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, 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 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) 3,427,953.365 shares as of September 30, 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>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 12,596,141 $ 13,323,501
Federal funds sold 8,500,000 7,000,000
Interest bearing time deposits 0 106,688
Investment securities(1) 20,348,465 17,601,536
Securities available for sale(1) 50,050,230 40,176,218
Federal Home Loan Bank stock 899,900 890,600
Loans (net) 211,265,987 209,309,840
Premises and equipment 6,380,358 5,718,534
Other real estate owned 582,064 159,373
Accrued interest receivable 1,941,672 1,796,467
Goodwill 2,910,468 3,080,568
Other assets 4,246,992 2,407,260
---------------------------------
TOTAL ASSETS $319,722,277 $301,570,585
=================================
LIABILITIES & STOCKHOLDERS' EQUITY:
Deposits $286,126,417 $271,322,250
Short term borrowings 315,966 1,200,000
Notes payable 2,613,714 1,375,308
Other liabilities 1,714,906 1,236,601
---------------------------------
TOTAL LIABILITIES 290,771,003 275,134,159
STOCKHOLDERS' EQUITY:
Common stock 34,280 32,367
Paid in capital 22,014,042 18,978,598
Retained earnings 6,762,541 7,276,174
Net unrealized gain on investments
in available for sale securities 140,411 149,287
---------------------------------
TOTAL STOCKHOLDERS' EQUITY 28,951,274 26,436,426
---------------------------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $319,722,277 $301,570,585
=================================
<FN>
<F1> Investment securities are to be held to maturity ahd have a fair market
value of $20,585,685 as of September 30, 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.
</FN>
</TABLE>
CONSOLIDATED STATEMENT OF INCOME AND EXPENSE
(UNAUDITED)
9 MONTHS ENDING SEPTEMBER 30,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $14,902,281 $14,105,859
Interest and dividends on investments 2,850,176 2,655,885
Other interest 449,620 497,129
----------------------------
Total interest and dividend income 18,202,077 17,258,873
----------------------------
INTEREST EXPENSE:
Interest on deposits 7,856,863 7,661,261
Interest on other borrowed funds 143,330 108,962
----------------------------
Total interest expense 8,000,193 7,770,223
----------------------------
Net interest and dividend income 10,201,884 9,488,650
----------------------------
PROVISION FOR LOAN LOSSES 450,000 450,000
Net interest and dividend income
after provision for loan losses 9,751,884 9,038,650
----------------------------
OTHER INCOME:
Service charges on deposit accounts 681,107 707,690
Security gains, net 382,370 312,865
Other income 200,499 227,658
----------------------------
Total other income 1,263,976 1,248,213
----------------------------
OTHER EXPENSE:
Salaries and employee benefits 4,056,344 4,072,061
Occupancy expense 515,451 501,282
Equipment expense 429,012 467,761
Loss (gain) on sale of other real estate owned (33,039) 27,166
Writedown of other real estate owned 0 6,449
Other expense 1,730,539 1,768,685
----------------------------
Total other expense 6,698,307 6,843,404
----------------------------
Income before income taxes 4,317,553 3,443,459
Income taxes 1,708,504 1,380,503
----------------------------
NET INCOME $ 2,609,049 $ 2,062,956
============================
Basic earnings per share $ 0.77 $ 0.66
============================
Diluted earnings per share $ 0.77 $ 0.66
============================
Average shares outstanding 3,390,719 3,128,625
============================
</TABLE>
CONSOLIDATED STATEMENT OF INCOME AND EXPENSE
(UNAUDITED)
3 MONTHS ENDING SEPTEMBER 30,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans $ 5,150,988 $ 4,972,912
Interest and dividends on investments 1,004,961 909,841
Other interest 113,973 130,667
----------------------------
Total interest and dividend income 6,269,922 6,013,420
----------------------------
INTEREST EXPENSE:
Interest on deposits 2,625,112 2,610,050
Interest on other borrowed funds 59,152 34,971
----------------------------
Total interest expense 2,684,264 2,645,021
----------------------------
Net interest and dividend income 3,585,658 3,368,399
----------------------------
PROVISION FOR LOAN LOSSES 150,000 150,000
Net interest and dividend income
after provision for loan losses 3,435,658 3,218,399
----------------------------
OTHER INCOME:
Service charges on deposit accounts 221,401 227,863
Security gains, net 197,901 83,315
Other income 59,573 60,355
----------------------------
Total other income 478,875 371,533
----------------------------
OTHER EXPENSE:
Salaries and employee benefits 1,402,525 1,382,167
Occupancy expense 170,600 163,310
Equipment expense 137,395 156,425
Loss (gain) on sale of other real estate owned (37,275) 33,491
Writedown of other real estate owned 0 6,449
Other expense 586,695 633,290
----------------------------
Total other expense 2,259,940 2,375,132
----------------------------
Income before income taxes 1,654,593 1,214,800
Income taxes 654,951 486,385
----------------------------
NET INCOME $ 999,642 $ 728,415
============================
Basic earnings per share $ 0.29 $ 0.22
============================
Diluted earnings per share $ 0.29 $ 0.22
============================
Average shares outstanding 3,423,922 3,378,853
============================
</TABLE>
SLADE'S FERRY BANCORP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Reconciliation of net income to net cash used
in operating activities:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,609,049 $ 2,062,956
Adjustments to reconcile net income to net
cash used in operating activities:
Accretion, net of amortization of fair
market value adjustments (6,538) (4,288)
Amortization of goodwill 170,100 170,100
Gain on sale of fixed assets (2,700) (4,000)
Depreciation and amortization 494,619 485,015
Securities available for sale gains, net (382,370) (312,865)
Provision for loan losses 450,000 450,000
Increase (decrease) in taxes payable 227,314 (8,389)
Increase in interest receivable (145,205) (149,829)
Decrease in interest payable (15,291) (14,291)
Increase in accrued expenses 433,749 210,216
(Increase) decrease in prepaid expenses 55,581 (74,588)
Accretion of securities, net of amortization (102,092) (145,812)
Accretion of securities available for sale,
net of amortization 20,557 (33,510)
Loss (gain) on sale of other real estate
owned (33,039) 27,166
Writedown of other real estate owned -0- 19,739
Change in unearned income 68,822 52,253
(Increase) decrease in other assets (2,137,818) 295,255
Increase (decrease) in other liabilities 57,835 (377,518)
------------------------------
Net cash provided by operating activities $ 1,762,573 $ 2,647,610
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (27,365,464) (10,405,473)
Maturities of securities available for sale 16,812,650 7,258,379
Sales of securities available for sale 1,046,930 1,389,999
Proceeds from sale of other real estate owned 192,412 302,683
Proceeds from maturities of investment
securities 7,572,094 11,517,664
Purchases of investment securities (10,216,931) (12,601,384)
Net increase in loans (3,111,071) (14,711,344)
Capital expenditures (1,156,443) (200,642)
Proceeds from sale of fixed assets 2,700 4,000
Purchases of Federal Home Loan Bank Stock (9,300) -0-
Recoveries of previously charged-off loans 62,588 47,612
Maturities of interest bearing time deposits 106,688 42,910
------------------------------
Net cash used in investing activities $(16,063,147) $(17,355,596)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock $ 469,594 $ 4,165,702
Net increase (decrease) in demand deposits,
NOW, money market and savings accounts 1,281,154 (7,391,063)
Net increase in time deposits 13,523,013 7,165,082
Net increase (decrease) in short-term
borrowing (884,034) 119,690
Dividends paid (554,919) (461,408)
Increase (decrease) in notes payable 1,238,406 (67,626)
------------------------------
Net cash provided by financing activities $ 15,073,214 $ 3,530,377
------------------------------
Net increase (decrease) in cash and cash
equivalents 772,640 (11,177,609)
Cash and cash equivalents at beginning of
period 20,323,501 24,128,724
------------------------------
Cash and cash equivalents at end of
period $ 21,096,141 $ 12,951,115
==============================
SUPPLEMENTAL DISCLOSURES:
Loans originating from sales of Other Real
Estate Owned $ 60,800 $ 93,600
Interest paid $ 8,015,484 $ 7,784,514
Income taxes paid $ 1,481,190 $ 1,388,892
Loans transferred to Other Real Estate Owned $ 582,064 $ 287,239
</TABLE>
SLADE'S FERRY BANCORP AND SUBSIDIARY, SLADE'S FERRY TRUST COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 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 nine months
ended September 30, 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
At September 30, 1998 the Company had total assets of $319.7 Million
compared to $301.6 Million reported at December 31, 1997. The increase in
assets of $18.1 Million occurred predominately in investment securities of
$2.7 Million and securities available for sale of $9.9 Million. Funding for
the purchases of these investment products was provided by the increase in
deposit levels. Deposits at September 30, 1998 totaled $286.1, up by $14.8
Million from $271.3 Million reported at year end 1997. Certificates of
deposits is the largest deposit component and represents $145.6 Million
reflecting a growth of $13.5 Million during the first nine months of 1998
from $132.1 Million at the end of 1997. The remaining increase of $1.3
Million occurred in the demand deposit and savings categories. Certificates
of deposits do not extend out beyond three years.
The loan portfolio which generally averages monthly paydowns of $2.5
Million, had a net increase of $2.0 Million since December 31, 1997. The
bank also financed $1.7 Million in loans to qualified commercial borrowers
through a match funding program offered by the Federal Home Loan Bank. The
interest earned on these types of loans generally yields less than
conventional financing. This product is offered only to borrowers that meet
certain credit and deposit requirements.
Premises and equipment increased by $662,000 at September 30, 1998 due to a
capital outlay of $1,050,000, net of year to date depreciation. The capital
outlay consisted of $550,000 to acquire a plot of land located at 833 Ashley
Boulevard, New Bedford, Massachusetts for the purpose of erecting a colonial
style branch bank. It is estimated that the cost of construction will be
approximately $400,000 for a total estimated cost of $950,000. The Bank
also paid $500,000 to purchase a branch bank facility at 1601 South Main
Street, Fall River, Massachusetts. This facility was formerly a branch of
BankBoston prior to its closing in June 1998. The Bank anticipates that the
two branches will be opened by mid January 1999.
Other assets increased by $1.8 Million during the past nine months of which
$1.6 Million was used to purchase single premium life insurance policies,
which provide each member of the Board of Directors with a supplementary
life insurance benefit.
At September 30, 1998, securities classified as Available for Sale had net
unrealized gains of $140,411 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 September 30, 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 $ 9,314 $101 $-- $ 9,415
Debt securities issued by states of
the United States and political
subdivisions of the states 10,898 136 1 11,033
Mortgage-backed securities 136 1 -- 137
Other debt securities 1 -- -- 1
------------------------------------------------
$20,349 $238 $ 1 $20,586
================================================
</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, 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 $38,357 $240 $ 87 $38,510
Marketable Equities 1,876 227 219 1,884
Mortgage-backed securities 9,091 75 5 9,161
Asset-backed securities 226 2 -- 228
------------------------------------------------
$49,550 $544 $311 $49,783
================================================
Increase to Stockholders' Equity:
(In Whole Dollars)
Unrealized gain on Available for Sale Securities $234,122
Less Tax effect 93,711
--------
Net unrealized gain on Available for Sale Securities $140,411
========
</TABLE>
INFORMATION WITH RESPECT TO NONACCRUAL AND PAST DUE LOANS
AT SEPTEMBER 30, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
At September 30 At December 31
- --------------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual Loans $3,717 $4,719 $4,597 $4,352
Loans 90 days or more past due and
still accruing 421 707 147 112
Real estate acquired by forclosure
or substantively repossessed 582 245 159 308
Percentage of nonaccrual loans to
total loans 1.62% 2.21% 2.15% 2.19%
Percentage of nonaccrual loans and
real estate acquired by foreclosure
or substantively repossessed to
total assets 1.34% 1.67% 2.00% 1.88%
Percentage of allowance for possible
loan losses to nonaccrual loans 94.19% 76.48% 80.36% 77.07%
</TABLE>
The $3.7 Million in nonaccrual loans consists of $3.4 Million of real estate
mortgages and $.3 Million attributed to commercial loans. There are no
restructured loans outstanding in the nonaccrual category at September 30,
1998.
The Company's nonperforming assets as a total decreased to $4.7 Million at
September 30, 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, decreased by $880,000 during this nine
month period. The decrease consists of $1.3 Million of loans placed into the
nonaccrual status, offset by $2.1 Million representing payments and loans
resolved or charged off. A $1.3 Million commercial real estate loan that had
been previously classified as nonaccrual in March 1997 remains in the
nonaccrual category despite payments being made by the borrower which are
applied directly to principal. Pursuant to the Company's normal policy, the
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 past due 90 days or more but still accruing
increased to $421,000 from $147,000 reported at the end of 1997. This amount
represents three separate loans that have properties with substantial values
collateralizing each loan. Therefore, the Company has elected to continue to
accrue income on these loans.
Real estate acquired through foreclosure or substantively repossessed
increased to $582,000 at September 30, 1998 and consists of three parcels of
real estate.
The percentage of nonaccrual loans to total loans decreased from 2.15%
reported at year end 1997 to 1.62% at September 30, 1998 primarily due to
the decrease in the nonaccrual category and the slight increase in the total
loan portfolio.
INFORMATION WITH RESPECT TO NONACCRUAL AND RESTRUCTURED LOANS
AT SEPTEMBER 30, 1998 AND 1997 AND DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
At September 30 At December 31
- ---------------------------------------------------------------------------------
(Dollars in Thousands) 1998 1997 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nonaccrual Loans $3,717 $4,719 $4,597 $4,352
Interest income that would have
been recorded under original terms $ 267 $ 308 $ 394 $ 361
Interest income recorded during
the period $ 21 $ 39 $ 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 homogenous loans are considered
by the Company to include consumer installment loans and credit card loans.
Included in the $3,716,965 in nonaccrual loans are $3,713,774 which the
Company has determined to be impaired, for which $735,871 have a related
allowance for credit losses of $187,577 and $2,977,903 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 September
30, 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>
Nine Months Years Ended
At September 30 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 -- (40) (40) (276)
Real estate-construction -- -- -- --
Real estate-mortgage (651) (147) (147) (4)
Installment/consumer (54) (56) (68) (159)
------------------------------------------
(705) (243) (255) (439)
------------------------------------------
Recoveries:
Commercial 6 12 41 332
Real estate-construction -- -- -- --
Real estate-mortgage 42 1 16 --
Installment/consumer 14 35 38 107
------------------------------------------
62 48 95 439
------------------------------------------
Net Charge-offs (643) (195) (160) --
------------------------------------------
Additions charged to operations 450 450 500 400
Allowance attributable to
acquisition -- -- -- 456
------------------------------------------
Balance at end of period $3,501 $3,609 $3,694 $3,354
==========================================
Ratio of net charge-offs to
average loans outstanding 0.300% 0.09% 0.080% 0.000%
</TABLE>
The Allowance for Possible Loan Losses at September 30, 1998 was $3,500,706,
compared to $3,693,865 at year end 1997. The decrease is due to the amount
of loans charged off during the second quarter totaling $559,000 which
occurred in the real estate loan category. The Allowance for Possible Loan
Losses as a percentage to outstanding loans decreased by 0.11% during the
nine month period to 1.62% from 1.73% reported at year end 1997.
The Bank provided $500,000 in 1997, $400,000 in 1996, and $450,000 as of
September 30, 1998 to the Allowance for Possible Loan Losses. Loans charged
off were $255,000 in 1997, $439,000 in 1996, and $705,000 as of September
30, 1998. Despite the amount of charge offs that occurred during the second
and third quarters in 1998, management believes that the current level of
the Allowance for Loan Losses is adequate to absorb any losses in the
foreseeable future due to the value of assets collateralizing the loan
portfolio.
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, 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 $1,266(1) 21.22% $ 984(1) 17.14% $ 789(1) 15.70%
Real estate-Construction 25 1.74 44 3.12 41 3.46
Real estate-Mortgage 1,871(2) 73.98 2,311(2) 76.50 2,150(2) 77.42
Consumer(3) 339(4) 3.06 355(4) 3.24 374(4) 3.42
------------------------------------------------------------------
$3,501 100.00% $3,694 100.00% $3,354 100.00%
==================================================================
<FN>
<F1> Includes amounts specifically reserved for impaired loans of $67,070
as of September 30, 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 $312,940
as of September 30, 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 $17,364
as of September 30, 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.
</FN>
</TABLE>
The loan portfolio's largest segment of loans is commercial real estate
loans, which represent 53.5% of gross loans. Residential real estate
represents 20.5% 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 21% 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
Net interest income for nine months ending September 30, 1998 increased by
$713,234 to $10,201,884 when compared to $9,488,650 recorded during the same
period in 1997. Total interest and dividend income increased by $943,204
primarily due to a larger loan base. This was offset by an increase of
$195,602 in interest expense, due to higher deposit levels being serviced
during the current nine month period compared to the same period in the
previous year.
The Provision for Loan Losses is a charge against earnings and funds the
Allowance for Possible Loan Losses. The Bank's provision during the nine
month period ending September 30, 1998 was $450,000, the same amount that
was provided during the same period in the prior year.
Total Other income increased by $15,763 for the first nine months in 1998,
compared to the same period in 1997. Service charges on deposit accounts
were down by $26,583 due to customers switching to no fee checking accounts,
which are provided in order to remain competitive with other area banks and
credit unions. The Company realized $382,370 of gains on sales of securities
due to the sale of various corporate equities, compared to $312,865 realized
in the same period of the previous year. The line item Other Income
decreased by $27,159 compared to the same period in 1997. During the first
quarter in 1997, non-recurring income totaling $18,432 associated with the
acquisition of the National Bank of Fairhaven was recognized. This was
offset by a decrease in Food Coupon income of $7,500 resulting from the
discontinuance of the bank issuing program by the Commonwealth of
Massachusetts and decreases in Safe Deposit Rentals, income on Other Real
Estate Owned properties and Rental Income of $8,000, $3,550 and $5,750
respectively.
Total Other Expense for the first nine months in 1998 was down by $145,097
to $6,698,307, from $6,843,404 recorded for the same period in 1997.
Salaries and employees benefits were down by $15,717, despite general wage
increases and increased cost of benefits, primarily due to the nonreplacement
of individuals whose services with the Bank have been terminated. Occupancy
and Equipment Expenses combined were down by $24,580 primarily due to a net
reduction in depreciation costs realized on equipment that became fully
depreciated during the latter part of 1997, which offset depreciation costs
of newly obtained equipment.
A gain of $33,039 was incurred in the sale of real estate that was acquired
by foreclosure, whereas during the same period in 1997, the Bank realized a
loss on sale of other real estate of $27,166.
The following table sets forth the components of the line item Other
Expense. This table reflects a decrease of $46,595 to $586,695 from $633,290
for the three month period ending September 30, 1998, and a decrease of
$38,146 to $1,730,539 from $1,768,685 for the nine month period ending
September 30, 1998.
<TABLE>
<CAPTION>
Third Quarter Nine Months
- -----------------------------------------------------------------------------------------
Dollars in Thousands 1998 1997 Variance 1998 1997 Variance
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Amortization of Goodwill $ 57 $ 57 $ 0 $ 170 $ 170 $ 0
Advertising & Public Relations 97 110 (13) 296 308 (12)
Stationary & Supplies 56 69 (13) 171 245 (74)
Communications 71 66 5 222 203 19
Professional fees &
Other Services 88 105 (17) 225 243 (18)
Other Miscellaneous Expenses 218 226 (8) 647 600 47
-------------------------------------------------------
Other Expenses $587 $633 $(46) $1,731 $1,769 $(38)
=======================================================
</TABLE>
Stationary and Supplies had material decreases of $13,000 during the third
quarter and $74,000 during the first nine months of 1998 compared to the
previous year. These decreases are the result of bulk purchasing at
discounted prices of supplies that will not become outdated, and an overall
reduction of supply usage.
Other Miscellaneous Expenses decreased by $8,000 during the third quarter
and increased by $47,000 for the nine month period in 1998, when compared to
the prior year. There were increases attributable to directors fees, due to the
expansion of the Board of Directors that occurred in the last quarter of
1997; and the expense associated with the purchase of the single premium
life insurance policies that occurred in January 1998, which provide each
member of the Board of Directors with a supplementary life insurance
benefit. This cost will decrease annually until policy year 2000, when the
cash surrender value of the policies is expected to realize income.
Committee fees were up by $3,900 and $13,700 for three and nine months
respectively, when compared to the previous year; and life insurance expense
incurred costs of $25,500 and $68,000 respectively, for the three month
period and nine month period ending September 30, 1998. These increases were
offset by decreases in FDIC assessments of $19,290 and $28,400 and
decreases in Other Real Estate Owned expenses of $5,000 and $22,500 for the
three and nine months respectively when compared to the previous year.
Income before income taxes for the nine month period ending September 30,
1998 was $4,317,553, up by $874,094 from $3,443,459 reported as of September
30, 1997. Applicable income taxes for the nine month period ending
September 30, 1998 were $1,708,504, an increase of $328,001 when compared to
$1,380,503 expensed in the same period of the prior year. Net earnings were
$2,609,049, up by $546,093 or 26.5%, when compared to $2,062,956 reported for
nine months in the previous year. Earnings per share on a fully diluted basis
was $0.77 for nine months ending September 30, 1998 compared to $0.66 reported
at September 30, 1997.
The results of operation for the third quarter in 1998 indicate that net
interest income was up by $217,259 to $3,585,658 from $3,368,399 earned
during the same period in the previous year. The provision for loan losses
remained the same as incurred during the third quarter in 1997. Total Other
Income increased by $107,342 of which a decrease of $6,462 occurred in
service charges on deposit accounts. This decrease was directly related to
the "no service charge" product previously mentioned. Various corporate
equities were sold during the third quarter realizing gains of $197,901.
During the same period in the prior year, gains on sales of securities
totaled $83,315.
Other Income decreased by $782 for the third quarter in 1998 when compared
to the third quarter in 1997. This decrease was due to normal business
activity.
Total Other Expense decreased by $115,192 to $2,259,940 for the three month
period ending September 30, 1998 compared to $2,375,132 reported for the
third quarter in 1997.
An increase of $20,358 occurred in Salaries and Employee Benefits due to the
addition to staff in anticipation of the openings of the new Fall River and
New Bedford branches in late 1998 to early 1999. Occupancy and Equipment
Expense combined decreased by $11,740 due to equipment still being utilized
which became fully depreciated during 1997 and the first quarter of 1998. A
gain on sale of foreclosed property of $33,275 occurred during the third
quarter in 1998 compared to a loss on sale of foreclosed property of $33,491
in the same period in 1997.
The line item Other Expense is detailed in the aforementioned chart and, as
noted, significant variances occurred in stationery and supplies, and other
miscellaneous expenses which reflect fees and insurance costs relating to
the directors.
Income before taxes for the third quarter in 1998 was up by $439,793 to
$1,654,593 from $1,214,800 reported for the same period in the prior year.
Applicable income taxes increased by $168,566 to $654,951 when compared to
$486,385 reported in the third quarter in 1997.
The net income for the three month period ending September 30, 1998 was
$999,642, up by $271,227 or 23.4%, when compared to $728,415 earned in the
third quarter in 1997. Diluted earnings per share for the third quarter in
1998 were $0.29 compared to $0.22 for the same period in 1997.
YEAR 2000 COMPLIANCE
The approaching Year 2000 presents companies in all industries with a myriad
of challenges including the ongoing operation of their data systems to check
proper interpretation of calendar year digits and resulting calculations.
To meet these challenges, the Company has completed an assessment of Year
2000 issues, developed a plan to resolve these issues, and commenced the
implementation of changes and testing required to achieve compliance.
The Company is on schedule to complete changes and testing of essential
systems by March 31, 1999 utilizing both internal and external resources.
Essential systems have been identified as the applications for processing
depositors' and borrower' accounts, stockholder information, origination and
receiving of electronic charges and credits (ACH items), general ledger
processing and the PC network system, including the teller system. The
first stage of testing has been completed on the depositor and borrower
applications and the general ledger system. Phases two, three and four are
scheduled to be completed by early December 1998. In September 1998, the
Company replaced the existing stockholder software with Year 2000 compatible
software at a cost of approximately $20,000.00. This conversion had been
anticipated prior to any Year 2000 planning and would have occurred
regardless of this requirement. The first phase of testing on the Federal
Reserve Bank's fedline system, which provides the Company the ability to
perform various operations including originating and receiving ACH items,
performing wire transfers and purchasing securities, was completed
successfully in October 1998. The second and final phase of testing is
scheduled for November 1998. The necessary upgrade to the teller system is
scheduled to be completed and tested by December 1998. The testing of non-
essential applications will continue throughout 1999 and will be completed
prior to any impact non-compliance may have on operations.
Key vendors and customers have been identified and contacted to determine
any vulnerability the Company may have due to the failure of these parties
to remedy their own Year 2000 issues. The above mentioned testing has been
performed using the resources of the key vendors and the Company's own
internal resources. To the extent that key vendors, customers or other
general suppliers, not affiliated with the Company, such as communications
and electric suppliers, are unsuccessful in properly addressing the Year
2000 issue, the Company could possibly be negatively impacted.
Although the Company does not anticipate any system to be non-compliant,
should a problem arise with a key vendor, customer or general supplier, the
Company is finalizing a contingency plan to deal with these issues. It is
impossible at this time to determine what effect this could have on the
Company's operations, liquidity and financial condition.
The total cost of the Year 2000 project is estimated at $40,000 to $50,000.
These costs are not expected to be material to the Company's operations,
liquidity and financial condition. The Company has incurred no Year 2000
related expenses during the first nine months of 1998. These estimated
costs are based upon management's best estimates which have been derived
from numerous assumptions of future events which include the availability of
certain resources, third party modification plans and other factors.
However, there is no guarantee that these estimates will hold true and
actual results could differ from those anticipated.
The Federal Deposit Insurance Corporation (FDIC) has established Year 2000
standards for safety and soundness consistent with the Federal Financial
Institutions Examination Council (FFIEC) guidance papers describing certain
essential steps that each FDIC-supervised financial institution must take to
become Year 2000 ready. There is ongoing regulatory oversight by the FDIC
of all insured financial institutions, including the Company, concerning
Year 2000 compliance.
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 for liquidity purposes 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 for liquidity
purposes in 1997 nor during the first nine months 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 $1,741,395 borrowing from the Federal Home Loan Bank
included in Notes Payable representing the match funding program that is
available to qualified borrowers.
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, 1998, the Bank's liquidity ratio stood at 28.6% as compared
to 24.5% 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 the nine months ending September 30, 1998
and 1997 shows a decrease in the net cash provided by operating activities
of $0.9 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 a net decrease in cash used in
investing activities of $1.2 Million when compared to 1997. Purchases of
securities increased by $14.6 Million offset by an increase in maturities of
securities of $5.6 Million when compared to the same nine months in 1997.
There was a decrease in cash used in loan activity of $11.6 Million when
compared to 1997. This decrease includes approximately $16.0 Million in
loans that have transferred to other institutions offering rates and
underwriting criteria the Company did not feel was prudent to match.
Capital expenditures increased by $1.0 Million due to the purchase of the
New Bedford and Fall River properties.
Cash provided by financing activities increased $11.5 Million during the
first nine months of 1998 when compared to the same period in 1997. The
change in cash provided by time deposits represented $6.3 Million of the
increase. There were also increases in cash provided by demand, NOW, money
market and savings accounts of $8.7 Million and notes payable of $1.3
Million. These were offset by decreases of $3.7 Million in proceeds from
issuance of stock and $1.0 Million in short term borrowings. There was a
new offering of common stock from mid May to mid June 1997 which resulted
in $3.9 Million in cash provided by proceeds from issuance of that stock for
the first nine months of 1997. There was no new offering in 1998.
CAPITAL
As of September 30, 1998, the Company had total capital of $28,951,274.
This represents an increase of $2,514,848 from $26,436,426 reported on
December 31, 1997. The increase in capital was a combination of several
factors. Additions consisted of nine months earnings of $2,609,050 and
transactions originating through the Dividend Reinvestment Program whereby
10,307.941 shares were issued for cash contributions of $174,648 and
15,084.766 shares were issued for $257,130 in lieu of cash dividend
payments. Stock options were exercised for proceeds of $37,815. These
additions were offset by dividends paid of $546,802.
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 September 30, 1998, as a result of current
market values, the portfolio reflects unrealized gains, net of taxes, of
$140,411.
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, 1998 the actual Risk Based Capital of the Bank was
$23,558,000 for Tier 1 Capital, exceeding the minimum requirements of
$8,940,680 by $14,617,320. Total Capital of $26,365,000 exceeded the minimum
requirements of $17,881,360 by $8,483,640 and Leverage Capital of
$23,558,000 exceeded the minimum requirements of $12,539,720 by $11,018,280.
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 September 30, 1998 and at December 31, 1997.
<TABLE>
<CAPTION>
Well September 30, 1998 December 31, 1997
Capitalized ---------------------------------------
Requirement Bancorp Bank Bancorp Bank
----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets) 10% 12.81% 11.80% 12.04% 11.18%
Tier I Capital (to Risk Weighted Assets) 6% 11.56% 10.54% 10.74% 9.88%
Leverage Capital (to Average Assets) 5% 8.21% 7.51% 7.79% 7.18%
</TABLE>
PART II
OTHER INFORMATION
ITEM 6
Exhibits and Reports on Form 8-K
(a) Exhibits: See exhibit index
(b) Reports on Form 8-K: None
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)
November 9, 1998 /s/ Kenneth R. Rezendes
(Date) (Signature) Kenneth R. Rezendes
President/CEO
November 9, 1998 /s/ James D. Carey
(Date) (Signature) James D. Carey
Executive Vice President
November 9, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,596,141
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,050,230
<INVESTMENTS-CARRYING> 20,348,465
<INVESTMENTS-MARKET> 20,585,685
<LOANS> 215,525,563
<ALLOWANCE> 3,500,706
<TOTAL-ASSETS> 319,722,277
<DEPOSITS> 286,126,417
<SHORT-TERM> 315,966
<LIABILITIES-OTHER> 1,714,906
<LONG-TERM> 2,613,714
0
0
<COMMON> 34,280
<OTHER-SE> 28,916,994
<TOTAL-LIABILITIES-AND-EQUITY> 319,722,277
<INTEREST-LOAN> 14,902,281
<INTEREST-INVEST> 2,850,176
<INTEREST-OTHER> 449,620
<INTEREST-TOTAL> 18,202,077
<INTEREST-DEPOSIT> 7,856,863
<INTEREST-EXPENSE> 8,000,193
<INTEREST-INCOME-NET> 10,201,884
<LOAN-LOSSES> 450,000
<SECURITIES-GAINS> 382,370
<EXPENSE-OTHER> 6,698,307
<INCOME-PRETAX> 4,317,553
<INCOME-PRE-EXTRAORDINARY> 4,317,553
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,609,049
<EPS-PRIMARY> .77
<EPS-DILUTED> .77
<YIELD-ACTUAL> 4.61
<LOANS-NON> 3,716,965
<LOANS-PAST> 421,446
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 500,000
<ALLOWANCE-OPEN> 3,693,865
<CHARGE-OFFS> 705,746
<RECOVERIES> 62,587
<ALLOWANCE-CLOSE> 3,500,706
<ALLOWANCE-DOMESTIC> 3,500,706
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
