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 March 31, 1998
----------------
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 (I.R.S. Employer
of 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) 3,408,270.627 shares as of March 31, 1998.
- ------------------------------------------------------------------------
Traditional Small Business Disclosure Format:
Yes X No
----- -----
PART I
ITEM 1
Financial Statements
- --------------------
SLADE'S FERRY BANCORP
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
(In Hundreds) March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 14,005,974 $ 13,323,501
Federal funds sold 11,500,000 7,000,000
Interest bearing time deposits 106,688 106,688
Investment securities(1) 18,564,453 17,601,536
Securities available for sale(2) 41,097,892 40,176,218
Federal Home Loan Bank stock 899,900 890,600
Loans (net) 206,059,372 209,309,840
Premises and equipment 5,603,192 5,718,534
Other real estate owned 92,373 159,373
Accrued interest receivable 1,784,862 1,796,467
Goodwill 3,023,868 3,080,568
Other assets 4,172,150 2,407,260
-------------------------------
TOTAL ASSETS $306,910,724 $301,570,585
===============================
LIABILITIES & STOCKHOLDERS' EQUITY:
Deposits $275,540,348 $271,322,250
Short term borrowings 1,105,892 1,200,000
Notes payable 1,350,500 1,375,308
Other liabilities 1,622,323 1,236,601
-------------------------------
TOTAL LIABILITIES $279,619,063 $275,134,159
STOCKHOLDERS' EQUITY:
Common stock 34,083 32,367
Paid in capital 21,704,856 18,978,598
Retained earnings 5,275,227 7,276,174
Net unrealized gain on investments
in available for sale securities 277,495 149,287
-------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 27,291,661 $ 26,436,426
-------------------------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $306,910,724 $301,570,585
===============================
- --------------------
<F1> Investment securities are to be held to maturity and have a fair
market value of $18,733,028 as of March 31, 1998 and $17,748,500 as of
December 31, 1997.
<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)
3 MONTHS ENDING MARCH 31,
<TABLE>
<CAPTION>
(In Hundreds Except Per Share Date) 1998 1997
---- ----
<S> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $4,885,359 $4,509,123
Interest and dividends on investments 852,637 881,092
Other interest 120,117 163,934
------------------------
Total interest and dividend income 5,858,113 5,554,149
------------------------
INTEREST EXPENSE:
Interest on deposits 2,571,429 2,503,775
Interest on other borrowed funds 40,234 36,933
------------------------
Total interest expense 2,611,663 2,540,708
------------------------
Net interest and dividend income 3,246,450 3,013,441
------------------------
PROVISION FOR LOAN LOSSES 150,000 150,000
Net interest and dividend income
after provision for loan losses 3,096,450 2,863,441
------------------------
OTHER INCOME:
Service charges on deposit accounts 225,977 238,743
Security gains net 56,280 106,251
Other income 77,316 92,294
------------------------
Total other income 359,573 437,288
------------------------
OTHER EXPENSE:
Salaries and employee benefits 1,318,116 1,326,013
Occupancy expense 178,834 169,709
Equipment expense 150,073 154,671
Loss (gain) on sale of other real estate owned 4,236 (2,830)
Writedown of other real estate owned 0 0
Other expense 567,563 598,201
------------------------
Total other expense 2,218,822 2,245,764
------------------------
Income before income taxes 1,237,201 1,054,965
Income taxes 491,853 420,800
------------------------
NET INCOME $ 745,348 $ 634,165
========================
Earnings per share $ 0.22 $ 0.21
========================
Diluted earnings per share $ 0.22 $ 0.21
========================
Average shares outstanding 3,331,939 2,957,200
========================
</TABLE>
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31
(Unaudited)
<TABLE>
<CAPTION>
Reconciliation of net income to net cash used in operating activities: 1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 745,348 $ 634,165
Adjustments to reconcile net income to net cash used in operating
activities:
Accretion, net of amortization of fair market value adjustments (2,179) (2,179)
Amortization of goodwill 56,700 56,700
Depreciation and amortization 165,156 164,294
Gain on sale of fixed assets (2,700) -0-
Securities available for sale (gains) losses, net (56,280) (106,251)
Provision for loan losses 150,000 150,000
Increase in taxes payable 374,309 251,110
(Increase) decrease in interest receivable 11,605 (159,127)
Increase (decrease) in interest payable 2,460 (5,452)
Increase in accrued expenses 96,616 17,113
(Increase) decrease in prepaid expenses 105,727 (2,489)
Accretion of securities, net of amortization (33,136) (53,857)
Accretion of securities available for sale, net of amortization 9,248 (21,063)
Loss (gain) on sale of other real estate owned 4,236 (2,830)
Writedown of other real estate owned -0- -0-
Change in unearned income 48,404 (114,600)
(Increase) decrease in other assets (2,316,486) 557,043
Increase (decrease) in other liabilities 285,975 (339,374)
--------------------------
Net cash (used in) provided by operating activities $ (354,997) $ 1,023,203
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (8,214,966) (1,372,533)
Maturities of securities available for sale 7,364,656 1,583,820
Sales of securities available for sale 175,436 325,738
Proceeds from sale of other real estate owned 62,764 89,830
Proceeds from maturities of investment securities 1,813,228 4,222,134
Purchases of investment securities (2,743,009) (3,977,290)
Net (increase) decrease in loans 3,046,958 (1,224,818)
Capital expenditures (49,814) (81,714)
Proceeds from sales of fixed assets 2,700 -0-
Purchases of Federal Home Loan Bank Stock (9,300) -0-
Recoveries of previously charged-off loans 7,956 8,069
--------------------------
Net cash provided by (used in) investing activities $ 1,456,609 $ (426,764)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock $ 160,209 $ 75,705
Net decrease in demand deposits, NOW, money market and savings accounts (2,824,588) (4,363,451)
Net increase in time deposits 7,042,686 3,087,014
Net increase (decrease) in short-term borrowing (94,108) 497,941
Dividends paid (178,530) (139,872)
Decrease in notes payable (24,808) (17,626)
--------------------------
Net cash (used in) provided by financing activities 4,080,861 (860,289)
--------------------------
Net increase (decrease) in cash and cash equivalents 5,182,473 (263,850)
Cash and cash equivalents at beginning of period 20,323,501 24,128,724
--------------------------
Cash and cash equivalents at end of period $25,505,974 $23,864,874
==========================
SUPPLEMENTAL DISCLOSURES:
Loans originating from sales of Other Real Estate Owned $ 60,800 $ 93,600
Interest paid $ 2,609,203 $ 2,546,160
Income taxes paid $ 117,544 $ 169,690
Loans transferred to Other Real Estate Owned $ -0- $ 165,789
</TABLE>
SLADE'S FERRY BANCORP AND SUBSIDIARY, SLADE'S FERRY TRUST COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1998
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 three months
ended March 31, 1998 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998.
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 1997.
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 March 31, 1998 were up by $5.3 Million to $306.9 Million from
$301.6 Million reported on December 31, 1997. The increase is predominately
attributed to additional available funds derived from growth in deposits.
The most noted variances in asset components were increases of $4.5 Million
in the Federal Funds Sold category due to excess available cash at March 31,
1998, a combined increase of $1.9 Million in the Investment Securities and
Securities Available for Sale category, and a decrease of $3.2 Million in
net loans. The decrease in the loan portfolio is predominately due to
monthly payments made by borrowers on loan principal which generally
averages $2.0 Million per month. Also, several large borrowers paid off
their loans by refinancing into long term fixed rate products offered by
other lending entities. The Bank recognizes this competition and is meeting
this competitive rate environment by offering similar products to qualified
customers through a match funding program utilizing the Bank's borrowing
ability with the Federal Home Loan Bank. Management does not anticipate
material variances in the total loans serviced despite the intense rate
competition in the Southeastern Massachusetts area. Management believes
that the continuation of its business development program, the economic
conditions in the area, and the usage of the match funding program, will
assist in maintaining its current loan levels.
Other Assets increased to $4.2 Million on March 31, 1998 from $2.4 Million
reported at December 31, 1997. The increase is predominately attributable
to the investment of $1.6 Million in single premium life insurance policies,
which provide each member of the Board of Directors with a supplementary
life insurance benefit. These benefits will create a specific annual
expense for the Bank. It is estimated that the net, after tax, first year
cost will be $56,000. This cost will decrease annually until policy year
2000 when the cash surrender value of the policies is expected to realize
net income. These life insurance policies provide the Bank with an earning
asset that can offset the current costs of the benefit and eventually, at
the death of the insured, provide recovery of all cash outflows plus lost
earning opportunities associated with the policies.
Deposits were up by $4.2 Million to $275.5 Million at March 31, 1998 from
$271.3 Million reported at year end 1997. The increase occurred primarily
in the certificate of deposit category. The certificate of deposit category
increased by $7.0 Million during this past quarter. The longest certificate
of deposit term offered by the Bank is three years.
At March 31, 1998, securities classified as Available for Sale had net
unrealized gains of $277,495 as a result of current market conditions,
compared to net unrealized gains of $149,287 reported on December 31, 1997.
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 March 31, 1998.
<TABLE>
<CAPTION>
Gross
Gross Unrealized
Amortized Unrealized Holding
(Dollars in Thousands) Cost Basis Holding Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities issued by the U. S.
Treasury and other U. S.
Government corporations and
agencies $ 9,313 $ 60 $ 4 $ 9,369
Debt securities issued by states of the
United States and political
subdivisions of the states 9,056 131 21 9,166
Mortgage-backed securities 195 2 --- 197
Other debt securities 1 --- --- 1
- ------------------------------------------------------------------------------------------------
$18,565 $193 $25 $18,733
================================================================================================
</TABLE>
Investments in Available for Sale securities are carried at fair value on
the balance sheet and are summarized as follows as of March 31, 1998.
<TABLE>
<CAPTION>
Gross
Gross Unrealized
Amortized Unrealized Holding
(Dollars in Thousands) Cost Basis Holding Gains Losses Fair Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities issued by the U. S.
Treasury and other U. S.
Government corporations and
agencies $29,951 $ 85 $ 82 $29,954
Marketable Equities 1,732 447 49 2,130
Mortgage-backed securities 8,756 41 14 8,783
Asset-backed securities 231 --- --- 231
- --------------------------------------------------------------------------------------------
$40,670 $573 $145 $41,098
============================================================================================
</TABLE>
<TABLE>
<S> <C>
Increase to Stockholders' Equity:
(In Whole Dollars)
Unrealized gain on Available for Sale Securities $427,574
Less tax effect 150,079
--------
Net unrealized gain on Available for Sale Securities $277,495
========
</TABLE>
INFORMATION WITH RESPECT TO NONACCRUAL AND PAST DUE LOANS
AT MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
At March 31 At December 31
- --------------------------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual Loans $4,815 $5,205 $4,597 $4,352
Loans 90 days or more past due and still accruing 245 836 147 112
Real estate acquired by foreclosure
or substantively repossessed 92 386 159 308
Percentage of nonaccrual loans to total loans 2.29% 2.60% 2.15% 2.19%
Percentage of nonaccrual loans and real estate
acquired by foreclosure or substantively
repossessed to total assets 1.57% 1.92% 2.00% 1.88%
Percentage of allowance for possible loan losses
to nonaccrual loans 79.20% 63.84% 8.36% 77.07%
</TABLE>
The $4.8 Million in nonaccrual loans consists of $4.6 Million of real estate
mortgages and $.2 Million attributed to commercial loans. Of the total
nonaccrual loans outstanding, $253,035 are restructured at March 31, 1998.
The Company's nonperforming assets as a total increased to $5.2 Million at
March 31, 1998 from $4.9 Million reported on December 31, 1997. The Company
considers nonaccrual loans, loans past due 90 days or more but still
accruing, and real estate acquired by foreclosure or substantively
repossessed as nonperforming assets. Nonaccrual loans which is the largest
component of nonperforming assets increased by $218,000 during the first
quarter primarily associated with one individual borrower with total credit
of $382,000 representing several parcels of property. The $1.6 Million
commercial real estate loan previously classified as nonaccrual in March
1997 remains in this category despite payments being made by the borrower
which are applied to principal. Pursuant to the Company's normal policy,
this loan will remain in the nonaccrual status until the loan becomes
current and the borrower can demonstrate a regular consistent schedule of
payments. The real estate collateralizing this loan has an appraised value
of $2.7 Million obtained in December 1997. Loans 90 days or more but still
accruing increased by $98,000 during the current quarter and real estate
acquired by foreclosure or substantively repossessed decreased by $63,000
due to the sale of property.
The net increase in the nonaccrual category from $4.6 Million at December
31, 1997 to $4.8 Million at March 31, 1998 is a combination of $452,000 in
loans placed into the nonaccrual status, offset by $234,000 representing
payments and loans resolved or charged off.
Real estate acquired through foreclosure or substantively repossessed
decreased by $67,000 when compared to the balance on December 31, 1997 of
$159,373, due to the sale of one parcel of property. The current balance of
$92,373 represents the one remaining property in this category.
The percentage of nonaccrual loans to total loans increased from 2.15%
reported at year end to 2.29% at March 31, 1998 due to the combination of a
decrease in total loans and an increase in the nonaccrual category, while
the percentage of nonaccrual loans and real estate acquired by foreclosure
or substantively repossessed to total assets decreased due to growth in
assets.
INFORMATION WITH RESPECT TO NONACCRUAL AND RESTRUCTURED LOANS
AT MARCH 31, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
At March 31 At December 31
- -------------------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual Loans $4,815 $5,205 $4,597 $4,352
Interest income that would have been recorded
under original terms $ 119 $ 125 $ 394 $ 361
Interest income recorded during the period $ 14 $ 50 $ 58 $ 62
</TABLE>
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" 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 $4,814,587 in nonaccrual loans are $4,811,396 which the
Company has determined to be impaired, for which $1,548,495 have a related
allowance for credit losses of $496,500 and $3,262,901 have no related
allowance for credit losses.
The Company has $500,000 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 March 31,
1998 that management reasonably expects will materially impact future
operating results, liquidity or capital resources.
ANALYSIS OF THE ALLOWANCE FOR POSSIBLE LOAN LOSSES
<TABLE>
<CAPTION>
Three Months Years Ended
At March 31 At December 31
- -----------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1 $3,694 $3,354 $3,354 $2,498
- -----------------------------------------------------------------------------
Charge-offs:
Commercial --- (8) (40) (276)
Real estate - construction --- --- --- ---
Real estate - mortgage --- (146) (147) (4)
Installment/consumer (10) (35) (68) (159)
- ----------------------------------------------------------------------------
(10) (189) (255) (439)
- ----------------------------------------------------------------------------
Recoveries:
Commercial 2 2 41 332
Real estate - construction --- --- -0- -0-
Real estate - mortgage --- --- 16 -0-
Installment/consumer 6 6 38 107
- ----------------------------------------------------------------------------
8 8 95 439
- ----------------------------------------------------------------------------
Net Charge-offs (2) (181) (160) -0-
- ----------------------------------------------------------------------------
Additions charged to operations 150 150 500 400
Allowance attributable to acquisition -0- -0- -0- 456
- ----------------------------------------------------------------------------
Balance at end of period $3,842 $3,323 $3,694 $3,354
============================================================================
Ratio of net charge-offs to
average loans outstanding 0.001% 0.090% 0.080% 0.000%
</TABLE>
The Allowance for Possible Loan Losses at March 31, 1998 was $3,841,884,
compared to $3,693,865 at year end 1997. The Allowance for Possible Loan
Losses as a percent of outstanding loans was 1.82% at March 31, 1998 and
1.73% at December 31, 1997.
The Bank provided $500,000 in 1997, $400,000 in 1996, and $150,000 as of
March 31, 1998 to the Allowance for Possible Loan Losses. Loans charged off
were $255,000 in 1997, $439,000 in 1996, and $10,000 as of March 31, 1998.
Recoveries on loans previously charged off were $95,000 in 1997, $439,000 in
1996, and $8,000 as of March 31, 1998. Management believes that the
Allowance for Loan Losses of $3,841,884 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>
March 31, 1998 December 31, 1997 December 31, 1996
---------------------- ---------------------- ----------------------
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 $1,069(1) 18.63% $ 984(1) 17.14% $ 789(1) 15.70%
Real estate - Construction 45 3.07% 44 3.12 41 3.46
Real estate - mortgage 2,417(2) 75.14% 2,311(2) 76.50 2,150(2) 77.42
Consumer(3) 311(4) 3.16% 355(4) 3.24 374(4) 3.42
---------------------------------------------------------------------
$3,842 100.00% $3,694 100.00% $3,354 100.00%
=====================================================================
- --------------------
<F1> Includes amounts specifically reserved for impaired loans of $12,934
as of March 31, 1998, $42,937 as of December 31, 1997 and $0.00 as of
December 31, 1996 as required by Financial Accounting Standard No.
114, Accounting for Impairment of Loans.
<F2> Includes amounts specifically reserved for impaired loans of $672,599
as of March 31, 1998, $566,220 as of December 31, 1997 and $838,290 as
of December 31, 1996 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 amounts specifically reserved for impaired loans of $12,511
as of March 31, 1998, $14,413 as of December 31, 1997, and $0.00 as of
December 31, 1996, 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 23% 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 19% 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 then 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
- ---------------------
Net interest income increased by $233,009 to $3,246,450 when compared to
$3,013,441 recorded during the same period in 1997. Total interest and
dividend income went up by $303,964 primarily due to a larger loan base.
This was offset by an increase of $70,955 in interest expense due to a
larger deposit base particularly in the certificate of deposit category
which earns higher interest rates than other deposits.
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 three month period ending March 31, 1998 was $150,000, no change from
the amount recorded for the same period in the prior year.
Total Other Income decreased by $77,715 for the first quarter in 1998
compared to the first quarter in 1997. Service charges on deposit accounts
which is the largest component of other income decreased slightly by $12,766
during the current period due to customers switching to no fee checking
accounts which the Company provides in order to remain competitive with
other area banks and credit unions. The Company realized $56,280 of gains
on sales of securities due to the sale of various corporate equities
compared to $106,251 realized in the same period of the previous year. The
line item Other Income was down by $14,978 compared to the first quarter in
1997. During the first quarter of 1997, the Company recorded certain income
associated with the acquisition of the National Bank of Fairhaven of which
$7,458 was interest earned on escrowed fund during the stock tendering
process and $10,974 attributed to income recognition of safe deposit box
rentals.
Other Expense for the first quarter in 1998 was down by $26,942 to
$2,218,882 when compared to $2,245,764 recorded in the first quarter in
1997. Salaries and employee benefits were down by $7,897 despite general
wage increases and increased cost of benefits primarily due to the non
replacement of individuals who have terminated their services with the Bank.
Occupancy and equipment expense combined were up slightly by $4,527 due to
various maintenance projects and additional depreciation occurring on newly
acquired equipment. A loss of $4,236 was realized on the sale of property
previously acquired through foreclosure during the current quarter compared
to a gain of $2,830 recorded in the same period of the prior year.
The table below illustrates the line item Other Expense, which reflects a
decrease of $30,638 for the first quarter in 1998 compared to the same
period reported in 1997.
<TABLE>
<CAPTION>
March 31, 1998 March 31,1997 Variance
-------------------------------------------
<S> <C> <C> <C>
Amortization of Goodwill 56,700 56,700 0
Advertising & Public Relations 99,015 77,991 21,024
Stationery & Supplies 53,607 92,724 (39,117)
Communications 84,652 81,299 3,353
Professional fees & Other Services 130,007 147,425 (17,418)
Other 143,582 142,062 1,520
---------------------------------------
567,563 598,201 (30,638)
=======================================
</TABLE>
Amortization of Goodwill represents a continuous process to the year 2011 of
amortizing the premiums paid above the book value to the shareholders of
Fairbank, Inc. parent company of the National Bank of Fairhaven due to the
acquisition which occurred in August 1996. Advertising expense increased by
$21,024 due to the expansion of our marketing program. Stationery and
supplies decreased by $39,117. This is attributable to an increase in bulk
purchasing of various supplies that will not become outdated. Other
variances noted above are a result of normal business transactions.
Income before income taxes totaled $1,237,201 at March 31, 1998, up by
$182,236 when compared to $1,054,965 reported on March 31, 1997. Federal
and state income taxes for the period amounted to $491,853 compared to
$420,800 for the same period in the previous year.
Net income of $745,348 reflects an increase of 17.5% from earnings of
$634,165 reported at March 31, 1997.
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 1996 and in 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. and was assumed at the time of the merger. It 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. There is
also a $430,000 borrowing from the Federal Home Loan Bank.
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 March 31, 1998, the Bank's liquidity ratio stood at 30.9% as compared to
28.8% at December 31, 1997. 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) 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 three months ending March 31, 1998 and 1997
shows an increase in the net cash used in operating activities of $1.4
Million. This is largely attributable to the increase in other assets which
includes the aforementioned $1.6 Million of single premium life insurance
policies.
Cash flows from investing activities show an increase in cash provided of
$1.9 Million when compared to 1997. Purchases of securities increased by
$5.6 Million and maturities of securities increased by $3.4 Million when
compared to the same three months in 1997. The remaining change in cash
provided by investing activities was provided by the decrease in loans of
$4.3 Million when compared to March 31, 1997.
Cash provided by financing activities for the three months in 1998, when
compared to the same period in 1997, increased by $4.9 Million. The change
in cash provided by time deposits represented $4.0 Million of the increase.
The change in demand deposits, NOW, money market and savings accounts
accounted for $1.5 Million; offset by a $.6 Million decrease in short term
borrowings.
Capital
- -------
As of March 31, 1998, the Company had total capital of $27,291,661. This
represents an increase of $855,235 from $26,436,426 reported on December 31,
1997. The increase in capital was a combination of several factors.
Additions consisted of three months earnings of $745,348 and transactions
originating through the Dividend Reinvestment Program whereby 4,929.304
shares were issued for cash contributions of $79,445 and 4,930.665 shares
were issued for $80,764 in lieu of cash dividend payments. These additions
were offset by dividends paid of $178,530.
Also, affecting capital is the adjustment that reflects net unrealized gains
or losses, net of taxes, on securities classified as Available for Sale.
On December 31, 1997 the Available for Sale portfolio had unrealized gains,
net of taxes, of $149,287, and on March 31, 1998, as a result of current
market values, the portfolio reflects unrealized gains, net of taxes, of
$277,495.
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 March 31, 1998 the actual Risk Based Capital of the Bank was $21,954,000
for Tier 1 Capital, exceeding the minimum requirements of $8,557,680 by
$13,396,320. Total Capital of $24,643,000 exceeded the minimum requirements
of $17,115,360 by $7,527,640 and Leverage Capital of $21,954,000 exceeded
the minimum requirements of $11,945,680 by $10,008,320. In addition to the
"minimum" capital requirements, "well capitalized" standards have also been
established by the Federal Banking Regulators.
The table below illustrates the capital ratios of the Company and the Bank
on March 31, 1998 and at December 31, 1997.
<TABLE>
<CAPTION>
Well March 31, 1998 December 31, 1997
Capitalized ---------------- -----------------
Requirement Bancorp Bank Bancorp Bank
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Capital (to Risk
Weighted Assets) 10% 12.45% 11.52% 12.04% 11.18%
- -------------------------------------------------------------------------------
Tier I Capital (to Risk
Weighted Assets) 6% 11.20% 10.26% 10.74% 9.88%
- -------------------------------------------------------------------------------
Leverage Capital (to
Average Assets) 5% 7.99% 7.35% 7.79% 7.18%
- -------------------------------------------------------------------------------
</TABLE>
PART II
OTHER INFORMATION
ITEM 6
Exhibits and Reports on Form 8-K
(a) Exhibits: See exhibit index
EXHIBIT INDEX
Exhibit No. Description Page
- ----------- ----------- ----
27 Financial Data Schedule
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)
May 15, 1998 /s/ Kenneth R. Rezendes
- ------------------------- ----------------------------------------
(Date) (Signature) Kenneth R. Rezendes
President/CEO
May 15, 1998 /s/ James D. Carey
- ------------------------- ----------------------------------------
(Date) (Signature) James D. Carey
Executive Vice President
May 15, 1998 /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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 14,005,974
<INT-BEARING-DEPOSITS> 106,688
<FED-FUNDS-SOLD> 11,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,097,892
<INVESTMENTS-CARRYING> 18,564,453
<INVESTMENTS-MARKET> 18,733,028
<LOANS> 210,679,608
<ALLOWANCE> 3,841,884
<TOTAL-ASSETS> 306,910,724
<DEPOSITS> 275,540,348
<SHORT-TERM> 1,105,892
<LIABILITIES-OTHER> 1,622,323
<LONG-TERM> 1,350,500
0
0
<COMMON> 34,083
<OTHER-SE> 27,257,578
<TOTAL-LIABILITIES-AND-EQUITY> 306,910,724
<INTEREST-LOAN> 4,885,359
<INTEREST-INVEST> 852,637
<INTEREST-OTHER> 120,117
<INTEREST-TOTAL> 5,858,113
<INTEREST-DEPOSIT> 2,571,429
<INTEREST-EXPENSE> 2,611,663
<INTEREST-INCOME-NET> 3,246,450
<LOAN-LOSSES> 150,000
<SECURITIES-GAINS> 56,280
<EXPENSE-OTHER> 2,218,822
<INCOME-PRETAX> 1,237,201
<INCOME-PRE-EXTRAORDINARY> 1,237,201
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,237,201
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.22
<YIELD-ACTUAL> 4.65
<LOANS-NON> 4,814,587
<LOANS-PAST> 245,154
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 500,000
<ALLOWANCE-OPEN> 3,693,865
<CHARGE-OFFS> 9,937
<RECOVERIES> 7,956
<ALLOWANCE-CLOSE> 3,841,884
<ALLOWANCE-DOMESTIC> 3,841,884
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
