UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30, 1997
----------------------
Commission file number 33-47248
------------
SLADE'S FERRY BANCORP
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3061936
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
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)
Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--------- ---------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common stock ($.01 par value) 3,222,567.753 shares as of September 30, 1997.
- ----------------------------------------------------------------------------
Traditional Small Business Disclosure Format:
Yes X No
--------- ---------
PART I
ITEM 1
FINANCIAL INFORMATION
- ---------------------
SLADE'S FERRY BANCORP
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
AS OF
<TABLE>
<CAPTION>
(In Hundreds) September 30, 1997 December 31, 1996
---------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 11,951,115 $ 11,128,724
Federal funds sold 1,000,000 13,000,000
Interest bearing time deposits 106,688 149,598
Investment securities(1) 20,816,211 19,586,678
Securities available for sale(2) 39,461,881 37,255,163
Federal Home Loan Bank stock 890,600 890,600
Loans (net) 208,817,635 194,934,845
Premises and equipment 5,686,501 5,970,874
Other real estate owned 245,241 307,591
Accrued interest receivable 2,003,612 1,853,783
Goodwill 3,137,268 3,307,368
Other assets 2,699,650 2,957,251
----------------------------------
TOTAL ASSETS $296,816,402 $291,342,475
==================================
LIABILITIES & STOCKHOLDERS' EQUITY:
Deposits $267,565,028 $267,791,009
Short term borrowings 1,319,690 1,200,000
Notes payable 975,000 1,042,626
Other liabilities 1,284,184 1,461,515
----------------------------------
TOTAL LIABILITIES 271,143,902 271,495,150
STOCKHOLDERS' EQUITY:
Common stock 32,226 27,891
Paid in capital 18,768,666 14,607,299
Retained earnings 6,816,311 5,214,763
Net unrealized gain (loss) on investments
in available for sale securities 55,297 (2,628)
----------------------------------
TOTAL STOCKHOLDERS' EQUITY 25,672,500 19,847,325
----------------------------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $296,816,402 $291,342,475
==================================
- --------------------
<F1> Investment securities are to be held to maturity and have a fair market
value of $20,941,657 as of September 30, 1997 and $19,544,811 as of
December 31, 1996.
<F2> Securities classified as Available for Sale are stated at fair value
with any unrealized gains or losses reflected as an adjustment in
Stockholders' Equity.
</TABLE>
CONSOLIDATED STATEMENT OF INCOME AND EXPENSE
(UNAUDITED)
9 MONTHS ENDING SEPTEMBER 30,
<TABLE>
<CAPTION>
(In Hundreds Except Per Share Data) 1997 1996
----------------------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $14,105,859 $11,113,571
Interest and dividends on investments 2,655,885 2,168,643
Other interest 497,129 568,837
----------------------------
Total interest and dividend income 17,258,873 13,851,051
----------------------------
INTEREST EXPENSE:
Interest on deposits 7,661,261 6,478,735
Interest on other borrowed funds 108,962 46,812
----------------------------
Total interest expense 7,770,223 6,525,547
----------------------------
Net interest and dividend income 9,488,650 7,325,504
----------------------------
PROVISION FOR LOAN LOSSES 450,000 400,000
Net interest and dividend income
after provision for loan losses 9,038,650 6,925,504
----------------------------
OTHER INCOME:
Service charges on deposit accounts 707,690 641,830
Security gains, net 312,865 101,248
Other income 227,658 201,591
----------------------------
Total other income 1,248,213 944,669
----------------------------
OTHER EXPENSE:
Salaries and employee benefits 4,072,061 3,136,818
Occupancy expense 501,282 405,079
Equipment expense 467,761 342,249
Loss (gain) on sale of other real estate owned 27,166 (657)
Writedown of other real estate owned 6,449 30,000
Other expense 1,768,685 1,302,894
----------------------------
Total other expense 6,843,404 5,216,383
----------------------------
Income before income taxes 3,443,459 2,653,790
Income taxes 1,380,503 1,032,400
----------------------------
NET INCOME $ 2,062,956 $ 1,621,390
============================
Earnings per share $ 0.70 $ 0.59
============================
Average shares outstanding 2,966,927 2,757,051
============================
</TABLE>
CONSOLIDATED STATEMENT OF INCOME AND EXPENSE
(UNAUDITED)
3 MONTHS ENDING SEPTEMBER 30,
<TABLE>
<CAPTION>
(In Hundreds Except Per Share Data) 1997 1996
------------------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $4,972,912 $4,138,553
Interest and dividends on investments 909,841 637,218
Other interest 130,667 202,807
------------------------
Total interest and dividend income 6,013,420 4,978,578
------------------------
INTEREST EXPENSE:
Interest on deposits 2,610,050 2,250,774
Interest on other borrowed funds 34,971 23,060
------------------------
Total interest expense 2,645,021 2,273,834
------------------------
Net interest and dividend income 3,368,399 2,704,744
------------------------
PROVISION FOR LOAN LOSSES 150,000 100,000
Net interest and dividend income
after provision for loan losses 3,218,399 2,604,744
------------------------
OTHER INCOME:
Service charges on deposit accounts 227,863 226,878
Security gains, net 83,315 8,688
Other income 60,355 67,587
------------------------
Total other income 371,533 303,153
------------------------
OTHER EXPENSE:
Salaries and employee benefits 1,382,167 1,159,356
Occupancy expense 163,310 151,064
Equipment expense 156,425 133,482
Loss on sale of other real estate owned 33,491 0
Writedown of other real estate owned 6,449 0
Other expense 633,290 535,423
------------------------
Total other expense 2,375,132 1,979,325
------------------------
Income before income taxes 1,214,800 928,572
Income taxes 486,385 381,736
------------------------
NET INCOME $ 728,415 $ 546,836
========================
Earnings per share $ 0.23 $ 0.20
========================
Average shares outstanding 3,217,155 2,768,750
========================
</TABLE>
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
Reconciliation of net income to net cash used in operating activities: 1997 1996
-----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,062,956 $ 1,621,390
Adjustments to reconcile net income to net cash used in
operating activities:
Accretion, net of amortization of fair market value adjustments (4,288) 0
Amortization of goodwill 170,100 40,000
Gain on sales of fixed assets (4,000) 0
Depreciation and amortization 485,015 337,711
Securities available for sale gains, net (312,865) (101,248)
Provision for loan losses 450,000 400,000
Decrease in taxes payable (8,389) (640,292)
(Increase) decrease in interest receivable (149,829) 925,292
Decrease in interest payable (14,291) (53,124)
Increase in accrued expenses 210,216 83,518
Increase in prepaid expenses (74,588) (12,832)
Accretion of securities, net of amortization (145,812) (116,354)
Accretion of securities available for sale, net of amortization (33,510) (200,556)
Loss (gain) on sale of other real estate owned 27,166 (657)
Writedown of other real estate owned 19,739 30,000
Change in unearned income 52,253 (5,183)
Decrease in other assets 295,255 274,772
Increase (decrease) in other liabilities (377,518) 72,742
-----------------------------
Net cash provided by operating activities $ 2,647,610 $ 2,655,179
-----------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash and cash equivalents used in acquisition, net of cash acquired 0 11,419,869
Purchases of securities available for sale (10,405,473) (4,577,091)
Maturities of securities available for sale 7,258,379 10,482,738
Sales of securities available for sale 1,389,999 825,091
Proceeds from sale of other real estate owned 302,683 254,124
Proceeds from maturities of investment securities 11,517,664 15,777,672
Purchases of investment securities (12,601,384) (10,315,755)
Net increase in loans (14,711,344) (14,764,692)
Capital expenditures (200,642) (756,527)
Proceeds from sales of fixed assets 4,000 0
Purchases of Federal Home Loan Bank Stock 0 (409,400)
Recoveries of previously charged-off loans 47,612 408,942
Increase in time deposits 0 6,688
Maturities of interest bearing time deposits 42,910 0
-----------------------------
Net cash provided by (used in) investing activities $(17,355,596) $ 8,351,659
-----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock $ 4,165,702 $ 186,591
Net increase (decrease) in demand deposits, NOW,
money market and savings accounts (7,391,063) 3,671,259
Net increase (decrease) in time deposits 7,165,082 (1,239,101)
Net increase in short-term borrowing 119,690 674,668
Dividends paid (461,408) (334,855)
Decrease in notes payable (67,626) (209,968)
-----------------------------
Net cash provided by (used in) financing activities 3,530,377 2,748,594
-----------------------------
Net increase (decrease) in cash and cash equivalents (11,177,609) 13,755,432
Cash and cash equivalents at beginning of period 24,128,724 18,539,970
-----------------------------
Cash and cash equivalents at end of period $ 12,951,115 $ 32,295,402
=============================
SUPPLEMENTAL DISCLOSURES:
Loans originating from sales of Other Real Estate Owned $ 93,600 $ 110,000
Interest paid $ 7,784,514 $ 6,525,547
Income taxes paid $ 1,388,892 $ 1,090,833
Loans transferred to Other Real Estate Owned $ 287,239 $ 37,000
In 1996 the Company purchased all of the Common Stock
of Fairbank, Inc. for $8,575,284. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired $ 65,141,843
Cash paid for the common stock 8,575,284
------------
Liabilities assumed $ 56,566,559
============
</TABLE>
SLADE'S FERRY BANCORP AND SUBSIDIARY, SLADE'S FERRY TRUST COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1997
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-QSB and,
accordingly, do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of the management of Slade's Ferry Bancorp, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine months
ended September 30, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997.
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 at year end 1996.
The consolidated financial statements of Slade's Ferry Bancorp include its
wholly-owned subsidiary, Slade's Ferry Trust Company, and its subsidiaries,
the Slade's Ferry Realty Trust and the Slade's Ferry Securities Corporation.
All significant intercompany balances have been eliminated.
ITEM 2
Management's Discussion and Analysis
- ------------------------------------
Financial Condition
- -------------------
Assets at September 30, 1997 were up by $5.5 Million to $296.8 Million from
$291.3 Million reported on December 31, 1996. The increase is predominately
attributed to new capital of $3.9 Million that was acquired through a public
offering of the Company's common stock in June 1997, and nine months
earnings totaling $2.1 Million. The loan portfolio increased significantly
from $198.9 Million to $213.1 Million on September 30, 1997. Growth in
loans is primarily in commercial real estate lending, contained within the
Bank's community reinvestment area of southeastern Massachusetts. Loans are
also granted to nearby communities in Rhode Island.
Investment securities and securities Available for Sale, as a total,
increased to $60.3 Million at September 30, 1997 from $56.8 Million at year
end 1996. Funding for the growth in loans and the increase in investments
was provided primarily by an accumulation of daily liquidity from the
Federal Funds Sold category and the net proceeds derived from the public
offering.
Deposit levels at September 30, 1997 remained relatively the same as year
end 1996, despite competitive rates offered by the Bank on interest bearing
accounts. However, the number of accounts being serviced continues to
increase throughout the branch network.
At September 30, 1997, securities classified as Available for Sale had net
unrealized gains of $55,297 as a result of current market conditions,
compared to net unrealized losses of $2,628 reported on December 31, 1996.
Securities in the Available for Sale category may be sold if it becomes
desirable to improve liquidity, or when management feels it would be
appropriate to improve interest rate risk by selling securities and
reinvesting the proceeds into higher yielding investments.
Investment Securities are securities that the Company will hold to maturity
and are carried at amortized cost on the balance sheet, and are summarized
as follows as of September 30, 1997.
<TABLE>
<CAPTION>
Gross
Gross Unrealized
Amortized Unrealized Holding
Cost Basis Holding Gains Losses Fair Value
---------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Debt securities issued by the U. S.
Treasury and other U. S. Govern-
ment corporations and agencies $13,305 $ 51 $ 2 $13,354
Debt securities issued by states of the
United States and political
subdivisions of the states 7,276 144 70 7,350
Mortgage-backed securities 234 3 237
Other debt securities 1 -- -- 1
------------------------------------------------
$20,816 $198 $72 $20,942
================================================
</TABLE>
Investments in Available for Sale securities are carried at fair value on
the balance sheet and are summarized as follows as of September 30, 1997.
<TABLE>
<CAPTION>
Gross
Gross Unrealized
Amortized Unrealized Holding
Cost Basis Holding Gains Losses Fair Value
---------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Debt securities issued by the U. S.
Treasury and other U. S. Govern-
ment corporations and agencies $31,529 $181 $257 $31,453
Marketable equity securities 1,676 214 45 1,845
Mortgage-backed securities 5,945 5 23 5,927
Asset-backed securities 237 -- 237
------------------------------------------------
$39,387 $400 $325 $39,462
================================================
</TABLE>
<TABLE>
<S> <C>
Addition to Stockholders' Equity:
(In Whole Dollars)
Unrealized gain on Available for Sale Securities $75,296
Less tax effect 19,999
-------
Net unrealized gain on Available for Sale Securities $55,297
=======
</TABLE>
INFORMATION WITH RESPECT TO NONACCRUAL AND PAST DUE LOANS
AT SEPTEMBER 30, 1997 AND 1996 AND DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
(Dollars in Thousands)
At September 30 At December 31
--------------- ----------------
1997 1996 1996 1995
-----------------------------------
<S> <C> <C> <C> <C>
Nonaccrual Loans $4,719 $4,518 $4,352 $2,695
Loans 90 days or more past due and still accruing 707 283 112 23
Real estate acquired by foreclosure
or substantively repossessed 245 550 308 633
Percentage of nonaccrual loans to total loans 2.21% 2.27% 2.19% 1.78%
Percentage of nonaccrual loans and real estate
acquired by foreclosure or substantively
repossessed to total assets 1.67% 1.72% 1.88% 1.42%
Percentage of allowance for possible loan losses
to nonaccrual loans 76.48% 78.35% 77.07% 92.69%
</TABLE>
The $4.7 Million in nonaccrual loans consists of $4.5 Million of real estate
mortgages and $.2 Million attributed to commercial loans. Of the total
nonaccrual loans outstanding, $269,158 are restructured at September 30,
1997.
The Company's nonperforming assets as a total increased to $5.7 Million at
September 30, 1997 from $4.8 Million reported at year end 1996. Nonaccrual
loans, loans past due 90 days or more but still accruing, and real estate
acquired by foreclosure or substantively repossessed are considered
nonperforming assets by the Company. Contributing to this increase is a
$1.6 Million commercial real estate loan that was classified as nonaccrual
in March 1997. The borrower continues to make payments which are being
applied to principal, however, management will retain the loan in the
nonaccrual status until the loan becomes current. The real estate
collateralizing this loan has an appraised value of $2.8 Million obtained in
July 1997.
The net increase in the nonaccrual category from $4.4 Million at December
31, 1996 to $4.7 Million on September 30, 1997 is a combination of $2.4
Million loans placed into the nonaccrual status which includes the
aforementioned loan, offset by $2.1 Million representing payments, loans
resolved or charged off, and acquisitions of properties through the
foreclosure process.
Loans 90 days or more past due but still accruing increased by $425,000 to
$707,000 at September 30, 1997 when compared to $283,000 reported at
September 30, 1996. This category consists of $673,000 real estate loans
and $34,000 of personal and business loans. Management does not attribute
the increase to any negative economic occurrence. Management believes that
collection in full is imminent and does not foresee any potential losses in
this category due to the excess value of collateral securing these loans
compared to their outstanding balances.
Real estate acquired through foreclosure or substantively repossessed is
comprised of three separate parcels totaling $245,241. Purchase and sales
agreements have been received on two parcels, and it is anticipated that
final closings will occur by mid November 1997.
The percentage of nonaccrual loans to total loans increased from 2.19%
reported at year end 1996 to 2.21% at September 30, 1997. The increase is
associated with the aforementioned loan of $1.6 Million classified as
nonaccrual in March 1997. The percentage of nonaccrual loans and real
estate acquired through foreclosure or substantively repossessed to total
assets decreased to 1.67% from 1.88% reported at year end, primarily due to
an increase in assets. The percentage of the Allowance for Possible Loan
Losses to Nonaccrual Loans decreased slightly to 76% from 77% at year end
1996. The Company did not make any special provisions to the allowance for
the aforementioned loan due to the excess in collateral values of
approximately 43%.
INFORMATION WITH RESPECT TO NONACCRUAL AND RESTRUCTURED LOANS
AT SEPTEMBER 30, 1997 AND 1996 AND DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
(Dollars in Thousands)
At September 30 At December 31
---------------------------------
1997 1996 1996 1995
---------------------------------
<S> <C> <C> <C> <C>
Nonaccrual Loans $4,719 $4,518 $4,352 $2,695
Interest income that would have been
recorded under original terms 308 320 361 243
Interest income recorded during the period 39 71 62 21
The Company stops accruing interest on a loan once it becomes past due 90
days or more unless there is adequate collateral and the financial condition
of the borrower is sufficient. When a loan is placed on a nonaccrual
status, all previously accrued but unpaid interest is reversed and charged
against current income. Interest is thereafter recognized only when
payments are received and the loan becomes current.
Loans in the nonaccrual category will remain until the possibility of
collection no longer exists, the loan is paid off or becomes current. When
a loan is determined to be uncollectible, it is then charged off against the
Allowance for Possible Loan Losses.
Statement of Financial Accounting Standards No. 114 "Accounting by Creditors
for Impairment of a Loan" was adopted by the Company as of January 1, 1995.
Statement 114 applies to all loans except large groups of smaller-balance
homogeneous loans that are collectively evaluated for impairment, loans
measured at fair value or at a lower of cost or fair value, leases, and debt
securities as defined in Statement 115. Statement 114 requires that
impaired loans be valued at the present value of expected future cash flows
discounted at the loan's effective interest rate or as a practical
expedient, at the loan's observable market value of the collateral if the
loan is collateral dependent. Smaller balance homogeneous loans are
considered by the Company to include consumer installment loans and credit
card loans.
Included in the $4,719,252 in nonaccrual loans are $4,118,129 which the
Company has determined to be impaired, for which $1,239,333 have a related
allowance for credit losses of $531,726 and $2,878,796 have no related
allowance for credit losses.
The Company has $200,000 of potential problem loans for which payments are
presently current. However, the borrowers are experiencing financial
difficulty. These loans are subject to management's attention and their
classification is reviewed monthly. If these loans should become
nonperforming, the effect will be immaterial, due to the asset values of
their collateral.
There were no other loans classified for regulatory purposes at September
30, 1997 that management reasonably expects will materially impact future
operating results, liquidity or capital resources.
ANALYSIS OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
</TABLE>
<TABLE>
<CAPTION>
(Dollars in Thousands)
Six Months Years Ended
At September 30 At December 31
--------------- ---------------
1997 1996 1996 1995
---------------------------------
<S> <C> <C> <C> <C>
Balance at January 1 $3,354 $2,498 $2,498 $2,306
Charge Offs:
Commercial 40 73 276 184
Real Estate - Construction -- -- -- --
Real Estate - Mortgage 147 4 4 79
Installment/Consumer 56 145 159 134
---------------------------------
243 222 439 397
Recoveries:
Commercial 12 57 332 1
Real Estate - Construction -- -- -- --
Real Estate - Mortgage 1 309 -- 16
Installment/Consumer 35 42 107 22
---------------------------------
48 408 439 39
---------------------------------
Net Charge Offs 195 (186) 0 358
---------------------------------
Additions Charged to Operations 450 400 400 550
Allowance Attributable to Acquisition -- 456 456 --
Balance at End of Period $3,609 $3,540 $3,354 $2,498
=================================
Ratio of Net Charge Offs to
Average Loans Outstanding .09% (0.11%) 0.00% 0.25%
</TABLE>
The Allowance for Possible Loan Losses at September 30, 1997 was $3,609,073,
compared to $3,354,311 at year end 1996. The Allowance for Possible Loan
Losses as a percent of outstanding loans was 1.69% at September 30, 1997 and
1.69% at December 31, 1996.
The Bank provided $400,000 in 1996, $550,000 in 1995, and $450,000 as of
September 30, 1997 to the Allowance for Possible Loan Losses. Loans charged
off were $439,229 in 1996, $396,639 in 1995, and $242,850 as of September
30, 1997. Recoveries on loans previously charged off were $439,788 in 1996,
$39,553 in 1995, and $47,612 as of September 30, 1997. Management believes
that the Allowance for Loan Losses of $3,609,073 is adequate to absorb any
losses in the foreseeable future, due to the Bank's strong collateral
position and the current asset quality.
The level of the Allowance for Possible Loan Losses is evaluated by
management and encompasses several factors, which include but are not
limited to, recent trends in the nonperforming loans, the adequacy of the
assets which collateralize the nonperforming loans, current economic
conditions in the market area, and various other external and internal
factors.
This table shows an allocation of the allowance for loan losses as of the
end of each of the periods indicated.
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996 December 31, 1995
---------------------- --------------------- ---------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Each Each Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
----------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Domestic:
Commercial $ 953(1) 18.31% $ 789(1) 15.70% $ 597(1) 11.35%
Real estate - Construction 32 2.54% 41 3.46% 40 4.55%
Real estate - mortgage 2,259(2) 76.03% 2,150(2) 77.42% 1,581(2) 80.04%
Consumer(3) 365(4) 3.12% 374(4) 3.42% 280(4) 4.06%
--------------------------------------------------------------------
$3,609 100.00% $3,354 100.00% $2,498 100.00%
====================================================================
- --------------------
<F1> Includes the following amounts specifically reserved for impaired
loans: $.00 as of September 30, 1997, $0.00 as of December 31, 1996 and
$214,542 as of December 31, 1995 as required by Financial Accounting
Standard No. 114, Accounting for Impairment of Loans.
<F2> Includes the following amounts specifically reserved for impaired
loans: $527,548 as of September 30, 1997, $838,290 as of December 31,
1996 and $240,500 as of December 31, 1995 as required by Financial
Accounting Standard No. 114, Accounting for Impairment of Loans.
<F3> Includes consumer, obligations of states and political subdivisions and
other.
<F4> Includes the following amounts specifically reserved for impaired
loans: $4,178 as of September 30, 1997, $0.00 as of December 31, 1996
and $0.00 as of December 31, 1995 as required by Financial Accounting
Standard No. 114, Accounting for Impairment of Loans.
</TABLE>
The loan portfolio's largest segment of loans is commercial real estate
loans, which represent 52% of gross loans. Residential real estate, which
is the second largest segment of the loan portfolio, represents 24% of gross
loans. The Company requires a loan to value ratio of 80% in both commercial
and residential mortgages. These mortgages are secured by real properties
which have a readily ascertainable appraised value.
Generally, commercial real estate loans have a higher degree of credit risk
than residential real estate loans because they depend primarily on the
success of the business. When granting these loans, the Company evaluates
the financial statements of the borrower(s), the location of the real
estate, the quality of management, and general economic and competitive
conditions. When granting a residential mortgage, the Company reviews the
borrower(s) repayment history on past debts, and assesses the borrower(s)
ability to meet existing obligations and payments on the proposed loans.
Commercial loans consist of loans predominantly collateralized by inventory,
furniture and fixtures, and accounts receivable. In assessing the
collateral for this type of loan, management applies a 40% liquidation value
to inventories, 25% to furniture, fixtures and equipment; and 60% to
accounts receivable. Commercial loans represent 18.3% of the loan
portfolio.
Consumer loans are generally unsecured credits and represent 3% of the total
loan portfolio. These loans have a higher degree of risk than residential
mortgage loans. The underlying collateral of a secured consumer loan tends
to depreciate in value. Consumer loans are typically made based on the
borrower's ability to repay the loan through continued financial stability.
The Company endeavors to minimize risk by reviewing the borrower's repayment
history on past debts, and assessing the borrower's ability to meet existing
obligations on the proposed loans.
The allocation of the Allowance for Loan Losses is based on management's
judgement of potential losses in the respective portfolios. While
management has allocated reserves to various portfolio segments, the
Allowance is general in nature and is available for the portfolio in its
entirety.
Results of Operations
- ---------------------
Income and expenses during the first nine months of 1997 compared to the
same period of the previous year reflect certain significant variances
primarily due to the acquisition of the National Bank of Fairhaven in the
third quarter of 1996.
Net interest income increased by $2,163,146 to $9,488,650 on September 30,
1997, when compared to $7,325,504 earned during the same period in 1996.
Interest earned increased by $3,407,822 during the nine month period, mostly
due to the acquired loan and investment portfolios, as well as new loan
originations throughout 1997. This increase in interest income was offset
by an increase in interest expense of $1,244,676 due to a larger deposit
base, primarily attributed to deposits assumed through the merger.
The Provision for Loan Losses is a charge against earnings, which in turn
funds the Allowance for Possible Loan Losses. The Company's provision for
the nine months ending September 30, 1997 was $450,000. During the same
period in the prior year, the provision was $400,000.
Total Other Income increased by $303,544, from $944,669 as of September 30,
1996 to $1,248,213 as of September 30, 1997. Service charges on deposit
accounts, the largest component of Other Income, increased by $65,860, due
to the expansion of our customer base into the Fairhaven and New Bedford
communities. Also, our new drive-up facility at the Brayton Avenue office
continues to attract new account relationships. As a result of favorable
market conditions, the Bank sold various marketable equity securities that
had appreciated in value. Realized gains on the sale of these securities
for the nine months amounted to $312,865, compared to gains of $101,248
realized during the same nine months of the prior year. The market trends
of these types of securities are monitored very closely and acted upon when
management feels it is advantageous to do so. Other income reflected an
increase of $26,067 of which $22,082 was derived from the rental of safe
deposit boxes acquired through the merger, $10,131 of interest earned on
escrowed funds during the stock tendering process affiliated with the
acquisition of the National Bank of Fairhaven, and the remaining decrease of
$6,146 was attributed to a gain on the sale of an asset recorded in 1996,
with no asset sales in 1997.
Total Other Expense increased by $1,627,021 for the first nine months in
1997 to $6,843,404 from $5,216,383 reported for the same period in 1996.
Salaries and employee benefits, which are the largest component of Other
Expense, increased by $935,243 due to general wage adjustments, increases in
employee benefits and the retention of 29 officers and employees from the
National Bank of Fairhaven who are now permanent employees of Slade's Ferry
Trust Company.
Occupancy and equipment expense combined increased by $221,715 due to
additional depreciation expense attributed to the new teller equipment, new
drive-up facility at the Brayton Avenue office, and fixed assets acquired
from the National Bank of Fairhaven. In addition, lease expense also
increased due to the facilities rented at the New Bedford office. The Bank
also realized a loss of $27,166 resulting from the sale of Other Real Estate
Owned during the current period, compared to a gain of $657 in the previous
year. Although properties in Other Real Estate Owned have been reduced, the
Bank had to write down the value of one property to fair market value by
$6,449 in the current period, compared to a $30,000 writedown in the
previous year.
The following table sets forth the components of the line item Other
Expense, which reflects an increase of $98,000 for the three month period
ending September 30, 1997 and an increase of $466,000 for the first nine
months in 1997.
<TABLE>
<CAPTION>
Third Quarter Nine Months
-------------------- -----------------------
1997 1996 Change 1997 1996 Change
------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Amortization of Goodwill $ 57 $ 40 $ 17 $ 170 $ 40 $130
Advertising & Public Relations 94 107 (13) 257 184 73
Stationery & Supplies 69 57 12 245 169 76
Communications 66 63 3 203 172 31
FDIC Insurance Premiums 28 5 23 53 6 47
Professional Fees &
Other Services 185 143 42 500 415 85
Other 134 120 14 341 317 24
-----------------------------------------------
Other Expense $633 $535 $ 98 $1,769 $1,303 $466
===============================================
</TABLE>
Amortization of Goodwill is a new expense item resulting from the
acquisition of the National Bank of Fairhaven in August, 1996. This
goodwill is the premium paid above the book value to the stockholders of
Fairbank Inc., parent company of the National Bank of Fairhaven. Goodwill
is to be amortized over a fifteen year period. The increase in Advertising
and Public Relations expense during the first nine months of 1997 when
compared to the same period of the previous year is attributed to promoting
the Slade's Ferry Bank name in the Greater New Bedford market area.
Additional expense for stationery and supplies is due to the increase in
inventory necessary to maintain the branches acquired. The increase in
Communications Expense is a result of the larger customer base now being
serviced due to the acquisition of the National Bank of Fairhaven. FDIC
Insurance increased primarily due to the increase in our deposit base due to
the merger, and a change in the Bank's risk classification used to determine
the deposit insurance assessment rate.
Professional and Other Service fees was up for the nine month period ending
September 30, 1997 primarily due to increases in legal fees, collection and
repossession expense and other expenses associated with outside professional
services. Other Expense has increased through normal business transactions
due to the increased asset base after the acquisition.
Income before income taxes for the nine month period ending September 30,
1997 was $3,443,459, an increase of $789,669 compared to $2,653,790 recorded
for the same period in the prior year. Applicable income taxes for the nine
month period ending September 30, 1997 was $1,380,503, an increase of
$348,103 when compared to $1,032,400 expensed in the prior year. This
resulted in net earnings of $2,062,956 or $0.70 per share for the first nine
months of 1997. Net earnings for the same period in 1996 were $1,621,390 or
$0.59 per share.
The results of operation for the third quarter in 1997 indicates that net
interest income was up by $663,655 to $3,368,399 from $2,704,744 earned
during the third quarter of 1996. The Provision for Loan Losses was
increased to $150,000 during the current year's third quarter, from the
$100,000 provision booked during the same period in the prior year.
Management increased its provision based on the current assessment of the
Allowance for Possible Loan Losses.
Other Income increased by $68,380 for the three months ending September 30,
1997 primarily attributable to realized gains on the sale of equity
securities due to market conditions.
Total Other Expenses for the third quarter in 1997 were $2,375,132, up by
$395,807 from $1,979,325 reported for the same quarter in 1996. Salaries
and benefits, the largest component of this category, were up by $222,811
due to the additional staff acquired from the National Bank of Fairhaven and
general wage adjustments. Occupancy and equipment expense combined
increased by $35,189 for the third quarter in 1997, when compared to the
same period in 1996. This increase is due to additional depreciation
expense, lease payments, and general repairs and maintenance. In the third
quarter of 1997, the Bank incurred a loss of $33,491 on the sale of two
Other Real Estate Owned (OREO) properties, whereas no gains or losses were
realized in the same quarter of 1996.
Writedown on OREO properties in the third quarter of 1997 totaled $6,449,
compared to no writedown in the same quarter of 1996. The Bank appraises
OREO properties annually, and if the appraisal is less than the book value,
a writedown is incurred.
The line item Other Expense for the third quarter in 1997 increased by
$97,867 to $633,290, from $535,423 reported for the same period in the
previous year. Amortization of Goodwill is a new item due to the premium
paid above book value of Fairbank, Inc. Goodwill expense was $57,000,
representing three months of amortization, whereas the $40,000 in 1996
represented only two months. Advertising and Public Relations expense
decreased by $13,000 due to the additional expenses in the third quarter of
1996 attributed to promoting the Slade's Ferry Bank name in the Greater New
Bedford area as a result of the merger on August 26, 1996. Other items
showing increases were stationery and supplies, communication expense, FDIC
Insurance premiums, and other various expenses totaling $52,000. These
increases were attributed to the additional branches and larger customer
base. Professional Fees and Other Service Fees were up $42,000 for the
three months ending September 30, 1997 due to increased legal and collection
and repossession expenses.
Income before taxes for the third quarter in 1997 was up by $286,228 to
$1,214,800 from $928,572 reported for the same period in the prior year.
Applicable income taxes increased by $104,649 to $486,385 when compared to
$381,736 reported in the prior year.
The net income for the three month period ending September 30, 1997 was
$728,415 or $0.23 per share, up by $181,579 or $0.03 per share, when
compared to $546,836 or $0.20 per share earned in the same period in 1996.
Liquidity
- ---------
The Company's principal sources of funds are customer deposits, loan
amortization, loan payoffs, and the maturities of investment securities.
Through these sources, funds are provided for customer withdrawals from
their deposit accounts, loan originations, draw-downs on loan commitments,
acquisition of investment securities and other normal business activities.
Investors' capital also provides a source of funding.
The largest source of funds is provided by depositors. The largest
component of the Company's deposit base is reflected in the Time Deposit
category. The Company does not participate in brokered deposits. Deposits
are obtained from consumers and commercial customers within the Bank's
community reinvestment area, being Bristol County, Massachusetts and several
abutting towns in Rhode Island.
The Company also has the ability to borrow funds from correspondent banks,
the Federal Home Loan Bank, as well as the Federal Reserve Bank of Boston by
pledging various investment securities as collateral. The Company did not
have the need to borrow in either 1996 or the current year. Tax payments
made by our customers which are owed to the Federal Reserve Bank Treasury
Tax and Loan account are classified as Short Term Borrowings. The Notes
Payable represents a note due Fleet Bank. The note is attributable to
Fairbank, Inc. which was assumed at the time of the merger and has a final
maturity in November, 1999. Due to the applicable prepayment fees, it is
advantageous for the Bank to continue with the applicable terms of the note.
Excess available funds are invested on a daily basis as Federal Funds Sold
and can be withdrawn daily. The Bank attempts through its cash management
strategies to maintain a minimum level of Federal Funds Sold to further
enhance its liquidity.
Liquidity represents the ability of the Bank to meet its funding
requirements. In assessing the appropriate level of liquidity, the Bank
considers deposit levels, lending requirements, and investment maturities in
light of prevailing economic conditions. Through this assessment, the Bank
manages its liquidity level to optimize earnings and respond to fluctuations
in customer borrowing needs.
At September 30, 1997, the Bank's liquidity ratio stood at 23.0% as compared
to 26.5% at December 31, 1996. The liquidity ratio is determined by
dividing the Bank's short term assets (cash and due from banks, interest
bearing deposits due from other banks, securities, and federal funds sold,
net of pledged securities and reserve requirements) by the Bank's total
deposits. Management believes the Bank's liquidity to be adequate to meet
the current and presently foreseeable needs of the Bank.
The comparison of cash flows for nine months ending September 30, 1997 and
1996 indicates cash flows, as a result of operating activities, remained
relatively the same showing a decrease of $7,569 during the current period
compared to the same period in 1996.
Cash flows from investing activities show an increase in cash used of
$25,707,255 when compared to 1996. Purchases of securities as of September
30, 1997 increased by $8,114,011 when compared to the same six months in
1996 and maturities of securities decreased by $7,484,367. The remaining
change in cash used in investing activities is represented by the net
cash provided by the acquisition of the National Bank of Fairhaven amounting
to $11,419,869 as of September 30, 1996.
Cash provided by financing activities for the nine months in 1997, when
compared to the same period in 1996, increased by $781,783. Proceeds from
issuance of stock increased by $3,979,111 mainly attributable to the
offering that was in effect from mid May to mid June 1997, combined with
transactions resulting from the Dividend Reinvestment Plan. Also adding to
the increase in cash flows from financing activities was an increase in time
deposits of $8,404,183 offset by a decrease in demand deposits, NOWs, Money
Market and savings accounts of $11,062,322.
Capital
- -------
At September 30, 1997, the Company had total capital of $25,672,500. This
represents an increase of $5,825,175 from $19,847,325 reported on December
31, 1996. The increase in capital was a combination of several factors.
Additions consisted of $3,866,171 of the net proceeds derived from the
recent public offering of the Company's common stock and nine months
earnings of $2,062,956. Other additions to capital were transactions
originating through the Dividend Reinvestment Program whereby 10,477.491
shares were issued for cash contributions of $108,310 and 19,988.125 shares
were issued for $191,221 in lieu of cash dividend payments. These additions
were offset by dividends paid of $461,408.
Also, affecting capital is the adjustment for net unrealized gains or
losses, net of taxes, on securities classified as Available for Sale. On
December 31, 1996 the Available for Sale portfolio had unrealized losses,
net of taxes, of $2,628, and on September 30, 1997, as a result of current
market values, the portfolio reflects unrealized gains, net of taxes, of
$55,297 which is an adjustment from capital.
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. At December 31, 1993, the minimum regulatory
capital level for Risk Based Capital was 4.0% for Tier 1 capital, 8.0% for
total capital, and 4.0% for Leverage Capital (Tier 1 as a percentage of
total assets).
At September 30, 1997 the actual Risk Based Capital of the Bank was
$20,812,000 for Tier 1 Capital, exceeding the minimum requirements of
$8,501,280 by $12,310,720. Total Capital of $23,480,000 exceeded the
minimum requirements of $17,002,560 by $6,477,440 and Leverage Capital of
$20,812,000 exceeded the minimum requirements of $11,835,520 by $8,976,480.
The table below illustrates the capital ratios of the Company and the Bank
on September 30, 1997 and at December 31, 1996.
<TABLE>
<CAPTION>
Well September 30, 1997 December 31, 1996
Capitalized ------------------ -----------------
Requirement Bancorp Bank Bancorp Bank
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Capital (to Risk
Weighted Assets) 10% 11.82% 11.05% 9.56% 9.51%
Tier I Capital (to Risk
Weighted Assets) 6% 10.57% 9.79% 8.27% 8.22%
Leverage Capital (to
Average Assets) 5% 7.59% 7.03% 5.70% 5.66%
</TABLE>
In addition to the "minimum" capital requirements, "well capitalized"
standards have also been established by the Federal Banking Regulators. As
a result of the merger, the Bank did not meet the "well capitalized"
standards as of December 31, 1996. However, as of September 30, 1997, the
Bank now meets the "well capitalized" requirements.
PART II
OTHER INFORMATION
ITEMS 1-4
None
ITEM 5. Other Information
At a Board of Directors meeting held on October 14, 1997, the Board voted to
enlarge the Board to seventeen Directors and the following individuals were
elected to serve as Directors of Slade's Ferry Bancorp and Slade's Ferry
Trust Company. Each new director was assigned to a specific class of
Directors with the term of expiration as set forth below.
Class III - Term Expires Annual Meeting 1998
--------------------------------------------
William Q. MacLean Jr., Vice President of Cornish & Company, Inc. Insurance
in Fairhaven, Massachusetts since prior to 1992 and President/Founder of
MacLean Consulting, Inc., a general business consulting company in Boston,
Massachusetts.
David F. Westgate, President of Quequechan Management Corp., a management
consulting firm located in Fall River, Massachusetts since prior to 1992,
and former Senior Vice President/Senior Lending Officer of the Bank of New
England South.
Class I - Term Expires Annual Meeting 1999
------------------------------------------
Lawrence J. Oliveira DDS, Orthodontist from New Bedford and Mattapoisett,
Massachusetts since prior to 1992; Past Director of the former New Bedford
Institution for Savings.
Class II - Term Expires Annual Meeting 2000
-------------------------------------------
Melvyn A. Holland, Managing Partner of Rosenfield, Holland & Raymon PC,
Certified Public Accountants of New Bedford, Massachusetts, since prior to
1992.
Shaun O'Hearn, President of Bolger & O'Hearn, Inc., a color and chemicals
company in Fall River, Massachusetts, since prior to 1992.
ITEM 6.
None
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)
November 10, 1997 /s/ Kenneth R. Rezendes
- --------------------- -------------------------------------
(Date) (Signature) Kenneth R. Rezendes
President
November 10, 1997 /s/ James D. Carey
- --------------------- -------------------------------------
(Date) (Signature) James D. Carey
Executive Vice President
November 10, 1997 /s/ Ralph S. Borges
- --------------------- -------------------------------------
(Date) (Signature) Ralph S. Borges
Treasurer
Chief Financial Officer
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 11,951,115
<INT-BEARING-DEPOSITS> 106,688
<FED-FUNDS-SOLD> 1,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 39,461,881
<INVESTMENTS-CARRYING> 20,816,211
<INVESTMENTS-MARKET> 20,941,657
<LOANS> 213,121,867
<ALLOWANCE> 3,609,073
<TOTAL-ASSETS> 296,816,402
<DEPOSITS> 267,565,028
<SHORT-TERM> 1,319,690
<LIABILITIES-OTHER> 1,284,184
<LONG-TERM> 975,000
0
0
<COMMON> 32,226
<OTHER-SE> 25,640,274
<TOTAL-LIABILITIES-AND-EQUITY> 296,816,402
<INTEREST-LOAN> 14,105,859
<INTEREST-INVEST> 2,655,885
<INTEREST-OTHER> 497,129
<INTEREST-TOTAL> 17,258,873
<INTEREST-DEPOSIT> 7,661,261
<INTEREST-EXPENSE> 7,770,223
<INTEREST-INCOME-NET> 9,488,650
<LOAN-LOSSES> 450,000
<SECURITIES-GAINS> 312,865
<EXPENSE-OTHER> 6,843,404
<INCOME-PRETAX> 3,443,459
<INCOME-PRE-EXTRAORDINARY> 3,443,459
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,062,956
<EPS-PRIMARY> .70
<EPS-DILUTED> .70
<YIELD-ACTUAL> 4.62
<LOANS-NON> 4,719,252
<LOANS-PAST> 706,929
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 200,000
<ALLOWANCE-OPEN> 3,354,311
<CHARGE-OFFS> 242,850
<RECOVERIES> 47,612
<ALLOWANCE-CLOSE> 3,609,073
<ALLOWANCE-DOMESTIC> 3,609,073
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
