advances 133,142 3,169 4.80% 110,998 2,365 4.30% Subordinated debt 10,310 425 8.31% 10,310 394 7.71% ------------------------------------------ ------------------------------------- Total interest bearing liabilities 485,325 8,985 3.73% 458,349 6,926 3.05% ------- ------- Demand deposits 73,651 73,868 Other liabilities 1,939 842 -------- -------- Total liabilities 560,915 533,059 Total stockholders' equity 50,082 51,562 -------- -------- $610,997 $584,621 ======== ======== Net interest income $ 8,605 $ 9,034 ======= ======= Net interest spread 2.43% 2.80% ==== ==== Net interest margin 3.01% 3.31% ==== ==== (1) 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. (2) On a fully taxable basis based on a tax rate of 35.0% for 2007 and 2006. Interest income on investments and net interest income includes a fully taxable equivalent adjustment of $51,000 in 2007 and $74,000 in 2006. 26
The following table presents the changes in components of net interest income for the six months ended June 30, 2007 and 2006, 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, 2007 vs. 2006 Increase (Decrease) --------------------------------- Total Due to Due to Change Volume Rate --------------------------------- (In thousands) Commercial loans $ 477 $ 309 $ 168 Commercial real estate 253 (9) 262 Residential real estate 219 159 60 Consumer loans 5 5 - Federal funds sold 151 133 18 Taxable debt securities 435 168 267 Tax-exempt debt securities (62) (62) - Marketable equity securities (4) 15 (19) FHLB Stock 149 18 131 Other investments 7 - 7 ------------------------------ Total interest income 1,630 736 894 ------------------------------ Savings accounts (32) (71) 39 NOW accounts (2) (19) 17 Money market accounts 115 11 104 Time deposits 1,143 355 788 FHLB advances 804 501 303 Subordinated debt 31 - 31 ------------------------------ Total interest expense 2,059 777 1,282 ------------------------------ Net interest income $ (429) $ (41) $ (388) ============================== Provision for Loan Losses - ------------------------- 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. In 2007, a review of the allowance for loan losses resulted in a reallocation of the allowance based on qualitative factor analysis, the introduction of commercial loan risk ratings in the analysis, and the transfer of the off- balance-sheet component of the allowance to other liabilities. Management concluded that no provision for loan losses was required for the six months ended June 30, 2007. A provision for loan losses of $39,000 was recorded for the six months ended June 30, 2006. Non-Interest Income - ------------------- Non-interest income increased from $1.3 million for the six months ended June 30, 2006 to $1.5 million for the six months ended June 30, 2007, an increase of $293,000 or 23.5%. The increase was mainly due to the gain on the sale of available-for-sale securities which changed from a loss of $169,000 for the six months 27 ended June 30, 2006 to a gain of $139,000 for the six months ended June 30, 2007, an increase of $308,000. In 2007, after reviewing the investment market and the investment portfolio, management determined that the sale of certain securities to realize market appreciation was appropriate. In 2006, the Company restructured the investment portfolio by selling $14.5 million of low-yielding obligations of government sponsored enterprises, resulting in realized losses of $176,000. Additionally, service charges on deposit accounts increased by $22,000 from $659,000 for the six months ended June 30, 2006 to $681,000 for the six months ended June 30, 2007. Other income decreased $44,000, or 8.1%, from $546,000 for the six months ended June 30, 2006 to $502,000 for the six months ended June 30, 2007. This was the result of decreased volumes of sales of non-deposit investment products combined with a changed sales environment. The Company formerly recorded gross income on sales whereas in 2007 the function has been outsourced, and the Company now records income net of commissions and other expenses. Non-Interest Expense - -------------------- Non-interest expense decreased from $7.7 million for the six months ended June 30, 2006 to $7.5 million for the six months ended June 30, 2007, a decrease of $156,000 or 2.0%. Salaries and employee benefits decreased by $385,000 or 8.8%, from $4.4 million for the six months ended June 30, 2006 to $4.0 million for the six months ended June 30, 2007. The decrease in salaries and benefits was primarily attributable staff reductions and a reduction in pension expense on a comparable six month basis. Staff reductions resulted primarily from outsourcing the Company's core item processing, back office proof operations and internal audit in 2006. Pension expense decreased due to $133,000 of expense for settlement accounting recognized on the Bank's defined benefit pension plan in 2006. See Note E to the consolidated financial statements included herein for stock-based compensation awards that will increase compensation expense in periods subsequent to June 30, 2007. Also see Part II, Item 5-Other Information, for new defined contribution supplemental executive retirement plans that will increase benefits expense in periods subsequent to June 30, 2007. Professional fees decreased $208,000 as a result of the non-recurrence of various accounting and regulatory matters that occurred during the six months ended June 30, 2006. Marketing expense increased $141,000 to $328,000 for the six months ended June 30, 2007 from $187,000 for the six months ended June 30, 2006. This increase is attributable to expenses related to the Bank's rebranding initiative and the launch of a new deposit product during the period ended June 30, 2007. Data processing expenses increased $374,000 from $199,000 for the six months ended June 30, 2006 to $573,000 for the six months ended June 30, 2007. The increase was primarily due to expenses associated with outsourced core processing, item processing and statement rendering functions that were done in-house during the same period of 2006. Other expenses decreased $93,000 or 8.2% from $ 1.1 million for the six months ended June 30, 2006 to $1 million for the six months ended June 30, 2007, due primarily to reduced Board committee meeting expense. Provision for Income Taxes - -------------------------- Income before income taxes was $2.6 million for the six months ended June 30, 2007 as compared to $2.5 million for the six months ended June 30, 2006. The provision for income taxes totaled $885,000 and $935,000 for the six months ended June 30, 2007 and 2006, respectively, representing effective tax rates of 34.7% and 37.9%, respectively. The lower effective tax rate is primarily due to an increase in interest income at the Company's securities corporations, which receive favorable tax rates. 28 Capital - ------- At June 30, 2007, our total stockholders' equity was $50.8 million, a decrease of $482,000 from $51.2 million at December 31, 2006. Additions consisted primarily of net income of $1.7 million for the six months ended June 30, 2007. There were 15,665 shares of common stock issued at a value of $275,000, pursuant to regular reinvestment and optional cash contributions under our Dividend Reinvestment Program. Stock options exercised, resulted in the issuance of 18,000 shares at a value of $254,000, including a tax benefit of $19,000, and stock compensation expense of $91,000. Other comprehensive losses were $166,000, relating to market declines in the Company's securities available for sale. Reductions in capital related to dividends declared of $758,000, the repurchase of 94,956 shares of common stock under our stock repurchase program at a cost of $1.6 million, and the purchase of 12,723 shares of stock at a cost of $225,000 to be used to grant potential stock awards. 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 meet the criteria of the well-capitalized category established by the federal banking agencies as of June 30, 2007 and at December 31, 2006. The Tier I Capital leverage ratio and Tier I Capital to risk weighted assets ratio for the Company are 9.65% and 13.01%, respectively, at June 30, 2007. The Company's Tier I Capital leverage ratio and Tier I Capital to risk weighted assets ratio at December 31, 2006 were 9.90% and 14.18%, respectively. The Tier I Capital leverage ratio and Tier I Capital to risk weighted assets ratio for the Bank are 8.01% and 10.75%, respectively, at June 30, 2007. The Bank's Tier I Capital leverage ratio and Tier I Capital to risk weighted assets ratio at December 31, 2006 were 8.78% and 12.60%, respectively. Off-Balance Sheet Arrangements - ------------------------------ We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. 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 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, 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 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. Our investment securities portfolio provides 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, 2007, cash flow from maturities, calls and pay-downs of securities was $12.7 million, proceeds from sales of securities totaled $1 million, compared to maturities, calls and pay-downs of securities of $7.7 million, and proceeds from sales of securities of $15.1 million for the six months ended June 30, 2006. 29 Purchases of securities totaled $6.7 million and $6.4 million for the six months ended June 30, 2007 and June 30, 2006, respectively. Amortization and pay-offs of the loan portfolio also provides us with significant liquidity. Traditionally, amortization and pay-offs are reinvested into loans. Excess liquidity is invested in federal funds sold and overnight investments at the FHLB. We have also used borrowed funds as a source of liquidity. At June 30, 2007, the Bank's outstanding borrowings from the FHLB were $137.9 million. The Bank has the capacity to borrow an additional $4.0 million from the FHLB as of June 30, 2007. The Bank has the ability to increase this capacity with additional asset pledges. The Bank has obtained brokered certificates of deposits as an additional funding source during the quarter ending June 30, 2007, with an outstanding balance of $23.3 million at quarter end. These deposits mature over the next three months. While management will evaluate future brokered certificates of deposit, the bank expects that FHLB borrowings will remain the primary source of additional liquidity. Loan originations for the six months ended June 30, 2007 totaled $54.0 million. Commitments to originate loans at June 30, 2007 were $26.5 million, excluding unadvanced construction funds totaling $12.9 million, unadvanced commercial lines of credit totaling $24.3 million and unadvanced home equity lines totaling $15.8 million. Management believes that adequate liquidity is available to fund loan commitments utilizing deposits, loan amortization, maturities of securities, or borrowings. The increase in liquidity is due to the utilization of advances from the FHLB in conjunction with the investment portfolio maturities, calls and paydowns of certain state and municipal obligations and mortgage-backed securities that were used to provide liquidity for the current loan growth and deposit runoff. 30 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 the repricing of assets and liabilities; the differences in the various pricing indices inherent in our assets and liabilities; and the effects of overt and embedded options in our assets and liabilities. Our Asset/Liability Committee, comprised of executive management, is responsible for managing and monitoring interest rate risk, and reviewing with the Board of Directors, at least quarterly, the interest rate risk positions, the impact changes in interest rates would have on net interest income, and the maintenance of interest rate risk exposure within approved guidelines. The potentially volatile nature of market interest rates requires us to manage interest rate risk on an active and dynamic basis. Our objective is to reduce and control the volatility of 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 an 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 in interest rates and a 200 basis point decrease in rates. 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 established by the Board provides an internal tolerance level to control interest rate risk. We were slightly outside our policy-mandated risk limit for net interest income at risk due to a management decision, with the Board of Directors concurrence, not to extend long-term funding in light of what we believe to be temporarily overpriced short and long term funding costs. 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 -10.79% (19) -200 5.60% 10 31 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 13.38% N/A +200 12.03% -1.35% -200 13.83% 0.44% 32 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, 2007 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 has been no change 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. 33 PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS We are not involved in any pending legal proceedings that would have a material impact on our consolidated financial condition and results of operations. 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, 2006 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 quarter ended June 30, 2007.
- --------------------------------------------------------------------------------------------------------------------------- (c) Total Number of (d) Maximum Number (or (a) Total Shares Purchased as Approximate Dollar Value) of Number of (b) Average Part of Publicly Shares that may yet be Shares Price Paid Announced Plans or Purchased under the Plans or Period Purchased per Share Programs (1) Programs (1) - --------------------------------------------------------------------------------------------------------------------------- April 1, 2007 through April 30, 2007 1,965 $17.22 1,965 114,623 - --------------------------------------------------------------------------------------------------------------------------- May 1, 2007 through May 31, 2007 9,137 $16.71 9,137 105,486 - --------------------------------------------------------------------------------------------------------------------------- June 1, 2007 through June 30, 2007 21,849 $16.21 21,849 83,637 - --------------------------------------------------------------------------------------------------------------------------- Total 32,951 $16.41 32,951 83,637 - --------------------------------------------------------------------------------------------------------------------------- (1) On July 18, 2006, the Company announced that its Board of Directors approved a repurchase program pursuant to which the Company may repurchase up to 208,036 shares of its common stock.
34 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 16, 2007 with the following matter being voted upon and with the indicated results: Election of Directors for terms expiring in 2010 Votes ----------------------- Nominee For Withheld - ------------------------------- --------- -------- Paul C. Downey 2,797,848 299,837 Mary Lynn D. Lenz 2,774,543 323,142 Majed Mouded, MD 2,978,888 118,797 William J. Piccerelli, CPA, CVA 2,798,146 299,539 David F. Westgate 2,989,996 107,689 ITEM 5 OTHER INFORMATION On August 9, 2007, the Company entered into letter agreements (the "Agreements") with Mary Lynn D. Lenz, President and Chief Executive Officer and Deborah A. McLaughlin, Executive Vice President and Chief Financial Officer/Chief Operations Officer (the "Executive Officers") that set forth the compensation programs to be implemented for the remainder of 2007 for the Executive Officers. Pursuant to the Agreements, the Company and the Executive Officers will enter into new defined contribution supplemental executive retirement plans (the "New SERPs") which will be credited with (1) one-time "catch-up" contributions in 2007 in the amount of $250,000 for Ms. Lenz and $50,000 for Ms. McLaughlin; and (2) annual contributions at year-end for 2007 and each year thereafter in an amount equal to 20% of the Executive Officers' base salary for the relevant year. Such amounts will be fully vested at all times and will be placed in rabbi trusts for the benefit of the Executive Officers. The "catch-up" contributions will be charged to compensation expense upon the execution of the New SERPs, and the anticipated annual contributions will be recognized as compensation expense on a straight-line basis during each relevant year. In the third quarter, the Company will record the "catch-up" contributions and nine months of expense for 2007. In the event of a change of control of the Company, each Executive Officer will receive an additional contribution of 60% of the Executive Officer's then current base salary, in addition to amounts already accrued under the New SERPs. ITEM 6 EXHIBITS Exhibits: See exhibit index. 35 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 14, 2007 /s/ Mary Lynn D. Lenz - ----------------------- ----------------------------------- (Date) Mary Lynn D. Lenz President Chief Executive Officer (Principal Executive Officer) August 14, 2007 /s/ Deborah A. McLaughlin - ----------------------- ----------------------------------- (Date) Deborah A. McLaughlin Executive Vice President Chief Financial Officer & Chief Operations Officer (Principal Financial and Accounting Officer) 36
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 Bancorp 10.1 Slade's Ferry Bancorp. 1996 Stock Option Plan, as amended (4) 10.2 Amended and Restated Supplemental Executive Retirement Agreement between Slade's Ferry Bancorp. and Manuel J. Tavares (5) 10.3 Supplemental Executive Retirement Agreement between Slade's Ferry Bancorp. (6) and Mary Lynn D. Lenz 10.4 Employment Agreement between Slade's Ferry Bancorp. and Mary Lynn D. Lenz (7) 10.5 Employment Agreement between Slade's Ferry Bancorp. and Deborah A. McLaughlin (8) 10.6 Employment Agreement between Slade's Ferry Bancorp. and Manuel J. Tavares (9) 10.7 Form Change of Control Agreement (10) 10.8 Severance Pay Plan (11) 10.9 Slade's Ferry Bancorp. 2004 Equity Incentive Plan (12) 10.10 Form of Amendment to Directors' Supplemental Retirement Program for Non-Employee Directors (13) 11.1 Statement Regarding Computation of Per Share Earnings 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 26, 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 8K filed with the Commission on July 18, 2007. (6) Incorporated by reference to Exhibit 10.10 to the Registrant's Form 10-Q/A for the quarter ended March 31, 2003. (7) Incorporated by reference to Exhibit 10.11 to the Registrant's Form 10-Q/A for the quarter ended June 30, 2004. (8) Incorporated by reference to Exhibit 10.7 to the Registrant's Form 10-Q/A for the quarter ended September 30, 2004. (9) Incorporated by reference to Exhibit 10.8 to the Registrant's Form 10-Q/A for the quarter ended September 30, 2004. (10) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on January 13, 2005. (11) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on January 14, 2005. (12) Incorporated by reference to Appendix C to the Registrant's Proxy Statement filed on April 9, 2004 (13) Incorporated by reference to the Registrant's Form 8-K filed with the Commission on December 22, 2006.
37 EX-11 2 ex11_67947.txt EXHIBIT 11.1 Exhibit 11.1 ------------ SLADE'S FERRY BANCORP. AND SUBSIDIARY QUARTERLY DATA (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30, 2007 2006 2007 2006 --------------------------- ------------------------- (In thousands, except per share date) Net income $ 792 $ 626 $ 1,665 $ 1,533 ========= ========= ========= ========= Average common shares outstanding 4,047,215 4,156,481 4,063,511 4,151,091 ========= ========= ========= ========= Basic earnings per share $ 0.20 $ 0.15 $ 0.41 $ 0.37 ========= ========= ========= ========= Average common shares outstanding 4,047,215 4,156,481 4,063,511 4,151,091 Net effect of dilutive stock options 3,144 14,129 3,833 17,180 --------- --------- --------- --------- Adjusted common shares outstanding 4,050,359 4,170,610 4,067,344 4,168,271 ========= ========= ========= ========= Diluted earnings per share $ 0.20 $ 0.15 $ 0.41 $ 0.37 ========= ========= ========= =========
38 EX-31 3 ex311_67947.txt EXHIBIT 31.1 Exhibit 31.1 ------------ CERTIFICATIONS I, Mary Lynn D. Lenz, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Slade's Ferry Bancorp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2007 /s/ Mary Lynn D. Lenz ----------------------- ------------------------------------ Mary Lynn D. Lenz President/Chief Executive Officer 39 EX-31 4 ex312_67947.txt EXHIBIT 31.2 Exhibit 31.2 ------------ CERTIFICATIONS I, Deborah A. McLaughlin, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Slade's Ferry Bancorp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15(d)-15(e)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial data; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 14, 2007 /s/ Deborah A. McLaughlin ----------------------- ------------------------------------ Deborah A. McLaughlin Executive Vice President Chief Financial Officer & Chief Operations Officer 40 EX-32 5 ex321_67947.txt EXHIBIT 32.1 Exhibit 32.1 ------------ STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, Mary Lynn D. Lenz, is the President and Chief Executive Officer of Slade's Ferry Bancorp. (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (the "Report"). By execution of this statement, I certify that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. DATE: August 14, 2007 /s/ Mary Lynn D. Lenz ----------------------- ------------------------------------ Mary Lynn D. Lenz President/Chief Executive Officer 41 EX-32 6 ex322_67947.txt EXHIBIT 32.2 Exhibit 32.2 ------------ STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, Deborah A. McLaughlin, is the Chief Financial Officer and Chief Operating Officer of Slade's Ferry Bancorp. (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (the "Report"). By execution of this statement, I certify that: 1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. DATE: August 14, 2007 /s/ Deborah A. McLaughlin ----------------------- ------------------------------------ Deborah A. McLaughlin Executive Vice President Chief Financial Officer & Chief Operations Officer 42 -----END PRIVACY-ENHANCED MESSAGE-----